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‘Nassim Taleb’, an author, a philosopher and an alumnus of ‘Wharton School of Business’
known for his famous book, ‘The Black Swan’ tweeted on 20th March 2013, ‘Bitcoin is the
beginning of something great: a currency without a government, something necessary and
imperative.’1 Bitcoin is a cryptographic currency or ‘cryptocurrency’, the one that uses
‘cryptography’, which is coding or making a program, to control its creation or management
instead of depending upon an independent or central authority like a central bank for its
existence.2 Creation of Bitcoins is known to have come from the hands of an unknown person
or a group of persons using the pseudonym ‘Satoshi Nakamoto’. A paper was published by
him online that gave the description of bitcoin as a ‘cryptocurrency’ for the first time.
According to him, the prominent problem faced with the fiat currency was that ‘trust’ was
required to make the system work, he says that while looking into the history of fiat
currencies, one can see that it is full of breaches of such ‘trust’. He further goes on to state
that the banks use the currency entrusted to them to lend it out in ‘waves of credit bubbles’,
with hardly anything in reserve as is done in a loan making process.3 Bitcoin serves as an
alternative to fiat currency and is a new mode of transaction. It is software based online
payment system introduced as an open source in 2009.4 It is also considered to be world’s
first decentralized currency.5


Like Indian Rupee, Bitcoins have no such intrinsic value and unlike them they do not have a
legal form, cannot be regarded as legal tender and are not supported by our Central
Government. This system is completely private without any traditional financial institutions
involved in transactions. Each Bitcoin and each user is encrypted with a unique identity and
each transaction is recorded on a ‘public ledger’ which is decentralized (‘distributed ledger
or a blockchain’) that is completely visible to all computers on the network but does not
reveal any private information of the parties that are involved in it. A technique to discover

Jerry Brito, Andera Castillio, “Bitcoin : A premier for policymakers” 2013 available at http
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System,,
new Bitcoins is called as ‘mining’, where in order to make sure ‘Bitcoin’ is genuine, miners
verify the transaction.6 For example a transaction may be verified in a way which is similar to
solving a math problem, the miner who is able solve the problem first, broadcasts his proof to
the ‘Bitcoin’ network. The result is verified by other miners in the network and when it is
found to be correct, the system rewards him with few Bitcoins. They may also be obtained in
exchange of conventional money such as Indian rupee as once the purchase is made the value
of particular amount of ‘Bitcoins’ is transferred from one ‘wallet’, electronic wallet such as
‘citrus’ or ‘state bank buddy’ to another or as a mode of payment7 or they can be obtained in
exchange of sales of goods or services such as a merchant accepting Bitcoin from a buyer for
the sale of goods which he made to him. ‘Bitcoin is a remarkable cryptographic achievement
and the ability to create something that is not duplicate in the digital world has enormous
value’, says ‘Eric Schmidt’, who served as CEO of ‘Google’ from year 2001 to year 2011. It
has become a popular mode of transaction including for those who are vendors of goods and
provider of services, despite being a ‘cryptocurrency’, its usage is growing fast. Also they are
being used a lot in many countries including North and South America, Europe, Asia,


Although we find that bitcoins are being used in many countries, despite of that, we find a
varied response of nations over the current surge in Bitcoins, some are readily accepting their
regime whereas some are fretting over them and are still in a state of quandary. It’s important
to note that the first ever country to introduce a national law on the usage of Bitcoin was
Canada. In Canada, those who deal in digital currencies have to register themselves as
‘Money Service Businesses’, also referred to as ‘MSB’s’ with ‘Financial Transactions and
Report Analysis centre of Canada’, also called ‘FINTRAC’ and all the businesses that are
dealing in digital currency have now been subject to ‘Proceeds of Crime Money Laundering
and Terrorist Financing Act’, ‘PCMLTF’.9 Also we find that failure to comply with the
obligations mentioned in the above statutes, results in a criminal offence punishable by the
Canadian domestic law. Thus in Canada the use of Bitcoins is legal and is subjected to
different statutes as well.

Dean, Andrew, “Online Gambling Meets Bitcoin”,
In USA, the bill titled ‘The Crypto-Currency Protocol Protection and Moratorium Act’,
which is yet deliberated upon, when passed would hold off any kind of ‘statutory restrictions
or regulations’, which may exist presently.10 Currently ‘Internal Revenue Service’, also
known as ‘IRS’ of USA taxes ‘Bitcoin’ holdings as if they were a type of ‘property’. The
Moratorium bill however proposes to treat ‘Bitcoin’ as ‘currency’, rather than ‘property’ and
criticizes the ‘asset focussed tax perspective’ of ‘bitcoin’.11 The essence of the same could be
seen in the statement made by ‘Ron Paul’, who was former candidate for US Presidential
election, when he shared his thoughts on a leading website named ‘Quora’, where he said ‘I
don’t personally believe that bitcoin is true money,however it should be perfectly legal and
there should be no restrictions on it and there should be no taxes on it’.

