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Cryptocurrencies and related legal issues in India with special reference to Bitcoin

A cryptocurrency is a medium of exchange that is , encrypted, decentralized and digital. There is no central authority to determine the value of cryptocurrency. Instead, the value of cryptocurrency is determined by its customers over the Internet. Cryptocurrency functions through the network , where a large number of computers are employed, which is why cryptocurrency is decentralized, and control of the currency is not confined to the hands of a government authority or a central authority.

Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled Bitcoin: A Peer-to-Peer Electronic Cash System Nakamoto described the project as an electronic payment system based on cryptographic proof instead of trust.

That cryptographic proof comes in the form of transactions that are verified and recorded in a form of program called a blockchain.[1] Although released in 2009, Bitcoin is still the most popular and valuable digital currency.

Bitcoin - A detailed analysis

Bitcoin is what everyone calls BTC for short. One of the characteristics of crypto currencies is that non physical existence or non physical accessibility.

In a short period of time, cryptocurrencies gained a lot of popularity and thus hit the digital market under different names. Bitcoins are one among them. It's always a question as to the issuing authority behind Bitcoin. Like we have RBI for India We all know the authority or issuing body behind bank currencies of a particular nation Unlike cryptocurrencies like Bitcoin's and other ones are not controlled directly by Government, private individual or other body of individuals. Thus the Anonymity of the issuing body forms another prominent feature.

Bitcoins can be stored as a digital currency as well as used as a medium of exchange for other goods. Another distinguishing feature is that we can transfer Bitcoin as easily as sending a message from one electronic device to another keeping the anonymity of the sender and receiver.

Bitcoin network controls the bitcoin. Bitcoin network comprises the common man who uses bitcoin, and anybody can become a part of it. To understand this network, we must understand the Bitcoin Public Ledger. All confirmed transactions from the start of Bitcoin's creation are stored in the public ledger. This complete record of the transaction which is a sequence of records called blocks.

On November 1, 2008, a man named Satoshi Nakamoto (a tentative name whose existence is questionable) posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called Bitcoin. One of the core challenges of designing a digital currency involves something called the double-spending problem. Bitcoin did away with the third party by publicly distributing the ledger, which Nakamoto called the 'block chain.'Users willing to devote the CPU power to running a special piece of software would be called miners and would form a network to maintain the blockchain collectively. In the process, they would generate new currency.[2]

The primary advantage of cryptocurrency is that a third parties and intermediaries like banks, can be avoided if two people want to transact money with each other making it possible though the use of public and private keys. Since there are no third parties or inter-mediaries here, we can save processing fee and other charges over transactions.

The biggest disadvantage of this is that the identity of the parties involved in the transaction being unclear , so it is possible to take advantage of this opportunity and do a lot of illegal activities such as money laundering, tax evasion , drug peddling, smuggling, and procurement of guns. The reality that a computer crash can erase one's digital fortune, or an act of a hacker can be considered as some other drawbacks of using cryptocurrencies.

Experts say people who invest in equities and gold, have started identifying a new investment portfolio called ‘Digital currencies'. One can never reject the fact that the value of virtual currencies is increasing day by day. when Lockdown was announced all over the country in the wake of the corona virus, people started making use of online networks for new investments, jobs etc . people began to know about cryptocurrencies and started to invest in.

With very few Bitcoin's being circulated in the market, the value of Bitcoin's went increasing day by day as everyone went after it. it also started gaining worldwide attention. Now it has become a new trend to make an investment by buying and keeping digital currencies. In a way, the trend of such people has led to an increase in the value of cryptocurrencies such as Bitcoin.

Therefore rather than investing in gold and equities which are the traditional investment methods people started switching in to cryptocurrencies such as Bitcoin hence the value of digital currencies got increased in the midst of the pandemic .

Bitcoin's however had a very limited quantity of circulation and everyone seemed to be going crazy behind it, Ordinary investors have come up with the idea of saving or purchasing Bitcoin's other than choosing regular conventional techniques of investments, for a while. The fact is that the Bitcoin has gradually increased its value and is now at a height that no one can dream of.

