INTRODUCTION

General

The evolution of money is mystifying; from trading cattle to the daily global trade of billions of cybernetic algorithms representing monetary value in a stock exchange, technological progress can be regarded as one of the constants in our society. New advancements are developed to cater to the growing needs of humankind in this fast-paced society; cryptocurrency is one such innovation. The idea of Cryptocurrency was introduced through a white paper in 2008 by an anonymous going by the name of Satoshi Nakamoto. To be precise it is a highly peer-to-peer based digital currency system without the presence of any central authority. 2017 served a turning point to this technology when it became a worldwide phenomenon and its demand skyrocketed. 

STATEMENT OF PROBLEM

1)  What is Cryptocurrency and how does it work?

2)  What is the need of Cryptocurrency and what are the advantages and disadvantages associated with   it?

3)  The current legislation does not declare Cryptocurrency legal or illegal, but RBI has issued notifications warning about the risk associated with such currency and banned all the bodies under RBI to deal in Cryptocurrency. Therefore whether there is any need for legal reform? (This will be examined in this paper by comparing it with other countries, which have regulated the use of such currency).

OBJECTIVE OF STUDY

The government is not ready for the idea of Cryptocurrency. The technology is claimed to be a bubble technology as it is susceptible to various cyber threats and consumer risks. Cyber experts contend that such use of currency is the future and the governments have to adapt to such technology in the near future. Keeping such premise in mind, the objective is to understand:

1) The concept and functioning of Cryptocurrency.

2) The way it can be classified.

3) Whether banning such currency be helpful in the future, considering the fact that, India and other countries are taking steps to curb its use.

HISTORICAL BACKGROUND ORIGIN

The attempt to make a similar kind of technology can be traced back to 1980s in the Netherlands where smart cards were introduced in petrol pumps; these cards were given instead of cash to avoid robbery during the night. During the same period, David Chaum, an American cryptographer known as “the father of online anonymity” was figuring out the concept of electronic cash. He came up with the concept of the Blind signature, which made transactions secure. This technology can be explained using a simple illustration; A & B need to exchange message, which C has to sign and it is desirable that C is unaware of the contents and the parties involved. This technology allowed masking the message and the sender to C, the only thing he could do is to verify his own signature later. [1]

Nature & Characteristics

Beyond the layers of cryptography and the mathematical nature of Cryptocurrency lies the political, social and legal nature of it.

• Social Nature

“In the world of Bitcoin, there are gold bugs, hippies, anarchists, cyberpunks, cryptographers, payment systems experts, currency activists, commodity traders, and the curious”

Cryptocurrency’s underlying philosophy is based on social relations and trust. The community around Cryptocurrency is held up with the belief that such currency will replace all social relations with regard to money with machine code i.e.; the cryptography and blockchain. Bitcoins are designed as a peer-to-peer network; it is the code involved which authenticates the transaction and not the parties contracting. The relationship of customers any financial institution is based upon trust, which can be ensured by the cryptography and blockchain in case of Cryptocurrency. Therefore, a set of computer algorithms existing in cyber reality is claimed to replace human interaction. In modern society, debt is created by loans and other services which yield interest to the sovereign. Voluntary or not, everyone in the market uses credit for what they do.

• Legal Nature

The exchange of CC involves a lot of laws, starting from jurisdiction, and contract to investment, Information Technology, and criminal law. Lack of any central authority casts a shadow on the jurisdiction; most of the countries do not have a clear position on the legality of CC, some have tried to regulate it. In the meantime, there is no denying that the cryptographic money exists and utilized broadly and the volatile nature of the CC, susceptible to hacking, discourages government to regulate.

In India due to lack of legislation in this regard, it is being tackled aggressively by the    Indian government by freezing accounts of CC exchanges to protect the rights of the investors. The RBI is the regulatory body of money markets in India, which has also gone ahead and issued a notification in this regard, cautioning the investors that the risk is going to be borne by them and no remedies are available as of yet.

Characteristics

Pros:

• Bitcoin, unlike money, cannot have inflation, because there is a limited number of Bitcoins which is only 21 million and its smallest part is one hundred millionth of a Bitcoin.
• Verification in transactions is secured by the way of a private and public key, therefore, by the way of Digital Signatures, authentication is made, which system is recognized legally in India.
• Cannot be counterfeited like a traditional
• Customers do not need to disclose their personal data. In systems like PayPal personal data is collected and the system has the power to freeze it without any warning. In Bitcoins, an owner has complete control over his/her wallet.
• The authenticity of each transaction is protected by digital signatures corresponding to the sending

Cons:

• While some CC like Bitcoins is growing more popular, it’s still relatively unknown for the majority. Although more business is starting to adopt and receive CC, it is mostly done to be at the forefront of innovation and not a necessity.
• The speed of transaction is not as fast when compared to existing systems like Visa or MasterCard.
• Password or device if lost can be fatal; if the wallet is lost then recovering it is almost impossible.
• The transactions are irreversible.