Due to absence of a clear statute that would expressly apply to Bitcoin, we cannot be sure as
to what law would apply to them. In USA for example 18 U.S.C. Section 1341 that talks
about ‘mail fraud’ and Section 1343 which talks about ‘wire fraud’ and which talks about
‘whoever, having devised or intending to devise any scheme of artifice to defraud, or for
obtaining money or property by means of false and fraudulent pretences, representations, or
promises, transmits or causes to be transmitted by means of wire, radio or television
communication in interstate or foreign commerce, any writings, signs, signals, pictures, or
sounds for the purpose of executing such scheme or artifice’, can be applied to
‘cryptocurrencies’ such as Bitcoins and its scope a can be extended to include digital
currency like ‘Bitcoin’ also. This can be applied because selling and purchasing of goods
takes place through bitcoins also and them being a digital currency, which have a specific
exchange value can be ‘wire frauded’ by anyone and therefore the section which talks about
‘wire’ and ‘mail’ fraud fits the scope of bitcoins also. The supreme court of United States
have interpreted clause 5, section 8 of Article 1 of the US constitution which talks “to coin
money, regulate the value thereof, and of foreign coin, and fix the standard of weights and
measures;”, to include the authorization of legislation chartering the ‘first bank’ of United
States and giving it power to issue circulating notes.12 It was even interpreted to authorize
legislation that required US treasury notes to be treated as legal tender for antecedent debts.13
Honorable Court in Knox v. Lee14 opined that “every contract for the payment of money

McCulloh v. Maryland, 17 U.S.(12 Wall.) 457(1871)
Juilliard v Greenman, 110 U.S. 421 (1884)
79 U.S. (12 Wall.) 457, 549 (1871)
simply is necessarily subject to the constitutional power of the government over the currency,
whatever that power may be, and the obligation of the parties is therefore assumed with
reference to that power”

It’s important to understand that one of the main problems which are faced by the authorities
that are moving forward to regulate these technological currencies is that they sometimes find
it difficult to apply existing laws to technological currencies. New York on June 3, 2015
became the first ever state to establish a dedicated framework for the control of virtual
currency business when its department of financial services issued regulations for the
supervision for digital currency businesses operating in New York.15 Also it issued its first
virtual currency license to Bitcoin exchange, ‘itBit’ Trust Company, LLC also received a
license to operate as a trust under New York’s state banking laws.16 Despite of absence of a
statute explicitly dealing with bitcoin, many countries are moving ahead with the prospect of
recognition of bitcoin as a legal method of transaction, it is not illegal per se, and however
there is not such law making it legal also.

The much awaited law which came into existence in Japan on April 1, 2017(which marks the
beginning of a new fiscal year), treats bitcoins as a legal mode of payment. 17 According to
this law, every bitcoin exchange would come under regulatory scrutiny. Since it is now
required as a legal tender, it would mean that all the laws and regulations that govern banks
and other financial institutions, would be applied to bitcoins, same thing was stated by
Japan’s ‘Financial Services Agency.’18 Also in a report which was published by ‘Yasutake
Okano’ of ‘Nomura Research Institute’ he stated that Japanese laws such as “Banking Act”
and “Financial Instruments and Exchange Act” would require a change in order to meet
change in technology.19 Major role was played says “Niekki” by the “Accounting Standards
Board of Japan” for issuing certain standards to deal with digital currencies like Bitcoins.20
This was a bold step which was taken by Japan in order to keep up with the changes in trend
of digital transaction.

Evan Weinberger, “NY Bitcoin Rules Put Virtual Currency On Path to Legitmacy,” http://
“NYSDFS”, press release, “NYSDFS Grants First Charter to a New York Virtual Currency Company,” May
7, 2015,

The Bank of England in its ‘Quarterly Bulletin 2014 Q1’ released a report in which it
unveiled the mystery as to how banks make money out of nothing.21

“Most of the money in our economy is created by banks, in the form of bank deposits – the
numbers that appear in your account. Banks create new money whenever they make loans. In
UK 97% of the money in the economy today is created by banks, whilst just 3% is created by
the government”22.

“In the modern economy, most money takes the form of bank deposits. But how those bank
deposits are created is often misunderstood: the principal way is through commercial banks
making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit
in the borrower’s bank account, thereby creating new money.”23 And this new money created
by bank represents new spending power or money in the economy.

