Author Name:   upasana.dahiya

In this era of technology due to transformation in the global economy, new ways of exchange of goods, assets and services have emerged. There exists a complete market over the internet where one can easily select and purchase goods through digital money that is by means of their debit or credit cards.

Making India Ready For Virtual Currency: An Analysis

Introduction:
In this era of technology due to transformation in the global economy, new ways of exchange of goods, assets and services have emerged. There exists a complete market over the internet where one can easily select and purchase goods through digital money that is by means of their debit or credit cards. In the recent years there has been an addition to the digital money the "virtual currency", the currency which exists online. VC schemes make use of "distributed ledger" technologies that provide complete and secure transaction records without using a central registry. These technologies therefore allow for direct peer-to-peer transactions and eliminate the need for central clearinghouses. Therefore, virtual currencies are issued without the support of a central regulating system and question the role states and financial institutions have played in regulating financial system. The virtual currencies have a lot of benefits as well. They reduce the transaction time and costs specifically across borders. With the advancement of technology it has a potential to generate bigger markets and financial infrastructure as a fast and accurate record keeping system. On the other hand they have risks like money laundering, terror financing, tax evasions and other forms of illegal activities. Due to the lesser use of VC at this stage the chances of effect on the monetary policy and financial system is less but in future with the advancement in technology such threats can be posed to the economy as well. Right now the major need to regulate this currency is because of the consumer safety issues. Virtual Currencies are categorized according to their flow into closed or non-convertible virtual currencies (example: fictional currencies) and convertible virtual currencies (example: Bitcoins). In India there are a significant number of people using Bitcoins. India currently has around 50,000 Bitcoin enthusiasts, with 30,000 of them actually owning the currency. The numbers are expected to increase in future with technological development. This would lead to more risks to the economy and hence greater need of regulations.

2. Historical Background

Bitcoin the most prominent virtual currency came out in 2009 as a decentralized digital currency. Bitcoin didn't come out of blue; it has a history of past 13 years. A lot many people tried to establish a successful virtual currency platform as an alternative to normal economy but failed due to various reasons including technical or regulatory. At last Satoshi Nakamoto was able to succeed in establishing a platform for virtual currency that could change the whole Fintech industry. Firstly, the concept of virtual currency or as popularly known digital currency came out in 1996, by the name of E-GOLD, which managed to have 5 million user accounts by 2009. It was started by Douglas Jackson, an oncologist by profession and it grew so big that many merchants at that time started accepting it as a currency. This virtual currency was backed by gold and this project was doing pretty well at that time but as everything has its pros and cons, this platform failed to manage with problems that arose when money-launderers and extortionists started using E-Gold which led to its downfall. Another attempt was made in 1998 by the name of WEBMONEY, which became very famous after E-Gold and offered a lot many services ranging from online bill payment to various merchant services and even online trading platforms. Moreover, it learned from E-Gold and made many changes to its services to restrict the illegal activities online. Later in 2006, an attempt was made to create an anonymous money transaction business by the name of LIBERTY RESERVE which was centralized. This platform allowed users to create account and transfer the money to any account without any verification. Moreover they could hide their account information and even identity from the people they are transferring money to. But it became favourable to cybercriminals and that's why it was shut down. In May 2013, the US government announced an indictment against Liberty Reserve. According to the indictment, Liberty Reserve dollars were used to distribute, store, and launder the proceeds of more than USD 6 billion worth for illegal activity that included credit card fraud, identity theft, and drug trafficking. Thus Liberty Reserve was shut down, and US authorities seized 45 bank accounts in connection with the operation. As we see that decline of one platform leads to the growth of another, which happened with the PERFECT MONEY, launched in 2009. As Liberty Reserve got shut down by the regulators, customers started moving towards Perfect Money. This platform worked with multiple currencies including GBP, USD, EUR and many more. This platform provided similar services to that of Liberty Reserve but is not available in United States of America and the citizens of United States living anywhere in the world. After so many efforts, Satoshi Nakamoto came up with the idea of Bitcoins as a decentralized virtual currency platform in 2009. Being decentralized, this platform prevents any one from manipulating or having a monopoly over the entire system, making the entire community as in charge of this platform. Moreover, Bitcoin has played its role very well, learning from the past experiences and solving all the complications of virtual currency, satisfying a larger part of the community. But the idea of virtual currency has not stopped here; new virtual currencies are coming up with time. Many countries have come up with their own virtual currencies like Ecuador and Barcelona. Moreover, many countries like Germany, USA, and Spain are trying to adopt and regulate the virtual currency.

