By: Vijay Pal Dalmia, Advocate
Supreme Court of India & Delhi High Court
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Mobile No.: +91 9810081079
And Siddharth Dalmia
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Mobile: +91 9971799250
Bitcoin is a cryptocurrency; it is a digital asset designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than to rely on a central authority. The transfer of this currency is like sending the e-mail or text message to a person. To send a bitcoin, a wallet app is used (app: 'Bitcoin Wallet'), the amount to be sent is typed in the wallet app and type the details for the recipient( account number in this case), and you have sent the bitcoin which can later be converted to fiat currency.
Let's take the hypothetical case of Mr. X and Mr. Y. X pays 5 bitcoins to Y, X's balance is reduced by 5 bitcoins and Y's increases by 5. This transaction, when completed will be shown in public ledger. This ledger is maintained by Bitcoin's public network. When X filled the relevant details and pressed send, the bitcoin network receives a message from X and the message says that Y is being sent so and so number of bitcoins by me. If some thief can replicate that message and send it to the bitcoin network, then he might be able to steal X's money i.e., bitcoins. But this message cannot be replicated because each message comprises a unique signature, after encrypting this unique signature, the message is sent to the Bitcoin network so that it is impossible to replicate.
Cryptocurrency uses a system of cryptography (AKA encryption) to control the creation of coins and to verify transactions. Cryptography, in layman's language, means the art of writing and solving codes. So, each letter/ word/ any component of the language can be mapped to arbitrary characters, letters, pixels and numbers so that it is not readable without the proper key. When X sent the message to bitcoin network, bitcoin account has two keys, i.e. private key and public key. So, the message sent uses both private and the public key. The ledger comprises both the public key and the encrypted information from the X's side. Every transaction uses a different encrypted code. Therefore, it is called a cryptocurrency.
Features of bitcoin:
Bitcoin is a currency that is not tied to a bank or government and allows the users to spend the money anonymously.
No single institution controls the bitcoin network.
It is analogous to an online version of cash. Many products and services can be bought by it.
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.
The maintenance of ledger takes up a lot of resources. It solves many vital issues. The incentive to maintain this ledger and to perform such an important task would pay you in the form of bitcoins. They will have the privilege to mine the bitcoins.
Miners install software for bitcoin, this software, by utilizing the power and resources, computes numerous mathematical algorithms. After computing these algorithms, the software provides a reliable algorithm to the ledger. The ledger will use these algorithms to solve the complexity of maintaining it.
How to get 'bitcoins.'
You can buy bitcoins by using real money.
You can sell things and let people pay you with bitcoins.
Or they can be created using a computer.
Why are bitcoins valuable?
There are a lot of things other than money which we consider valuable like diamonds and gold. The Aztecs used cocoa for money!
Bitcoins are valuable because people are willing to exchange them for real goods and services and even cash.
Countries such as Russia and Japan moved to legitimize cryptocurrency. But they can do so because most of their economy has 'white' money and ours (Indian) run on considerable amount of black money, so it would not be suitable for our economy as people would use them to convert them from black to white. Japan has passed the law to bitcoin as a legal payment method. Russia is reportedly looking into ways to regulate bitcoin.
Is it anonymous?
Yes, to a point. Transactions and accounts can be traced, but the account owners are not necessarily known. However, investigators might be able to track down the owners when bitcoins are converted to regular currency. But the people might be able to spend that money online and might be impossible to trace.
With bitcoin it is possible to be able to send and get money anywhere in the world at any given time.
You are in control of your own bitcoin. There is no central authority figure in bitcoin network.
With the blockchain, all finalized transactions are for anyone to see.
Fact is many people are still unaware of digital currencies and Bitcoin.
Bitcoin has volatility because there is a limited amount of coins (21 million bitcoins), and demand for them increases by each passing day.
Bitcoin is still at its infancy stage, with incomplete features that are in development.
Legality of Bitcoins in India
As it stands, bitcoin buying, selling, trading, or mining is not illegal by any law in India.
Tellingly, the publication's source also adds that any decision that ruled the cryptocurrency to be illegal in India would mean that India's nascent but growing bitcoin industry will have to shut down.
Bitcoin has been the de facto currency of the Dark Web – the 'hidden' Internet accessible only by Tor – since the pioneering marketplace Silk Road, the 'eBay of drugs,' arrived in 2011.
