Asheeta RegidiFeb 04, 2018 11:35:28 IST
The statement of the Finance Minister Arun Jaitley in the Budget speech on cryptocurrencies created quite a disruption, with many speculating that the statement implied that cryptocurrencies were banned in India.
The statement has since been cleared to establish that this was not the case, and only limited uses as legal tender and for illegal activities were not allowed. This article evaluates the legal implications of this statement on the various uses of cryptocurrencies in India:
The current stand on VCs in India
The statement made by the Finance Minister was-
‘… the government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system...’
What this statement indicates is, firstly, that cryptocurrencies or virtual currencies (VCs) are not legal tender, i.e., they are not a recognized, legal currency in India. This simply reiterates the stand that the Indian government always had on VCs. Secondly, the use of a cryptocurrency to finance illegitimate activities, in any form, is not allowed. This means that illegal uses of VCs are not allowed. Thirdly, their use as a legal currency, in a payment system is not allowed. This indicates that since VCs are not legal tender, they cannot be used to make payments, as a part of a payment system.
Use as a ‘payment system’
Legally, the term ‘payment system’, as per the Payment and Settlement Systems Act, refers to a system which enables payment between a payer and a beneficiary. The RBI gives a list of such payment systems in India, which includes, for example, a mobile wallet that enables payments, mobile banking, ATMs or a system like NEFT or IMPS. Online payment gateways are another example of infrastructure enabling payments.
While it is unclear if the Finance Minister was referring to payment systems precisely as defined, the definition gives an indication of what the statement could imply. By this definition, the use of VCs on any of these authorized payment systems is not allowed. The result is that you likely cannot upload your mobile wallet with VCs, or similarly cannot purchase goods over a payment gateway using VCs.
The point simply reiterates the governmental stand that VCs are not legal tender and thus cannot be used as such. The impact is that while VCs cannot be used as legal tender, they may be used in other forms, such as-as goods or securities. In a previous notification in February 2017, the RBI stated that dealing with investors, traders, holders, etc. of VCs is at the users' own risk, indicating that such uses, except for a use in a payment system, are not prohibited (See previous notifications- December 2013, February 2017 and December 2017). This indicates that such uses are unregulated, but not illegal.
International approach to regulating VCs
VCs (to the best of the author’s knowledge) have so far not been declared to be legal tender in any jurisdiction. Despite this, many laws have been passed regulating their use. This indicates that not having the status of legal tender does not affect the use of VCs in other forms.
Many countries have refrained from actively classifying and regulating VCs as (for example) currency, property or securities, given the wide range of uses they are being put to. A more common approach is to look at how VCs are used in a given transaction and address its legality based on that. A common definition of VCs under foreign laws is thus as a type of digital unit that is used as a medium of exchange or a form of stored value but is not legal tender.
Regulations also often impose requirements on the actors in the VC industry, such as the licensing requirements under the New York BitLicense, or the EU’s imposition of KYC requirements.
Looking at uses of VCs
The key issue, in determining the legality or illegality of VC related activities, is thus often determined by the nature of the underlying activity, and the use to which VCs have been put to in that activity. VCs may, thus, act as a payment method, as securities or as goods (in all cases still not legal tender) and attract different laws accordingly.
A look at some of the approaches international regulators have taken is indicative of the kind of transactions that are clearly illegal, and those which remain in the unregulated area. Here, some transactions are assessed based on the stand of foreign regulators:
- Purchase of goods/ services-
In some countries, VCs are accepted as payment in cafes, engineering companies, advertising companies, pharmacies, etc. The Indonesian Central Bank, on the other hand, has declared that VCs are not a legal method of method of payment. In countries like Japan, however, the use of VCs as a mode of payment for goods and services has been recognized, without recognizing it as legal tender.
