Are Bitcoins legal in India?

Introduction
Bitcoin is a new age form of decentralised digital money that no government or
bank can control unlike other forms of money.

Think about the time when the knowledge was centralised, basically if you
wanted certain information you had to resort to books, newspapers or other
official sources holding that information. But today, thanks to the internet,
information is decentralised and you can consume knowledge from all around the
world with a single click.

This way, Bitcoin is the internet of money, offering decentralised solution to

money encrypted and understood only by the sender and receiver without
engaging a third party.

This article seeks to explain to you what Bitcoin is all about and if it is legal in India
or not.

Evolution of Money: From Barter to Bitcoin

To understand Bitcoin, we will have to track back a little to the concept of money.
At its core, money represents value. In the real world, if I do some work for you,
you give me money in exchange and I can use that money to get something of
value from someone else in the future.

Historically, value has taken many forms and people have used different materials
to represent money. However, to epitomize value, people have to trust that it is
indeed valuable and will stay valuable long enough for them to redeem value in
the future. Hence, the money works on a Trust model.

Initially, we always trusted in ‘something’ to represent money. For example, things

like grains and metals. Conversely, due to various limitations like the impracticality,
inconvenience of carrying and indivisibility we shifted from barter to banknotes.
Hence, we’ve changed our trust model from trusting ‘something’ to trusting
‘someone’. In the case of currency notes, that ‘someone’ is the government.
Therefore, the currency notes for that matter have value because the government
orders it to. This value comes from a legal status given to it by the government in
the form of legal tender, which means currency notes must be accepted if offered
as payment.

But with the passage of time, we witnessed certain difficulties in this model too,
which are as follows –

Firstly the model of currency notes works on the principle of centralization. It has
a central authority that controls and issues it i.e. government or central bank.
Hence, total control lies with this authority. It can anytime withdraw the legal
tender status occasioning demonetization. The authority can further keep track of
who owns what.

Further, it is not limited by quantity, the government or a central bank can print as
much as they want whenever needed and inflate the money supply in the market.
Consequently, if the market is flooded with more money, the value of currency
drops. The same happened during the pandemic, to fight the COVID-crisis, there
was a surge in printing currency globally leading to inflation which also left the
stock market shaky.

Digital Money

In the modern era, no area has been left untouched by digitalization.

Digitalization of the financial ecosystem has led to the replacement of cash
transactions by digital transactions to a greater extent. Credits cards, UPI and
various other forms of digital wallets have tamed the problem of fear of
demonetization to a larger extent.

But the other problems of the centralised system are still intact with the form of
digital money also. To regulate digital money banks hold a ledger on their
computer which keeps track of who owns what.
The centralised system equips the government and banks with enormous power
and this creates three major issues:-
1. The first issue is corruption, “Power tends to corrupt, and absolute power
corrupts absolutely.” When banks have a mandate to create money or value,
they control the flow of value in the market. This gives them almost unlimited
powers.

2. The second issue of the centralised system is mismanagement. If the central

authority’s interest isn’t aligned with the people it controls, this may be a case
of mismanagement of the money. For example, giving away bad loans or
printing a lot of money to save a certain bank or institution from collapsing, as
happened during the economic crisis of 2008, printing a lot of money causes
inflation and erodes the value of citizen’s money.

3. The last issue in this form of money is giving away all control to the
government or bank. At any point in time, the government can decide to
freeze your account and deny you access to your funds.

Emergence of new age currency: Bitcoin

This was the status until 2009 creating an alternative to the current monetary
system seemed like a lost cause. Then everything changed, In October 2008, a
document was published by a person namely Satoshi Nakamoto, which suggested
a way of creating a system for a decentralized currency called Bitcoin.

At its core, Bitcoin is a transparent ledger without a central authority.

To understand better, let’s compare Bitcoin with banks, since most money today
is already digital, the bank manages its own ledger of balances and transactions.
However, the bank’s ledger is not transparent as it is stored on the bank’s
computer, you can’t sneak peek into the bank’s ledger and only the bank has
complete control over it.

Bitcoin, on the other hand, is a transparent ledger and at any point in time, you
can sneak peek into the ledger and see all the transactions and balances that are
taking place. The only thing you can’t figure out is that who owns these balances
and who is behind each transaction? This means that the Bitcoin is pseudo-
anonymous; everything is open, transparent and traceable yet you cannot tell
who is sending what to whom.
In such a way, Bitcoin is decentralised; no one computer holds the ledger. With
Bitcoin, every computer that participates in the system is also keeping the copy of
a ledger also known as the Blockchain.

Here the question arises whether the Bitcoins are legal in India or is it safe to
trade in bitcoin in India for that matter.

The legality of Bitcoin in India

As things stand today, there is no particular law that either regulates or specifically
bans bitcoins or other crypto assets in India hence, crypto assets and
cryptocurrencies are legal in India.

In March 2018, the Reserve Bank of India (RBI) issued a circular to all the banks
and financial institutions of the country asking them not to provide services or
deal with anybody who was in turn dealing in virtual currencies or crypto assets
essentially. So now, this circular which was so drastic was challenged up to the
Supreme Court and the Supreme Court in March 2020, came out with its verdict
and held that the circular issued by RBI was bad in law and illegal. Among other
things, the Supreme Court said that the circular was illegal because it violated the
fundamental rights guaranteed by the constitution of India.

Interestingly, while the matter was pending the government came out with a
proposed bill in February 2019, to ban crypto assets in India. However, the
government neither introduced the bill in the parliament nor made it a law and
this was noted by the Supreme Court also. So no action was taken by the
government on this bill.

After March 2020, once the verdict of the Supreme Court came out the
government in 2021 has come out with a bill called (The Cryptocurrency and
Regulation of Official Digital Currency Bill, 2021). It indicates that the government
is determined to come out with a law on crypto assets and it appears that the
government perhaps is tilted towards regulating crypto assets.

Very recently, Hon’ble Finance Minister Nirmala Sitharaman specifically

mentioned that the government is in talks with RBI and negotiating how to go
about this and the government proposes to take a very calibrated position in view
of the advancement of technology all around the world and how the world is
responding to crypto assets and she also mentioned that the government does
not propose to make any extreme view on cryptocurrency.

So all in all, we can say that the government is more inclined towards regulating
crypto assets as against completely banning them. So essentially, as of today,
cryptocurrency is legal in India but the government does propose to come out
with a law to regulate it.