Bitcoin in India and its Legality

February 15, 2018

Bitcoin in India RBI


During the Budget speech, 2018 the Government announced that it would take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.After the country has been resonating the Finance Minister’s statement on cryptocurrencies not being legal tender in India, there has been considerable curiosity about fate of Bitcoins.

Money is an accepted medium of exchange. A currency is an accepted form of money in a particular country and a crypto currency is a form of currency wherein encryption techniques are used to regulate its generation. Bitcoin is a cryptocurrency and a payment system which operates through a peer-to-peer technology. It was launched in the year 2009 by a person or entity by the name of ‘Satoshi Nakamoto’. This currency operates through a system of codes which uses complex and cryptographic code in its design. One of the most striking characteristics of Bitcoin may be the fact that it is not regulated by any central authority or banks. It is therefore, not limited by Geographical boundaries. The network itself as a community issues Bitcoin. For this, it uses complex and cryptographic code in its design. Bitcoin is created through a system called mining, which has been designed in such a way that the maximum number of Bitcoins that can ever be created is 21 million.

Technology used in Bitcoins:

Bitcoin makes use of the Block chain technology. A block chain is more or less an incorruptible digital ledger that can be programmed to record details of financial and non-financial transactions. The whole ledger is completely transparent for every person in the network.

In recent years, virtual currency has attracted the attention of many in India in terms of its usage and the identity and form that it holds. Amongst the multiple digital currencies in the world, one can safely call it to be the fastest growing and widely used category of money known as cryptocurrency.

Legal position of Bitcoin in India

As of present, the position and legal status of Bitcoins vary from country to country. In many cases, it is still undefined and changing in many of them. Bitcoin is in a stage where some countries have explicitly allowed its use and trade, while others have banned or restricted it. Let us look into the position of Bitcoins with reference to India.

  1. Applicability of Coinage Act, 2011Coins in India are governed by the Coinage Act, 2011. Section 2(a): “coin” means any coin which is made of any metal or any other material stamped by the Government or any other authority empowered by the Government in this behalf and which is a legal tender including commemorative coin and the Government of India one rupee note.From the above definition, it is clear that bitcoin being a virtual currency lacking the sanction of the appropriate authority in India, does not fall under the ambit of coins under the Coinage Act.
  2. Applicability of Foreign Exchange Management Act, 1999 So far as Bitcoin is concerned, one must look into the provisions of FEMA to see whether Bitcoin can be considered as a currency or not. For this, we take a look at section 2 (m) which deals with foreign currency, section 2 (q), which deals with Indian currency and section 2 (h) which deals with currency. Perusal of these provisions would show that cryptocurrency or in other words virtual currency is nowhere covered in the definitions. Hence FEMA, presently is not applicable when it comes to the regulation of Bitcoins in India, which further implies that the Reserve Bank of India (hereinafter referred as ‘RBI’) at this stage is unable to regulate Bitcoins and its operations.
  3. Applicability of KYC means “Know Your Customer” . It is a process by which banks obtain information about the identity and the address of its customers. The KYC procedure is meant to be undertaken by the banks while opening its customers’ accounts. In India, KYC Norms are set by the RBI as banks are required to continuously monitor their customers’ transactions, keep an up-to-date record of their identity, and take appropriate steps in case any of the transactions of a customer break from his or her usual pattern of behavior.One of the most prominent Bitcoin wallet/app in India, Zebpay, while following the KYC and Anti-Money Laundering (AML) norms, adheres to a self-regulation structure at present. This provides the need to attract the applicability of the provisions of the Prevention of Money laundering Act, 2002 (PMLA), in order to ensure and secure that individuals or organisations do not use these platforms for illegal purposes.
  4. Applicability of the Sale of Goods Act, 1930There is a possibility that Bitcoins may be considered as ‘goods’ as per section 2 (7) of the Sale of Goods Act, 1930. But in situations where Bitcoins are used as consideration, this Act will not apply since consideration can only be in the form of price as per section 2 (10) of the Sale of Goods Act, which is regulated by an existing law and not otherwise i.e., consideration cannot be in kind under Sale of Goods Act. The applicability of the Indian Contract Act, 1872, could also be considered if the transactions between parties are formed by lawful consideration.
  5. Taxability of Bitcoin in India Since coming into prominence in the Indian market, Bitcoin has been raising questions as to its taxability as per the Indian taxation law. Keeping this in mind, both the central and state governments levy taxes. When taxation is on income, it may be on Bitcoin representing such income or on Bitcoin representing asset value.Bitcoin may be treated as capital assets under section 2 (14) of the Income Tax Act, 1961, which talks about properties and securities held by an assessee. Further, any profit or gain arising from the transfer and sale of an asset, i.e., Bitcoin, may be treated as income or capital gain under the Income Tax Act, thereby making it taxable.
  6. Contribution of the RBI and Supreme Court of IndiaThe RBI vide its press release 2017-2018/1530 dated
    December 5, 2017, has restated the concern over the usage and flow of virtual/ digital currency including Bitcoins, by drawing the attention of public to its earlier own press release 2016-17/2054 dated
    February 1, 2017, wherein it was clarified that it has not given any license/ authorization to any entity/ company to operate such virtual currency. Further, it was also clearly stated that any user, holder, trader, investor etc., will be doing business solely at their own risk.The Supreme Court of India also recently issued a notice to the Ministries of Finance, Law and Justice, Information Technology, and market regulators including the Securities and Exchange Board of India and the RBI after hearing a Public Interest Litigation
    (Writ Petition (Civil) no.1076 of 2017) under Article 32 of the Constitution against the Union of India filed by Adv. Dwaipayan Bhowmick seeking a regulatory framework to be laid down on virtual currency and wanted that the virtual currency be made accountable by the exchequer.


Bitcoin in India as seen from above still has a long way to go in terms of its regulations under the existing Indian laws. But given the broad spectrum and opportunity that it holds for the people, the market and the economy as a whole, while considering the inadequacies it may pose in terms of its value through the course of time and security threat that any virtual currency may hold, it is upon the Indian Government to implement regulatory frameworks for the smooth operation of Bitcoin, which does not compromise and restrict its movement and transactions.

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