The point when a bank makes a loan, for instance to somebody taking out a mortgage to buy
a house, it does not do so by handing over them banknotes. Instead, it makes a new bank
account and credits their bank account with a bank deposit of the size of mortgage. At that
moment, new money is created. To this reason, some economists have referred to bank
deposits as ‘fountain pen money’, made at the stroke of bankers’ pens when they affirm

“When banks extend loans to their customers, they create money by crediting their
customers’ accounts.”25

The money created by banks in UK is not limited by reserve ratio. In fact there has been no
reserve ratio for years which means that total amount of money in the economy is not really
limited. The bank created money can expand out of control and Bank of England wouldn’t be
able to stop it at least not within the current monetary system. In 2006 the bank created
money was 80 times bigger than the base money (which comprises of real money).

Bank of England – Money in the modern economy: an introduction
Money in a Human Economy, by Keith Hart, page 197
Sir Mervyn King, Governor of the Bank of England 2003-2013
The repercussions of this money created by bankers exude inflation which ultimately
culminates into house price bubbles and gambling on financial markets and this has led to
ever widening inequality, the highest personal debt in history and house prices that very few
people can afford, before even mentioning the financial crisis. Some of the prominent
consequences are as follows:

A bank creates new money to profit itself and the borrower. The borrower uses the new
money to purchase things: labour, businesses, capital assets, luxuries, etc. The more assets a
borrower has, the more it can borrow. In this way, new money enriches persons who already
have money. By purchasing assets, new money enhances the value of capital assets generally.
Income from these assets accumulates with their owners: rent, interest, dividends, etc. which
culminates into inequality.26

‘Extreme cycles of prosperity and recession are an inevitable result of banks creating the
money supply due to what economists have called the ‘perverse elasticity’ of bank-created
money: banks create too much money in the good times, and not enough in bad times’27.

We will see in the paper as to how Bitcoins provide the best remedy for all these problems
which are deliberately caused by the present banking systems across the world.


One of the prominent objectives of demonetization was to curb black money, corruption and
fake money menace (the real currency i.e. paper currency issued by RBI). Digitalisation has
always been the primary task of our Prime Minister Shri Narendra Modi’s government and
demonetization is only an effect of digitalization. He jibed at the chief political leaders who
have stashed big amount of money and therefore joined hands to force government to
rollback its decision.
The government’s stated objective behind the demonetization policy are as follows:
i) It’s an attempt to make India corruption free.
ii) it is done to curb black money
iii) to control escalating price rise
iv) to stop funds flow to illegal activity

Lester, Richard A. Monetary Experiments (1939, 1970) p. 291; and on p.292
v) to make people accountable for every rupee they possess and pay income tax
vi) to stop the circulation of fake currency
vii) it is an attempt to make a cashless society and create a Digital India
It is significant here to point out that the ultimate objective is to make India a cashless
society. All the monetary transaction has to be through the banking methods and individuals
have to be accountable for each penny they possess. It is a giant step towards the dream of
making a digital India.
It is not ironic that ‘Milton Friedman’, author of a leading treatise on the interaction of
currency, macroeconomics and governmental action prophesized of a time when the internet
would help evolve a new currency28.
Recently a surge has been seen in the use of Bitcoins as a mode of payment. This is because
the fee charged in case of making payments with the use of Bitcoin is lower than the general
2-3% interest imposed by credit card processors.29
India is also ushering in the same direction as many established and rookie entrepreneurs are
enthused about Bitcoin system and all eyes are on the Reserve Bank of India (RBI), which is
yet to come out with an ultimate verdict. ‘Although, RBI has issued a press release cautioning
users, holders and traders of Virtual currencies, including Bitcoins, about the potential
financial, operational, legal, security related risks that they are exposing themselves to’30.
The principle laws concerning existence of Bitcoins in India are:

1. Power to make laws on Bitcoins under Constitution of India, 1950

In order to understand the position of Bitcoins with respect to Constitution of India a
profound analysis has been undertaken. It has been found that Article 246 read with
Seventh Schedule of the Constitution enumerates the list of activities that the Central
Government and the State Governments are allowed to legislate.
Entry 36 and 46 of List I of the Seventh Schedule of the Constitution states that the
Central Government is allowed to legislate in respect of currency, coinage, legal

A Monetary History of the United States, 1867 – 1960, Milton Friedman and Anna Schwartz, Princeton
University Press
A. Rogojanu and L. Badea, “The issue of competing currencies. Case study – Bitcoins”;Theoretical and
Applied Economics Volume XXI (2014), No. 1(590), pp. 103-114.
tender, foreign exchange and bills of exchange, cheques, promissory notes and other
like instruments respectively.31
If Bitcoins fall within any of the categories stated above then the Central Government
shall have the exclusive power to legislate. So now our task has been reduced to
determine as to under which category Bitcoins fall.

