The Author, Lakhan Gupta is a 1st year student of BA.LLB (H) at University School of Law and Legal Studies, GGSIPU, New Delhi. He is currently interning with LatestLaws.com
Economy is a spawn of the human ‘wants’ thereby granting people the ability to prove their superiority. Economy comprises of various mediums of exchange, abundance of which are used to prove one’s superiority over another. One of the most common mediums used for carrying out an exchange is bank balance. Hence, the higher the bank balance of an individual, the superior he is to others.
In reality, however it is not necessary that having an abundance of various mediums of exchange grants a person’s superiority over another. Many other factors also come into play. However such mediums of exchange facilitate in fulfilling most of the human ‘desires’ or ‘wants’. Thus money acts as a medium of exchange in modern times by replacing the barter system of exchange. This is done through the introduction of currency which has a fixed value for different commodities and can hence be used uniformly for any exchange of goods and services.
A different form of currency which has gained popularity this past decade only is virtual currency. In our technologically advanced society where any monetary transaction can be carried out through one’s mobile phones, virtual currency is a form of currency which is available only in electronic form and can thus only be utilized electronically. One of the most important forms of virtual currency is cryptocurrency.
A cryptocurrency is a virtual currency that is used as a means of exchange and is nearly impossible to counterfeit or double-spend making it a safe and secure mode of payment. A salient feature of cryptocurrencies is that since they are generally not issued by any central authority, they are theoretically immune from any form of government interference or manipulation. These cryptocurrencies are secure to a large extent owing to the fact that they are decentralized networks based on blockchain technology. In other words, the data is stored not by any central authority but by almost all of the people dealing in cryptocurrencies, which could be millions. This also means that any of these users could make a copy of this data. However, since privacy of the user is preserved to a large extent, it is very difficult to try and manipulate the records stored in the blockchain technology because to completely leave no trail of manipulation, a hacker would need to control more than over half of the accounts in the blockchain which even if was miraculously possible, is not worth the time and resources when compared to the profits, if any, earned.
However, what one has to understand that these cryptocurrencies are though similar to cash and bank balance are not identical to them. It means that though these cryptocurrencies could act as a medium of exchange of goods and services, it cannot be regarded as cash or bank balance. This is because as opposed to cash, which is backed by a central government authority, these cryptocurrencies are not backed by anyone and hence, a possibility exists that they would cease to be used as quickly as they have been accepted as a medium of exchange.
Next we must understand as to how cryptocurrencies are valued. This is because if cryptocurrencies are not issued by any government or central authority, it means that there value is not backed by any authority. Thus, it is important to understand the factors that influence the value of any cryptocurrency. This is because if one does not understand the process of providing a cryptocurrency with a value, one cannot fully appreciate the process of its legality in various parts of the world. Thus the various factors determining the price of a cryptocurrency are as given below:
- Supply and Demand- The major factor in determining the price of any cryptocurrency is its demand and supply. For example, if a cryptocurrency has a high demand and low supply, its price would increase substantially and the vice-versa is also true.
- Competition- Competition provided by other cryptocurrencies providing the same services or features also affects the price of a particular cryptocurrency. And new competition is constantly on the horizon due to relatively few barriers to entry.
- Mass Adoption and Utility- Because any cryptocurrency is priced through its demand by people across the world, it would be correct to assume that the demand would increase only because of mass adoption caused through increased utility. Utility here means that units of cryptocurrency could be easily, reliably and securely traded in exchange of goods and services. If a cryptocurrency has such a utility, then it would easily gain mass adoption and hence, more number of places would accept them as a means of payment. This would lead to rise in price of a cryptocurrency.
- Production Cost- It has been observed that the role played by direct costs and opportunity costs of producing a coin in determining its price is an important one. Bitcoin, for example, has a high cost of production. In fact, the resources and energy used for its mining can be seen as a factor to determining its high value. Thus, this factor works on the principle of ‘no pain, no gain’.
- Counterfeitablity- Any cryptocurrency should be safe and secure to prevent counterfeitablity in any transaction so that the cryptocurrency as a whole remains effective. Thus, a less secure cryptocurrency would be prone to attack from malicious parties thereby negatively impacting the currency’s value.