To understand the difference, it is important to understand what ‘legal tender’ means. As per the RBI Act, RBI issued notes are declared to be legal tender, and thus have to be accepted for the settlement of a debt or obligation. If the legal tender status is withdrawn from a given note, it ceases to have value and becomes paper. The demonetization move, for instance, saw the withdrawal of legal tender status from the Rs.500/- and Rs.1000/- notes.
The declaration by the Indian government that VCs as not legal tender, thus, prevents its use as an official currency, to settle debts and financial obligations. Looking at Japan’s stand, it is very much possible for something which is not legal tender to be used as a payment method for the purchase of goods and services. Thus previously, VCs were not legal tender in India, but could possibly still be used as a payment method. However, the new statement of the Finance Minister preventing the use of VCs in a payment system indicates that such payments will not be possible in India.
While VCs thus cannot be used as payment, they may still be used to buy goods and services as a barter system. In such a system, the VCs would be treated as goods or property, and not legal tender. Such a use would remain in the unregulated area.
- Exchanges and trading-
VC exchanges are involved in a range of activities including buying, selling and trading of VCs, and their conversion into fiat currencies. Such exchanges are recognized in many countries, such as the US, Japan and Philippines. This is despite these countries expressly stating that these are not legal tender. The US, for instance, recognizes exchangers as ‘money transmitters’. Since VCs are not legal tender, these money transmitters are limited it to convertible VCs, or VCs which have an equivalent value in fiat currencies.
The Indian stand on exchanges, again, has not been clarified. Since in India, only the use of VCs as legal tender, in payment systems, or in illegal uses is not allowed, VC exchanges are in a grey area. They are unregulated, and not illegal use of VCs. Mere buying and selling of VCs on an exchange, if the transaction involves VCs as goods and not currency, is in the same unregulated area.
Even with the trading of VCs, trading will involve the use of VCs as securities, and not currency, and therefore is likely to be in the same unregulated area. Technically, the term ‘payment systems’ under Indian laws, excludes stock exchanges. As will be discussed below in the case of ICOs, such trading is nevertheless likely to attract securities laws. The US’s SEC, for example, has acted against virtual stock exchanges for allowing buying, selling and trading of VCs without registering as a stock exchange with them. A recent report that the government is seeking to regulate trading in VCs soon is positive news for those in the VC industry.
Initial coin offerings are a form of fundraising where the companies issue their own virtual tokens or coins in exchange for the funds. The international stand on this has been mixed, with some countries like China banning ICOs, and the US Securities and Exchanges Commission ruling that the DAO tokens (the Ethereum hack) are securities, subject to securities regulation. Even in the US, no ICOs have officially been registered with the SEC.
The Indian stand on ICOs is unclear, though so far, the use of VCs as securities has not been banned. Under Indian laws, VCs are so far not declared to be securities, though a given VC related scheme may amount to a security-related transaction. Going by the US stand, each particular transaction will have to evaluated to see if it amounts to a security. If it does, the transaction will attract Indian securities law.
- Mining bitcoins-
In the US, the FinCEN has classified bitcoin mining as ‘obtaining’ VCs, indicating that this is legal. Even in India, since mining of bitcoins, or other VCs, does not imply its use as a currency, it is under the unregulated category. The use the mined VCs are put to, of course, will be subject to the same restriction as other VCs.
The Finance Minister’s statement, on the whole, indicate a cautious, but not prohibitory approach to VCs. The recognition of Blockchain technology and its uses is another positive development. Various reports since the Finance Minister’s statement have indicated that the government is likely to come out with an official position on such other uses of cryptocurrencies soon. An official government stand will go a long way in clarifying what can and cannot be done with cryptocurrencies.
Disclaimer- Readers must keep in mind that the legality of a given VC related transaction varies greatly based on the details of the transaction. This discussion is for general purposes only and is not to be construed as legal advice. Readers must note that the RBI has cautioned users against the risks of VCs, VCs are not legal tender and cannot be used as such, and other uses of VCs are unregulated.
The author is a lawyer and author specializing in technology laws. She is also a certified information privacy professional.
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