2. Can Bitcoins be treated as ‘currency’ or ‘legal tender’ under ‘Foreign Exchange

Management Act’, 1999 (“FEMA”) and ‘Reserve Bank of India Act’, 1934?
Section 2(h), “FEMA”, 1999 defines ‘currency’ and says, ‘it includes all currency
notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques,
letters of credit, bills of exchange and promissory notes, credit cards or such other
similar instruments, as may be notified by the Reserve Bank’32. The definition of
currency is not exhaustive but inclusive as it begins with ‘includes’. Hence it leaves
the discretion of conferring the status of currency on Bitcoins in the hands of Reserve
Bank of India (“RBI”) and there is no such declaration in respect of crypto currencies.
So, in light of the above definition it can be validly deduced that status of currency
can be bestowed upon Bitcoins.
“FEMA” defines ‘foreign currency’ as ‘any currency other than Indian currency’.33
Definition of ‘Indian Currency’ under “FEMA” states that "Indian currency" means
‘currency which is expressed or drawn in Indian rupees but does not include special
bank notes and special one rupee notes issued under section 28A of the Reserve Bank
of India Act, 1934’34.
Legal tender has not been defined anywhere under Indian Law. The exclusive power
to issue bank note is conferred upon Reserve Bank of India (“RBI”). The Bank note
issued by RBI is treated as legal tender.35
‘Legal tender’ is the money that is recognised by the law of the land, as valid for
payment of debt. It must be accepted for discharge of debt. The “RBI” Act of 1934,
which gives the central bank the sole right to issue bank notes, states that “Every bank

Entry 36 and 46, Seventh Schedule, Part XXII, Constitution of India, 1950
Section 2(h) of The Foreign Exchange Management Act, 1999
Section 2(m) of The Foreign Exchange Management Act, 1999
Section 2(q) of The Foreign Exchange Management Act, 1999
Section 26 of Reserve Bank of India Act, 1934
note shall be legal tender at any place in India in payment for the amount expressed
Hence, from the above it’s been inclined to deduce that Bitcoins do not fall under the
category of ‘legal tender’.

3. Can Bitcoins be treated as ‘goods’ under ‘Sale of Goods Act’, 1930

"Goods mean every kind of moveable property other than actionable claims and
money; and include stock and shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be severed before sale or under the
contract of sale.”37
Since Bitcoins are an intangible asset, the definition of ‘goods’ under The ‘Sale of
Goods Act’, 1930 leaves a pretty fine scope for Bitcoins to be categorised as ‘goods’.
Bitcoins have been listed and traded on different stock exchanges around the world.
Some of the stock exchanges are, ‘Mt. Gox in Japan, BTC China, Bitcurex in Poland,
Bitbox in United States, Bitsamp in Slovenia’.
The term “goods” as used in Article 366(12) of the Constitution and as defined in the
said Act is very wide and includes all types of movable properties, whether those
properties are tangible or intangible. In India the test is to determine whether a
property is ‘goods’, for the purposes of sales tax, is not whether the property is
tangible or intangible or incorporeal. The test is whether the item concerned is capable
of abstraction, consumption and use and whether it can be transmitted, transferred,
delivered, stored, possessed, etc.38
After scrutinizing the pertinent laws and case laws decided by Supreme Court it can
be deduced that Bitcoins have a wide possibility to fall under the category of ‘goods’.
“Globally, there are over 11 million Bitcoins, worth over $1.2 billion, in circulation.
At present, India does not have a centralised Bitcoin exchange, but users in India can
buy and sell coins through websites such as The community here is
believed to be some 50,000-strong, with as many as 23,000 India-based users having
an online Bitcoin wallet where the digital currency is stored”39.

Section 2(7) of The Sale of Goods Act, 1930
Tata Consultancy Services v. State Of Andhra Pradesh; (2005) 1 SCC 308, ¶ 27
currency-bitcoin-yet/articleshow/21814624.cms?intenttarget=no, ¶ 5
4. Can Bitcoins qualify as ‘securities’ or ‘derivative’ under Securities Contracts
(Regulation) Act, 1956
The ‘Securities Contracts (Regulation) Act’, 1956 “Act” was enacted in order to
prevent undesirable transactions in securities and to regulate the working of stock
exchanges in the country. The transactions relating to and involving securities are
being regulated by “SCRA”.
“Securities include-40
i) shares, scripts stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body
a) [derivative;
b) units or any other instrument issued by any collective investment scheme to the
investors in such schemes]41
c) security receipt as defined in clause (zg) of section 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
d) units or any other such instrument issued to the investors under any mutual fund
ii) Government securities
iii) rights or interests in securities”
All the above instruments can be demarcated with an ease from Bitcoins, as these
instruments carry an underlying capital asset e.g. the assets of a company which are
referred as security, whereas Bitcoins do not carry such capital asset. These
instruments are issued by a proper authority whereas Bitcoins are not issued by
anyone they are obtained by activity of mining.
Another question arises here, whether Bitcoins can qualify as a derivative?
In order to answer this question it is pertinent to look into the definition of
‘derivative’, which says ‘derivative includes44-

