Money is regarded as the first and foremost form of social convention arising to develop trust in an economic transaction involving two strangers. It initiates an intertemporal exchange which otherwise would not have taken place. Historically, money has been considered as the economic prowess of a nation. Public confidence in currency was based on the quality of the coins that formed the base of the currency. States had an upper hand compared to the private issuers in guaranteeing such quality, because states can internalize the long-run benefits of a stable currency. [1] Economic transactions have gone through massive changes in the past few years and with that, cryptocurrency or digital currency has gained momentum. These new financial products and services are posing great challenges such as monetary and financial stability, protection of customers, costs, and benefits of allowing these new forms in the existing payment system before legislators and regulators.
DEFINITION AND SCOPE
Digital money has been in vogue in recent years. The main forms of digital money are the reserves in the central bank and also the money that the bank makes out of loans. It is a common notion that money is issued by a sovereign institution or a bank that has the sufficient authority to do so but in recent years, this notion has been changed by the arrival of instruments similar to currency but lacking in the physical aspect. Cryptocurrency is the name given to such an instrument. It is the digital representation of value that is neither issued by a sovereign or a public authority but is accepted and used by a person as a means of payment either in artificial or natural manner.[2] It is a means of exchange that takes place virtually. The word derives its origin from the encryption techniques that are used for securing networks. It has no physical form and is only a product of the digital world. The world’s first cryptocurrency, ‘Bitcoin’ was created by a developer, Satoshi Nakamoto in 2009.
LEGALITY OF CRYPTOCURRENCY
CRYPTOCURRENCY IS A FORM OF ELECTRONIC MONEY
People who are in support of this view highlights the similarities in the kind of function that both cryptocurrency and money play. Since both can be used to pay for goods and services, it has been regarded as a form of electric money in some countries. In the U.S., for example, wages are paid in the form of cryptocurrency. Japan too has recognized cryptocurrency as having the same value as fiat money. It accordingly developed a regulatory framework to integrate cryptocurrency into its banking system.
CRYPTOCURRENCY IS A MONEY’S SURROGATE
Those people who oppose the former view of cryptocurrency as fiat money, argue that cryptocurrency can never equate with fiat money since it is not being regulated by any authority. It lacks the obligation to get accepted as a monetary instrument. In the majority of the countries, cryptocurrency is not an acceptable means of payment. E.g. Denmark although doesn’t have any designated laws on cryptocurrency but in 2014, it announced the rejection of bitcoin as a currency saying that it won’t regulate its uses since it doesn’t have any trading value. [3]
CRYPTOCURRENCY IS A COMMODITY
A commodity is an economic good that can be interchanged with other goods of the same type. Since cryptocurrency can be interchanged with money as a mode of payment, in some countries cryptocurrencies qualify as a non-material commodity that has a definite value at a given point of time. For example, Israel passed a regulation in 2016, considering cryptocurrency as a ‘financial asset’ for which a license is required and taxation is applied. Commodity Futures Trading Commission (CFTC), an independent federal agency of the U.S. has declared Bitcoin as a commodity in 2015.
CRYPTOCURRENCY IS A FINANCIAL INSTRUMENT
Financial instruments are contracts between parties that are monetary. It provides the realization of the task to buy/sell, securities, and goods. The underlying asset of any financial instrument can be a commodity or security. In 2013, Germany issued a decree recognizing cryptocurrency as a financial instrument. In so far as the legality of cryptocurrency as a mode of payment is concerned, it is yet to receive such a status.
CRYPTOCURRENCY IS A PROPERTY
In National Provincial Bank v. Ainsworth, the definition of property was given as something that is “definable, can be identified by third parties, has some degree of permanence”.[4] Justice Bryan in the case of AA v. Persons Unknown has stated that cryptocurrencies should be treated as a form of property because they conform to the definition of property. [5]
According to the Internal Revenue System (IRS), cryptocurrency can be qualified as:
- Property
- Currency
- Investment instruments
In the U.S., bitcoin is treated as a property where owners are not entitled to the profits earned from the exchange rate differences, but the profit from capital gains upon its sale. A further payment of wages in cryptocurrency is subject to taxation.
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LEGAL REGULATIONS AROUND THE WORLD
NON-EUROPEAN COUNTRIES
- BRAZIL– Brazil doesn’t recognize cryptocurrency as a financial asset. The Securities Exchange Commission, Comissao de Valores Mobiliarios (CVM), has stated that for virtual currencies to be treated as securities, it has to pay interest/dividends or allow participation in company management through votes. [6]
- CHINA – In 2017, cryptocurrency was banned in China. If someone is caught trading cryptocurrencies, he will be subjected to the penal laws. However, it is interesting to note that it is not illegal to hold cryptocurrencies; the Chinese govt. encourages the development of blockchain technology provided it helps in the real economy.
- ISRAEL– Cryptocurrency is considered as a ‘financial asset’ in Israel. In 2018 it declared that virtual currencies can never be treated as actual currencies, it is strictly a financial asset. It has further collaborated with Switzerland, on issues relating to blockchain technology and cryptocurrencies.[7]
- UNITED STATES OF AMERICA– The U.S. is the hub of cryptocurrency. Laws governing these currencies vary from state to state. In states like Louisiana, Idaho, Washington, etc, the transfer of virtual currency and mining has been adopted as an object of money transmission. As per the guidance of the Internal Revenue Service, cryptocurrencies are a digital reflection of the value that acts as a mode of exchange. For taxation purposes, cryptocurrencies are treated as property. Cryptocurrencies, therefore, are not banned in the U.S. but there is a significant lack of regulations which is capable of integrating it into the financial structure of the country.