3. What Is Virtual Currency And Its Working

Virtual currency is a digital form of money that can be digitally traded and functions as a medium of exchange, unit of account and a store of value, but does not have legal status in any jurisdiction. It functions because of the agreement within the community of virtual currency users. Virtual currency is different from fiat currency which is the currency of a country declared by the government to be a legal tender. It is different from e-money as well which is the electronic form of fiat currency and has a legal tender status.

3.1 Types of Virtual Currency
Virtual Currency can be broadly classified into Convertible and Non- Convertible Virtual Currency: Convertible Virtual Currency: It is also known as open currency and can be used back and forth in exchange for real currency. This means it has an equivalent value in real currency.
Examples: Bitcoin, Web Money, Second Life Linden Dollars, E-Gold and Liberty Reserve. Non-Convertible Virtual Currency: It is also known as closed virtual currency and it can only be used in the environment for which it was designed. Examples: Video game credits, as they can be used only in the chosen game.

3.2 Centralised and Non- Centralised Virtual Currencies
Centralised Virtual Currencies:
They have a single administering authority called the administrator who controls the system. He can issue and redeem the currency and maintains a central payment ledger. The exchange rate for a convertible virtual currency can be floating (currency price set by foreign exchange market based on demand and supply compared with other countries ) or at a value measured in fiat currency or another real world source of value such as gold. Decentralised Virtual Currencies: They have no central administering authority and are based on distributed ledger technology. They are mathematical, code based, peer to peer transactions. Another name for decentralised virtual currencies is cryptocurrencies.
Examples: Bitcoins, Ripple and LiteCoin.

Distributed Ledger Technology:
A distributed ledger technology is an agreement of repeated, shared and synchronized data spread across various sites, countries and institutions. The technology maintains a permanent record which is secure and cannot be distorted. Also, it provides a platform for real time data sharing and eliminates the requirement of a central registry. 3.3 Payment Related Aspect There are various factors involved in making payments through VCs and they are as follows: Inventors: They are the creators of virtual currency and deal with the technical part. They can be known or unknown. Issuers: They are the ones who issue virtual currency. The total volume of virtual currency is either predetermined or depends on demand. Miners: They are the people who voluntarily make computer processing available in order to validate the use of a decentralised VC used in a set of transactions (called a "block") and add this to payment ledger (called a "blockchain"). Miners have a very important role to play as without them a decentralised virtual currency would not run smoothly and a double spent or false currency can be introduced. They receive a specific number of units as a work reward. Processing service providers: They transfer units from one user to another. In decentralised VCs this function is performed by the miners.

Users: They use virtual currency for buying and selling goods and services, for remittances or for investment purpose. They get virtual currency units in the following ways: # By purchasing # By engaging in activities which generate units as rewards
# By mining
# By receiving units as payment
# By receiving units as a gift Wallet Providers:

They provide digital wallets to store virtual currency cryptographic keys, authentication codes and give an outline of transaction history.

Exchanges: They provide trading services to users by mentioning exchange rate of virtual currencies against the real currencies or other virtual currencies for which they can be brought or sold against the real currencies or other virtual currencies. Trading Platforms: They provide a platform to the users of virtual currencies where they can buy and offer among themselves. Unlike, exchanges they do not engage in trading themselves.

4. Virtual Currency Usage In India

India being the largest democracy of the world with a GDP of around 2 trillion US dollars has one of the largest internet user base in the world. But when it comes to virtual currency, India has a very tenuous and dubious history. According to the report that was released by the Internet and Mobile Association of India in 2015, India had 402 million users till December 2015, which is world's second largest after China with 600 million users . Moreover, the Indian rupee has also lost its 40 percent of value against US dollar since last few years, which makes India a plenteous and responsive market for Virtual Currency. Buysellbitco.in, a platform to buy and sell Bitcoins which was active in India was raided by The Reserve Bank of India on the grounds of money launder, later it was forced to shut down. In the mid of 2014, another Bitcoins exchange platform came up which was fully compliant with the name of BTCX India which also shut down, when their banking partner refused to serve any Bitcoin business further. But as time flies perception changes and market undergoes several changes.

