Centre for Internet & Society

The paper analyses the laws and regulations that apply to Bitcoin in India, and comes to the conclusion that the government has wide powers that it can exercise, if it wishes, to regulate Bitcoin. Given the lack of existing legal and regulatory analysis on this issue in India, we greatly welcome comments on this issue.

Bitcoin: Legal Treatment under the Current Indian Legal and Regulatory Regime

This paper is an effort to examine the legal basis and treatment of Bitcoin under the current legal and regulatory regime in India. It seeks to explore whether Indian laws and regulations as they stand today would even consider Bitcoin as ‘currency’ and which regulations would govern different kinds of Bitcoin transactions. In this paper we shall first give a brief description of Bitcoin and then move on to what its legal treatment would most likely be which would then lead us to examine which regulations would most likely apply to various Bitcoin transactions.

What is Bitcoin?

Bitcoin is a cryptography based digital currency first described in a 2008 paper by a single or group of pseudonymous developer(s) by the name of Satoshi Nakamoto, who called it a “peer-to-peer, electronic cash system”. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each Bitcoin is subdivided down to eight decimal places, forming 100,000,000 smaller units called satoshis. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution. The processing of Bitcoin transactions is secured by servers called Bitcoin “miners”. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology, also known as the “blockchain”. The integrity and chronological order of the blockchain is enforced with cryptography. In addition to archiving transactions, each new ledger update creates some newly-minted Bitcoins. The number of new Bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more Bitcoins will be added into circulation and the total number of Bitcoins will have reached a maximum of 21 million Bitcoins.

Each user of Bitcoin gets a digital wallet and a Bitcoin address which is the address from and to which Bitcoins can be transferred once this address is given to another party for the transfer. A transaction or transfer of Bitcoins is simply a transfer of value between Bitcoin addresses that gets included in the block chain or the system log, which ensures that each transaction is valid and that nobody can use his or her Bitcoins more than once i.e. it avoids double spending.. Bitcoin wallets keep a secret piece of data called a “private key” for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they have come from the owner of the addresses. The “signature” also prevents the transaction from being altered by anybody once it has been issued.

With this very basic and brief understanding of Bitcoin, we shall now try to examine whether Bitcoins should be treated under Indian law as (i) currency, (ii) security, (iii) derivative, (iv) negotiable instrument, (v) prepaid payment instrument, or (vi) movable property.

Can Bitcoins be Treated as Currency?

Indian laws do not define digital currency or virtual currency, so we will have to look at the traditional definition of currency to see if Bitcoin falls in that definition. The term currency is defined in section 2(h) of the Foreign Exchange Management Act, 1999 (“FEMA”) in the following words:

“currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;

It is notable here that this is an inclusive definition which means that it has a large scope for expansion. The legislature has consciously made the definition capable of further expansion by making it inclusive and also by giving the Reserve Bank of India (“RBI”) the authority to notify other similar instruments. This means that if any instrument which is being used as a currency is not covered by the definition as it stands, then the RBI is free to notify it and include it in the definition of currency. All “currency” other than Indian currency is considered by the FEMA as “foreign currency” which would have to then comply with various rules and regulations under FEMA. This means that if Bitcoin is classified as a “currency”, it would have to come under the definition of “foreign currency” and Bitcoin transactions would therefore have to comply with the entire foreign exchange regime under FEMA.

It is clear that Bitcoin is not really similar to any of the instruments mentioned in the definition, not least because none of them are digital or virtual in nature. On May 3, 2000 the RBI notified “debit cards, ATM cards or any other instrument that can be used to create a financial liability” as “currency” under the FEMA (by Notification No. FEMA 15/2000/RB dated May 3, 2001). Since Bitcoin is not really backed by any institution and has no backing by any central bank or institution and because most of the transactions involving acceptance of Bitcoin are voluntary in nature, therefore it does not seem that Bitcoin is an instrument that can be used to create a financial liability. This can be explained further with the help of two examples:

(i) If a person owns Indian rupee notes worth Rs. 500 and everyone stops accepting the currency, he can always go to the Governor of the RBI and claim Rs. 500 from him, however if I own Bitcoins then whether my Bitcoins can be used to buy any goods or services is entirely dependant upon the willingness of third parties to accept Bitcoin as a valuable item.

(ii) If I order a pair of shoes worth Rs. 500 from flipkart.com and pay for those shoes using Indian currency, then it does not matter if flipkart decides to not accept Indian currency (whether by means of cash, credit card, cheque, etc.) and accepts payment only in Bitcoins. As soon as I give flipkart currency notes or coins worth Rs. 500, my legal obligation to pay for the shoes is fulfilled. On the other hand if I pay for those shoes with Bitcoins then unless flipkart voluntarily accepts payment in Bitcoin, my liability to pay for the shoes will still legally exist till I pay flipkart Rs. 500 in Indian currency.

