India: Arbitrage Of Cryptocurrencies Or Virtual Currencies Such As Bitcoin, Ripple, Ethereum Or Litecoin Etc. In India – Legal Status In India

Last Updated: 23 February 2018
Article by Vijay Pal Dalmia, Partner

Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India
Email: vpdalmia@vaishlaw.com Mobile: +919810081079

What are CryptoCurrencies (cryptocurrency) or virtual currencies such as Bitcoin, Ripple, Ethereum or Litecoin etc.? A Crypto Currency or Virtual Currency such as Bitcoin, Ripple, Ethereum or Litecoin, etc. is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. CryptoCurrencies (cryptocurrency) or virtual currencies do not have any physical form and are open source, peer to peer (transactions do not require a third-party intermediary such as PayPal or Visa), digital currencies (being electronic with no physical manifestation). Like the U.S. dollar or Indian Rupee, a CryptoCurrency or a Virtual Currency has no intrinsic value or underlying capital asset attached to it. As on date, in India CryptoCurrencies or Virtual Currencies are not considered as a legal tender or backed by Government of India.

Some of the laws in India which have a bearing on the aspects relating to CryptoCurrencies Or Virtual Currencies are as under:

  1. The Constitution of India, 1950;
  2. The Reserve Bank of India Act, 1934 ("RBI Act");
  3. The Coinage Act, 1906 ("Coinage Act");
  4. The Securities Contracts (Regulation) Act, 1956 ("SCRA"); and
  5. The Foreign Exchange Management Act, 1999 ("FEMA") and rules/regulations made thereunder;
  6. The Sale of Goods Act, 1930
  7. The Payment and Settlement Systems Act, 2007

At this stage, it is necessary to refer to the definition of person as provided under Section 2 (u) of FEMA, which states as under:

Section 2(u): "person" includes-

  1. an individual,
  2. a Hindu undivided family,
  3. a company,
  4. a firm,
  5. an association of persons or a body of individuals, whether incorporated or not,
  6. every artificial juridical person, not falling within any of the preceding sub-clauses, and
  7. any agency, office or branch owned or controlled by such person.

From the above definition, it is clear that under the Indian laws there is no difference between a natural person, partnership, a company or any other type of business entity, as the above definition is wide enough to cover all types of entities, capable of doing any business.

Entry 36 and 46 of List I of the Seventh Schedule of the Constitution provides that only the Central Government shall have the power to legislate in respect of currency, coinage, legal tender, foreign exchange and bills of exchange, cheques, promissory notes and other like instruments respectively. However, to date, no law especially regulating or governing CryptoCurrencies or Virtual Currencies has been passed by the Government of India or any state in India.

The prime purpose of the establishment of the Reserve Bank of India (RBI) in India was to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

Section 22 of the Reserve Bank of India Act, 1934 mandates that the RBI shall have the sole right to issue bank notes in India, and may issue currency notes of the Government of India supplied to it by the Central Government, and the provisions of this Act applicable to bank notes shall, unless a contrary intention appears, apply to all currency notes of the Government of India issued either by the Central Government or by the RBI in like manner as if such currency notes were bank notes.

However, CryptoCurrencies or Virtual Currencies do not qualify as currency or bank notes, as CryptoCurrencies or Virtual Currencies have not been issued by the RBI.

The term "securities" has been defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 to include:

  1. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
  2. derivative;
  3. units or any other instrument issued by any collective investment scheme to the investors in such schemes;
  4. security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
  5. units or any other such instrument issued to the investors under any mutual fund scheme;
  6. any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;
  7. Government securities;
  8. such other instruments as may be declared by the Central Government to be securities; and
  9. rights or interest in securities;

It is pertinent herein to note that all of the above instruments have an underlying capital asset. However there is no underlying asset in relation to CryptoCurrencies or Virtual Currencies. Accordingly CryptoCurrencies or Virtual Currencies do not fall under the definition of the securities, as mentioned above.

Under the Indian law, the term 'Currency' has been defined under Section 2(h) of FEMA to include all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank. However CryptoCurrencies or Virtual Currencies do not fall within the definition of Currency, as defined above, and till date, no CryptoCurrencies or Virtual Currencies has been notified as Currency by RBI in India also.

Section 2(m) of FEMA, 'foreign currency' has been defined as any currency other than Indian currency. Under Section 2 (q) of FEMA, "Indian currency" means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934). Till date, none of the CryptoCurrencies or Virtual Currencies have been designated by the Government of India, to be a legal tender, hence the same will not fall into the definition of a foreign currency or Indian currency.