This year Reserve Bank of India released an official statement saying that the regulators and authorities must keep pace with the recent developments happening in the world as the world's largest banks are trying to set up a wide platform to standardize the use of technology in the form of currency which might transform the working of banks and could bring a major change in the payment methods. According to the survey conducted by the Times of India, leading newspapers in India, there is around 50,000 active Bitcoin enthusiasts and out of them around 30,000 users actually own this Virtual Currency. With the increase of Bitcoin users in India many merchants have also started accepting Bitcoins as a currency from the customers. Recently, a survey was conducted by one of the leading management consulting firms Zinnov on the growth of startups working in the Fintech sectors over the last 2-3 years and it was reported that there is an exponential rise in the number of Fintech startups with a total investment of around 1.3 billion US dollars. Moreover, it has analyzed that most of the startups are set-up in the payment services sector which accounts for 33%, which is followed by the aggregators at 29% and then comes the financial services sector at 15% and the rest 23% startups are set-up in the Bitcoins and crowd funding sector. Currently, India is going through a lot of development in the Fintech sector, which makes way for the new enterprises. Coinsecure, which is India's leading Bitcoin exchange platform, has announced its new partnership with Netki, a wallet name service which will allow the users to have their own wallet names. Moreover, another Bitcoins exchange platform of India, Zebpay crossed over 100 crore rupees transactions in just 10 months, which proves the advancing popularity of the Virtual Currency.

The mining industry is new for India but it is picking up pace since 2015 when the value of Bitcoin started rising and people started investing more and more into it. The crypto-mining industry is becoming more of a hobby for Indian tech-youngsters in metropolitan cities like Bengaluru, Mumbai and even in small cities like Chandigarh. As such there is no infrastructure in India for mining of Bitcoins or any other virtual currency but since the rise of Bitcoins of India people have started setting up their own mining infrastructure and have started hiring other people for the mining work. These people, who lack resources use even small USB-based ASIC Antminer machines which is 1000 times slower than mining rigs of today. The recent hard fork situation which arose after the split in Bitcoin's Blockchain has created a new cryptocurrency Bitcoin Cash and it is supported by some developers and miners who were against the BIP (Bitcoin Improvement Proposal) 91 implementation. The new currency has found support in the international market as the exchange platforms are getting ready to trade and mine BCH (Bitcoin Cash), but the situation is much different in India as the Indian giant Bitcoin exchange platforms like Zebpay and Unocoin have refused to support BCH over security concerns. So, the users who want to use BCH have to transfer it to the private wallet and this is resulting in a very confusing situation for Indian users. According to the Forbes India, the exchanges in virtual currency are warming up to BCH and the Indian Exchange platforms may accept exchange in BCH by January 2018.

5. Risks Involved In Usage
Virtual Currency, that solves many of the problems related to the real world currencies, also comes with some uncertainties that normal people are unaware of. One of the most popular features of Bit coins being untraceable is attracting criminal society as anyone can buy or sell any illicit or illegal drugs and other illegal goods without being tracked by any government authority. This becomes one of the most dangerous features of Bitcoin which can lead to increased rate of crime in future as it might become the favourite place for kidnappers, blackmailers, drug dealers' et al. Another drawback or risk of using virtual currency is that it is not recoverable. Generally, some investments are insured through Securities Investor Protection Corporation, to protect the clients' interest. Normal bank accounts are also insured, so that in case the account holder's money is lost by the negligence of the bank, it can be recovered. But there is no such policy or mechanism to recover the lost Bitcoins. If someone hacks into the wallet of another person, where the Bitcoins are usually saved, there is no possible way by which they can be recovered. Moreover, market risk is also associated with the Bitcoins, as it is too volatile. This means that the price of Bitcoin is very fluctuating and it is not predictable. For past 2-3 years, the value of Bitcoin has seen large fluctuations in its value. In 2013, the value of Bitcoin got highest at 226$ but soon it dropped to 50$, further after breakdown of online drug marketplace, Silk Road, it rose to 197$ , one month later the value of Bitcoin rose to its peak of all time and closed at 1082$. The value of Bitcoin in 2014 was also very fluctuating, which started at 903$ and dropped at 314$ at the end of the year. The following year 2015 faced a quite steady value of the Bitcoins ranging from 289$ to 455$. In the starting of this year, the value of Bitcoin was 430$ and it has increased steadily and is currently standing at 607$. So it becomes very risky for the consumer to trade in the Bitcoins, and it is also quite difficult for the local merchants to adjust their prices with the fluctuating price of Bitcoins, which makes it inefficient.

