It would be beneficial to discuss what laws would regulate the various Bitcoin transactions that occur in general practice, for the purposes of this paper we shall limit our discussion to the following transactions:
i) Mining of Bitcoins; ii) Transfer of Bitcoins from one person to another within the territory of India; iii) Exchange of Bitcoins for Indian Rupees, provided the entire transaction is based in India; iv) Transfer of Bitcoins from one person to another where the person sending the Bitcoins is not resident in India; v) Exchange of Bitcoins for Indian Rupees, where the exchange is based outside India.
Mining of Bitcoins
The mining of Bitcoins is essentially the utilization of one’s own computing power and electricity to generate more computer programmes or an extension of an existing computer programme. Thus Bitcoin ‘mining’ would be like making your own computer programme and there is no law which prevents or prohibits a person from doing so, therefore it seems that mining Bitcoins in India would be a perfectly permissible and legal activity.
Transfer of Bitcoins from one person to another within the territory of India
Any sale of Bitcoins would be governed by the Sale of Goods Act, 1930 however it must be noted that the Sale of Goods Act does not regulate barter transactions. According to section 4 of the Sale of Goods Act the transfer of the property in the goods is for a price, i.e., for money consideration. As price is an essential element of a contract of sale, barter is ruled out from a transaction of sale of goods. This means that any transaction whereby payment is made in Bitcoins would come within the category of a barter transaction would not be governed by the Sale of Goods Act.
Exchange of Bitcoins for Indian Rupees, provided the entire transaction is based in India
In case there is an online Bitcoin exchange where one can buy or sell Bitcoins using real currency (such as Mt.Gox) based in India which deals only with Indian residents and buys or sells Bitcoins for Indian Rupees, then the transactions of this online exchange would be governed by the Sale of Goods Act and all relevant laws regarding sale of goods on an exchange platform with regard to goods such as computer programmes would be applicable to such an online exchange including the Forward Contracts (Regulation) Act, 1952. This would imply that as long as the online exchange does plain vanilla buying and selling of Bitcoins it would not be amenable to regulatory oversight but if it wants to offer Bitcoin derivatives such as Bitcoin futures then it would have to get itself registered as per the provisions of the Forward Contracts (Regulation) Act and also follow all the rules and regulations prescribed thereunder.
Transfer of Bitcoins from one person to another where the person sending the Bitcoins is not resident in India
If Bitcoins are transferred from a person residing outside India to a person resident within India then that would amount to import of computer programmes within India. If this transfer is done in return for the Indian party sending an item or rendering a service to the foreign party then this would be a barter transaction. Although the Indian import and customs regulations do not mention barter transactions, the guidance on the website of the Directorate General of Valuation, Central Board of Excise and Customs, Government of India seems to suggest that barter transactions for import of goods although are not prohibited but do present unique problems of valuation of the goods. However since software imported online does not attract any duty under Indian law, it would be immaterial to discuss exactly how a barter transaction involving Bitcoins should be valued under the Indian customs regime. For the purposes of this discussion it is sufficient to note that a Bitcoin transaction entered into by an Indian with a party outside India is not prohibited as long as the item or service being exported out of India is itself legal and above board. This would be the legal analysis for a general citizen but this analysis is subject to regulations governing specific instances.
Can an NGO based in India receive donations in Bitcoin?
This is an interesting question because it would be perfectly legal for a regular citizen to receive Bitcoins from abroad as a gift or donation, etc. However if the entity receiving such Bitcoins is an NGO then there would be the added layer of regulation from the Foreign Contributions Regulation Act, 2010 (“FCRA”) which regulates all foreign contributions received by NGOs. Section 2(1)(h) of the FCRA defines foreign contribution to include the receipt of any article from a foreign source. This means that even if an NGO based in India receives contribution from a foreign source in Bitcoins, such a transaction would fall within the regulatory ambit of the FCRA.
Exchange of Bitcoins for Indian Rupees, where the exchange is based outside India
If a person imports a computer programme into India he would have to pay the customs duty at the prevalent rates, however if this import of software is done via the Internet and does not involve any physical shipments then no import duty is levied on the import of computer software in India. This situation would also be applicable to any person buying Bitcoins from an online exchange based outside India. The only documentation that would be required for buying Bitcoins from an online exchange abroad would be that which the bank may insist upon for exchanging Indian rupees into a foreign currency and then transferring it to an overseas account. This documentation would involve filing of Form A-1 if the total value of the money being exchanged is greater than USD 5,000 however if the amount of money is less than USD 5,000 then only a simple letter containing basic information viz. the name and the address of the applicant, name and address of the beneficiary, amount to be remitted and the purpose of remittance is required. If the transaction is done using a credit card then in most instances, banks would not be insist upon this letter since these transactions usually go through their automated channels.
Although Bitcoins can currently be classified only as movable property and more specifically as computer software, this position is not tested in a Court of law. Further it appears from the analysis of the definitions of ‘currency’ and ‘prepaid payment instrument’ that the government has the power to bring Bitcoins into the definition of either currency or prepaid payment instrument by just amending the regulations, which is not a very cumbersome process since financial regulations, by their very nature, are quite fluid and prone to changes. Even so it is worth noting that even as the legal regime stands now offering of derivative products in Bitcoins might require registration and approval under the Forward Contracts Regulation Act.
It is worth noting that unlike other digital currencies such as e-gold, liberty reserve, etc. Bitcoin is a peer to peer network based currency which does not have one centralized agency or institution regulating the entire system and therefore even if the agencies want to regulate or shut it down they will not physically be able to do so as there is no nodal institution that the authorities can go after. However this argument is fallacious to a certain extent in that the authorities can go after online exchanges which are websites or portals run by individuals or entities which have a physical manifestation. They would have names, addresses, bank accounts, etc. and the authorities could easily go after the major exchanges to cut off the supply or cash into the Bitcoin system by attacking the source where cash or ‘real currency’ enters or leaves the system thereby severely reducing the efficacy of Bitcoins.
Looking at the relatively small number of people who use Paypal or other e-wallets in India, it would not be entirely unlikely that the regulations to govern Bitcoin, whenever they come, would be a reaction to a particular event and whether these regulations are enabling or disabling in nature would probably depend upon the nature of the event to which they are reacting.
A version of this post was published here.
(c) Centre for Internet & Society.
The Centre for Internet and Society is a non-profit research organization that works on policy issues relating to freedom of expression, privacy, accessibility for persons with disabilities, access to knowledge and IPR reform, and openness (including open government, FOSS, open standards, etc.), and engages in academic research on digital natives and digital humanities.