Professional Documents
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Basu Basak 2017 ICCLR Issue 1 Proof 2 PDF
Basu Basak 2017 ICCLR Issue 1 Proof 2 PDF
*
5th Year, BA LLB (Hons), Rajiv Gandhi National University of Law, Punjab, India. Email: basusamraat@gmail.com; basak.sayan94@gmail.com.
1
Kerry Lynn Macintosh, “The New Money” (1999) 14 Berkeley Technology Law Journal 659.
2
Reuben Grinberg, “Bitcoin: An Innovative Alternative Digital Currency” (2011) 4 Hastings Sci. & Tech. L.J. 160, 162; see also William Hett, “Digital Currencies and the
Financing of Terrorism” (2008) 15 Rich. J.L. & Tech. 4, 7.
3
Grinberg, “Bitcoin” (2011) 4 Hastings Sci. & Tech. L.J. 160, 162; see also Hett, “Digital Currencies and the Financing of Terrorism” (2008) 15 Rich. J.L. & Tech. 4, 7.
4
Vesna Harasic, “It’s not just about the Money: A Comparative Snalysis of the Regulatory Status of Bitcoin under Various Domestic Securities Laws” (2014) 3 American
University Business Law Review 487, 489.
5
Benjamin W. Akins et al, “A Whole New World: Income Tax Considerations of the Bitcoin Economy” (2014) 12 Pittsburg Tax Review 25.
6
Akins et al, “A Whole New World” (2014) 12 Pittsburg Tax Review 25, 27.
7
Fergal Reid and Martin Harrigan, An Analysis of Anonymity in the Bitcoin System (New York: Springer, 2013), pp.4–5.
8
Omri Marian, “Are Cryptocurrencies Super Tax Havens?” (2013) 112 Mich. L. Rev. 38, 41.
9
Akins et al, “A Whole New World” (2014) 12 Pittsburg Tax Review 25.
10
Akins et al, “A Whole New World” (2014) 12 Pittsburg Tax Review 25.
11
Reid and Harrigan, An Analysis of Anonymity in the Bitcoin System (2013), pp.4–5.
12
Danielle Drainville, “An Analysis of the Bitcoin Electronic Cash System” (December 2012) available at: https://uwaterloo.ca/combinatorics-and-optimization/sites/ca
.combinatorics-and-optimization/files/uploads/files/drainville_danielle.pdf [Accessed 27 October 2016].
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
The Dawn of the Digital Currency Era: A Global Analysis of Bitcoin and its Implications in India 23
Therefore, the value of Bitcoin has a basis in the level of two transacting parties.22 The other factors that contributed
acceptance of the currency in exchange for goods or to the inception and development of this concept were
services of a certain value.13 the need for greater privacy, self-governance and the
An internet currency or a currency which is used in the riddance of a debt-based currency. However, there are
virtual world is a type of online money which is accepted two sides to every coin, and although bitcoins provide
as a means of exchange in the virtual world.14 The origin greater privacy, they have posed the threat of illegal
of Bitcoin can be traced to a paper entitled “Bitcoin: A anonymous transactions through various proxies to
Peer-to-Peer Electronic Cash System” by Satoshi obfuscate users’ IP addresses23 and tumbler software to
Nakamoto.15 The purpose of Bitcoin was to reduce the render transactions obscure.24 This anonymous nature of
cost of transactions by removing the third-party the internet may also provide a platform for nefarious
intermediaries who facilitate transactions.16 To that end, activities such as arms sales, drug dealing,25 human
the Bitcoin system enabled a self-regulating e-exchange trafficking and money laundering.26
between members of the online community in which each
member verifies the authenticity of every transaction The internal mechanics of the mega
without relying on banks, payment facilitators, payment cryptocurrency—Bitcoin
processors or any other third-party intermediary.17 It was
thought that a purely peer-to-peer version of electronic Bitcoin has no physical existence and it is completely
cash would allow online payments to be sent directly electronic in its existence.27 It exists as a computer file
from one party to another without going through a which is possessed by the owner.28 The transfer of the
financial institution.18 The creators of bitcoins felt that currency involves an e-transfer of the electronic file
the transaction cost could be reduced with the help of between the owner and the recipient of the bitcoins.29 An
such a currency where there would be no need of any essential software to obtain bitcoins is Bitcoin Mangement
mediator. In the words of Satoshi Nakamato, “with Software30 which helps you connect to the Bitcoin network
e-currency based on cryptographic proof, without the of connected peer-to-peer computers called nodes.31
need to trust a third party middleman, money can be According to this system, an electronic coin is defined as
secure and transactions effortless”.19 The need for bitcoins a chain of digital signatures.32 Each bitcoin is subdivided
was seen as they offered more protection to buyers as down to eight decimal places, forming 100,000,000
well as to sellers. The transactions that were smaller units called satoshis. The “blockchain” is a shared
computationally impractical to reverse would protect public ledger on which the entire Bitcoin network relies,
sellers from fraud, and routine escrow mechanisms could while a transaction is the exchange of value between
easily be implemented to protect buyers.20 The creators bitcoin wallets.33 Transactions let users spend satoshis.