Therefore it is clear that Bitcoins do not fit into the plain vanilla definition of currency under Indian law. However this does not mean that the RBI cannot regulate Bitcoins or transactions involving Bitcoins. The RBI can very well notify Bitcoins as “currency” and then come out with rules and regulations for Bitcoin transactions. Cynics may argue that this is not possible due to the peer to peer nature of Bitcoins and the Bitcoin network and they would be right to the extent that it may not be physically feasible for the RBI to regulate every Bitcoin transaction, but it would be possible for them to target Bitcoin exchanges which is the entry point for most users of Bitcoin. To sum up, although Bitcoins may not be classified as a currency at present, this does not preclude the RBI from regulating them in the future.

Can Bitcoins be considered as Securities?

The term “securities” is defined in section 2 (h) of the Securities Contracts (Regulation) Act, 1955 in the following manner: “securities” include —

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;”

It is clear from a bare reading of this definition that Bitcoin does not come within any of the parts of the definition of securities, other than possibly ‘derivative’ (which is something we shall examine in the next part of this paper). Apart from the term derivative, the only other way in which Bitcoins can be brought under the definition of ‘securities’ is if the Central Government notifies Bitcoins as such since the Central Government has the power to declare any instrument as a ‘security’. In such a scenario it will be the entire gamut of regulations governing securities including the various rules and regulations prescribed by the Securities and Exchange Board of India (SEBI). Another argument is that Bitcoin may fall under the definition of a “derivative”.

Can Bitcoins be considered as a Derivatives or a Negotiable Instruments?

The definition of “derivative” under the SCRA is

(ac) “derivative” includes— (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities;

As discussed above, Bitcoin is not a security and therefore would not satisfy the first part of the definition of “derivative” within the SCRA. Further since Bitcoin is only a voluntary currency based on two parties deciding that the code itself has some value, therefore Bitcoin can also not be described as a contract which derives its value from the prices or index of prices of underlying securities. Therefore it is clear that Bitcoin would not satisfy the requirements of being a derivative under the SCRA. Under Indian law, another definition of the term derivative is provided under the Reserve Bank of India Act, 1934 which defines “derivative” in section 17(6A) to mean:

an instrument, to be settled at a future date, whose value is derived from change in one or a combination of more than one of the following underlyings, namely:--

(a) interest rate,

(b) price of securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government,

(c) price of foreign securities,

(d) foreign exchange rate,

(e) index of rates or prices,

(f) credit rating or credit index,

(g) price of gold or silver coins, or gold or silver bullion, or

(h) any other variable of similar nature.

Since Bitcoins are used as currency because Bitcoin users think it has inherent and not because its value is derived from any other underlying thing or object, therefore Bitcoin cannot be said to fall under the definition of “derivative” under the Reserve Bank of India Act, 1934 either.

The term negotiable instrument on the other hand is defined in the Negotiable Instruments Act, 1881 and defines a negotiable instrument as a “promissory note, bill of exchange or cheque payable either to order or to bearer”. Since the terms promissory note, bill of exchange or cheque are easily understood in trading parlance, there is no need to go into the definitions of these instruments as provided under the Negotiable Instruments Act, 1881, suffice it to say that Bitcoins do not fall under the definitions of any of these terms under the Act.

Can Bitcoin be Classified as a Prepaid Payment Instrument?

The enactment of the Payment and Settlement Systems Act, 2007 has brought the payment systems involved in the issuance of prepaid payment instruments under the regulatory jurisdiction of the RBI. In exercise of its powers under Section 18 of the Payment and Settlement Systems Act, 2007 the RBI on April 27, 2009 issued policy guidelines governing institutions issuing prepaid payment instruments such as mobile wallets, Paypal, etc. In these guidelines the term Prepaid Payment Instrument is defined in the following words:

Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card…

Since Prepaid Payment Instruments have a definite value stored on them which is equal to the amount paid by the holders in cash or by debit or credit card, it seems that Bitcoins cannot be classified as Prepaid Payment Instruments since there is no static value stored in Bitcoins, rather they have an inherent value. In other words the amount of money that a person pays to buy Bitcoin does not represent the value of the Bitcoins that the person is buying, rather the value (or exchange rate) of Bitcoins keeps changing on a daily basis. Therefore Bitcoins cannot be classified as prepaid payment instruments because the value stored on prepaid instruments such as Paypal is always constant and is equal to the amount of money paid to the system to get a Paypal balance, but this is not the case with Bitcoins.