Legal status and implication of Cryptocurrency in (Germany and U.S.)

The view on CC is not the same in all the countries, there is no international consensus regarding the same and therefore it can be said that determination of the legal position of CC is still at a primary stage. Firstly, no government wants its citizen to operate currency in a peer-to-peer basis, which may disturb the flow of govt. issued currency; secondly, it has to be classified because on the basis of CC’s category the tax and other implications shall be imposed. Thirdly, CC’s are unstable and are prone to theft and hacking, therefore, protection of consumers remains a question. Keeping this in mind, some countries have explicitly banned it since CCs can be used to feed the purpose of terrorism and other illegal activities. The IMF in 2017 has said that governments should look into the legality and regulation of CC as it would affect the role of Central Bank and financial services of a country and if it is ignored CC might cause governments to, “run for their money”.

TYPES

• Bitcoin as a form of currency

In the case of, Security Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust  the following was noted:

“[Bitcoin] can be used to purchase goods or services, and as Shavers stated, used to pay for

Individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the US dollar, Euro, Yen and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”[2]

In the popular case of, United States v Ross William Ulbricht[3], the court noted that:

“The money laundering statute is broad enough to encompass use of Bitcoins in financial transactions. Any other reading would – in light of Bitcoins’ sole raison d’être – be nonsensical.

Congress intended to prevent criminals from finding ways to wash the proceeds of criminal activity by transferring proceeds to other similar or different items that store significant value. … One can money launder using Bitcoin.”[4]

• Bitcoins as security

The definition of security in U.S legal system is very wide, there is certain requirements which if met would qualify an object as security.  Section 2 (a) (1) of the Securities Act, 1933 defines security broadly as to include any financial instruments which constitutes an investment and can have security laws enacted. Securities also include investment contracts, which is a contract between two parties agreeing to invest a specific amount of money and distribute its profit/loss as agreed upon. The U.S Supreme Court in the case of, SEC v. Howey Co  clarified that;

“The test of whether there is an “investment contract” under the Securities Act is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or non speculative, or whether there is a sale of property with or without intrinsic value.”

Position of Cryptocurrency in India

The position of Cryptocurrency in India is at a primal stage, it is neither legal nor illegal as there are no legislative documents declaring either. Recently, the Finance Minister of India, Arun Jaitley in his 2018 Union budget speech declared CC as an illegal tender, but assured that the government will explore the underlying technology of Blockchain Technology. Though this speech provides a peak into the intention of the current ruling party, it does not rule out the possibility of regularizing CC in India like several other countries in the near future. Further, the speech does not form any legal basis on the classification of CC.

It has to be noted that in 2017, the Supreme Court of India expressed its intention to regularize CC, which is contrary to the action of RBI.

In the case of, Dwaipayan Bhowmick Vs Union of India & Others[5], a PIL was filed under Article 142 of the Constitution of India praying the court to issue directions clarifying the nature of CC and set up a special committee to frame appropriate regulation to deal with CC in India. The lack of any framework had rather left the market unregulated, which can harness all sorts of criminal activities.

CONCLUSION

Science has always helped to transform mere imaginations into reality. CC is one such example where the entire concept of money and the role of government have been challenged, this has led governments either to regulate it or ban it. In my opinion, regulating and developing mechanisms to control CC would give governments more security than by banning it completely; regulating it like Germany would generate huge revenues to the government whereas, banning CCs would not serve well in the long run because more and more countries are beginning to recognize CCs. Further, recent observations by expert suggest that Bitcoin and other Cryptocurrencies might become the biggest international currency by market capitalization.

[1] Cryptocurrency and its legal implications: A comparative analysis

By Gazala Parveen  https://blog.ipleaders.in/legal-implications-cryptocurrency/

[2] Section 66C of the IT Act.

[3] Section 66D of IT Act, 2000

[4] https://www.coindesk.com/imf-calls-for-international-cooperation-on-cryptocurrencies/

[5] https://www.thequint.com/news/business/bitcoin-cryptocurrency-trade-in-india

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