of bitcoins also offered a pragmatic solution to the Each transaction is constructed out of a number of parts
double-spending problem. The need for programmable which enable both uncomplicated direct payments and
cash arose from people’s experiences of thefts of physical compound transactions.34 Bitcoin wallets keep a secret
currencies and frauds on internet banking.21 This creation piece of data called a private key or seed, which is used
ensured that anyone and everyone could have a “bitcoin to sign transactions, providing a mathematical proof that
wallet” and have petty cash which would be charged to they have come from the owner of the wallet. All definite
their browser. The decentralised ledger system of this transactions are included in the block chain. Each and
payment system facilitated the use of bitcoins in “smart every program contains the history of all Bitcoin transfers,
contracts” and other contracts requiring trust between the referred to as a “blockchain”.35 This is critical in validating
13
Joshua A. Kroll et al, “The Economics of Bitcoin Mining, or Bitcoin in the Presence of Adversaries” (WEIS, 2013), Twelfth Workshop on the Economics of Information
Security available at: http://www.econinfosec.org/archive/weis2013/papers/KrollDaveyFeltenWEIS2013.pdf [Accessed 27 October 2016].
14
Akins et al, “A Whole New World” (2014) 12 Pittsburg Tax Review 25.
15
Satoshi Nakamoto, “Bitcoin: A Peer-To-Peer Electronic Cash System” (2008), p.8 available at: http://bitcoin.org/bitcoin.pdf [Accessed 27 October 2016].
16
Nakamoto, “Bitcoin” (2008), p.8.
17
Derek A. Dion, “I’ll Gladly Trade You Two Bits on Tuesday for a Byte Today: Bitcoin, Regulating Fraud in the E-Conomy of Hacker-Cash” [2013] U. Ill. J.L. Tech. &
Pol’y 165, 169.
18
Nakamoto, “Bitcoin” (2008), p.8.
19
Available at: https://bitcoin.org/En/Press [Accessed27 October 2016].
20
Akins et al, “A Whole New World” (2014) 12 Pittsburg Tax Review 25.
21
Nicholas A. Plassaras, “Regulating Digital Currencies: Bringing Bitcoin Within the Reach of the IMF” (2013) 14(1) Chicago Journal of International Law 377.
22
Stuart Hoegner, “Bitcoins and the Age of Smart Contracts”, CBA National Magazine, March 2014.
23
Dion, “I’ll Gladly Trade You Two Bits on Tuesday for a Byte Today” [2013] U. Ill. J.L. Tech. & Pol’y 165, 166.
24
Jonathan Lane, “Bitcoin, Silk Road, and the Need for a New Approach to Virtual Currency Regulation” (2014) 8 Charleston Law Review 511, 521.
25
James P. Gerkis and Serafima Krikunova, “Bitcoin and Other Virtual Currencies: Approaching US Regulatory Acceptance” (2014) 39 SPG Admin. & Regulatory L.
News 4, 8.
26
Eric Engle, “Is Bitcoin rat poison? Cryptocurrency, Crime and Counterfeiting” (2016) 26(2) Journal of High Technology Law 344.
27
Bitcoin, “Frequently Asked Questions” available at: http:/bitcoin.org/about.html [Accessed 27 October 2016]; Nikolci M. Kaplanov, “Nerdy Money: Bitcoin, The Private
Digital Currency, and the Case against its Regulation” (2012) 25 Loy. Consumer L. Rev. 111, 113.
