CryptoSeries: 3. Legality of Cryptocurrency: India & beyond
Updated: Oct 13, 2019
Cryptography has nonchalantly proved its potential to entwine the very fabric of privacy. It has proven its potential, by achieving great speeds to facilitate transactions, using only the processing power of the system on which it is based upon. It has the potential of transforming every facet of the society with a minimalist modus operandi.
The extent to which block-chain associated encryption based technologies strive to endorse privacy, is perceived to be skeptically cynical, and thus usually glared upon. We fail to understand the very concept behind it. A block-chain based technology is nothing but a decentralized distributed ledger technology based upon the transaction of currency to which it is associated with, and storing the hash functions or encryption value in them, it is a publicly available record which cannot be altered at any point of time. The identities of both ends of the users are virtually untraceable. However, the issue of antagonistic anonymity may be solved using complex “Know Your Customer” mechanisms, for example, Regulated and Sovereign backed Crypto-currencies (RSBC); and/or nation coins or nation wallets. It would then subsequently provide largely as a data-hub, for a large number of transactions, based upon their encryption value, date and exact time which may generally not be inclined to any external altercations. This brings us to the next extension of the aforementioned technology which is the crypto-currency. In simple terms, it can be defined as a medium of exchange using intricate encryption mechanism which safeguards every quanta of information involved with the transactions and then the said information is stored in the form of a distributed ledger, the information of which is available publicly and can be accessed at all points.
Whenever there is a transaction between two or more people, it has been seen that every expenditure involving the crypto-currency transaction gets registered in the distributed ledger, with the exact amount and the encryption value as associated with the transaction. The network related to such a technology helps in detailing each and every transaction facilitated during a certain time frame into a list. The list is essentially referred to as a ‘Block’. There are certain sets of people who actually verify the validity of such transactions, who generally identify themselves as ‘Miners’. Miners typically use their high-end hardware computer components to solve complex mathematical problems and thereby validating any transaction associated within the said system.
HOW TO MAKE IT LEGAL IN INDIA?
The issue surrounding the legalization of crypto-currency has been afloat since the summer of last year when a notification by RBI declared the usage of crypto-currency in any manner, illegal. Since the usage of crypto based technology and the currency, it has in itself proven to be a challenge in front of all the crypto geeks. Here are few ways under Indian Information Technology Act, 2000 by which we can make crypto legal:
1. INCULCATION OF CRYPTO-CURRENCY U/S 2(f) OF IT ACT, 2000: Section 2(f) of the Act states the components of an Asymmetric Crypto system which paves a way for legalizing the crypto currency in all walks of life. The definition speaks about an asymmetric system which is a dual factor authentication, exactly similar to the technology which is used for the transaction of any crypto-currency. When the question of legality arises then it is possible to inculcate the crypto-currency based systems into it. Thereby making the systems associated with it, legal and once the system is legal we can legalize the currency. The method for legalizing Crypto-currency is very simple; the first eventual step of which is to legalize the systems associated with it.
2. CREATING A CENTRALIZED CURRENCY RESERVE: The government solution for legalizing crypto-currency will be to diversify the current critical sector agency called NCIIPC established under Section 70(a) of the Information Technology Act, 2000 and empower it to make rules pertaining to regulation of centralized Crypto-currency reserve. The value of a centralized currency can be associated with any material goods in order to fluctuate the value for any future scenarios and the government will also be satisfied that it can manipulate the value at any time and monitor the transaction at the same time. The agency could be a sub organization under NCIIPC focusing purely on the Crypto-currency regulations and monitoring authority. This will also strengthen the information gathering sector and shall minimize the rate of money laundering.
3. FOCUSING ON EVIDENTIARY VALUE: We know that every quanta of transaction happening on a closed system is a part of a block. The main argument which goes along with any Crypto-currency based technology is whether it is of any evidentiary value in a court of law? The answer is surprising; the evidence presented in the form of a block transaction is not admissible because the records produced is completely intelligible to human eye, only hash function along with creation, access and modified values is represented and no data relating to the end users is their. The 3rd eventual step will be to evaluate the evidentiary value. Question of the hour is that how to pass this test of stable evidence? So if we are able to centralize a crypto currency, what government can do is to create a sophisticated know your customer mechanism which will help in realizing the identities of the end user and the person who wants to keep his or her identity safe can be taxed by creating a new tax value of "Anonymity Tax". This will help in curbing practices like money laundering, Cyber fraud, terrorists group funding etc. Any crypto currency transaction should be passed as an electronic signature mentioned under Section 3(2) of Information Technology Act, 2000 which speaks that any digital signature passed under it should be subject to an asymmetric crypto authentication and wait for it! the same technology is being used in crypto currency transaction for authentication purposes. Once the transaction is authenticated as the electronic signature then it can be made admissible under Section 65(b)(4)of the Indian Evidence Act, 1872 which speaks of admitting an electronic evidence.
