Bitcoin in India.. Raid to force regulatory Clarity

The raids conducted by the Enforcement Directorate in Ahmedabad on Bitcoin traders appear at first glance to be a blow to the Bitcoin community. Temporarily there will be fear and a suspicion that the Bitcoin bubble has been pricked. Holders of Bitcoin in India may feel that they have lost their investments. Miners will be worried about their investment. Conventional money managers would say “I told you…”

But, behind this gloom, I see the glimmer of a bright light… The light that may actually clarify the enigma of Bitcoin as per Indian law. This may be  good in the long run and actually help all Cryptocoins to flourish in the days to come.

Now that the regulators have launched some action, they need to justify why they have acted in the given manner.  They need to justify that buysellbitco.in and rbitco.in were indulging in violation of law and there was a reasonable ground for believing so. They also have to clarify what is the wrong they see in the system. They need to justify all this in a Court of law soon. Courts will therefore be forced to take a view on the subject matter one way or the other.

If this is only a raid to frighten the industry, based on some loose perceptions, then there could be a counter legal action against the violation of the freedom to carry on a legitimate business.

It is time for the media to now question the ED on the ground on which the raids were conducted and how they intend proceeding further.

The option before the ED is two fold. The first is to admit that there was some incorrect perceptions and withdraw silently with a cautionary advisory of its own to warn of any wrong doing in the future. This would be an easier option.

The second option which is tougher is for ED to justify its action by trying to prove that there was some illegal activity surrounding the two raided business houses buysellbitco.in and rbitco.in. For this they need to define what business they were indulging in and why that business was not according to Indian law. If they are not able to convince the Courts that there was reasonable ground to believe that the two business houses were aware that they were breaking the law and had the “Guilty Mind”, the charges would fizzle out.

It is not surprising that Indian regulatory authorities must have surmised “If there is something that is being traded in US $ outside the banking system, it must be illegal.”  Beyond this it is doubtful of the authorities have given thought to the legal implications in detail before launching the raid.

It must be remembered that “Bitcoin” is an electronic document recognized under Section 4 of Information Technology Act 2000 (ITA 2000) and is admissible as an evidence like a paper document in any Court in India. A digitally signed transfer of this electronic document is also legally recognized. Hence there is no way (except by retrospective amendment of ITA 2000) that “Bitcoin” can be considered as an “Illegal Asset” or trading in bitcoins is not a permitted business activity. possession of Bitcoins and trading is perfectly legitimate as any dealing with any asset recognized in law.

The bitcoin users consider it as a “Private Currency” and are willing to exchange goods and services though there is no monetary backing by any authority guaranteeing a value for the bitcoin. This is being done at their own free will and not at the compulsion of any authority.

Use of any asset as a “Private Currency” is not a concern of the authorities except when there is “Cheating” through “Misrepresentation” that “The private currency is a fiat currency”. Unless such an allegation can be sustained in a Court of law, neither RBI nor ED can take objection to the “Private Currency”.

Unfortunately there is lack of clarity in India law whether a “Virtual Asset” is a “movable” property or an “immovable” property or an “actionable claim” or an asset created by law like an “Intellectual Property Right”. It is therefore difficult to determine what is the procedure for transfer of this property whether it is by “endorsement and delivery” or by physical “transfer of possession” or by “occupation”  of the asset or “constructive delivery”. Bitcoin transfer is a contractual transfer and such transfer  appears to be perfectly within Indian law.

RBI or any other  banking institution in India have not declared that Bitcoin is a “Currency”. Since Bitcoin does not carry any promise from any Government agency, it is impossible for RBI to declare it as a “Currency”.

Bitcoin cannot be considered as a “Foreign” currency since there is no “Cyber Nation” recognized in Indian law and also since Bitcoins can also be produced locally in India itself.

To recognize Bitcoin as a “Foreign Currency” and apply laws applicable to foreign currency, there is a need first to declare “Cyber Space” as a “Nation” and “Virtual Currency” as the “Currency of the Cyber Nation”. Any move to invoke FEMA in its present form would automatically recognize an implied “Cyber Nation” with other collateral consequences such as Can India tax the earnings of the Cyber Nation?

Even in the RBI advisory, there is only a concern expressed in public interest that users should guard against any legal violations. There was no mention of what laws the RBI considered as being violated.

It is therefore not possible for Citizens to presume that currency laws will apply to Bitcoin activities and design their business models accordingly.

Naavi.org had  earlier warned the Bitcoin users about the possible foreign currency angle involved when the purchases or sales are made to foreign counterparts and settled in foreign exchange.  We had warned that if these trades were not handled like the Export and Import of commodity there could be a risk of FEMA violations. This is being played out in the action initiated by the ED.

The FEMA risk arising out of trading is however distinctly different from mining or  buying and selling Bitcoins against Indian Rupees or providing services against bitcoins as consideration. Rupee transactions involving a legally recognized asset (electronic document) is perfectly within law. “Mining” is  a completely different activity which generates a saleable asset through the use of computers and had no illegality involved. Participating in foreign mining pools is also nothing but software service exports and is within the legal limits.

At the same time, we need to appreciate that Enforcement Directorate has every right to investigate any suspected havala operation or other criminal activity whether they are done with Indian rupees or Bitcoins. Hence one cannot raise objection to the fact that ED thought it necessary to investigate. However it is not clear if ED is investigating this case in the correct perspective. At the end of this exercise, ED will be forced to provide clarity on their perspective of Bitcoins and Bitcoin trading.

Once there is a commitment from the regulator, it will be easy for businesses to make necessary modifications to their business models so that they can be compliant to the laws.