28
Bitcoin, “Some Bitcoin Words You Might Hear” available at: http://bitcoin.org/cn/vocabulary#bitcoin [Accessed 2 May 2015].
29
Nakamoto, “Bitcoin” (2008), p.8.
30
Bitcoin, “How Does Bitcoin Work?” available at: http://bitcoin.org/en/how-it-works [Accessed 27 October 2016].
31
Drainville, “An Analysis of the Bitcoin Electronic Cash System” (December 2012).
32
Nakamoto, “Bitcoin” (2008), p.2.
33
See Bitcoin, “How Does Bitcoin Work?”
34
Bitcoin, “How Does Bitcoin Work?”
35
Nakamoto, “Bitcoin” (2008), p.2.
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
24 International Company and Commercial Law Review
bitcoin transactions as Bitcoin is a system which does not is used to confirm waiting transactions by including them
have a central authority. Therefore, all these transactions in the blockchain. It enforces a chronological order in the
are verified using the blockchain. This provides a blockchain, protects the neutrality of the network, and
time-stamped record of all confirmed transactions as well allows different computers to agree on the state of the
as modifying to the preceding transactions. A single system. The mining of bitcoins is, in a nutshell, the
transaction can spend bitcoins in manifold outputs, as processing of Bitcoin transactions and the updating of
would be the case when sending satoshis to multiple the blockchain. In addition to archiving transactions, each
addresses, but each output of a particular transaction can new ledger update creates some newly minted bitcoins.
only be used as an input once in the blockchain.36 An individual or a group of individuals have to create
and run software that matches the cryptographic
Transfer of bitcoins information of all current and previous transactions on a
blockchain.42 These puzzles have numerous solutions;
The entire process of transferring bitcoins starts with the therefore a significant amount of computing power needs
initial file that contains the bitcoin which is in the to be used by each node to find a solution. Further, there
possession of the owner. This file that stores the bitcoin is an inbuilt variable that is adjusted in order to make the
is known as the “wallet”.37 A simpler way to visualise the task of solution discovery either easier or more difficult.43
wallet is to imagine a certain space in the computer which Finally when the software finds the solution by correctly
is used to store bitcoins. To transfer bitcoins, every wallet matching the information, this is forwarded to the entire
has two cryptographic keys, one of which is private and network as part of the new blockchain.44 Then the network
the other which is a public key.38 The public key is the either rejects or approves the solution to the puzzle.45 If
address of the wallet to which bitcoins are sent or from the solution is approved, it is accepted as part of the
which bitcoins are received. This aids in increasing blockchain. This process is known as bitcoin mining, as
transparency as it allows all users to trace prior bitcoin this is the method through which new bitcoins can be
transactions. To transfer bitcoins, the process is to add a entered into circulation.46 The individual network
hash, the amount of the transfer and the transferee’s public members who undertake this difficult task and emerge
key.39 The private key is used for authorisation and successful are rewarded.47 The reward for block
verification of every transaction. The transfer is signed verification commences at 50 bitcoins, with this amount
by the sender’s private key and authorised. Once verified, being halved every time 210,000 blocks are verified.48 It
the transaction is time stamped and cemented.40 It is then is projected that in the year 2140, all bitcoins would have
transmitted to the entire network of nodes.41 However, been mined and introduced into the system.49 At that time
the public key does not disclose the owner’s personal no more bitcoins will be added into circulation and the
identity; therefore, it is a completely anonymous system. total number of bitcoins will have reached a maximum
Eventually, the transaction is recorded and becomes a of 21 million.50 Thus, bitcoin mining is limited to a certain
part of the blockchain, and collectively the twin engines period and number.
of transaction information and time stamp help in the
verification of each transaction, which is critical in
ensuring the credibility of the Bitcoin system.
The advantages of using
cryptocurrencies
Creation of bitcoins—understanding the The absence of a central authority has certain positive
concept of virtual mining consequences, the most important being the reduction in
transaction costs since bitcoins can be verified
Bitcoins are not a discovery; they are essentially a independently by miners. This also allows for freedom
computer program which has been created. In order to of payment, and grants a certain degree of autonomy to
mine or create new bitcoins, extremely complex the user himself. The signature system also prevents the
verification puzzles are required to be solved by the transaction from being altered by anybody once it has
“miner”. Mining is a distributed consensus system that
36
See Bitcoin, “How Does Bitcoin Work?”
