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The word ‘cryptocurrency’ is derived from the encryption methods which are used to secure the network. A cryptocurrency is a digital currency that is generally a decentralized network i.e, it doesn’t fall under the supervision of the government. Cryptocurrencies are based on blockchain technology(a digital ledger of transactions that are distributed across numerous connected computer systems). Blockchain technology helps to ensure the veracity of transactional data, which is an essential component of cryptocurrencies. It is a means through which we can exchange goods and services online. Cryptocurrencies are a form of a system acting as a secure payment method which is considered as virtual ‘tokens’ in the market. There are whopping 13,000+ cryptocurrencies traded publicly according to a market research website. The estimated total of all the cryptocurrencies as of October 2021 was recorded to be more than $2.5 trillion. Cryptocurrencies have gained popularity in recent times, resulting in over 6000 total cryptocurrencies present in the world as of 2021. Out of the many, the 1stblockchain-based cryptocurrency was Bitcoin, which continues to be the most popular and valuable cryptocurrency till today.
Basics about Bitcoin
What is a Bitcoin?
Bitcoin is a decentralized virtual currency that you can buy, sell, exchange directly without the interference of an intermediary(banks). The Bitcoin transaction is displayed on a public ledger( a system that keeps a record of people’s identity securely and anonymously), thus making the transactions easily accessible to everyone, causing the transactions hard to reverse and difficult to fake. It is categorized as a cryptocurrency because it uses cryptography to maintain its credibility. Neither is bitcoin regulated by the government nor is an individual bitcoin valued as a commodity. During the bitcoin transaction process, it is validated by a huge amount of computer power through a process known as ‘mining’. Bitcoin mining is the process of generating new bitcoins by solving mathematical puzzles. Though bitcoin is not accepted as a legal tender, it still holds the most popular spot among all other cryptocurrencies. It has also triggered the launch of hundreds of other cryptocurrencies, collectively known as altcoins. While trading, bitcoin is abbreviated as BTC.
When and who created Bitcoin: Bitcoin was created on 3rd January, 2009 immediately after the world suffered from an economic recession. It was initially created as an electronic peer-to-peer cash system, however, later many crypto-curious investors started to regard bitcoin as store-of-value currency just like gold.
The concept of bitcoin was first published on a white paper written by an anonymous figure under the name Satoshi Nakamoto whose identity remains a mystery. It is not known whether Satoshi Nakamoto is a single person or a group of organizations of the cryptocurrency community.
How does Bitcoin work?
Bitcoin is a computer file which is stored in an app known as a ‘digital wallet’. This app can be installed on a smartphone or a computer/laptop. After this, the app will generate a new bitcoin address that can be used only once and this address can be shared with others so that they can pay you and vice versa. Later, all the confirmed transactions are updated in the public ledger(blockchain)and added to the network which verifies the information within 10-20 minutes via mining. This helps to trace and keep a record of the bitcoins to stop people from spending coins they do not own, thus ensuring integrity during the entire process. A transaction is a transfer of values between bitcoin wallets that gets included in the blockchain. To make sure that the coins of the spender are thoroughly protected, the bitcoin wallet keeps a secret piece of data known as a private key or seed which is used to sign transactions, providing a mathematical proof that they have come from the owner’s wallet.
Is it legal to buy Bitcoin in India?
As discussed earlier, bitcoin, as a method of payment, is neither authorized nor regulated by any central authority in India. Apart from this, there are no set of rules formulated to resolve disputes in case there is any dispute arising out of cryptocurrency transactions. Therefore, there is also a risk associated with bitcoin transactions. However, we cannot conclude that bitcoin is illegal in India as there is no ban levied on cryptocurrencies in India. Bitcoin is often compared with the internet as there are no guidelines or rules to control or own the internet yet it is used by billions of people because it’s not illegal to use the internet. Similarly, bitcoin can be compared with gold as people continue to buy gold though there is no law framed by the government to control transactions over gold. Bitcoin is not considered a valid currency in India to pay for goods and services as these currencies are not issued by the RBI. The power to issue currencies is vested solely in the hands of RBI because it is the central authority of our country. Though RBI doesn’t modulate cryptocurrencies, it still can be used as an investment in India where the investors can buy and sell the coins among themselves in that particular domain. However, in the light of the recent events, ‘The Cryptocurrency and Regulation of Official Digital Currency Bill,2021’ will be introduced in the winter session of the Parliament which seeks to prohibit all private cryptocurrencies in India but provides for certain exceptions to promote the technology and its uses. The Bill still hasn’t been introduced in the Parliament as it has not received the approval from the cabinet. Therefore, it remains to be seen how this proposed Bill will decide the fate of cryptocurrencies in India.