EUROPEAN COUNTRIES
European Union doesn’t have a general regulation on Cryptocurrency. The European Central Bank (ECB) has tracked the growth of cryptocurrency over the years. It has defined virtual currency as a type of digital money that is unregulated and issued by the developers of the currency and is used within a specific virtual community.
- FRANCE– two legislations have been passed in the French legislation on cryptocurrency. The first legislation limits the scope of cryptocurrency by terming it as a coupon. The second legislation on the other hand widens the scope of financial instruments. Cryptocurrencies by and large are still unregulated in France but it is planning to become a leading market of bitcoins.
- GERMANY– Germany recognizes virtual currencies as financial instruments. The German Federal Financial Supervisory Authority (BaFin), undertakes the responsibility of regulating the exchange and brokerage of cryptocurrency.
- FINLAND– The Financial Supervisory Authority (FSA) has warned the consumers on the risk of using cryptocurrencies. Earlier in 2019, a new law was passed to regulate cryptocurrency. The Act empowers the Financial Supervisory Authority (FSA) to trade cryptocurrencies.
- IRELAND- Ireland does not regard cryptocurrency as currency or money. There is no regulation concerning cryptocurrency but, no prohibition has been put over cryptocurrency. CBI, the competent authority to regulate cryptocurrency is skeptical of using cryptocurrency and has issued warnings on the risks of using cryptocurrencies as a means of payment.
CRYPTOCURRENCY IN INDIA
In 2013, the Reserve Bank of India had issued warnings regarding the use of cryptocurrency in the Indian markets. It stated that cryptocurrencies are not regulated and entities providing such services have not taken prior authorization or permission to trade cryptocurrency. In 2017, an Inter-ministerial committee (IMC) was set up to analyze the virtual currencies and to come up with suggestions to regulate its uses. Following the draft report, the Crypto-token and Crypto-asset (Banning, Control, and Regulation) Bill, 2018 was introduced.
However, in IAMAI v. RBI [8], the RBI notification was challenged before the Supreme Court of India by the Internet & Mobile Association of India (IAMAI). The Court held that the legislature’s position can not be determined from this bill as on the one hand, the bill imposes criminal liability on users of cryptocurrencies and criminalised certain activities in the country, such as the mining, storage, sale, trade, release, disposal or use of cryptocurrencies. By comparison, the bill paved the way for the state to introduce its own digital currency, the Digital Rupee of the Central Bank.
The Court then applied the doctrine of proportionality and held that it was reasonable for RBI to pass the test alluded to above and to show at least a certain semblance of any damage incurred by its regulated entities. But the RBI couldn’t reveal any reasons for the same. Additionally, the Court held that the clear position of RBI was that VCs were not banned and that in the absence of an appeal by the Government of India despite several committees proposing several measures, including two draught bills, both of which endorsed precisely opposite positions, the Court was unable to hold that the measure challenged was proportionate.
Then the order appealed by the RBI was quashed and declared unconstitutional.
CONCLUSION
Cryptocurrencies are a product of the virtual world and have the ability to become a global currency. At present, most of the countries don’t have any regulations regarding the use of such currencies. Due to it being unauthorized by the sovereign institutions, many countries are skeptical about its usage. The legality of such currencies is still subject to the debate around the world. But the growing transition to the virtual world has surely paved the way for the acceptance of these virtual currencies.
REFERENCES
[1] Charles A.E. Goodhart, The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas, 14(3) European Journal of Political Economy 407 (1998).
[2]European Commission, Proposal for a directive of the European Parliament and of the Council amending Directive (EU ) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC (Jun. 18, 2018), available at: 52016PC0450 – EN – EUR-Lex.
[3] Regulation of cryptocurrency around the world, available at: https://www.loc.gov/law/help/cryptocurrency/world-survey.php#denmark (Last visited on Oct. 2, 2020).
[4] National Provincial Bank v. Ainsworth, [1965] 1 AC 1175.
[5] AA v. Persons Unknown, [2019] EWHC 3556.
[6] Brazilian SE C Confirms: Digital Currency Niobium Coin (NBC) Is Not a Financial Asset, Markets Insider, 22 January 2018 (Jun. 18, 2018), available at: http://markets.businessinsider.com/news/stocks/braziliansec-confirms-digital-currency-niobium-coin-nbc-is-not-a-financial-asset-1013591426 (Last visited on October 2, 2020).
[7] Cryptocurrencies: Israel enters into crypto partnership with Switzerland, available at: https://www.euromoney.com/article/b1b9n4xg6502hd/cryptocurrencies-israel-enters-into-crypto-partnership-with-switzerland (Last visited on October 2, 2020).
[8] IAMAI v. RBI, Writ Petition (Civil) No.528 of 2018.
BY PRITHA LAHIRI | INSTITUTE OF LAW, NIRMA UNIVERSITY