6. Legal Perspective of Virtual Currency In India

There are no regulations governing virtual currency in India at present. In December 2013, RBI through a press release made a statement that use of virtual currencies is not authorized by any central bank or monetary authority and it warned the people regarding the risks involved in the usage of Bitcoins, Litecoins, Bbqcoins, Dogecoins, etc. Thus, in the absence of any regulations for the virtual currencies, they can't be said to be illegal. According to the Indian Constitution, Seventh Schedule (Article 246) Central Government has the power to legislate on the issues like currency, coinage, legal tender and foreign exchange. Thus, if virtual currency falls into any of the above categories then Central Government has exclusive power to legislate on it.

The laws concerning Virtual Currency are:
• The Constitution of India, 1950
• The Foreign Exchange Management Act, 1999 ( FEMA)
• The Reserve Bank of India Act, 1934 ( RBI Act)`
• The Coinage Act, 1906
• The Securities Contracts( Regulation) Act, 1956
• The Sale of Goods Act, 1930 • The Payment and Settlement Systems Act, 2007
• Indian Contract Act, 1872

FEMA, RBI Act and Coinage Act together deal with the definition, issuance, utilization and disposal of the currency. Currency: According to Section 2(h) of Foreign Exchange Management Act, 1999 (FEMA) '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. 'Foreign Currency' is defined as any currency other than the Indian Currency. 'Indian Currency' is defined as currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934). Legal Tender: As such there is no definition of legal tender under the Indian Law but a legal tender is an official medium for paying off the debt or other financial obligation which is recognized by law. National currency of a country is a legal tender. Currency Notes: 'Currency Notes' as defined under FEMA means and includes cash in the form of coins and bank notes. Under Section 22 of Reserve Bank of India Act, 1934 RBI has the power to issue currency notes. Virtual Currency: When the above given definition of virtual currency is analysed the author reaches to the conclusion that it's not a part of the currency. Also if any other instrument is to be made a part of the currency it has to be notified by the RBI which too is not the case. Thus, virtual currency doesn't come under the purview of currency. Payment System: According to The Payment and Settlement Systems, Act, 2007 a payment system needs to be authorised by the RBI. Virtual Currency though is based on peer to peer payment system, it can't be considered a payment system under the Payment and Settlement Systems Act, 2007.

Security:
The Security Contracts (Regulations) Act, 1956 defines 'securities' to 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;
a) derivative;
b) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
c) security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
d) units or any other such instrument issued to the investors under any mutual fund scheme;

ii. Government securities;

iii. such other instruments as may be declared by the Central Government to be securities;

iv. rights or interest in securities.

Analysing the above definition the author reaches to the conclusion that Virtual Currency doesn't fall under the purview of the securities. Consideration: According to Indian Contract Act, 1872 "The consideration or object of an agreement is lawful, unless it is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy." As virtual currency falls under the ambit of lawful consideration and isn't opposed to public policy a transaction made using it would be lawful. But according to Sale of Goods Act, 1930 price is an essential component for transaction. However, if virtual currency is treated as a form of property, then such a transaction would amount to a barter transaction and would not be enforceable under the Sale of Goods Act. In the absence of any specific legislation governing the use of Bitcoins in India and seeing the notable growth in Bitcoin market of India the Department of Economic Affairs of India has constituted a committee to work upon this issue. The panel constituted will comprise of representatives of Ministry of Electronics and Information Technology, Reserve Bank of India, Ministry of Home Affairs, Department of Financial Services and State Bank of India, Department of Economic Affairs and NITI Aayog. The panel instituted would look into the current scenario of usage of Virtual Currency in India and globally; examine the legal structures governing Virtual Currency; suggest framework for regulating the currency in India and would look upon the matters associated like taxation, consumer protection and money laundering.