Under Section 2(i) of FEMA, "currency notes" means and includes cash in the form of coins and bank notes, and this definition does not include any cryptocurrency or virtual currency, which are issued either under the Coinage Act or Reserve Bank of India Act, 1934.

Under Section 2(n) of The Foreign Exchange Management Act, 1999 (FEMA),"foreign exchange" means foreign currency and includes,-

  1. deposits, credits and balances payable in any foreign currency,
  2. drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,
  3. drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

On the basis of above, it can be safely deduced that no CryptoCurrencies or Virtual Currencies will fall under the definition of currency or any other instrument as defined under the definition of foreign exchange and hence, as such no crypto currency (cryptocurrency) /or virtual currency can be considered as foreign exchange also.

Accordingly online transfer of CryptoCurrencies or Virtual Currencies from foreign wallets (exchange) to Indian wallets (exchange) and vice-versa, will attract the provisions of FEMA resulting in FEMA violations.

Under Section 3 of FEMA, no person shall except as provided under the rules or regulations made under FEMA, or with the permission of RBI, shall

  1. deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
  2. make any payment to or for the credit of any person resident outside India in any manner;
  3. receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
  4. enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

At this stage, it is imperative to understand the term "authorized person" under FEMA in India.

Under Section 2(c) of FEMA, the term "authorized person" has been defined to mean an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.

Accordingly, no payment out of India or to India can be made directly, except through an authorized person, who are bound to follow the rules and regulations including directions of RBI for the control of inbound and outbound currency.

From the above provisions, it is also apparent that any payment to any person resident outside India, cannot be made from India, until and unless the same is permitted under the regulation of the FEMA or allowed by RBI. This also involves a scenario where CryptoCurrencies or Virtual Currencies have been sold in India and after that, the consideration is intended to be taken out of India involving foreign currency. The sale money cannot be taken out except with the permission of RBI or through an authorized dealer.

There are two types of transactions defined under FEMA for which a person can send money outside India.

  1. Capital Account Transaction; and
  2. Current Account Transaction.

Under Section 2(e) of FEMA, "capital account transaction" means a transaction which alters

  1. the assets or liabilities, including contingent liabilities,

    1. outside India

      1. of persons resident in India or
  2. assets or liabilities

    1. in India

      1. of persons resident outside India.

(Ref.: Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/13251.pdf) 1,2,3

Under Section 61 of FEMA, a person can only sell or draw foreign exchange to or from an authorized person for a capital account transaction which are permitted by the RBI. Under Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=155 ), RBI has provided a list of permissible capital account transactions for persons resident in India and persons resident outside India. Under Rule 4 of the Regulations above, no person shall undertake or sell or draw foreign exchange to or from an authorized person for any capital account transaction except as provided under the Act, Regulation, etc.

The trade of CryptoCurrencies or Virtual Currencies does not fall into any class of capital account transactions of Persons resident in India, or into any Class of capital account transactions of persons resident outside India, as permitted under Schedule I and II of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.

Accordingly, the trading activities of CryptoCurrencies or Virtual Currencies for Arbitrage or otherwise, will not fall into the category of permitted capital account transactions.

Further, till date, RBI has not permitted transactions related to CryptoCurrencies or Virtual Currencies. On the other hand, RBI has from time to time issued cautionary notices, cautioning people of India not to indulge in any activity relating to CryptoCurrencies as the same involve legal and financial risks in India. Reference in this regard, please be made to the following circulars/ press notes issued by RBI:

  1. https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247
  2. https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=39435
  3. https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462

Even a statement has been made by Shri Arjun Ram Meghwal, Minister of State in the Ministry of Finance in written reply to a question in Rajya Sabha, that the creation, trading or usage of VCs including Bitcoins, as a medium of payment is not authorized by any central bank or monetary authority, and no regulatory approval, registration or authorization has been obtained by the entities concerned for carrying on such activities. The Hon'ble Minister further stated that the absence of counter parties in the usage of VCs including Bitcoins, for illicit and illegal activities in anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws. The statement of the Hon'ble Minister is available at http://pib.nic.in/newsite/mberel.aspx?relid=160894 .