If ED’s perspective is unacceptable, then the industry has the legitimate cause of action to object to it and call the attention of the highest court of the land and force legal clarity. Either way it is good for the industry in future.

In the reported case, there was a mention that one of the entrepreneurs had started an exchange activity after first earning Bitcoins as a reward for some software development activity. ED should recognize that this is a simple activity of export of software and it is the prerogative of the exporter to designate the consideration either in rupees or in dollars or in bitcoins or in any other form. Hence no objection can be raised for designating the exports in Bitcoins. However if the proceeds are not received  within a reasonable time in India then there could be a concern that potential foreign exchange earning of the country had leaked out. In this case since the Bitcoins were in fact received in India, there is no issue of foreign exchange loss. Since no Bank can accept Bitcoins through their systems, it was inevitable that the receiver had to receive them directly and not through an “Authorized Dealer” since there is no “Authorized” dealer for bitcoins. 

After this incident, RBI needs to consider how to “Authorize” receipt of Bitcoins from abroad. May be one or more Banks should be designated an “Authorized Bitcoin Dealer” or willing private entities should be registered as “Authorized Bitcoin Exchangers”. Otherwise RBI has to put up with the private mechanism of settlement of consideration between two entities engaged in a legitimate foreign trade.

 It is difficult for RBI to interfere on contractual aspects such as how the consideration of an export contract has to be designated or to argue on the valuation of the export contract is uncertain if expressed in Bitcoins,  since this is a business decision.  Unless there is a deliberate “under invoicing” along with diversion of payment to an unaccounted foreign account, RBI has no cause of action.

Indian exporters are also permitted to retain their foreign exchange earnings in a Foreign Currency account (Exchange Earner’s Foreign Currency Account). However if the exporter has designated the consideration in “Bitcoins”, since there is no Bank which is accepting deposits in Bitcoins, it is imperative that the exporter has to either keep the asset in his own vault or trade it through agencies that are prepared to accept the asset in a repository and facilitate its trade.

In the light of these uncertainties, now it is the duty of the Enforcement Directorate to make a public announcement of the following:

a) Whether there is any restriction in the Indian Contract act to designate a consideration of a contract only in terms of “money”? and whether it is not legal to enter into a contract where the consideration is expressed in terms of a “Commodity”?. For example, Can a software export contract designate the reverse consideration as “xxx tonnes of Nymex Crude” instead of  xxx US dollars? If not, under what law there is such a prohibition?

b) Whether there is any price regulation on software exports in India according to which an exporter has to quote a minimum export price realizable in a designated currency only for his efforts. If not they cannot object to the pricing of the exports in bitcoins based on the volatility of Bitcoin value or non backing of its value by a “Government”.

c) Whether there is any restriction in the Indian Export-Import policy if transactions are to be designated only in Indian Rupees or in US Dollars or such currencies which are considered popular? Can such transactions be also designated in the currency of Timbuktu ? Or Bitcoin?. If not, ED should have no objection to the receipt of Bitcoins by the exporter of Software.

If ED raises any objection about the exporter earning in Bitcoins when there is no prohibition, it would amount to unfair harassment of the businessman. In fact NASSCOM should come to the rescue of such exporters.

Now, let us analyse the trading activities where a business entity buys and sells Bitcoins from the public. As already stated, if the trade is in Indian rupees there is no foreign exchange angle. It is like buying and selling of any asset in India for whatever consideration the buyer and seller agree upon. However since there is a possibility that the transferred wealth may be a “Stolen Property”, there is a possible “Tainted Title” passed on from the transferor to the transferee.

This is nothing different from a shop owner who sells household goods against a genuine rupee notes to a terrorist or a murderer or a robber. The shopper cannot be expected to investigate beyond the suspicious circumstances (if any) apparent during the transaction. The criminal investigator may seek the assistance of the shop owner to locate the criminal but cannot criminalize the act of the shopper in selling the goods itself. For example recently a murderous attack took place in an ATM premises in the Bank. Police can seek the assistance of the ATM owner in locating the attacker but may not be able to make the ATM owner criminally liable for the attack.

In the instant case therefore the ED may seek the services of the trader to investigate the transactions of the customers. The trader himself may not have apparently committed any crime since his intention of providing a trading platform cannot be considered as “mens rea” for a crime.

It would be interesting to see how ED will proceed from here onwards.

If the trader has done some minimal KYC such as collecting the PAN card information of the customers, will ED consider this as “Sufficient Due Diligence”?

If not, ED will have to clarify the nature of Bitcoin as an Asset in Indian law before they can proceed to define any crime.

If they consider Bitcoin as a “Currency”, then it will legitimize the currency similar to what the Swiss Government has done. Bitcoin will then be equivalent to a “Foreign Currency” though we may not know where this “Foreign Country” exists. If Bitcoin transfer is made subject to defects in the title of the previous transferor, then it will legitimize Bitcoin as a “Non Negotiable Instrument evidencing an actionable claim”.

Either way there will be more clarity on the status of Bitcoins.

If ED does not clarify the nature of the asset the dealing about which they have objection, their action would be arbitrary and fit to be questioned in a Court of law as a violation of right to carry on a legitimate business activity.

Will the main stream media take up a debate on the subject and extract clarifications from RBI and ED?

Naavi

Kindly Note that subsequent to writing of this post in December 2013, and observing the lack of self regulatory attitude of the Bitcoin managers and the continuing use of the Bitcoin by criminals, Naavi has reversed his support for Bitcoins. Presently in the Indian Context, Naavi is advocating an express ban on Bitcoins. See other recent articles to know why Naavi has changed his view.