The Internet and Mobile Association v. RBI case
In the Internet and Mobile Association of India vs Reserve Bank of India case, the Honorable Supreme Court declared the circular released by the RBI with regards to disallowing the trade of virtual currency as unenforceable. (Internet and Mobile Association vs the Reserve Bank of India, 2020)
- Facts: On 6th April 2018, the RBI issued a circular which prohibited the banks and other entities from trading in digital currencies. This circular was issued in exercise of a power conferred by (1) the Reserve Bank of India Act,1934 (2) the Banking Regulation Act,1949 and (3) the Payments Settlement System act,2007. The RBI believed that the trading in cryptocurrencies is prone to hacking that would lead to loss of the economy, terrorist activities, money laundering, etc. The circular further barred banks from providing services to the entities or individuals dealing or settling virtual currencies. This circular was challenged by the Internet and Mobile Association of India and a petition was filed against the RBI in the Supreme Court.
- Core Issue: Whether the RBI lacks jurisdiction to disallow the trade of virtual currency and to analyze whether the ban to be imposed on virtual currency is based on a misunderstanding among people about cryptocurrencies.
- Contentions: According to the petitioner, the RBI lacks jurisdiction to release a circular regarding a ban on cryptocurrencies which was merely based on a misunderstanding. Additionally, petitioners emphasized the point that virtual currency is not a currency note or a coin but a store of value or medium of exchange made for the purpose of investment. The RBI, on the other hand, responded by rejecting the claim concerning the lack of jurisdiction. They (RBI) disagreed with the fact that RBI lacks jurisdiction and said that virtual currencies are an online mode of payment, hence RBI holds the power to impose control on it. Reacting to the second point made by the petitioner, the RBI said that cryptocurrency is a stainless digital currency that is used for trading. They further contended that cryptocurrencies must be regulated as it is immune to government’s interference because of their independent nature.
- Judgment: After hearing arguments of both sides, the court was of the view that though the RBI plays an important role in uplifting and maintaining stability in the Indian economy, they are unable to show any evidence of losses incurred by its regulated entities because of virtual currency. The Supreme Court also declared the instructions given in the circular as inappropriate and illegal hence unenforceable.
- Conclusion: The Supreme Court in its decision held the circular to be unenforceable, however, it didn’t declare whether cryptocurrency was legal or not, since there is no legislation about the same hence they remain unregulated in India. In 2019, a bill had been drafted namely Banning of Crypto Currency and Regulation of Official Digital Currency Bill, 2019. However, this bill has not been presented in front of the parliament or has not been discussed by the members of the parliament. This bill raised questions about whether holding, selling, disposing off or any kind of trade through cryptocurrency is considered legal or not in India. However, till 2021 though there is no authority or laws regulating cryptocurrencies, it doesn’t mean that dealing with cryptocurrency is illegal. Hence, India hasn’t declared cryptocurrencies as illegal as digital currency is considered to be a source of investment for the people of India and many people are getting attracted to this source of investment.
Procedure to follow to buy Bitcoin in India
There is a procedure that people have to follow for buying Bitcoins in India. These steps include:
- Firstly, the most important thing is to submit relevant documents including the Aadhar Card and PAN Card of the investor. Thereafter, these documents are verified and the KYC (know your customer) process should be completed before investing in bitcoins.
- After this, the individual shall place their order for his/her order on a cryptocurrency exchange like Coindesk, Coinbase, and ZebPay. These platforms allow the investor to purchase bitcoins at a current market price.
- Once the order is placed, investors can directly transfer the said amount from the bank accounts to the crypto exchange. Payment can be done through other various modes such as RTGS, NEFT, debit or credit cards and any other mode of payment the investor uses for daily transactions.