In another statement, the Ministry of Finance has said that CryptoCurrencies are not legal tender and such CryptoCurrencies do not have any regulatory permission or protection in India. Further, in the said statement, the Ministry has also cautioned the investors and other participants dealing with CryptoCurrencies and advised not to participate in them. The said statement can be accessed at http://pib.nic.in/PressReleseDetail.aspx?PRID=1514609

Even, if it is presumed that the purchase and transfer of CryptoCurrencies or Virtual Currencies as a capital account transaction then also a person cannot sell or draw foreign exchange for making the payment, as the said transaction is not specifically permitted by RBI, hence not allowed.

The current account transaction has been defined under Section 2(j) of FEMA which states as under:

Current account transaction means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes, -

  1. payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,
  2. payments due as interest on loans and as net income from investments,
  3. remittances for living expenses of parents, spouse and children residing abroad, and
  4. expenses in connection with foreign travel, education and medical care of parents, spouse and children;

That from the above definition of the Current account transaction, it is clear that the transaction for arbitrage of CryptoCurrencies or Virtual Currencies, in any case, wouldn't fall under sub clauses (ii), (iii) & (iv).

Now, it has to be analyzed whether the transaction for arbitrage of CryptoCurrencies or Virtual Currencies can fall under the ambit of sub clause (i) or not.

For dealing with the aspect of Current account transaction, it is necessary to understand the nature of CryptoCurrencies or Virtual Currencies, i.e., whether these will fall into the category of a Good (product) or service or software.

Under Section 2 (7) of the Sale Of Goods Act, 1930 the term "goods" has been defined to mean every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

The term movable property has been defined (36) "movable property" has been defined under Section 2(36)of the General Clauses Act, 1897 as to mean property of every description, except immovable property.

CryptoCurrencies or Virtual Currencies do not fall into the category of an actionable claim and money, as there is no claim, an action for the recovery of which can be made, and there is no promise to pay. It is an instrument which is not binding on any party and does not have any underlying capital asset or value.

A cryptocurrency or virtual currency, therefore, will not fall into the category of a good as this does not possess any intrinsic value or a promise attached to it.

Crypto currency (cryptocurrency) /or virtual currency such as Bitcoin, Ripple, Ethereum or Litecoin, etc., also do not fall into the category of software (https://www.techopedia.com/definition/4356/software )4 or computer program, as CryptoCurrencies or Virtual Currencies itself do not perform any function. Software, in its most general sense, is a set of instructions or programs instructing a computer to do specific tasks. The software is a generic term used to describe computer programs. Scripts, applications, programs and a set of instructions are the terms often used to describe software. Explanation 3 to Section 9(1)(vi) of the Income Tax Act, 1961 defines "computer software" as any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.

In view of the above, it is also apparent that CryptoCurrencies or Virtual Currencies, itself, do not render any service, as these are only a set of code used for identification. Accordingly, CryptoCurrencies or Virtual Currencies do not fall into the category of service also. Since it is not a trade or business of goods or service, it will not fall into the category of Current account transaction.

Now, let's deal with the aspect of transfer of money through Non-Resident Ordinary Rupee (NRO) Account, for which the definition of following terms may be noted which have been defined in Master Circular on Non-Resident Ordinary Rupee (NRO) Account (https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9885 Master Circular on Non-Resident Ordinary Rupee (NRO) Account):

Non-Resident Indian (NRI)

NRI for this purpose is defined in Regulation 2 of Notification No. FEMA 5/2000- RB dated May 3, 2000. In terms of this Notification, an NRI means a person resident outside India who is a citizen of India or is a person of Indian origin.

Person of Indian Origin (PIO)

PIO for this purpose is defined in Regulation 2 of FEMA Notification ibid as a citizen of any country other than Bangladesh or Pakistan, if

  1. he at any time held Indian passport; or
  2. he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
  3. the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b).

Under Rule 3 of Foreign Exchange Management (Deposit) Regulations, 2016 (https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=10325 ), restrictions on deposits between a person resident in India and a person resident outside India have been provided as under:-

Save as otherwise provided in the Act or Regulations or in rules, directions and orders made or issued under the Act, no person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India:

Provided that the Reserve Bank may, on an application made to it and on being satisfied that it is necessary so to do, allow a person resident in India to accept or make a deposit from or with a person resident outside India.

From the above definition, it is clear that no deposit can be made even in NRO account by any Indian resident except as provided under Schedule 3 of the aforesaid regulation.

Para 3 of Schedule 3 states the credits and debits which are permissible in and from NRO Account.