But how much do we know about these new underground economies? Who is buying and selling – and what? Here's what available data can tell us about bitcoin on the Dark Web.
According to the FBI, the Silk Road made a total of $1.2bn between 2011 and 2013. The marketplace is widely understood to be the first 'killer app' for bitcoin, and drugs still make up a large proportion of transactions made using the digital currency today. http://www.coindesk.com/bitcoin-on-the-dark-web-the-facts/.
What roles do bitcoin and Tor play in the Deep Web?
Both of them are the best available privacy and anonymity protecting tools. Tor is used for browsing and Bitcoin for the transaction. It becomes almost impossible to trace either of those things. Let us say that you surfed a deep web version of amazon to buy something illegal. You most certainly don't want to get caught in any way. You use Tor to access that site so that the browser won't leave any trails or history or cookies. You found your product and want to buy it. Our standard secure banking can be easily traced. So, bitcoin, which uses a massively encrypted and mathematically complicated method of payment, helps you in keeping your payment safe, sound, and untraceable.
Many hackings that take place in India ask for payments through Bitcoins as anonymity is maintained. Many of these hackings go unreported as companies do not want to 'damage' their reputation. But the tremendous ransomware, aka wannacry, opened the eyes to the truth behind the bitcoins to the world.1
Legal position in India
The IMAI vs RBI2 shows the most recent position of law in India regarding the stance of cryptocurrencies. Reserve Bank of India (RBI) first issued its ban on banks' dealings with crypto businesses back in April 2018 (the 'order'), which took effect in July of that year 20183. The RBI notification was then challenged before the Supreme Court of India by the Internet & Mobile Association of India (IAMAI). The Court, whilst deciding the matter, looked at the draft bill which has been proposed (but not passed) by the legislature, namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. The Court held that the stand of the legislature cannot be gauged from this bill as the bill, on the one hand, imposed criminal liabilities on the users of cryptocurrencies and criminalized certain activities like mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. On the other hand, the bill paved the way for the government to introduce its own digital currency, namely 'Digital Rupee,' by the Central. Bank. The Court also emphasized that The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-Ministerial Committee contained proposals (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted. The key aspects of the Crypto-token Regulation Bill, 2018, found in paragraph 13 of the 'Note-precursor to report' shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of a digital crypto asset at recognized exchanges. Therefore, the intention and the stand of the legislature remains unclear on the matter of cryptocurrencies.
The Court first determined the reason because of which the notification by the RBI had been issued. The reason given by the RBI is the cryptocurrencies might disrupt the existing financial institutions. As reported during the January hearings, IAMAI's legal counsel had argued before the court that RBI had itself failed to adequately research the matter before deciding to take action. "Opinion cannot be formed on imaginary grounds," the counsel had argued.
The Court agreed that the RBI had failed to prove or bolster (through reasonable grounds) how the functioning of existing institutions could be disrupted through cryptocurrencies. The Court relied on its decision in State of Maharashtra v. Indian Hotel and Restaurants Association; there must have been at least some empirical data about the degree of harm suffered by the regulated entities (after establishing that they were harmed). It is not the case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exchanges. The Court further iterated that the administrative orders, like the order in question, should be well reasoned and have a rational and cannot be ambiguous.
Without the backing of any sort of reasoning, such orders or notification need to be quashed. The Court then applied the doctrine of proportionality before finally deciding the issue in favour of cryptocurrency. The doctrine of proportionality includes the following:
- whether the objective of the measure is sufficiently important to justify the limitation of a protected right,
- whether the measure is rationally connected to the objective,
- whether a less intrusive measure could have been used without unacceptably compromising the achievement of the objective, and
- whether, balancing the severity of the measure's effects on the rights of the persons to whom it applies against the importance of the objective, to the extent that the measure will contribute to its achievement, the former outweighs the latter.
The court held that RBI needed to pass the above test and to show at least some semblance of any damage suffered by its regulated entities. But the RBI could not show any. The Court finally held that the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, the Court cannot hold that the impugned measure is proportionate.
The impugned order by the RBI was hence quashed and, the order seems well reasoned. It would be a welcome move for cryptocurrencies, blockchain technology and exchanges across the country, though the future of the cryptocurrencies still seems to be shrouded in the mist because of legislative uncertainty.
2. Writ Petition (Civil) No.528 of 2018
3. 'Prohibition on dealing in Virtual Currencies (VCs)', Notifications, RBI, April 6, 2018.
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