What can Bitcoins be Classified As?

As discussed above, Bitcoins cannot be classified as regular financial instruments such as ‘currency’, ‘security’, ‘derivative’ or ‘negotiable instruments’ as these instruments are currently defined under Indian law. What therefore, should be the legal treatment of Bitcoins under Indian law? Bitcoins are essentially lines of code which create the system of transfer of Bitcoin currency from one account to another. The Indian Copyright Act defines the term “computer programme” as “a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result”. Based on this definition as well as the generally understood meaning of computer programme it would be fairly safe to say that Bitcoins would fall under the definition of the term “computer programme”. Now the General Clauses Act, 1897 defines the term movable property as property of every description, except immovable property. Immovable property has been defined to include land, benefits arising out of land or things attached to the earth or permanently fastened to anything attached to the earth. Clearly a computer programme would not fit into the definition of immovable property and relying upon the broad definition of movable property in the General Clauses Act, 1897 it can be said that a computer programme and by logical extension Bitcoins should be considered as movable property. Further the Forward Contracts (Regulation) Act, 1952 also defines goods to mean “every kind of movable property other than actionable claims, money and securities”. It would seem that on a bare reading, Bitcoins would also fulfill this condition and be generally defined as goods under Indian law.

Now that we have determined that Bitcoins would in all likelihood be treated as goods or movable property under the current legal regime in India, it would be beneficial to discuss what laws would regulate the various Bitcoin transactions that occur in general practice, for the purposes of this paper we shall limit our discussion to the following transactions:

i) Mining of Bitcoins; ii) Transfer of Bitcoins from one person to another within the territory of India; iii) Exchange of Bitcoins for Indian Rupees, provided the entire transaction is based in India; iv) Transfer of Bitcoins from one person to another where the person sending the Bitcoins is not resident in India; v) Exchange of Bitcoins for Indian Rupees, where the exchange is based outside India.

Mining of Bitcoins

Since Bitcoins are essentially lines of code and therefore would fall within the definition of “computer programme”, the mining of Bitcoins is essentially the utilization of one’s own computing power and electricity to generate more computer programmes or an extension of an existing computer programme. Thus Bitcoin ‘mining’ would be like making your own computer programme and there is no law which prevents or prohibits a person from doing so, therefore it seems that mining Bitcoins in India would be a perfectly permissible and legal activity.

Transfer of Bitcoins from one person to another within the territory of India

Although we have determined above that Bitcoins would in all probability be treated as goods and therefore any sale of Bitcoins would be governed by the Sale of Goods Act, 1930 however it must be noted that the Sale of Goods Act does not regulate barter transactions. This is so because the sale of goods means a contract whereby the property in the goods is actually transferred by the seller to the buyer and according to section 4 of the Sale of Goods Act the transfer of the property in the goods is for a price, i.e., for money consideration. As price is an essential element of a contract of sale, barter is ruled out from a transaction of sale of goods. This means that any transaction whereby payment is made in Bitcoins would come within the category of a barter transaction, for example if flipkart.com starts accepting payment in Bitcoin then the transaction of paying for a pair of shoes through Bitcoin would infact be a barter transaction and would not be governed by the Sale of Goods Act.

Exchange of Bitcoins for Indian Rupees, provided the entire transaction is based in India

In case there is an online Bitcoin exchange where one can buy or sell Bitcoins using real currency (such as Mt.Gox) based in India which deals only with Indian residents and buys or sells Bitcoins for Indian Rupees, then as per our discussion above all the transactions of this online exchange would be governed by the Sale of Goods Act and all relevant laws regarding sale of goods on an exchange platform with regard to goods such as computer programmes would be applicable to such an online exchange including the Forward Contracts (Regulation) Act, 1952. (As noted above, Bitcoins would satisfy the definition of ‘goods’ within the Forward Contracts (Regulation) Act, 1952.) This would imply that as long as the online exchange does plain vanilla buying and selling of Bitcoins it would not be amenable to regulatory oversight but if it wants to offer Bitcoin derivatives such as Bitcoin futures then it would have to get itself registered as per the provisions of the Forward Contracts (Regulation) Act and also follow all the rules and regulations prescribed thereunder.