Section 2(h) of Securities Contracts (Regulation) Act, 1956
Inserted by the Securities Laws (Amendment) Act, 1999, Sec. 2, w.e.f. 22-2-2000
Inserted by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, Sec. 41 and Schedule, w.e.f. 21-6-2002
Inserted by the Securities Laws (Amendment) Act, 2004, Sec. 2, w.e.f. 12-10-2004
Section 2(ac) of Securities Contracts (Regulation) Act, 1956
a) a security derived from a debt instrument, share, loan, whether secured or
unsecured, risk instrument or contract for differences or any other form of
b) a contract which derives its value from the prices, or index of prices, of
underlying securities’
Bitcoins do not fulfil any of the conditions in order to fall in the category of
‘derivative’. Hence, Bitcoins are to be kept out of the purview of ‘derivative’.

5. Can Bitcoins qualify as a valid consideration under ‘Indian Contract Act’, 1872?
The prominent question which arises under Indian Contract Act, 1872 is whether
Bitcoins are opposed to public policy under Section 23 of the Act?
Firstly, it is required to figure out as to what is public policy. As no exhaustive
definition of public policy is available under Indian law. The term ‘public policy’ in
itself is so wide, vast, broad and ever evolving that if one endeavours to define it
exhaustively, he would still see a sliver of it. It’s capable of encompassing umpteen
heads within it. English judge Burrough J., who held, back in 1824, that “public
policy is an unruly horse once you get astride it, you never know where it will carry
‘What consideration and objects are lawful, and what not
The consideration or object of an agreement is lawful, unless –
It is forbidden by law; or is of such nature that, if permitted it would defeat the
provision of any law or is fraudulent; or involves or implies, injury to the person or
property of another; or the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is void’46.
As far as Bitcoins are concerned they are not in contravention of any such law which
culminates in breach of public policy. In countries like Japan, Canada, United States
of America, China etc. the use of Bitcoins have been validated, this fact in itself is a
harbinger of Bitcoins not being opposed to public policy.
Another question which arises here is whether Bitcoins can be a lawful consideration
under the said Act?

Richardson v. Mellish, (1824) 2 Bing 252, (Eng.)
Section 23 of Indian Contract Act, 1872
According to Section 2(d)47, Consideration is defined as: "When at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or
does or abstains from doing, or promises to do or abstain from doing something, such
act or abstinence or promise is called consideration for the promise".
As per the definition ‘consideration’ under Indian Contract Act, 1872 is not
necessarily required to be in monetary terms, it has not provided the manner in which
such consideration is supposed to be paid by one party to another party. Accordingly,
Indian Contract Act, 1872 leaves a wide ambit for Bitcoins to be a valid
Hence under Indian Contract Act, 1872 Bitcoins serve as a valid ‘consideration’
whereas under The Sales of Goods Act, 1930 they serve as ‘goods’ and not
consideration as under the latter Act consideration has to be in monetary terms, it has
been held by the Supreme Court in Commissioner of Income Tax, Hyderabad v
Motors and General Stores Pvt Ltd48.


So far as India is concerned there has been nothing more than a press release by RBI
regarding warning issued against Bitcoins, we have no such law that expressly deals with the
prospect of virtual currency. Internet usage in India is rising on the back of the mobile phone
revolution, there are 105 crore wireless connections (TRAI; September 30, 2016) for a
population of 133 crore (World Bank; October 6, 2016).49 Digitization of our country makes
way for the usage of Bitcoins. Being a virtual currency, it would be easier for the people who
have internet access to get their hands on it and use it for carrying out their daily transactions.
Bitcoins in India have not been authorized yet, but there is clear scope of them being
authorized under many statutes. Since there is no certain regulatory policy for Bitcoin in
India, it’s important to adopt one. RBI issued a press release on December 2013, cautioning
the traders and holders of virtual currencies the financial, legal and operational risks that they
are exposing themselves to.50