7. Recommendations
Virtual currency has many benefits like it provides a platform for easy payment without paying the cost of banking transactions. It can be remitted abroad without paying any fees or other overcharging financial intermediaries. It provides a speedy method of payment and cross border transactions. Cryptocurrencies like Bitcoins which are based on distributed ledger system provide a secure platform which keeps a track of all the transactions and records them. At the same time there are various risks associated with virtual currency like fraud, loss, theft, transaction processing errors, cyber attacks, money laundering, terror funding and then its highly volatile nature make this mode of transaction highly vulnerable. As, making this mode of payment illegal would stifle innovations thus, careful approach is required in regulating the virtual currency.

Recommendations in this regard are as follows:
• According to Section 2(h) of FEMA, 1999 an instrument can be considered to be a currency if notified by RBI. Thus, virtual currency can be considered as currency if notified by RBI. But as of now RBI has kept its hands off virtual currency and has issued a warning against virtual currency usage. The bank has said that it's observing the virtual currency.

• KYC norms are the norms set up by RBI to monitor the customer transactions and keep record of their identity. In virtual currency like Bitcoins the block chain technology serves the purpose of monitoring the transactions, but due to the lack of physical presence of virtual currency it's very difficult to monitor it under the present laws and certain amendments in the laws are required.

• According to Section 3 of FEMA which deals with foreign exchange states that as otherwise provided in FEMA or unless the permission of RBI has been obtained no person shall-
(a) Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;

(b) Make any payment to or for the credit of any person resident outside India in any manner;

(c) Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.

Thus according to it a resident Indian purchasing a Bitcoin from a person resident outside India will be valid if money is transmitted through legitimate banking channels. Bitcoin transfer between two residents will also not trigger FEMA. However, sale of Bitcoins to a non resident by a resident Indian would be in violation of provisions of FEMA. Further, in this condition it can be regulated by RBI.

• In India taxes are levied either by the state government or the central government. Virtual currency can be taxed as an income or as an asset value under Income Tax Act, 1961. Also it can be taxed as expenditure (cost of acquiring Bitcoin) under Goods and Service Tax.

• As virtual currency is entirely a computer based thing it qualifies to come under the ambit of IT Act. Thus, if virtual currency is regulated then the computer based offences related to virtual currency which are sometimes criminal in nature can be curbed. • The Indian Government has sufficient powers to legislate on virtual currency but it should not legislate only for the sake of legislations and thus come out with needless legislations. The Government needs to engage with the virtual currency community and then introduce laws according to the dynamic and intelligent nature of this technology, instead of introducing counter-productive laws which will only stifle the innovation.

8. Conclusion
Virtual Currency may have a history of past several years but it is still going through its developing process. The block chain technology that records and distributes the virtual financial or economic transactions is almost incorruptible and various BIPs (Bitcoin Improvement Proposal) are implemented to improve the technology, making it more safe and viable. With increasing number of investors investing in Virtual Currency and new startups coming every year it is growing among consumers, investors and merchants. The advent of technology has brought more number of people within the reach of internet thus, making access to the virtual currency completely inevitable. Further as everything comes with its pros and cons, Virtual Currency also suffers from both. The person who thinks of indulging into Virtual Currency has to keep both the sides in mind before investing in it. Since there is no regulation on Virtual Currencies in most of the countries an investor has to keep due diligence before investing and has to invest on his own risk. Virtual Currency is growing steadily and gradually in various countries, making a business of millions of dollars but without being regulated it is prone to be misused by the cyber criminals and fraudsters. Moreover, since it is untraceable it can be used by cybercriminals or also for the purpose of terror funding and being non-recoverable, it is almost impossible for any authority to register a complaint for fraud and to recover back such currency. In coming time, virtual currency may complicate the situation even more for the Indian law makers. So, it is true that we cannot neglect the presence of Virtual Currency which might give a tough competition to the real world currencies in the coming future and regulating it will be the best way out for the government as well as consumers and investors.

Co-Authored by: *Upasana Dahiya **Gaurav Redhal

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