Transfer of Bitcoins from one person to another where the person sending the Bitcoins is not resident in India

If Bitcoins are transferred from a person residing outside India to a person resident within India then that would amount to import of computer programmes within India. If this transfer is done in return for the Indian party sending an item or rendering a service to the foreign party then this would be a barter transaction. It is useful to note that although the Indian import and customs regulations do not mention barter transactions, the guidance on the website of the Directorate General of Valuation, Central Board of Excise and Customs, Government of India seems to suggest that barter transactions for import of goods although are not prohibited but do present unique problems of valuation of the goods. However since software imported online does not attract any duty under Indian law, therefore it would be immaterial to discuss exactly how a barter transaction involving Bitcoins should be valued under the Indian customs regime. For the purposes of this discussion it is sufficient to note that a Bitcoin transaction entered into by an Indian with a party outside India is not prohibited as long as the item or service being exported out of India is itself legal and above board. For example, a transaction involving an Indian designing a website for a person sitting in Australia and being paid in Bitcoin would be legal whereas sending contraband substances to the same person while getting paid in Bitcoin would not be allowed. This would be the legal analysis for a general citizen but this analysis is subject to regulations governing specific instances, for example exchange or goods or items from certain countries may be declared illegal or the receipt of foreign articles by certain class of entities may be banned or otherwise regulated, such as political parties or Non Governmental Oorganisations (“NGOs”).

Can an NGO based in India receive donations in Bitcoin?

This is an interesting question because it would be perfectly legal for a regular citizen to receive Bitcoins from abroad as a gift or donation, etc. However if the entity receiving such Bitcoins is an NGO then there would be the added layer of regulation from the Foreign Contributions Regulation Act, 2010 (“FCRA”) which regulates all foreign contributions received by NGOs. Section 2(1)(h) of the FCRA defines foreign contribution to include the receipt of any article from a foreign source. This means that even if an NGO based in India receives contribution from a foreign source in Bitcoins, such a transaction would fall within the regulatory ambit of the FCRA and any such a transaction would have to be reported to the Ministry of Home Affairs in Form FC – 7 under Rule 17(3) of the Rules under the FCRA.

Exchange of Bitcoins for Indian Rupees, where the exchange is based outside India

If a person imports a computer programme into India he would have to pay the customs duty at the prevalent rates, however if this import of software is done via the internet and does not involve any physical shipments (e.g. downloading paid software from the internet) then no import duty is levied on the import of computer software in India. This would mean that any person buying a computer programme or software from a vendor abroad would not be liable to pay any customs duty or file any documentation with the customs authorities in India. This situation would also be applicable to any person buying Bitcoins from an online exchange based outside India. The only documentation that would be required for buying Bitcoins from an online exchange abroad would be that which the bank may insist upon for exchanging Indian rupees into a foreign currency and then transferring it to an overseas account. This documentation would involve filing of Form A-1 if the total value of the money being exchanged is greater than USD 5,000 however if the amount of money being exchanged is less than USD 5,000 then the person is only required to give a simple letter containing basic information viz. the name and the address of the applicant, name and address of the beneficiary, amount to be remitted and the purpose of remittance. If the transaction is done using a credit card then in most instances, banks would not be insist upon this letter since these transactions usually go through their automated channels.


Although Bitcoins can currently be classified only as movable property and more specifically as computer software, this position is not tested in a Court of law. Further it appears from the analysis of the definitions of ‘currency’ and ‘prepaid payment instrument’ that the government has the power to bring Bitcoins into the definition of either currency or prepaid payment instrument by just amending the regulations, which is not a very cumbersome process since financial regulations, by their very nature, are quite fluid and prone to changes. Even so it is worth noting that even as the legal regime stands now offering of derivative products in Bitcoins might require registration and approval under the Forward Contracts Regulation Act.

It is worth noting that unlike other digital currencies such as e-gold, liberty reserve, etc. Bitcoin is a peer to peer network based currency which does not have one centralized agency or institution regulating the entire system and therefore an argument is made that even if the agencies want to regulate or shut it down they will not physically be able to do so as there is no nodal institution that the authorities can go after. However this argument is fallacious to a certain extent in that the authorities can go after online exchanges which are websites or portals run by individuals or entities which have a physical manifestation. They would have names, addresses, bank accounts, etc. and the authorities could easily go after the major exchanges to cut off the supply or cash into the Bitcoin system by attacking the source where cash or ‘real currency’ enters or leaves the system thereby severely reducing the efficacy of Bitcoins.

Looking at the relatively small number of people who use Paypal or other e-wallets in India, it would not be entirely unlikely that the regulations to govern Bitcoin, whenever they come, would be a reaction to a particular event and whether these regulations are enabling or disabling in nature would probably depend upon the nature of the event to which they are reacting.

Note: Although not referred to here because of the limited context of this paper, a similar and much more thorough examination of the legality of Bitcoins done by Nokolei M. Kaplanov in the article titled Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation in the Temple Law Review.

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