Section 2(d) of Indian Contract Act, 1872
1968 AIR 200; 1967 SCR (3) 876
RBI Press Release, ”RBI cautions users of Virtual Currencies against Risks”, 24 December 2013.Available at:
They should be considered as legalized virtual currency as although there is an absence of a
standard statute dealing with any virtual currency including Bitcoins, the regulatory standard
that could be used for monitoring them might somewhat be similar to that set by RBI. For
example ‘KYC’ norms also known as ‘know your customer’ norms are the norms which are
set by RBI, which make it an obligation on the part of banks to continuously monitor the
transactions of their customers and keep a record of their activities related to it so as to track
the customer’s usual pattern of behaviour and any deviation from it so that it becomes easier
to identify a possible suspected behaviour.51 Similarly Bitcoins use ‘blockchain’ technology
that allows system to keep a record of transactions that are carried out through them.
Transactions are recorded and it becomes easier to track them in case there is some fraud.
Therefore monitoring Bitcoins and their transactions won’t be much difficult. Also Section 3
of ‘FEMA’ which says that no person shall “deal in or transfer any foreign exchange or
foreign security to any person not being an authorized person;

1. Make any payment to or for the credit of any person resident outside India in any
2. Receive otherwise through an authorized person, any payment by order or on behalf
of any person resident outside India in any manner; and
3. Enter into any financial transaction in India as consideration for or in association
with acquisition or creation or transfer of a right to acquire, any asset outside India
by any person.”
It can be rightly inferred from Section 3 that if an Indian buys Bitcoins from a resident of a
foreign country then the act of purchasing would not be in contravention of the provisions
mentioned in “FEMA”.


It is incorrect to call Bitcoins illegal in India because at present there is no statute calling it
illegal or legalizing it either for the same. The government of India is yet deliberating over
the issue of Bitcoins and people, including the dealers of Bitcoins as well as those working in
Bitcoin exchanges are positive that they would be legalized soon along with proper taxation.
Legalizing it and accepting it as a legal tender would be beneficial for the economy of our
country. ‘Technology changed the way of life, technology changed the social life, it changed

the way we do banking’, said ‘Chanda Kochhar’, ‘CEO’ of ‘ICICI’ bank during the launch of
‘Pockets’, India’s first digital bank.52 It’s important to note that banking sector of our country
is being digitalized thereby becoming more efficient.

‘Indusland Bank’, in 2014 launched its first digital branch in ‘Gurugram’.53 Each and every
function that is performed in an ordinary bank branch including, deposition and dispensation
of cash, transfer of funds, opening of accounts can be done here.

In March, 2017 ‘Kotak Mahindra’ launched India’s first downloadable bank account, “Kotak
811”, which would offer an interest up to ‘6% per annum’ and a ‘virtual debit card’ and can
be opened within five minutes with just the ‘aadhar’ and ‘pan’ details of the customer.54
Creation digital bank, a digital bank branch and a downloadable bank account, all these
developments reflect a digital revolution in financial sector of our country. Legalizing and
recognising Bitcoins as an official mode of transaction would be another step in achieving the
fruits of this digital revolution. It’s quite evident from the fact that we have a digital bank, a
digital bank branch along with a downloadable bank account, therefore there is clear scope of
having a digital currency as well. According to ‘zebpay’, which is India’s largest exchange of
Bitcoins, 1 Bitcoin equals around 1,40,000/- Re, this is the buying price, selling price is
however lower and amounts to roughly about 1,20,000/- Re.55


Currently the legal status of Bitcoin in India is very ambiguous and hence it is important for
us to understand how are the Bitcoin traders of India dealing with the issue of imposition of
taxes on Bitcoins. Business means trade, occupation or a commercial activity. The safest
assumption that can be made since nothing has been made clear by the government, on the

legality of Bitcoin is that bitcoin is a commercial activity because there is a clear history of
payments and transactions being made in the form of bitcoins in India as well as other
countries and hence it can be called as a business. Therefore like any other business,
whenever there is a profit or loss as a result of purchasing or selling of Bitcoin, income tax
has to be paid. Income tax can be imposed in two ways. When a businessman provides for a
mode, where he accepts trading with bitcoins, the income which is generated by him in this
way can be treated as a business income and tax can be imposed on that business income or
when a person purchases or sells bitcoins as his commodity, tax should be imposed on the
basis of capital gains. In context of capital gains, now if we assume that bitcoins are taxable,
the question arises whether they should be treated as ‘long term capital gains’ or ‘short term’,
now this question is important because the rate of taxation in the case of ‘short term capital
gains’ is 30% on the income more than 10 lakh rupees and in the case of ‘long term capital
gains’, it is 20%, 10% less than that of the former.56 In either case, the tax will not be on
Bitcoin, but on its rupee equivalent. In India taxation is supervised under the ‘Income Tax
Act’, 1981 which takes into account the worldwide income of the residents of India. Bitcoins
can be considered as a currency, if a law is passed to that effect in India as well as a capital
asset. Both of which can be taxed. As per Indian law, when a capital asset is sold, the profit
or gain which arises out of such sale is treated as a taxable income and the profit arising from
such sale is called as ‘capital gain’.57 The tax liability is then calculated by deducting the cost
of acquisition of the capital asset from the sales proceeds and then applying the rate of tax to
calculated difference.58. As per the tax code in India, income, profits and gains are taxable
even if they are received in money’s worth instead of real money or currency, because they
can be converted to their real money equivalent.59