37
Nakamoto, “Bitcoin” (2008), p.2.
38
Nakamoto, “Bitcoin” (2008), p.2.
39
Nakamoto, “Bitcoin” (2008), p.2.
40
Bitcoin, “How Does Bitcoin Work?”.
41
Bitcoin, “How Does Bitcoin Work?”.
42
J.P., “Virtual Currency” (13 June 2011), The Economist available at: http://www.economist.com/blogs/babbage/2011/06/virtual-currency [Accessed 27 October 2016].
43
J.P., “Virtual Currency” (13 June 2011), The Economist.
44
Grinberg, “Bitcoin” (2011) 4 Hastings Sci. & Tech. L.J. 160, 167.
45
Grinberg, “Bitcoin” (2011) 4 Hastings Sci. & Tech. L.J. 160, 167.
46
Nakamoto, “Bitcoin” (2008), p.2.
47
Bitcoin Cz Mining available at: http://mining.bitcoin.cz/ [Accessed 27 October 2016].
48
Drainville, “An Analysis of the Bitcoin Electronic Cash System” (December 2012).
49
“Bitcoin Community Celebrates ‘Halving Day’”, Prlog available at: http://www.prlog.org/12032578-bitcoin-community-celebrates-halving-day.html [Accessed 27 October
2016].
50
“Bitcoin Community Celebrates ‘Halving Day’”, Prlog.
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
The Dawn of the Digital Currency Era: A Global Analysis of Bitcoin and its Implications in India 25
been issued.51 All transactions are broadcast between users built-in deflationary nature of the currency; as the reserve
and usually begin to be confirmed by the network in the of bitcoins goes on decreasing, it will be valued more
following 10 minutes, through a process called mining. highly, and so only the early birds get the rewards. Also,
Bitcoin is not just a currency; it is also an inexpensive the fact that bitcoins are decentralised brings with it the
payment platform. Whereas credit card companies charge danger of there being no assurance for its minimum
merchants fees ranging from 1–5% of the purchase price, valuation. As there is no central authority, anyone who
Bitcoin is virtually free.52 The problem with credit cards, “dumps” bitcoins and leaves the economy would hurt the
PayPal and other similar services is that they allow buyers other Bitcoin users to a great extent as its value will
to claim back their money. However, with bitcoins, buyers decrease significantly.59
cannot take back the money and the seller can easily Moreover, since Bitcoin is not a legal tender and the
perform the requested service or send the product that the high potential for security breach upon dollar-bitcoin
client purchased. It is better for the buyer as sending exchanges, its acceptability as an international currency
money without an intermediary is cheaper and faster. suffers a huge setback. The relative anonymity provided
Often regular currencies which are dependent on by Bitcoin transactions also allows it to be used in illegal
governments fail occasionally. One of the tragic modern activities. These factors cumulatively suffice to lower the
examples is the phasing out of the Zimbabwean dollar.53 perception value of bitcoins, posing a threat to its very
Currently US$5 is worth 175 quadrillion Zimbabwe existence in the market.
dollars.54 The advantage of Bitcoin is that it is a global
currency which is not regulated by any one government. The issue of legal status—legitimising
It also has a very low inflation risk as the system has been Bitcoin
designed to have a finite number of bitcoins in circulation.
Unlike traditional currencies, in which a government can International perspective
keep printing as many notes as it wishes, the total number
of bitcoins that can be mined is 21 million.55 It is not Another important issue is the legal status accrued to
possible to track transactions back to anyone,56 and bitcoins, which varies from country to country. In
therefore there is greater privacy. February 2014, the Russian Prosecutor General’s Office
noted that bitcoins and other cryptocurrencies cannot be
The drawbacks of cryptocurrencies used legally in Russia.60 In December 2013, the People’s
Bank of China, the country’s central bank, banned
One of the most prominent disadvantages of bitcoins is payment services from Bitcoin-related business.61
that they are not widely accepted. They are restricted to Germany has declared that Bitcoin is not legal tender but
a few online traders. However, the list of merchants and stands as “private money”.62 The most prominent
companies accepting bitcoins is steadily growing. In fact, technology company, Apple, has removed the Bitcoin
recently, the major computer manufacturer Dell has wallet app Blockchain from its App Store. The Library
started accepting bitcoins.57 The valuation of bitcoins is of Congress in its 25-page report63 indicates how countries
constantly fluctuating. The system is still in its nascent around the world are addressing, taxing and viewing
stages and it will take a few more years before it cryptocurrencies like Bitcoin. This report mentions that
stabilises. The volatility in bitcoins discourages countries Brazil has embraced the concept of cryptocurrencies.