4. PREVENTION OF ONLINE OFFENCES PERTAINING TO CRYPTO CURRENCY: Once everything is on the closed network and monitoring is being done by the aforementioned authority. The crimes committed can be made punishable under the Indian Penal Code, 1860 and many other laws associated with varying degrees.
COMPARATIVE ANALYSIS OF GLOBAL CRYPTO -CURRENCY REGIME
An outcry to essentially regulate crypto-currencies, upon its proliferation across most burgeoning Economies across the globe, has been conceived. Rapidly evolving economies amp supply chains, and volatile markets, make it cumbersome to legislate apposite guidelines, to accommodate or rather assimilate with evolving standards, and expectations.
Despite deeming crypto currency exchanges, money transmitters, the United States Financial Crimes Enforcement Network, or more popularly referred to as ‘FinCEN’, does not particularly consider crypto-currencies, legal tender. While the Internal Revenue Service, regards crypto-currency as “taxable property, the United States Securities and Exchange Commission has essentially been apprehensive to warn investors, investing in crypto-currencies, of the possible investing risks plausible in the market, and further placed restrictions on several initial coin offering programmes, in pursuance of greater amendments to regulate crypto-currencies, deeming all crypto-currencies to be securities. The Commodities Future Trading Commission has however, on the other hand, adopted a laissez- faire approach, endorsing “Bitcoin”, as a product/ commodity.
Financial institutions under surveillance of the People’s Bank of China, have been discouraged from fostering relations, and facilitating crypto-currency transactions. The institution assumed a completely antagonistic approach, by banning domestic exchanges, and initial coin offerings.
Although, China has been apprehensive to clamp down on the proliferation of crypto-havens and exchanges, the country has virtually not yet banned mining associated activities. Chinese ‘bitcoin miners’ accounted for up to more than half of the global mining community , inducing the country’s administration to focus on obviating tax evasion, corruption, and stabilizing capital outflows. With dealings in crypto-currencies, and exchanges, being deemed legal in Australia, the country since 2017, has adopted a progressive approach towards regulation of its crypto regime, by making available- the necessary needs and demands, of an evolving and extremely volatile market, with appropriate administrative rule-making, judicial overlook, and minimalistic legislative interference; as juxtaposed with its controversial erstwhile policy to double tax, incomes as have been accrued from dealing crypto-currencies, under their corresponding goods and services tax (GST) laws. The Reserve Bank of Australia has approbated with the usage of crypto-currencies, as a legal and official form of currency. And moreover, beyond exchanges, initial coin offerings have truly been proliferating, while in constant surveillance, or rather scrutiny of the Australian Securities and Investments Commission, deriving legality of rule of law, under the ‘General Consumer Act’, and ‘The Corporations Act”. A license from the Swiss Financial Market Supervisory Authority, must be obtained, coupled with pursuance of mandatory registration procedures, for establishment and subsequent operation of crypto-currency exchanges. The Swiss Federal Tax Administrative authority deemed crypto-currencies, to be assets, which may incidentally be subjected to its corresponding Wealth tax, legally required to be disclosed while filing annual tax returns. It even established a functionally working initial coin offering committee, to strengthen legality, increase financial integrity and stability.
The authors of the blog are very well aware of the paradox the suggestion will create. The laws are in the favor technology and it now the time for the government to legalize it and strike a balance between privacy and all the monitoring it will need to create a normalized and stable crypto coins.
 National Critical Information Infrastructure Protection Centre: it is a national nodal agency established under Section 70(a) of the Information Technology Act, 2000 which checks and balances many online bank services and provide a valuable input onto them in case of any contingency.
Prajanya Raj Rathore & P. Aravind Raj,
Symbiosis Law School-Hyderabad.