Service tax can also be imposed on bitcoins. The 2017 budget increases the rate of service tax
to 16-18% from earlier 14%.60 For it to apply on the bitcoins, they need to fall under the
category ‘taxable services’, which is defined under ‘Section 65(105)’, in Chapter V of the
‘Finance Act’, 1994, where ‘clause z(h)’ says that taxable services mean ‘services to any
person, by any person, in relation to online information or database access or retrieval or

CIT v B.C. Srinivasa Setty, (1981) 128 ITR 294 (SC)
both in electronic form through computer network.’ In this regard it can be rightly inferred
that the activity of ‘mining’, which involves procedure of acquiring Bitcoins from a Bitcoin
network, can be considered as a ‘taxable service’ in accordance with Chapter V of the
‘Finance Act, 1994’ because ‘mining’ is one of ways a person can earn bitcoin legitimately
with his ‘proof of work’. It’s important to note that ‘Enforcement Directorate’, ‘ED’ officers
raided the offices of ‘RBItco’ and ‘’ and at the same time Indian Revenue
Services officers raided the office of ‘Satwik Vishwanath’, founder of ‘coinmonk’ and
‘unicoin’, and it was found that he had all the documents that could prove that he was paying
taxes, the raid then turned into a technical discussion whereby the officials sent him summons
asking him as to how they could tax bitcoin miners in India.61 But as a result of the raid all
the major bitcoin sites had to be shut down and on surfing these websites, users found a
maintenance error message. He says that the officials including director and deputy director
of investigating wing asked him to seek legal advice before re launching the sites as
according to them ‘there are other departments that might have problem with the currency.’
What other departments were they referring to? This was something that cannot be confirmed
at this moment. However when one looks deeper, we find that the growth of bitcoins appears
to be a threat to the banks and government62, because it rules out the need for a centralized
regulatory body for the circulation and regulation of currency. Further the cost of mining
Bitcoiins at a faster rate is very high because of the computational cycles required to mine a
bitcoin or a block and because of this the minors have to pool their money and resources
together to mine Bitcoins. Deducting the cost of electricity and other utilities such as
computer softwares and hardware parts, the profit in the short term would is very less and
therefore the profit would come only if there is a long term process of mining and selling.


In context of Australia, first of all the proof of Australian government’s support to financial
technology could be seen, when treasurer, ‘Hon Scott Morrison’ backed statement which was
made by ‘fintech’ in March 2016 which included a promise to address the double taxation on
digital currency, which was a problem under the GST.63 Double taxation on digital currency

was an impediment to the growth and development of digital currencies in Australia.64
Bitcoins are treated as ‘intangible property’ under their ‘GST Act’, 1999, Bitcoins are
subjected to GST. In Australia, GST was applied twice, first, when a person buys Bitcoins
and secondly when he uses it exchange of other goods that are subject to GST.65 An example
of it could be when a person buys Bitcoins from a domestic exchange worth 33$, he would
then have to pay 1/11th of it which would amount to 3$ in the form of GST on the supply of
Bitcoins which was made in the domestic currency, now he decides to use that to buy a
coffee, which would come under the scope of ‘taxable supply’ under ‘GST’, he will now be
charged with another 3$. So now he’s charged with a total of 6$ instead of 3$ that would
have been charged had he paid in domestic currency. It’s important to note that in Australia,
the export of digital currency is GST free and the ‘Productivity commission’s’, ‘Inquiry into
business, setup, transfer and closure’ suggests to treat digital currency as ‘money’ in order to
remove double taxation from it.66 Their suggestion to treat Bitcoins as money, in order to
remove double taxation, also resolves confusion as treating them as money would bring them
under the scope of various other statutes as well.