There are three different ways through which cryptocurrencies can be purchased. One prominent method of purchasing is Mining. Mining is an activity where an individual (called the miner) uses his computer prowess to crack computationally difficult puzzles. The process of cracking such puzzles which are integral to the blockchain technology, help in maintaining them. As a reward for this, the miner gets new bitcoins which is nothing but creation of a bitcoin or mining.[3]

Secondly, We can purchase Bitcoin's from a Bitcoin exchange by giving back real currency. As a last option we can receive Bitcoin's in consideration of selling goods and services.

Legal position of cryptocurrencies in India

India being one of the countries that makes the best use of cryptocurrencies the future perspective of digital currencies stands as the topic of much discussion. RBI has often issues press releases about the security concerns of cryptocurrencies such as Bitcoin. A committee was also constituted in India 2017 under the chairmanship of Shri Subhash Chandra Garg to analyse the legal issues associated with virtual currencies. The Committee Report stated that all private cryptocurrencies should not be allowed in India.

RBI issued a circular In April 2018 preventing commercial and co-operative banks, small finance banks, payment banks and NBFC from not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies. on My 15 2018, The Internet and Mobile Association of India (IMAI) filed a writ petition in the Supreme Court for withdrawing RBI Circular. Supreme court passed a decision, quashing the earlier ban imposed by the RBI.[4]

As a next step government introduced Digital currency bill 2019. Under the bill, Mining, holding, selling, issuing, transferring or using cryptocurrency is punishable with an imprisonment of up to 10 years . The bill paved the way for the government to introduce its own digital currency, namely ‘Digital Rupee,' by the Central Bank.

Under the Bill, Cryptocurrency is defined as ‘any information, code, or token which has a digital representation of value and has utility in a business activity, or acts as a store of value or a unit of account.[5]

Recently on 29 January 2021, in circular number 2,022, in the ‘E' new bills section under Legislative business, the Indian government proposed a new bill. The government has listed the new bill that will prohibit all private cryptocurrencies in India and provide a framework for creation of an official digital currency to be issued by the Reserve Bank of India. The new bill to be called as The Cryptocurrency and Regulation of Official Digital Currency Bill 2021, seeks to create a facilitative framework for an official digital currency that will be issued by the Reserve Bank of India (RBI).

The bill also contains provisions for banning all private cryptocurrencies such as Bitcoin, Ether, and Ripple but will exempt certain uses and the promotion of the underlying technology of such tenders. In an RBI booklet on payment systems, the government also mulled the creation of a digital version of India Rupee.

Cryptocurrencies related legal issues are as follows:
  • Anonymity of transacting parties
  • Problems related to lack of proper authority
  • Absence of well defined Laws
  • Problems of Tax Evasion, Money laundering etc
  • phishing attacks faced by users
  • Loss of Data
  • Insecurity of trading & purchase platforms etc

Conclusion
It's a fact that most of the people are not rushing to invest in digital currencies considering the face of all the pitfalls set out above, but there are people who are still looking forward to go with digital currencies by accepting the element of risk.

Safety and security of Virtual currencies always remains as a question because it does not have any proper regulatory authority as in ordinary currencies. Cryptocurrencies can be used boldly once if the government sets out proper legislations to tackle the associated issues. It's always advisable to go through all the ins and outs of the digital currencies before making an entry to the digital currency league.

Cryptocurrencies are something that can turn out to be very useful for common man if used within the legal boundaries. Government can come up with a permanent legislation removing all the shortfalls and loopholes roaming around the digital currency world to increase the credibility of its usage.

End-Notes:
  1. Kate Ashford & John Schmidt ,What is cryptocurrency?,Forbes.com,Dec 18 2020
  2. Vijay Pal Dalmia and Siddarth Dalmia,Explaining Bitcoin and Legal Position in India,lexology.com,March 28 2020
  3. Income tax on Bitcoin & its legality in india,cleartax.in,Jan 21 2021
  4. Internet and Mobile Association of India v. Reserve Bank of India
  5. S.2(1)(a), Banning of cryptocurrency & Regulation of official Digital Currency Bill, 2019

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