Bitcoins Alliance India (BAI), a community of Bitcoin entrepreneurs, welcomes the RBI warning about the risks surrounding the purchase, sale or use of Bitcoins. In light of the recent events, BAI appointed Nishith Desai Associates, an international Legal and Tax Counsellors, to examine the legality of Bitcoins.
Nishith Desai the Founder and Managing Partner of Nishith Desai Associates clarified that “Our Bitcoins Practice Group examined the issue from techno-legal perspective and have found that Bitcoins per se are not illegal in India. This is in consonance with international approach. US considers Bitcoins as a legitimate payment alternative. US Senate Home Land Security and Government Affairs Committee and the Senate Banking Committee consider that virtual currency has legitimate uses.”
Similar positions have been taken by Canada, the UK, Norway, Germany, Sweden, Israel, Cyprus, Turkey, Australia, Argentina and several others. Monetary Authority of Singapore has stated that whether or not businesses accept Bitcoins in exchange for their goods and services is a commercial decision and it will not interfere with it. China has restricted only financial institutions from dealing directly in Bitcoins without making it illegal.
Bitcoin is cryptographic digital product first described in a 2008 paper by single or group of pseudonymous developer(s) by the name of Satoshi Nakamoto who called it a “peer-to-peer electronic payment system”. Bitcoin creation and transfer is based on open source cryptographic protocol managed in a decentralized manner.
The Bitcoins look like currency or money, but it is not. It sounds similar to security, but it is not. It feels like a derivative or a negotiable instrument, but it is not. It’s not pre-paid instrument either. While in the US, Bitcoins are regarded as a commodity, it is doubtful whether it could be considered so in India as it is an intangible property.
At best it is a combination of protocol, data, and software program stored at multiple locations. When transacted it involves some kind of bartering. If the Bitcoins themselves are sold for a price in terms of ‘money’, Sale of Goods Act would apply but accepting Bitcoins against goods should not attract the provisions of Sale of Goods Act. Provisions of FEMA would not be triggered especially when the transactions are intra-India. Even importation of Bitcoins would be legitimate if transactions are carried out through proper banking channels. In any event as a commercial transaction the provisions of the Indian Contract Act would have to be complied with. Consequently a transaction in relation to Bitcoins must be for lawful consideration and should not be opposed to public policy. However, exporting goods from India against Bitcoins would not be permissible as the proceeds of exports must be repatriated to India in terms of foreign exchange through normal banking channels. Thus Bitcoins per se are not regulated by any authority as it an ‘internet product’ so to say.
It came to us as a bit of surprise that the BAI traders have a stringent KYC (know your client) process which is voluntarily followed by them. It appeared to be similar to the process followed by Indian banks. Further, it has been clarified to us that they would be willing to share all information with regulatory authority in accordance with law.
Whether the Bitcoins can be used for illegal trade is a question often asked. Yes, like any other cash it can be. But the cash is simply not traceable except by catching someone with physical possession. Bitcoins are far more traceable than money especially when traded through Bitcoin traders. BAI is committed to develop further standards of openness and transparency in collaboration with the regulators.
If properly harnessed, Bitcoins in general have number of benefits:
1. Facilitates “financial inclusion” to the poor and unbanked population
2. Significantly reduces transaction costs
3. Enables the growth, ease and security of both ecommerce and physical transactions
BAI urges the government to clarify that the Bitcoins are not illegal per se, however, they are saddled with number of commercial risks including its volatility, loss of hardware, digital wallet, etc.