- The last step is to securely store the purchased bitcoins in crypto wallets provided by the particular crypto exchanges.
A point to remember here is that the transacted bitcoins are registered with their wallet IDs instead of the name of the seller or the owner. Also, an investor can start his investment from Rs.500.
Can Bitcoin be used as a form of payment in India?
As discussed earlier, since there is no law to regulate cryptocurrencies, it is considered neither legal nor illegal in India. Taking advantage of this, it has been witnessed that India is slowly opening up to the thought of accepting cryptocurrencies as a legitimate method of payment in the formal and informal sector of the economy. Bitcoin, Ethereum, Solana and other crypto tokens in exchange for goods and services have been started to be accepted due to an increase in the demand for digital assets in India. Now, Bitcoin and other cryptocurrencies can be used to buy goods like a rug or for services such as recharging Fastag in India. Similarly, Unocoin, a bitcoin trading site, is now allowing its users to purchase vouchers from over 90 different brands. An investor registered with Unocoin can use bitcoins ranging from Rs.100 to Rs.1000 to avail these vouchers. These vouchers can be used to buy Domino’s Pizza, ice cream from Baskin & Robbins, beauty and health products from Himalaya, and even home appliances from Prestige. Though bitcoin is now used to buy selected items, it has still not reached a wider audience and has not gained much recognition till now for it to be used as a method of payment for the purchase of all goods and services.
Pros and Cons of Bitcoin
Bitcoin is also considered a high-risk investment when we talk about dealing with it in real life. It not only has advantages but also has some disadvantages that must be taken into account before deciding on investments in bitcoins.
- Quick and Inexpensive – It hardly takes some minutes to transfer any amount of money from one person to another. Usually, it costs a lot when we deal with places outside India. However, with bitcoin, the process can be completed with a cost that is either negligible or non-existent. Bitcoins can be transferred to any place on the planet as it has no geographical limitations.
- Decentralized Issuance – Bitcoin is not regulated or valued by any government and Central bank. It also cannot be created or distributed by the government that is there is no third-party interference involved which leads to increased liberty while dealing with bitcoins. No one has the authority to freeze, charge, demand, or seize your coins under any conditions.
- Lower transparency – During the transactions process, there is no disclosure of confidential financial data of the seller due to the presence of blockchain technology.It gives the investor freedom of time and payments.
- Increase in use of Bitcoin – People have started using cryptocurrencies widely, amongst large organizations and in sectors including pharmaceuticals and fashion.
- Creation of our own money – As the Central government can print its own money, similarly anyone can make their own money while using bitcoin through the process of mining bitcoins through a computer.
- Volatility – The prices of bitcoin keep on fluctuating at a rapid rate which makes it risky to invest in bitcoins because of its precarious nature.
- Lack of rules – There are no specific rules laid down to monitor and regulate cryptocurrencies. Cryptocurrency laws differ from country to country and are usually ambiguous and contentious. Lack of rules and regulations makes it prone to scams and misuse.
- Risk of loss – Bitcoin are effectively ‘damaged’ and ‘lost’ if the hard drive crashes or a virus corrupts the records, and the wallet file is corrupted. There is no way that the data can be retrieved back. This causes a wealthy Bitcoin investor to become bankrupt within seconds, with no means of recovering. There is no way to safeguard bitcoins from human and technological errors. If you mess up your bitcoin wallet then, all your money will be ‘gone’.
- Degree of acceptance – A lot of people are still not aware about bitcoins. Though there are few organizations and sectors that know and use bitcoin, the list is too short. It is since the advent of Covid that people are trying to learn more about bitcoins but the growth is seen among big organizations and not among the common man.
- Vulnerability to cyber-attacks and scams – Technology continues to evolve; it never remains constant and with this, the risk associated with technology also increases. Even the most protected data can be prone to attacks and scams. The same goes with bitcoin. Though there is blockchain technology to protect confidential data, it is still vulnerable to cyber-attacks, scams, fraud, and thefts.
How to safeguard oneself from Bitcoin fraud?
Cryptocurrency trading is exciting and awarding place to be in, but it is not untouched by scams or frauds either. There have been incidents where the investor money is siphoned off by fraudsters impersonating crypto exchanges. There are a few claims through which you can judge the companies and people to avoid during trading:
- Scammers assure you that you will make money – If someone promises you that you will make a profit, it’s usually a scam even if there are any celebrity endorsements or testimonials.