  1. Credits

    1. Proceeds of remittances received in any permitted currency from outside India through banking channels or any permitted currency tendered by the account-holder during his temporary visit to India or transfers from rupee accounts of non-resident banks.
    2. Legitimate dues in India of the account holder.
    3. Transfers from other NRO accounts.
    4. Any amount received by the account holder in accordance with the rules or regulations made under the Act

The list of the permissible credits in NRO Account does not include a situation where the amount received in Indian wallets, pursuant to the sale of CryptoCurrencies or virtual currencies in India which are transferred from a foreign country, can be credited to an NRO Account, as the said amount in the present legal scenario cannot be considered as legitimate due.

Further, Rule 4.2 of the Master Direction No. 13/2015-16 on Remittance of Assets (https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10197) states that any remittance of funds from the sale of assets in India held by a person, whether resident in or outside India, would require the prior approval of the Reserve Bank. Considering, the press notes issued by RBI and the statement of the Ministry of Finance, the chances to get such approval from RBI are very bleak.

PURCHASE OF CRYPTOCURRENCIES OR VIRTUAL CURRENCIES IN INDIA THROUGH INDIAN WALLETS AND SENDING THE SAME TO WALLETS IN FOREIGN COUNTRIES FOR SALE

As discussed above CryptoCurrencies or virtual currencies do not qualify as Good or Service or Software in India. Therefore, the Export regulation under FEMA won't be applicable in such a scenario. Reference may be made to Section 3 of FEMA. The relevant extract of Section 3 of FEMA is as under:

"No person shall except as provided under the rules or regulations made under FEMA, or with the permission of RBI, shall

  1. enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

    Explanation.—For the purpose of this clause, "financial transaction" means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt."

Therefore, buying of CryptoCurrencies or Virtual Currencies in India and sending the same to another Country would fall under the ambit of Section 3 clause (d) and is prohibited, as there is no rule or regulation in force permitting the same and RBI has not given any permission for such transactions.

It is also important to note that it has been reported in various newspapers and media reports that the Income Tax Authorities have conducted various raids/ surveys at the premises of major bitcoin exchanges/ wallets in India and have collected information about the entities/ individuals dealing in CryptoCurrencies and thereafter, issued notices. Recently, it has also been reported in the newspapers that various banks have suspended the bank accounts of major bitcoin exchanges.

From the above analysis, the author is of the view that arbitrage of CryptoCurrencies or Virtual Currencies between a foreign country and India, is not permitted under the India laws despite the fact that there is no law, rule or regulation specifically prohibiting the same.

Footnotes

1. Regulation 2 (b) "Drawal " means drawal of foreign exchange from an authorised person and includes opening of Letter of Credit or use of International Credit Card or International Debit Card or ATM card or any other thing by whatever name called which has the effect of creating foreign exchange liability.

2. Foreign Exchange Management (Permissible capital account tranctions) Regulations, 2000 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/13251.pdf)

Regulation 3 . Permissible Capital Account Transactions :- (1) Capital account transactions of a person may be classified under the following heads, namely :- (A) transactions, specified in Schedule I, of a person resident In India; (B) transactions, specified in Schedule II, of a person resident outside India.

3. Section 6 - Capital account transactions

(1) Subject to the provisions of sub-section (2),any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction.

(2) The Reserve Bank may, in consultation with the Central Government, specify -

[(a) any class or classes of capital account transactions, involving debt instruments, which are permissible;]

(b) the limit up to which foreign exchange shall be admissible for such transactions:

[(c) any conditions which may be placed on such transactions;]

[Provided that the Reserve Bank or the Central Government shall not impose any restrictions on the drawal of foreign exchange for payment due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business.]

[(2A) The Central Government may, in consultation with the Reserve Bank, prescribe--

(a) any class or classes of capital account transactions, not involving debt instruments, which are permissible;

(b) the limit up to which foreign exchange shall be admissible for such transactions; and

(c) any conditions which may be placed on such transactions.]

[***]

(4) A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

(5) A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

(6) Without prejudice to the provisions of this section, the Reserve Bank may by regulation prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business.

[(7) For the purposes of this section, the term "debt instruments" shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.]

4. https://www.rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=10256 Section 2 (viii) of the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015 'software' means any computer programme, database, drawing, design, audio/video signals, any information by whatever name called in or on any medium other than in or on any physical medium

© 2017, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Vijay Pal Dalmia, Partner
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Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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