from accepting Bitcoin as a currency, as this would herald Brazil enacted a law in 2013 which created the possibility
market instability, at the same time, undermining its for the normalisation of mobile payment systems and the
capacity to act as a store of value. The dollar price of creation of electronic currencies, including the Bitcoin.64
Bitcoin has moved 10% on a daily basis since its Denmark’s Finanstilsynet (Financial Supervisory
inception, including days when the price moved 190% Authority) has issued a statement rejecting the Bitcoin as
from that day’s highs to lows.58 The fact that bitcoins are a currency and stating that it will not regulate Bitcoin
finite and are capped at $21 million also signifies the use.65 The report also mentions that the Bank of Estonia
51
Rhys Bollen, “The Legal Status of Online Currencies: Are Bitcoins the Future?” (1 May 2013), SSRN available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id
=2285247 [Accessed 27 October 2016].
52
James Stryker, Bitcoin: The Rise of Alternative Currency (Createspace Independent Publishing Platform, 2010).
53
Available at: http://www.bbc.com/News/World-Africa-33105400 [Accessed 11 June 2015].
54
Available at: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/12/zimbabwe-is-paying-people-5-for-175-quadrillion-zimbabwe-dollars/ [Accessed 27 October
2016].
55
Available at: http://raszl.com/blog/bitcoin-benefits-and-risks [Accessed 27 October 2016].
56
Available at: http://cs.stanford.edu/people/eroberts/cs201/projects/2010-11/digitalcurrencies/advantages/index.html [Accessed 11 June 2016].
57
Available at: http://www.dell.com/learn/us/en/uscorp1/campaigns/bitcoin-marketing [Accessed 27 October 2016].
58
Tyler Durden, “Bitcoin: A Cost-Benefit Analysis” (12 May 2013), Zero Hedge available at: http://www.zerohedge.com/news/2013-12-05/bitcoin-cost-benefit-analysis
[Accessed 27 October 2016].
59
Anita Ramasastry, “Bitcoin: If You Can’t Ban It, Should You Regulate It? The Merits of Legalization” (25 February 2014) available at: http://verdict.justia.com/2014/02
/25/bitcoin-cant-banregulate#sthash.he1lomjw.dpuf [Accessed 4 June 2015].
60
Ramasastry, “Bitcoin: If You Can’t Ban It, Should You Regulate It?” (25 February 2014).
61
Ramasastry, “Bitcoin: If You Can’t Ban It, Should You Regulate It?” (25 February 2014).
62
Ramasastry, “Bitcoin: If You Can’t Ban It, Should You Regulate It?” (25 February 2014).
63
See Law Library of Congress, Regulation of Bitcoin in Selected Jurisdictions (Global Legal Research Center, January 2014) available at: http://www.loc.gov/law/help
/bitcoin-survey/regulation-of-bitcoin.pdf [Accessed 27 October 2016].
64
Law Library of Congress, Regulation of Bitcoin in Selected Jurisdictions (January 2014).
65
Law Library of Congress, Regulation of Bitcoin in Selected Jurisdictions (January 2014).