- Scammers promise big payouts with guaranteed returns – Considering the uncertainty in the prices of the cryptocurrencies no one can guarantee a set return, say, double your money, that too in such a short period of time.
- Scammers guarantee free money – Scammers promise free money in cash or cryptocurrency. In this world, it is impossible to get ‘free’ money, hence these types of offers are always fake.
- Scammers make big claims without details or explanations – Smart businessmen want to understand how the investments work and where their money is going. Good investor advisors also provide detailed information about the same. However, we have to beware of people who don’t provide any kind of detailed explanation when asked for it and tend to stall the topic by beating around the bush.
Every investor has to be aware of phishing activities and other types of scams so that they can avoid any fraud or scams resulting in huge losses. Investors have to stay on alert all the time and check out for the people and companies to avoid while investing, selling, and buying cryptocurrencies. So before blindly relying on anyone, one should do this:
- Research online for the name of the company and cryptocurrency name before indulging in trading with that company or person. Check whether that person and company are authentic or not.
- One should trade on a safe and reliable platform like ZebPay and not respond to any suspicious-looking emails, messages, or offers.
- Talk to people who have experienced this or have sufficient knowledge about such frauds and scams.
- Never reveal your confidential information to anyone who you do not trust or know.
Recent guidelines laid down by the RBI on digital lending
The Reserve Bank of India had constituted a Working Group on digital lending including lending through online platforms and mobile apps on 13th January 2021, in the light of an increase in customer concerns arising out of a spurt in digital lending activities. The report was released on 18th November, 2021 enlisting certain guidelines to enhance customer protection and create a secure digital lending environment while not compromising on innovation. These are the following guidelines:
- It will be necessary for the Digital lending Apps to go through a verification process conducted by a nodal agency which would be set up in consultation with stakeholders.
- Setting up a Self-Regulatory Organization involving the participants in the digital lending ecosystem.
- Formulation of rules to prevent illegal digital lending activities.
- Creation of certain baseline technology standards and compliance with those standards as pre-condition for offering digital lending solutions.
- The loans to be disbursed directly into the bank accounts of the borrower; disbursement and servicing of loans only through bank accounts of digital lenders.
- Data of the borrowers to be collected only with prior and free consent with verifiable audit trails.
- The data is to be stored in the servers located in India.
- To ensure transparency, the algorithmic features used in digital lending to be documented.
- The digital lender would be directed to provide a key fact statement in a standardized format including the Annual Percentage Rate.
- The use of unrequested commercial communications for digital loans are to be governed by a Code of Conduct to be applied by the proposed Self-Regulating Organization.
- A ‘negative list’ of Lending Service Providers to be maintained and monitored by the proposed Self-Regulating Organization
- A standardized Code of Conduct is to be framed by the proposed Self-Regulating Organization for recovery in association with the RBI.
This report is uploaded on the RBI website open to stakeholders and the public for any comments on it. The comments have to be submitted by 31st December 2021 through email. The comments will be examined and taken into consideration before a final view is taken on the suggestion made by the Working Group.
Out of the many cryptocurrencies, bitcoin is gaining momentum and has become the most popular cryptocurrency in the global financial system. Bitcoin’s growth is starting to captivate a lot of people in India who are thinking of investing in cryptocurrencies as it is a great source of investment just like gold. It has provided an idea of alternative currency and opened the door for economic transformation in many parts of the world. With this, cryptocurrencies give individuals more choices to manage their finances. However, the volatile nature of cryptocurrency is a major concern for people thinking of investing in bitcoin or any other cryptocurrency. It is also unregulated and there are no rules framed to protect the investors from frauds, scams, etc with regards to cryptocurrency. There are somewhat as many boons as there are banes associated with bitcoin. Any individual thinking of investing in bitcoin must thoroughly study the trend of the bitcoin in the digital market and consider both its advantages and disadvantages before taking any decision. In the end, it is up to the investor to decide whether investing in bitcoin is worth the risk or not after understanding the intricate details of how the cryptocurrencies function and operate.
This article is authored by Sakshi Ranadive, student at Government Law College, Mumbai