Laws about Bitcoin are in a gray area today across the world. I studied documents from the Reserve Bank of India’s public repository surrounding Virtual currencies and prepaid solutions. I happened to study two documents about Prepaid Payment and Foreign Exchange Management Rules, 2000.
Why research Prepaid Payment rules?
A person may come across the need to purchase them through Fiat Currencies (INR, USD, GBP, etc). Purchasing any e-currency and loading to an eWallet is regulated by the RBI. Although Bitcoin is in no way related to this, I wanted to see how close I could get to any laws that could present a roadblock.
Is Bitcoin Regulated in India?
The RBI regulation on Prepaid Payment Instruments in India defines a lot of areas. After understanding the documents of RBI’s guidelines and Rules, this is where I could find the only roadblock based on regulation.
3.2 Only banks which have been permitted to provide Mobile Banking Transactions by the Reserve Bank of India shall be permitted to launch mobile based prepaid payment instruments (mobile wallets & mobile accounts).”
In order to enter into the market; fiat is needed to purchase Bitcoin. Fiat will fade away as more people adopt Bitcoin. Until that frictionless free flow between consumers and merchants is made possible, this is a problem area for Bitcoins entry into India.
It can be overcome through:
- Donations and sponsorships. There are enough Smartphones to cause this market to explode in any sponsor’s favor.
- Sell Services and goods for Bitcoin. Programming Skills, etc.
- Mining is too expensive at this stage, unless you have the latest and best equipment. Electricity is not expensive in India.
If we keep fiat out of the system, then Bitcoin is unregulated in India.
I spent some time on the Foreign Exchange Management Act, but it is entirely out of the scope of Bitcoin. As it is a decentralized currency, it can be considered to be a domestic currency since it is being mined in India. This leaves it out of the scope of Foreign Exchange.
Even if, IP’s can be tracked when Bitcoin is used for Foreign Exchange, they can be easily anonymized through the Tor Wallet. Since it is a true P2P (Peer to Peer/ Person to Person) currency, it is impossible to regulate in a population using Bitcoin as a token of value to trade. The logistics to monitor a mass population is not feasable.
Please do read the Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India and Foreign Exchange Management (Current Account Transactions) Rules, 2000. They will help to understand more about the Banking Regulations in India and help solve some problems. India’s closed currency banking system is rival to none. The banks have maintained a lot of public faith in urban areas and have reached a lot of people in this 1.5B population landscape.
India has an unbanked population of 41% according to RBI statistics
(Source: URL Below).
I would like to reach out to the world of regulators and lawmakers to release a statement on Bitcoin. Can the Reserve Bank of India issue a statement on Bitcoin?
Please forward this till someone takes notice and moves Bitcoin along in a positive path.
Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India
Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Ignoring the Unbanked: Reserve Bank of India’s Mobile Payments Guidelines – A study by Radix Consultancy
1.) When I buy a prepaid credit card, the plastic has no value — the value instead comes from the promise that that card can swiped (redeemed) for purchases up to the promised value stored.
When I buy a silver round (bullion), I am buying a commodity. Nobody has promised that I can redeem that silver in exchange for anything.
Bitcoin is more like a commodity in this sense. It really isn’t a prepaid payment. Nobody is promising me that my bitcoins have any value or can be redeemed for anything. Therefore, I haven’t prepaid for anything.
2.) Also, since the data for the transaction I created is mine (I created with my software running on my computer) that might be protected as free speech. I have a write to create and transmit that data.
3.) As far as foreign exchange rules — since a coin’s origin is not known (and generally would have a pedigree including many sources of mined coins) that argument of it possibly being mined domestically has a few holes.
Great to see this type of study performed. So much focus so far has been on the laws in the U.S. and on a couple nations in the EU and what is unappreciated is that bitcoin will be a challenge to the regulations in nearly every country in the world. India, having nearly 20% of the global population, and the largest single destination for remittances, will be among the first where Bitcoin will be addressed by financial regulators.
Anon, can you explain point 3 to me a bit more? I am unable to grasp where you are coming from.
Thanks for the details.
I had first stumbled upon bitcoin when i was doing my engineering about 4 to 5 years ago. And i couldnt understand why it was taking so much time doing sync and all. I didnt understand how it works.
I have just started using it again. Looking forward to discover more. 🙂
Bitcoin came into existence in 2009. You must be talking about virtual currencies.
Great to have another Indian in the Bitcoin world 🙂
Oh, didnt know that. Then may be it was 2009 or 2010. Coz, i used to check sites like pirate bay and other hackers type sites. But i didnt understand the bitcoin system at all. And now , i am just waiting for the synchronization to completed in the Bitcoin software…
Do i have to wait till the sync is completed to get my hash code ??
No, you can go to receive and generate your address immediately. But you will not be able to send or receive Bitcoin till the blockchain downloads fully which can take several hours or even a day depending on conditions.
If you wish to instantly start sending and receiving, then use an online wallet such as coinbase.com or instawallet or electrum or blockchain.info wallet.
Thanks ben. So , i can create as many hashes as i want and use them. Its really cool 🙂
Are you from Bangalore?
No, i am from Visakhapatnam.
another Indian is here to raise doubt about bitcoin!!!!! i have some doubts regarding bitcoins…..!
Do let me know how I can answer your doubts.
Question NO-1-Does dealing in bitcoins violate the provisions of Foreign Exchange Management Act, 1999 specifically Section-3,4,7,13 and moreover does it violate any Foreign trade and exchange laws or any RBI regulations or guidelined.