- Regulation- The chance for regulation by governments is very high once the cryptocurrency goes mainstream. However, no one can correctly predict the consequences of such an action. If the regulations are positive, it may lead to a rise in value of the currency and vice-versa is also a possibility. One can only contemplate till cryptocurrency goes mainstream throughout the world.
Thus the value of cryptocurrency can change within a short span of time, depending on the factors mentioned above. However, one can observe that over time transactions through cryptocurrencies have increased with the volatility having decreased. However, one still cannot be assured that the investment made by them in cryptocurrency will hold value for a long time or not. This is because a possibility that their investments might be worth nothing in a matter of hours also exist. Thus it is up to every trader and investor to be aware of the risks associated with trade in cryptocurrencies. Thus the process of valuation of a cryptocurrency will definitely play an important role on its legality.
However, concerning the present scenario, it is always important to understand the reasons as to why we need cryptocurrencies and why is it more suitable to an economy instead of the other mediums of exchange before discussing the legality of cryptocurrencies throughout the world.
There are various reasons behind the success of cryptocurrencies throughout the world and they are as follows:
Fraud-proof- Cryptocurrencies are decentralized networks based on blockchain technology. Thus all transactions related to cryptocurrencies are stored in a public ledger.
- Therefore, to commit a fraud, a person needs to have access to more than half the users accessing the records. Hence, cryptocurrencies are to a large extent virtually fraud-proof.
- Identity Theft- All transactions are carried out only after confirming the identity of the current spender to verify if he is the owner or not. Because blockchain technology is used, the entity becomes virtually unhackable and void of fraud and identity theft due to secure digital transactions through encryption and “smart contracts”.
- Instant Settlement- A major component for success of cryptocurrency after its security is its ability to provide instant settlement of dues. Hence, ease of use is one of the major reasons why cryptocurrency is high in demand. All one requires is a smart device and an internet connection to access trade in cryptocurrencies.
- Accessibility- Cryptocurrencies are accessible from anywhere around the world where one has an internet access. Also because the account made by a person is secure, the account can also be accessed from another device without any fear of malicious virtual attacks.
- Elimination of Outside Interference/Influence- Another positive aspect of cryptocurrencies is that they work on a “peer-to-peer “ basis thereby eliminating any and all middlemen within a transaction and reducing the cost of processing or transfer which is otherwise charged by middlemen such as banks. Another feature of cryptocurrency i.e. it works as a decentralized network. This means that the government has no control or right over transactions carried out through cryptocurrencies and can hence exert no influence on them.
Thus one can observe that cryptocurrencies are a success because of all the benefits that they provide, not to the governments and central authorities but, to the investors and traders of cryptocurrency. However, it does not mean that the cryptocurrencies do not have any drawbacks. The major drawbacks of cryptocurrencies which would play a key role in case of any country banning trade through cryptocurrencies are:
- High Volatility- Because the price of cryptocurrency is volatile it is possible that an investment of high value would be worth nothing in a matter of hours without any safety. Thus, because a high possibility of such a situation exists, it would lead to heavy losses for all the investors.
- Lack of Authority- it has already been stated that cryptocurrency are a decentralized network, meaning that there is no authority or central figure to regulate them. Thus in a situation where the prices of a cryptocurrency drop drastically in a short span of time, there would be no authority to cover up any loss and in a case of a malicious attack of hacking, which though virtually impossible cannot be eliminated altogether because of technological advancements, there exists no authority with the right to remove the hacker or compensate the victims. In such a case, the entire cryptocurrency network would be at risk of being abandoned.
Legality in India
In India, after the launch of Bitcoin a number of cryptocurrency exchanges began to operate. However, such a situation was a legally unprecedented one. This is because not only was there no clear definition of a cryptocurrency but any laws that regulated or prohibited their use also did not exist. This situation prevailed until April 2018 when the Reserve Bank of India issued a circular banning the provision of banking services to any person who either carried out trade with on invested in cryptocurrencies. The circular however, did not ban the use of cryptocurrencies themselves. However, it still effectively thwarted any exchange which facilitated the use of cryptocurrencies. However, an event in which temporary relief, if nothing else, can be found is that the Supreme Court has quashed the Reserve Bank of India’s circular in Internet and Mobile Association of India v. RBI.
