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In the electronic world, Bitcoin is a kind of digital currency i.e. formed and kept electronically. They are not like conventional trading currency i.e. printed and used for day-to-day exchanges like dollar or rupees. It is popularly known as a cryptocurrency because it is cryptographic and is in virtual form. Bitcoins can be used to make payments both digitally as well as in retail stores/outlets.
Origin of Bitcoins
The genesis of Bitcoin was made in the year 2008 by a Software Developer, Satoshi Nakamoto in the form of an electronic payment method which was built on mathematical proof. Then, it was digitally created by a group of people that welcomed everyone to join and make use of this ‘peer-to-peer electronic payment system’. This community network brought this virtual currency alive by introducing its own payment system.
Legal Position on Bitcoins in India
It is important to analyze the risks of using bitcoins before understanding its legal position in India and why there is a need to govern the same.
Virtual currencies like e-wallets or bitcoins are in electronic forms which are stocked in online/electronic media but do involve certain risks:-
The position taken by the Reserve Bank of India (RBI) on the legalization of Bitcoins in India
Despite other countries like the USA, India’s RBI has not yet governed or authorized the use of bitcoins. In a press release issued by RBI, it declared that creation, trade, and use of virtual currencies like bitcoins are not authorized as a mode of payment by the central bank. RBI is still assessing the risks related to the security of using virtual currencies and there is a need to examine the regulatory framework that governs the payment system mechanism.
The position taken by the Foreign Exchange Management Act (FEMA) on Bitcoins
As per the definition of currency under FEMA, 1999, only RBI is authorized to include bitcoins within the present definition of currency. Currency other than Indian currency is known as ‘foreign currency’ and is governed by Foreign Exchange laws. Bitcoins may fall within the purview of the definition of ‘foreign currency’.
The position taken by the Indian Copyright Act on Bitcoins
Bitcoins are originated on the basis of a mathematical proof or computer programs. India’s copyright Act has defined computer program as a set of instructions in words, codes, or schemes that are capable of causing a computer to perform a given task or attain a particular outcome. In consideration of the aforementioned legislation and advancement in the global economy, India may make use of these laws to legalize bitcoins in the near future.
Can Bitcoins be used as currency in India?
First let us understand the definition of currency as given in FEMA Act, 1999 which says that “currency includes cheques, drafts, currency notes, money orders, letters of credit, bills of exchange and promissory notes, postal notes, traveler's cheques, credit cards, postal orders, other similar instruments as notified by RBI.”
It clearly is not an exhaustive definition and allows RBI to include or notify any other kinds of instruments. Also, all currencies that are not part of Indian currency fall in the scope of foreign currency. These foreign currencies have to comply with the rules, regulations, and standards of FEMA.
In consideration of the RBI press release, Bitcoin is not an authorized Indian currency and thus, falls under the head of foreign currency, which means, the rules and regulations of the foreign exchange regime of FEMA will apply on the same.
Firstly, Bitcoin is not governed by any central bank or monetary authority and secondly, acceptance of Bitcoins depends on the free will of the third parties. Thus, it cannot create or fulfill any financial obligation. Its peer to peer nature and virtual payment network needs to be regulated by RBI first before declaring it as a financial instrument under Indian law.
Hence, it cannot be treated as currency presently but RBI may consider it one in the near future once it devises a regulatory framework to govern its exchange and security.
Can Bitcoins be used as ‘Prepaid Payment Instruments’ in India
Payment and Settlement Act, 2007 has allowed the issuance of prepaid payment instruments like mobile wallets, PayPal, etc. under RBI jurisdiction. These prepaid payment instruments are used to buy goods or services against the amount stored in this instrument. This stored amount is the value paid for by the holders by way of cash/debit card/credit card.
Since the said instruments store a definite value which is equivalent to the value paid for by the holder by way of cash/debit or credit card, hence, bitcoins cannot be considered as prepaid payment instruments. Bitcoins have an innate value rather than definite value. In simple terms, the user of Bitcoins doesn’t represent the value of this virtual currency that he is buying. In fact, unlike other prepaid payment instruments, the value of Bitcoins keeps fluctuating on a daily basis.
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