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Understanding Virtual Currency

Cryptocurrency is also known as Bitcoin with virtual presence and unknown ownership maintained in a peer-to-peer network by entries in an enormous database called "blockchain." Transactions take place using participants' keys, known as crypto-credentials, acting as a signature and validated by the network.

Fiduciary Currency: This transaction is validated in a decentralized way by miners who maintain the blockchain. Some economists have termed Bitcoin as "fiduciary currency," because it has no inherent value, and derives value in exchanges either from regular currency backed by the government or by being accepted online by others.

The Global Perspective

The virtual-currency market and transactions are skyrocketing. However, these digital monies are non-legal tenders with different standards in most jurisdictions. Global regulators are divided on how to respond to it. As of now, there is no international regulator to regulate virtual currency.

Status in India

Currently Illegal / Not Legal Tender. The Indian government is planning to bring regulation. The RBI previously banned the sale or purchase of cryptocurrency. It is not recognized as legal tender in the country.

Overview of Indian Acts on Cryptocurrency

After going through the aforementioned policy stand, let us see what laws may be applicable to cryptocurrency technology and its various products in India, and understand whether Bitcoin falls under the purview of the Central Government.

Constitution of India Act & Jurisdiction

Article 246 of the Constitution, along with Entry 36 and 46 of List I of the VII Schedule, lists out the subject matter to legislate currency, coinage, legal tender, foreign exchange, and bills of exchange, cheques, promissory notes, and other like instruments by Center and State governments in India. The test is whether Bitcoin fulfills any condition of the aforementioned instruments so the Central government can legislate.

RBI Act and FEMA Definitions

Interestingly, the definition of currency is not defined by the RBI Act, rather it is defined by the Foreign Exchange Management Act, 1999 (FEMA) stating in Section 2 (M) that "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".

Under the Currency Ordinance 1940, the One Rupee and Notes issued by the RBI are defined as a legal tender. As far as Bitcoin is concerned, since it is not a legal tender, it falls out of this category.

The "Similar Instruments" Question

This analysis is also supported by Section 22 which enumerates that the right of issuance of bank notes solely rests with the RBI, and bank notes are legal tender in India as per Section 26 of the RBI Act.

As per this analysis, Bitcoins are not currency but have several features of a currency or legal tender, thus qualifying as "such other similar instruments" defined by Section 2(h) of the RBI Act to be notified by the RBI. Thus, it is a policy question before the RBI whether to recognize the medium of certain electronic records claiming to be "Decentralized Digital Currency" or "Virtual Currency" (such as Bitcoin, litecoins, bbqcoins, and dogecoins) as such other similar instruments.

Cryptocurrency Law