Bitcoin is a digital currency that allows people to buy goods and services and exchange money without involving banks, credit card issuers or other third parties. On 24 December 2013, the Reserve Bank of India ("RBI") issued a press release and cautioned users, holders and traders of virtual currencies ("VCs"), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks.
RBI clarified vide the aforesaid Press release that the creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorized by any central bank or monetary authority. Further, the said RBI press release claimed that no regulatory approvals, registration or authorization have been obtained by the entities concerned for carrying on such activities. RBI stated that such VCs may pose certain risks which include inter alia:
- VCs are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc.
- There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation.
- VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
In the wake of significant spurt in the valuation of many VCs and rapid growth in Initial Coin Offerings (ICOs) and keeping in view rampant increase in the trading of VCs including bitcoin, the RBI vide press release dated 1 February 2017 and 5 December 2017 advised that RBI has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.
Supreme Court on Bitcoin
Recently, in November 2017, a Public Interest Litigation ("PIL") was filed before the Hon'ble Supreme Court of India for seeking issuance of directions inter alia to regulate the flow of Bitcoin (crypto money). As per the said PIL, no regulator be it, SEBI, authorities under FEMA or money laundering Act or even the income tax officials have got no power to track, monitor and regulate crypto money account to crypto money account transfers. The said PIL further stated that Bitcoin (crypto money) is neither falling under the definition of money/currency nor share/debenture/ commodity but is an entity with financial value and hence liable to be made subject to statutory regulation of some kind.
The Hon'ble Supreme Court of India was pleased to issue notice to the ministries of Finance, Law and Justice, Information Technology, market regulator SEBI and the RBI and sought their response to the PIL.
VCs under regulators ' scanner
Recently, the Income Tax (I-T) Department conducted survey operations at major Bitcoin exchanges across the country including in Delhi, Bengaluru, Hyderabad, Kochi and Gurugram, on suspicion of alleged tax evasion. The survey, under section 133A of the Income Tax Act, was conducted for gathering evidence for establishing the identity of investors and traders, transaction undertaken by them, identifying counterparties, related bank accounts used, etc.34
Conclusion
Since 2013, the RBI has released on three occasions (two of them were issued in 2017) cautionary notifications on cryptocurrencies relating to potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such virtual currencies including bitcoins. However, there has been no regulatory action as it is a grey area and there exists uncertainty to determine who regulates the new technology of virtual currencies. Hopefully, the Government of India would undertake pragmatic approach to regulate this arena at the instance of the Apex Court.
Footnote
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