Question No-2-Is bitcoin a currency under the Foreign Exchange Management Act, 1999 and if not then why?
Ans No 1: As Bitcoin can be mined in India itself, it cannot be classified as an International currency. Even if the coins are mined outside the country, It is very easy to mix the source of coins. This typically cannot be regulated.
Ans No 2: Bitcoin can be termed as a currency as can Rice and Salt. 🙂 At the same time, all these currencies can be termed as commodities as well. Bitcoin is a unique set of characters which have value due to the fact that they are scare and hard to mine.
There is nothing like Bitcoin in any legislation.
Mr.Benson could u please explain the concept of mining and the specific question which I want to raise is that whether dealing in bitcoins is legal in India or not and as u stated that there is no such legislation to deal with bitcoins, but FEMA,1999 prohibits to deal with any foreign exchange or foreign security under Section-3 of the Act.
My question is that whether a person needs an authorization from the RBI to deal with bitcoins or not and if not then why and what provisions of FEMA, 1999 are applicable to bitcoins?
I am charged for violating Sections 3,4,7 and 13 of FEMA, 1999 for dealing in with bitcoins, please help me regarding this and I am expecting a legal answer 🙂
Can I be prosecuted for dealing with bitcoins under the aforementioned sections and if not then why and if yes then why….please answer me in a legal context.
As there is nothing in the current law that pertains to Bitcoin, It is unregulated.
It cannot be defined as a foreign currency if it is mined in India.
FEMA only comes into play if someone is buying Bitcoin from outside India.
As long as Fiat is not involved, Bitcoin is perfectly legal.
This is an info-graphic on how Bitcoin Works.
Lending your computers processing power to calculate a certain algorithm is called Mining. The reward for lending the computing power is Bitcoin.
I received 7000 Bitcoins in a business transaction from a business merchant in Dubai and when I transferred 5000 Bitcoins to a currency broker in India for which I received 36,00,000 Rs, subsequently I was charged with the aforementioned sections , so please let me know that whether I can be charged under such sections or not?
You are referring to a moot proposition. This is a fictional case. I have seen this as well.
There is no mention of this in any news. However this case involves Fiat, and as I have said earlier, when Fiat gets involved, Bitcoin moves into the grey area.
Yes u are right and I hope u are one of us, so please guide me through this….whether I need to go in details with bitcoin or simply I can deny that bitcoin is not termed as a currency under FEMA,1999 🙂
I am not that much of an expert to make this statement.
However, Bitcoin can either be looked at as a software as it is mined using computing power and has no physical presence. Or it can be looked at as a currency.
If I am not wrong then grey area means that use of the same is legal?
Grey area means that it can be debated. Since it is unregulated, it could fall into any category or none at all.
Thank you Mr.Benson and one last thing could u please suggest me any regulation which prohibits dealing in with bitcoins.
None that I am aware of. Bitcoin – Bitcoin is just like sending an e-mail. It can never be regulated as there is no central authority and it is non-political. No country owns it. Hope that helps.
What rules and regulations I need to go through to find out the legality of bitcoins in India.
They do not fall into any category that I have studied so far.
Thanx a ton 🙂
Mr. Benson though I agree with you that legality of bitcoins has become a debatable topic globally but don’t you think that after the “Silk Road” incident and the way the U.S Attorney General and F.B.I reacted on it pushes the debate on a more negative use of such decentralized currency and that to in U.S which offers more flexibility in trade and commerce. That is to say it has started from a bad note i.e. it has become a play toy in the hands of criminals using it as an instrument for money laundering. Secondly, in India though FEMA cannot grip Bitcoins but the PMLA, 2002 with its amendment of 2009 and the I.T Act,2000 along with the free gratis of Judicial Review of our courts can grip this GRAY MAN “THE BITCOINS”
is bitcoins synonymous with or atleast resembling to mobile payments gateway?
Bitcoin is a protocol. Any Software or Payment Gateway can be built on it. Example Bitpay.com
Pingback: Revisiting – The Legality of Bitcoin in India | Benson's Blog
Pingback: REVISITING – THE LEGALITY OF BITCOIN IN INDIA | INDIA BITCOIN
Hi Benson. I’m looking for making a transaction in Bitcoins. In this blog you have previously mentioned that Bitcoins otherwise unregulated come within a legal grey area when FIAT gets involved. how or why? What difference does involvement of FIAT make to the legality of the transaction? Which regulations may get violated when FIAT gets involved?
The only problem arising from FIAT is that it is regulated by the government.
There are 3 main types of digital payments
Closed – Only allowed in the environment of the virtual world. This is unregulated but needs approval
Semi-Closed – Can be used to purchase a few items outside the virtual world. ie – prepaid topups, etc – This is regulated but approval can be obtained to setup a prepaid method that can buy some controlled items.
Open – This is where Bitcoin can be defined or not. It allows free transfer of digital currency between FIAT and back. This is regulated and can only be run by Banks in India.
The discussion arises since people want to know where they stand with this clause.
Thanks for that. Could you tell me which regulations/rules/laws in India govern such Digital payments?
Pingback: Revisiting the Legality of Bitcoin in India | UnoCoin
Do we have any list of banks from each country that recognize BitCoins and come forward to exchange it into respective currencies?
SV Bank in USA & Aqoba bank in France. But this is Bitcoin at the age of 4. Am sure that more banks will get sucked in quite soon.