According to the 180-page long judgment, authored by Justice V Ramasubramanian, even if it has been discovered that though the RBI has the power to regulate virtual currencies and impose restrictions, the April 2018 circular issued by the RBI imposes disproportionate prohibition. The circular is therefore, ultra vires the Constitution. The Court believes that in the absence of any legislative proscription, according to the fundamental right to carry on any occupation, trade or business under Article 19(1)(g) of the Constitution, any and all trade or business dealing with cryptocurrencies is to be treated as a legitimate trade.
However, it was also observed that the circular was not an immediate measure taken by the RBI but rather a culmination of various steps undertaken by the RBI concerning the regulation of virtual currencies. Some of the steps are as follows. In 2013, the RBI began observing and analyzing the proliferation of transactions through virtual currencies and in June of the same year released a Financial Stability Report where it mentions virtual currency.
In December of the same year, RBI issued a caution to its users, holders and traders of virtual currencies informing them of all the risks related to trading in virtual currencies and even assured that it was in the process of examining the very legality of the use of these currencies. Further in July 2017, an Inter-Disciplinary Committee set up by the government advised against dealership in virtual currencies and even made a recommendation seeking legislative changes so as to make “possession, trade and use of cryptocurrencies expressly illegal and punishable”. However, no such change was implemented.
Two different petitioners namely- the Internet and Mobile Association of India, a non-profit group, and the other one was a group of corporations that provided crypto exchange platforms. The circular issued by RBI was attacked on the following grounds: first, that the virtual currencies fell outside the RBI’s regulatory ambit since they were tradeable commodities and not legal tender. Secondly, even assuming that virtual currencies were amenable to regulation by the RBI, the circular was disproportionate in infringing the petitioner’s rights.
The court however, only accepted the latter while rejecting the former ground. While rejecting the first ground through disproving it, the Court discovered that the term ‘virtual currencies’ elude precise definition. This is because while some regarded them as a medium of exchange, similar to cash and bank balance, others termed it as a stock while there were many who thought of them as a good/commodity. The Court after comparing features of virtual currencies with the traditional definition found that these currencies would likely fall within the meaning of money because it can be used as an asset, as a unit of account to provide a common base for prices and as a medium of exchange, though partially at the present, and hence decided that as long as there were certain institutions that accepted virtual currencies as a valid medium of exchange/mode of payment of goods and services, it was sufficient to bring the currencies within the regulatory ambit of the RBI. Thus the RBI has a right to regulate or prohibit anything that may pose a threat to or have an impact on the financial system of the country. Therefore, because the RBI had a power to prohibit, the first ground was rejected. Also in retrospect, it wasn’t the act of trading in virtual currencies that was prohibited; rather the provision of banking services to those who did trade in them was prohibited.
To prove the second argument that the prohibition of banking provisions to people or organizations trading in virtual currencies unreasonably impinged on the fundamental rights of those who traded in such currencies, four arguments were made. First, the RBI is required to make policies while keeping “public interest” in mind but it had failed to do so because the “public” has suffered according to them and the implied reason was that RBI had not analyzed the problem sufficiently before issuing the circular.
The Court rejected it outright, stating that RBI has been pondering over the subject, at least from June 2013. Secondly, they claimed that RBI had no right to freeze bank accounts of defaulting or shell companies. The Court held that the circular did not freeze the accounts themselves, but rather the services provided to these accounts by the RBI. Third, it was argues that RBI had tried to illegitimately improve its case by supplying reasons for the circular. However, the Court held that in this case, the Court itself had expressly directed the RBI to issue a detailed reply to representation and hence, it could not be held liable.
Lastly, it was argued that the circular did not conform to the doctrine of proportionality as it did not meet the test of proportionality. The Court therefore tested the circular on the question whether more proportional or less intrusive methods were considered by the RBI before the issuing of the circular or not. The Court also made two critical interventions. First, it is given that denial to access to banking services to a person gravely affects his/her life. Secondly, it rejected the RBI’s argument that Article 19(1)(g) could not be invoked because as on date, there was no legislation that prohibited the use of virtual currencies.
