Introduction
Cryptocurrencies have been exponentially growing in the past decade; however, unlike other currencies, their origin and regulation are ambiguous and uncertain, which poses the question of their sustainability and value in the future. It is believed that a man named Satoshi Nakamoto came up with the concept of a new digital currency called Bitcoin, which gave rise to various other cryptocurrencies[1]. The growth of these cryptocurrencies peaked during the Covid 19 lockdowns, where the rest of the economy was hit and plummeted[2]. People started investing in cryptocurrencies as they seemed to be rewarding amid the economic crisis. The Reserve Bank of India recognized it as a virtual currency based on cryptography. The currency is facilitated through blockchain technology, which involves person-to-person transactions and privacy[3]. After witnessing the immense growth of the cryptocurrency and the crypto market, RBI recognized the revenue loss due to the non-regulation of such virtual currency. There is also the issue of whether cryptocurrency can be considered legal tender and treated as a currency under Indian jurisdiction. The Negotiable Instruments Act, 1881, Section 13 denies cryptocurrency as a type of negotiable instrument, and neither is considered a coin as per Section 2(a) of The Coinage Act, 2011. The regulation of these cryptocurrencies pose major legal challenges such as various contractual issues within crypto-related transactions, and ambiguity in determining jurisdiction in case of disputes resulting from those contracts and transactions, the illegal activities that stem from the exploitation of various loopholes in the functioning and mechanisms of cryptocurrency, resulting privacy issues due to data theft and anonymity of transactions, and the lack of concrete laws needed to address the above issues and the steps that need to be taken. Thus, this research will try to explore and analyze the existing loopholes in the cryptocurrency mechanisms and their legal implications, and how it impacts in the regulation of cryptocurrency in India. For conducting this research, the researcher will rely on various social science and legal databases along with some online-based article resources and Indian legislation.
Statement of Problem:
The legal issues and challenges in the regulation of cryptocurrency in India are:
Contractual Issues
The blockchain chain technology and cryptocurrencies have been thriving due to one of its key features being digital and decentralized. And this feature is being used in smart contracts, which are self-executory. They consist of promises made by the parties in digital format and automatically facilitate the payment to the other party upon a specific performance of their contractual duty. The terms of the agreement are coded into the blockchain network, and the code also ensures the track record and irreversibility of the transactions. However, the issue arises due to its unique nature and complexity of whether it can be feasible as mode of transactions between parties and its legality in the country. The Indian Contract Act, 1872[4], has set the ingredients for the enforceability and legality of a contract. It is uncertain whether the smart contracts containing transaction of exchange of cryptocurrencies, which is decentralized, can be enforced. And due to smart contracts’ inherent complexity, it poses a major question of whether their nature and the terms fall under the definitions and ingredients mentioned under Indian Contract Act 1872, which can make it enforceable and legal.
Jurisdictional Issues
The next issue arises due to disputes in the contract involving the transaction of cryptocurrency, which is a jurisdictional issue. One of the main issues surrounding the regulation and enforceability of cryptocurrencies is their ambiguity in terms of location. The ledger, which records the transactions in the form of a code in the blockchain network, cannot be traced to a set location, making the transactions and functioning a bit suspicious and risky[5]. Although the transactions conducted through this blockchain network seem to provide more privacy than the traditional ones, it forms a major challenge in terms of jurisdiction. Firstly, due to the end of transactions taking place in different jurisdictions and unknown locations, they might be subject to conflicting legal frameworks of various countries. Secondly, the “residence country” of the software for cryptocurrency is ambiguous since the location of the ledger is unknown. Thirdly, due to the transnational nature of the cryptocurrency blockchain, it becomes challenging to determine the jurisdiction and the applicable laws in matters of dispute. In India, former finance minister Arun Jaitley while presenting the budget for the year 2018, stated that though the usage of cryptocurrencies is allowed, there is no redressal mechanism or remedies in case of disputes related to cryptocurrencies in India. Thus, it is very difficult to regulate cryptocurrencies due to their transnational nature and conflicting legal frameworks on it based on jurisdictions.
Illegal Activities Arising from Cryptocurrencies
Due to the ambiguity in the jurisdiction and lack of enforcement, crimes and illegal activities exploit the mechanism of cryptocurrency. The use of cryptocurrencies gives rise to various criminal organizations and new methods of committing illegal acts such as money laundering, financial fraud, data theft, etc. This issue arises mainly from the ability of the individuals who trade cryptocurrencies to remain anonymous. Due to this anonymity, the cryptocurrency is being used in “dark market websites,” which criminals use to trade illegal items and conduct various other illegal activities without being identified[6]. The use of cryptocurrency by drug dealers for drug deals is being labelled as the “new generation of criminals” by several governmental agencies. Thus, criminals are using cryptocurrency as a way of exploiting the loopholes in various existing legislations, such as the Prevention of Money Laundering Act, 2002[7] in India. The anonymity of transactions in cryptocurrency also gives rise to various financial frauds and data thefts, which cannot be dealt with due to the lack of tracing and enforceability in the country as per the legal framework for cryptocurrency. One of the biggest threats it poses includes terrorist and political funding.
