Revisiting – The Legality of Bitcoin in India

Over the past few weeks, there has been a surge of queries on my Blog’s public comment board and a stream of e-mails requesting help with a moot proposition. A moot proposition is a fictional case worked out by law students. During one of the moot propositions, Bitcoin made its debut. I am hoping to summarize some of those questions in this post below.

This article will outline the conversations between several students seeking more information on Bitcoins legal status and classification. Links have been provided at the end of this article for further reference, all of which have been studied thoroughly for traces of Bitcoins characteristics. A few of the discussions have already been recorded under the second half of the page’s comments at this link. I am also amending some of the answers that I had replied in order to summarize the posts.

The moot proposition that started it all can be downloaded here as a PDF file.

Common Elimination IX Moot Proposition

Summaries from different individuals, Some of the Questions that came up from this case were:

Question: My moot problem (which is fictitious) is based on a person being arrested for dealing in bitcoins. He exchanged 5000 bitcoins for Rs.36, 00, 000/- you seem to have a lot of knowledge on the subject. Was wondering if you could help? I haven’t really been able to grasp the concept of bitcoins to begin with, secondly as per your blog bitcoins are being mined in India and so could be considered a domestic currency. Is there a limit on how much you can transact of something to that effect?

Reply: Bitcoin can be considered a domestic currency, as it can be mined using Indian Electricity. It is a debatable topic. There are no transaction limits, however there is a finite number of Bitcoins that will ever be mined into existence. As the demand for Bitcoin increases, so will its value.

Question: I just want to know whether bitcoins are regulated by FEMA, 1999 or RBI regulations. If bitcoins purchased in a foreign nation and exchanging it to an authorised money exchanger in India without special or general permission from RBI amounts to an offence of money laundering?

Reply: It cannot come under FEMA because Bitcoins can be mined in India as well, Making it a domestic software. Anytime Bitcoin comes in Contact with Fiat, it moves into the grey are of the law. However cash and P2P networks are nearly impossible to regulate – Good example would be Bit torrent, we all know that it is used for illegal file sharing, but it cannot be shut down due to its decentralized nature. Even though the authorities and regulators know about it.

Question: If a person making transaction in Bitcoin is arrested by economic offences wing of police and charged for the offences of FEMA and prevention of money laundering stating that dealing with Bitcoin using fiat needs permission of RBI, then how could he defend himself from?

Reply: But where does it state by the RBI that Bitcoins cannot be used? Once again Bitcoin to Fiat rests in the grey area of the law. As far as money laundering is concerned, this is more prevalent with cash than Bitcoin. As long as taxes are paid and income is declared and nothing illegal is undertaken, why would Money Laundering come into the picture as well? There is nothing related to Bitcoin in any countries laws. Bitcoin was developed to solve these problem.

Question:

Does dealing in bitcoins violate the provisions of Foreign Exchange Management Act, 1999 specifically Section – 3, 4, 7, 13 and moreover does it violate any Foreign trade and exchange laws or any RBI regulations or guidelines. Is Bitcoin a currency under the Foreign Exchange Management Act, 1999 and if not then why?

Reply:

As Bitcoin can be mined in India itself, it cannot be classified as an International currency. Even if the coins are mined outside the country, it is very easy to mix the coins and anonymize the transaction. This typically cannot be regulated. Bitcoin can be termed as a currency as can Rice and Salt. At the same time, all these currencies can be termed as commodities as well. Bitcoin is a unique set of characters which have value due to the fact that they are scare and hard to mine.

There is nothing like Bitcoin in any current Indian regulation.

Question: Can Bitcoins be termed as currency under the definition provided by FEMA. On this line, if we can prove that they are Currency and FEMA is attracted, then we can go on to say that some RBI regulations are required to make such currency legal in India. Therefore, mainly I wanted your opinion on the issue whether Bitcoins can be covered under the definition of currency provided under Section 2(h) of the FEMA.

Answer: Bitcoin is an item of trade used to buy and sell various goods and services. It is also a piece of software that can be sold or bought by anyone who puts a price on It gathers value from the users and people who create and mine Bitcoin. If a currency needs to be issued by a governing body the Bitcoin cannot be classified as a currency.

Bitcoin is a commodity and a currency. It is the same as Gold or Precious stones.

My Views

As Bitcoin is open source and unregulated, it is free game for everyone. It has been a tremendous investment in 2012 and surges forward in 2013 as well. Any government that decides to regulate, control or outlaw Bitcoin only faces the problem of creating more value in Bitcoin due to its uniqueness. Bitcoin is nothing more than a unique and secure way of sending a string of numbers from one person to another. Due to tremendous merchant adoption as a token of value, Bitcoin races the charts at all the global exchanges every single day. The Bitcoin network is the strongest combined computational force in existence. Strengthened by millions of users, this network cannot be hacked into or have any of its parameters changed.

The importance of leveraging the economics of Bitcoin is more valuable today than the technology side of it. It was compared to the internet by Aaron Koenig, when he said “Bitcoin is like the decentralized internet. Not everyone knows how the internet works, packet switching, TCP/IP, etc., but we all know how to use the internet. And we do it every single day.

I plan to stay on course with my dedication to Bitcoin, expanding into newer and deeper economics and application development. As long as Bitcoin is not used illegally and taxes are paid in a currency accepted by the Government, It is cross border open-banking at its finest.

With Indiabitcoin.com all set to integrate India with Bitcoin, one can only hope that more adoption will follow.

Links

Foreign Exchange Management Act

Prevention of Money Laundering Act

Definitions in the PMLA

India’s Portal to the Bitcoin world