As we look into Indian context, we find out that, Section 2(5) of the ‘GST’ in India defines
‘money’ as ‘means the Indian legal tender or any foreign currency, cheque, promissory note,
bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or
electronic remittance or any other instrument recognised by the Reserve Bank of India when
used as a consideration to settle an obligation or exchange with Indian legal tender of
another denomination but shall not include any currency that is held for its numismatic
value.’ In view of this statement we find out that virtual currency does not come under the
scope of money because it is not yet recognised by the RBI, but it has a clear scope of
recognition. However in Australia it is treated as such also it is an ‘intangible property’ and
can come under the purview of ‘goods’ under ‘sale of goods act’. India has been the world’s
largest remittance market.67 The majority of remittance is in small amounts and for that
‘small amounts’ Indians have to pay 15% of the fee to companies like ‘Paypal’, ‘Western
Union’ or to banks as transfer or exchange rates. Now these virtual currencies make it easier
to send small amount of this remittance back home that is back to India, adding it to its
wealth and saving a lot of money which is paid to third parties as their fees


The peculiarity of Bitcoins can be seen from it being not regulated or governed by any
government, bank or any other authority for that matter. As most of the existing currencies in
the world are ‘fiat currencies’. Unlike ‘fiat currencies’ Bitcoins do not require issuance by
government, and no promises to pay an equivalent amount of gold in lieu of the money.
These are certain factors which demarcate Bitcoins from ‘fiat currency’ and are responsible
for free and frictionless mobility of Bitcoins in the market.

The most salient feature of Bitcoins which makes it exclusive and peculiar is that it roots out
the need for a trusted third party such as a governmental agency, bank or any other body.

In order to run any system effectively the most vital thing required is ‘trust’ but Bitcoins have
weeded out with the requirement of ‘trust’, instead of ‘trust’ this system works on ‘proof’, as
pointed out by ‘Satoshi Nakamoto’, ‘with e-currency based on cryptographic proof, without
the need to trust a third party middleman, money can be secure and transactions effortless.’
The proof system is something which implies that there is a unique way of mining or
producing bitcoins and which cannot be copied or used falsely to generate more bitcoins and
convert them into equivalent amount of money, because if it happened so, everyone would
use it to generate them and that would decrease their value.68

On 12th January, 2012 the first transaction involving Bitcoins took place between ‘Satoshi’
and ‘Hal Finney’, a developer and cryptographic activist and on 5th October 2012 ‘New
Liberty Standard’ published a Bitcoin exchange rate that establishes the value of a Bitcoin at
‘US$1 = 1,309.03 BTC’, using an equation that included the cost of electricity to run a
computer that generated Bitcoins69.

In 2017 Bitcoins surged miraculously to ‘1 BTC = US$ 2200’70 by touching and then going
ahead of all the milestones. Many Bitcoin exchanges have been established for the sole
purpose of doing business in Bitcoins across the world. The Chartered Financial Analysts,
Market Analysts, etc. all are awestruck and aghast at the same time by observing the
augmentation in the value of Bitcoins in such a short span of time. Bitcoins have become the
new buzz, people are making a ‘beeline’ to invest in Bitcoins.

70 , accessed on 19th May, 2017
In the wake of 2008 when the subprime mortgage crisis occurred in the United States (U.S.),
a situation arose involving a nationwide banking emergency which resulted to the U.S.
recession of December 2007 – June 2009.71 The repercussions of the recession were so
adverse that people lost confidence in the currency issued by government or commonly
known as ‘fiat currency’ and government’s and bank’s ability to manage the economy, even
the supply of money got very limited.72

Huge amount of money was handed over to banks and insurance companies to unencumber
them. This implies that the money was being printed in order to stimulate the economy. 73
During that situation an online paper was published by ‘Satoshi Nakamoto’ in which
‘Bitcoin’ was explained for the first time74. In the paper ‘Satoshi Nakamoto’ pointed out the
flaws in ‘fiat currency’ and provided solutions for such short comings in the form of Bitcoin.
It had been specifically figured out by the author that in order to run the ‘fiat currency’
successfully an element of ‘trust’ is required and the history of ‘fiat currency’ is full of
breaches of such ‘trust’ and Bitcoins have done away with the requirement of ‘trust’, it works
on system of ‘crypto proof’, which makes it better than the conventional currency.75

One prominent instance of such breach happened in United States in 2013 when debit and
credit card data of people got stolen on a large scale. Target reported that a range of 70
million to 110 million citizens’ personal information had been stolen. The theft is one of the
largest ever of retail data76. ‘Until now, the most extensive data breach on record for a
retailer was the theft of 90 million records from T. J. Maxx in 2005. The biggest breach over
all, however, was in 2009, when the card processor Heartland Payment Systems was targeted
and 130 million credit card numbers were stolen’77. There are other major instances of such
breaches also.

Despite the Reserve Bank's call for caution to people against the use of virtual currencies, a
domestic Bitcoin exchange said it is adding over 2,500 users a day and has reached five lakh
downloads78. Bitcoins have become a new mode of transaction, a lot of people have already

Taken from a five-hundred word essay written by Satoshi Nakamoto, where Bitcoins were mentioned for the
first time. A copy of the essay is available at:
started dealing with them in India since their inception. The benefits of using bitcoins are
huge, including user anonymity, low transaction fees to absence of third party interruptions,
which clearly makes them beneficial for the people.