After conducting its examination, the Court held that RBI had not considered such alternatives before issuing the circular but after the writ petitions were filed as it was able to provide specific rebuttal’s to the petitioner’s contentions. Thus the second ground was proved and the Court held that the circular was violating Article 19(1)(g) and hence, offended the doctrine of proportionality. Thus, while not outright banning trade in virtual currencies the government is weighing whether the virtual currencies can be regulated by the Reserve Bank of India, according to people aware of the development. A framework for the regulation will be decided upon after deliberations with the central bank.
Thus it can be stated, that though the RBI had issued the circular with an intention to safeguard the interest of Indian citizens, it did not consider any alternatives or less intrusive methods. However, if present deliberations go smoothly and successfully there is a chance that new regulations would be implemented. Therefore, there exists a chance that in future; trade in virtual currencies would be regulated to some extent, not to encroach on one’s privacy but to safeguard national interests and the interests of the users. Hopefully, these regulations would not introduce any form influence or interference from third parties.
Legality in other parts of the World
Cryptocurrency has affected the economy of not only India but the whole world thereby proving that education and social structure of a nation largely affects its decisions. Therefore, to understand the true picture regarding legality of cryptocurrency, we shall also take a look at its legality in other nations. For this purpose, we shall consider the legality of cryptocurrency in three countries namely- Japan, Saudi Arabia and Nepal.
Japan, as the world’s third largest economy, boasts about some of its most progressive and stringent cryptocurrency regulations. However, what is most astonishing that regulating the market was carried out against several high-profile crimes involving cryptocurrency. The Japanese regulators, instead of reacting negatively to these events, used them as an opportunity to develop a legal framework that can help reduce illegal activities through cryptocurrencies and instead in regulating them so as to provide safety.
The extraordinary efforts of Japan’s financial authorities to impose a working regulatory framework for cryptocurrencies should be regarded as an example throughout the world as the regulators have shown willingness to adapt legislation when it becomes clear that the existing one is not sufficient to cope with the present situation. Furthermore, by refusing to overreact to high-profile security breaches and allowing space to learn from mistakes, Japan has provided cryptocurrencies with a level of oversight similar to traditional financial assets.
In Saudi Arabia, though not expressly declared to be illegal the Saudi Arabian Monetary Agency (SAMA) has issued a warning against bitcoin because it is not being monitored or supported by any legitimate financial authority. Thus this proves that in Saudi Arabia, as safety of citizens is given more importance, it is not allowed to trade in cryptocurrencies with the banks. Hence, though cryptocurrencies are treated as a legal mode of payment, a banking ban against the same has been implemented.
According to the Nepal Rastra Bank Act and the 2019 Foreign Exchange Regulation Act, Nepal Rastra Bank has officially declared Bitcoin and other cryptocurrencies as illegal forms of financial tender. In 2017, the Central Investigation Bureau even arrested two individuals for running Bitcoin mining and exchange operations. Therefore, until the government of Nepal introduces some reforms and regulations regading trade in virtual currencies, it is considered illegal.
Thus the above three concepts of legality of cryptocurrency help paint the true picture by highlighting the three major takes on cryptocurrency: first, where it is considered completely legal and free to trade in. Secondly, where they might be considered legal for private trade but a banking ban on their trade is imposed. And last but not least, a complete ban on trade through cryptocurrencies.
Conclusion
In conclusion, one can state that at [present there are no fixed regulations governing trade in cryptocurrencies throughout the world, thereby causing varying legitimacy of cryptocurrency in different nations. In India alone, one can witness the changes leading up to determining the legality of cryptocurrency. Hopefully the government would implement better regulations with respect to trade in cryptocurrency. However, what one can hope for is to one day have uniform regulations regarding trade in cryptocurrency so as to make them legal throughout the world. But people also have to completely understand the risks associated with trading in cryptocurrency as they are not backed by any central or government authority making them highly volatile. One must also not forget that though the merits outweigh the demerits of cryptocurrency, those demerits exist and it would be beneficial to all if in the future, while enacting laws regarding the same, we would also aim to make the system devoid of at least the present demerits. But one can truly hope that one day the uniform regulations would exist because though we cannot imagine our lives without cash or bank balance but even when they were introduced, it had taken people a lot of time to adjust to the new but undoubtedly more efficient system. That is why it is not ambitious to say that one day even the present monetary system will be replaced by trade in cryptocurrency.
Picture Source :