Privacy Concerns
Illegal activities give rise to various privacy issues, such as data theft. The privacy of the citizens is considered the utmost importance when it comes to the regulation of cryptocurrency in a country. The key reason for the introduction of cryptocurrencies was to maintain the anonymity of the users in transactions. However, recent analytics have shown that the majority of the transactions in cryptocurrencies can be traced, which creates a dilemma whether to maintain the privacy and anonymity of the users or regulate the cryptocurrencies while tracking the transactions. Although the regulation would help prevent data theft or seeking remedies for such acts, it would abandon the key purpose of cryptocurrency, which is the anonymity of the users in transactions.
Lack of Concrete Laws on the Regulation of Cryptocurrency
In order to address the above problems, a well-defined legal framework is required, which will help regulate cryptocurrencies and mitigate any illegal acts. As of now, India does not have clearly defined laws regulating cryptocurrency, and at the same time, there is not a ban on the use of cryptocurrency in the country, which creates a loophole between the users of cryptocurrency and their inability to seek remedy in case of a dispute. To address such an issue, recently, Prime Minister Narendra Modi held a meeting with officials on the topic of cryptocurrency, and it was discussed that strong and clear steps need to be taken for its regulation[8]. The Finance Committee stated that cryptocurrencies in India should be regulated and not banned. Cryptocurrencies in India are currently not recognized as legal tender; thus, individuals investing in cryptocurrencies are doing it at their peril, and there is no redressal mechanism or remedies available for any disputes arising out of transactions in cryptocurrency. Furthermore, the definition of cryptocurrency is not clearly defined or interpreted by any of the statutes in India. It does not fit under the definition of a currency as per the Foreign Exchange Management Act, 1999[9], which makes it hard to regulate foreign exchange in terms of currency. The Negotiable Instruments Act, 1881[10], defines a negotiable instrument under Section 13 as “a promissory note, bill of exchange or a cheque payable either to order or to bearer.” Thus, it is evident that cryptocurrency does not fall under any of those categories to make it come under the scope of this Act. The Coinage Act, 2011[11], defines coins under section 2(a), but cryptocurrencies such as Bitcoin do not satisfy the ingredients in the definition, which would not consider it as legal tender. Securities Contracts (Regulation) Act, 1955[12], defines “securities” under Section 2(h), and after taking the provision under scrutiny, it can be concluded that cryptocurrencies such as Bitcoin do not come under the purview of this section. And since the Government does not recognize it as a legal tender, it cannot come under subclause (ii) (a) either. Lastly, the Payment & Settlement Systems Act, 2007[13], empowers the RBI to “certify any kind of pre-paid instrument”. Since cryptocurrency is not stable in nature and is subject to fluctuation, the uncertainty of it being used as payment in the purchase of goods and services makes it incapable of being considered under the purview of this Act.
Conclusion
The literature on the legal issues surrounding the regulation of cryptocurrencies depicts various loopholes and lacunae in the mechanism, and they also provide a solution to some extent. There are multiple authors discussing the concepts and explicating the rudimentary elements, and enough literature is available to cover it exhaustively. On the issues of criticism of some legislations and discovering specific loopholes, inadequate literature is available. The literature does not discuss what kind of security measures need to be taken if cryptocurrency were to be regularized with a legal framework. The economic impact of specific cryptocurrency and data relating to it is inadequate. The authors in the present literature fail to observe and give thoughts on situations in a country like India, where the state of cryptocurrency keeps changing with respect to bans.
Author(s) Name: Praneel Panchagavi (Symbiosis Law School, Pune)
References:
[1]Michael Adams, ‘Who is Satoshi Nakamoto?’ (Forbes, 31 August, 2021) https://www.forbes.com/advisor/investing/cryptocurrency/who-is-satoshi-nakamoto/ accessed 18 August 2022
[2] Hadar Y. Jabotinsky and Roee Sarel, ‘How the Covid-19 Pandemic Affected the Cryptocurrency Market’(The CLS Blue, 26 March, 2021) https://clsbluesky.law.columbia.edu/2021/03/26/how-the-covid-19-pandemic-affected-the-cryptocurrency-market/ accessed 20 August 2022
[3] Tomaso Aste, ‘Can Cryptocurrencies Preserve Privacy and Comply With Regulations?’ (Frontiers, 28 May 2019) https://www.frontiersin.org/articles/10.3389/fbloc.2019.00004/full accessed 21 August 2022
[4] Indian Contract Act, 1872 (India)
[5] Anna Katrenko, ‘Blockchain Attack Vectors: Vulnerabilities of the Most Secure Technology’ (Apriorit, 8 October 2020) https://www.apriorit.com/dev-blog/578-blockchain-attack-vectors accessed on 21 August 2022
[6] Chainalysis Team, ‘Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency Activity’ (Chainalysis, 6 January, 2022) https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/ accessed on 22 August 2022
[7] Prevention of Money Laundering Act, 2002 (India)
[8] ‘PM Narendra Modi urges collective global effort to deal with cryptocurrencies’ (The Economic Times, 18 January 2022) https://economictimes.indiatimes.com/tech/tech-bytes/pm-narendra-modi-urges-collective-global-effort-to-deal-with-cryptocurrencies/articleshow/88963949.cms accessed on August 18 2022
[9] Foreign Exchange Management Act, 1999 (India)
[10] The Negotiable Instruments Act, 1881, section 13 (India)
[11] The Coinage Act, 2011, section 2 (India)
[12] Securities Contracts (Regulation) Act, 1955, section 2(h) (India)
[13] Payment & Settlement Systems Act, 2007 (India)
