Enough has been said about the crypto currency Bitcoin, the technology behind it and its uses. We are not going to repeat the same here. The aim of this article is to analyse the legal framework that is governing bitcoin use, bitcoin websites and bitcoin businesses in India. Before we start we wish to make it clear that there is no dedicated law for bitcoin in India. Nevertheless, Perry4Law Law Firm would try to analyse the legality of Bitcoin from a strict techno legal perspective.
Despite various articles and views, it is clear that use of Bitcoin by various stakeholders in India is primarily governed by the Information Technology Act, 2000 (IT Act 2000). Then there are financial and taxation laws that govern the money laundering, taxation and similar issues. While we have the IT Act 2000 in place yet the Reserve Bank of India (RBI) has miserably failed to provide a regulatory guidance regarding the financial and monetary aspects of bitcoin in India. Instead it preferred to choose the escape route and cautioned the users against use of bitcoin in India in 2013 due to their risks (pdf). From 2013 to 2016 RBI has done nothing to bring uniformity or clarity regarding use of bitcoin in India.
Meanwhile bitcoins websites faced regulatory scanner of Enforcement Directorate (ED). In fact, Seven Digital Cash LLP is already facing legal scrutiny for dealing in bitcoins in India. More details would be available only once ED completes its investigation in this regard. ED believes that bitcoins money can be used for hawala transactions and funding terror operations and this seems to be a legally plausible explanation as well.
RBI has clearly mentioned that there have been several media reports of the usage of virtual currencies (VCs) including bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws. RBI has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.
In the absence of a dedicated law, bitcoins are governed by many laws that are indirectly applicable to its dealings and transactions in India. For instance, the IT Act 2000 prescribes cyber law due diligence (pdf) in India and the Internet intermediary liability in India. These cyber laws due diligence and Internet Intermediary requirements squarely apply to use of bitcoins in India. Further, money laundering, foreign exchange and security dealing laws also apply to Bitcoins dealings and trading in India. Naturally, the bitcoins website owners and entrepreneurs must comply with Indian laws to stay legal.
Even the banks, payment gateways and online payment merchants, mobile payment vendors, etc supporting these bitcoin websites and businesses can be held liable for not following cyber law due diligence norms if they have blindly approved online payment mechanism and banking channel options to illegal and law breaking bitcoin websites. These banks and payment gateways can also be held liable for money laundering, FEMA violations and assisting in tax evasion. If such banks, payment gateways and online payment merchants have already approved such illegal and law breaking bitcoin websites in India, it is in their own interest to cancel such approval immediately. The banks etc must ask them to first comply with applicable techno legal compliances and then support their claims with a proper techno legal consultancy from a reputed law firm.
Some entrepreneurs have contended that since there is no law restricting use of bitcoin in India its use and dealing is legal in India. This is a wrong assumption that would lead to legal prosecution only. The reverse argument is equally applicable in such a situation i.e. since there is no law to deal or regulate bitcoin in India, its use in India is illegal. The real criteria is what we are doing with the bitcoin and how we are using the same. To make the situation simple and legal the bitcoin entrepreneurs must have techno legal compliance policies besides having proper legal documents covering their websites in the best possible techno legal manner.
Take an example in this regard. If a bitcoin website is allowing use of bitcoin for making illegal bets on online gambling websites, such a bitcoin website can be held liable for violating Indian laws. Similarly, if a bitcoin website allows transaction of bitcoin for illegal surgical abortions such website can be held liable for violating Indian laws. There are hundred of such examples where bitcoin website can be guilty of violating various laws of India. A sound techno legal compliance policy can avoid these violations and criminal prosecutions.
Perry4Law has analysed popular bitcoin websites of India and found them lacking a techno legal compliance criteria. We have also found that data retention and data preservation related compliances are also ignored by these websites. Even the Companies Act 2013 now mandates the maintenance and inspection of document in electronic form. Thus, bitcoin websites managed by companies registered under the Indian Companies Act 2013 (pdf) are required to comply with additional legal requirements.
There are many more techno legal issues that are ignored by the bitcoin websites of India that we cannot discuss through this post. If you are a bitcoin entrepreneur and you wish to make your bitcoin business and website techno legal compliant, please feel free to establish a client attorney relationship so that we can assist you.