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
26 International Company and Commercial Law Review
currently monitors Bitcoin transactions, but Estonia does one who hoards bitcoins and uses them to make real or
not regulate them.66 In the UK, HM Revenue & Customs virtual purchases. Such users are not subject to any
(HMRC) has categorised virtual currencies as assets or regulations, as opposed to the miners who are classified
private money, reversing the earlier ruling which as money transmitters and are liable to face the legal
classified the virtual currencies as gift vouchers.67 Income consequences of the irregularities in transactions. The
generated from bitcoin mining activities will not attract Internal Revenue Service of the US, in March 2014, made
Value Added Tax (VAT) since they will not constitute its position very clear by declaring Bitcoin to be
an economic activity for VAT purposes. Bitcoins “property” and not a currency, and therefore tax policies
themselves will not be subjected to VAT when exchanged would be irrevocably enforced.74 Bitcoins are to be treated
for foreign currencies. Moreover, income generated by as property and would be subject to tax as ordinary
activities incidental to the mining of bitcoins by bitcoin income or subject to capital gains tax as on assets. This
miners will be covered under the exemption provided treatment of Bitcoin as property implies that the wages
under art.135(1)(d) of the EU VAT Directive.68 These paid to the employee are taxable and are subject to federal
incidental activities will be covered under art.135(1)(d), income tax withholding and payroll taxes. Payments made
which provides exemption to “transactions, including to independent contractors and service providers using
negotiations, concerning deposit and current accounts, virtual currency will be taxable, and self-employment tax
payments, transfers, debts, cheques and other negotiable rules will apply.75
instruments”. Thereby, this implies a direct exemption The EU released a clear warning notification to its
of VAT on digital currency transactions in the UK. Member States in December 2013, warning them of the
However, France is one of the noteworthy dissidents risks of tax evasion, fraud and misuse that threaten the
with regard to the Bitcoin in terms of its regulation. legal implementation of virtual currency.76 It emphasised
France’s central bank issued a report that states “that the the irretrievability of consumer funds, and the lack of
bitcoin cannot be considered a real currency or means of legal enforcement agencies to safeguard Bitcoin
payment under current French laws, and criticizes it as a consumers.
vehicle for speculation as well as an instrument for money
laundering and other illegal activities”.69 The report Indian perspective
proposes that bitcoin-to-fiat transactions should be limited
to French authorised payment service providers, therefore India had adopted a very non-commital stand towards the
reducing the risk of money laundering and fraud. issue of bitcoins, until December 2013,77 when the apex
While there are some countries like the US, Australia70 banking authority, the Reserve Bank of India, released a
and Canada71 that have specified laws and regulations to warning to the major exchanges, cautioning them of
supervise onshore transactions and exchanges of bitcoins, malware attacks and security-related risks, to the effect
their regulatory powers are also limited when it comes to that several notable exchanges even suspended all virtual
offshore services. The Financial Crimes Enforcement currency transactions.78 But several experts have noted
Network of the US took on itself the onus of regulating that market demand for trading in bitcoins has not
Bitcoin services, and chose to employ a selective method diminished much, a lot of which can be attributed to the
of determining the legality of transactions.72 The legal entry of new Bitcoin operators such as Unocoin and
considerations depend on the threefold categorisation BitQuick.in.79 Bitcoins have not yet been legitimised, and
provided by the network. The stakeholders are, namely, continue to have the legal status of an unauthorised
the user, the miner and the exchanger.73 The user is the currency. Considering that bitcoins are essentially lines
66
Law Library of Congress, Regulation of Bitcoin in Selected Jurisdictions (January 2014).
67
HM Revenue & Customs, “Bitcoin and other cryptocurrencies” (3 March 2014), Revenue and Customs Brief 9 available at: https://www.gov.uk/government/publications
/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies#vat-treatment-of-bitcoin
-and-similar-cryptocurrencies [Accessed 27 October 2016].
68
HM Revenue & Customs, “Bitcoin and other cryptocurrencies” (3 March 2014).
69
HM Revenue & Customs, “Bitcoin and other cryptocurrencies” (3 March 2014).
70
Kate Walsh and Jason Murphy, “ATO Targets Bitcoin Users” (24 June 2013) available at: http://www.afr.com/news/policy/tax/ato-targets-bitcoin-users-20130623-jhj8r
[Accessed 27 October 2016].
71
David George-Cosh, “Canada Says Bitcoin Isn’t Legal Tender” (16 January 2014), Wall Street Journal available at: http://blogs.wsj.com/canadarealtime/2014/01/16
/canada-says-bitcoin-isnt-legal-tender/; “Bitcoins Aren’t Tax Exempt, Revenue Canada Says” (26 April 2013), CBC News available at: http://www.cbc.ca/news/business
/bitcoins-aren-t-tax-exempt-revenue-canada-says-1.1395075 [Both accessed 27 October 2016].
72
Obrea O. Poindexter, Ryan H. Rogers and Jeremy Mandell, “United States: Fincen Issues Additional Regarding Bitcoins and Other Convertible Virtual Currency Activities”
(13 February 2014) available at: http://www.mondaq.com/unitedstates/X/292844/Financial+Services/Fincen+Issues+Additional+Clarifications+Regarding+Bitcoin+And
+Other+Convertible+Virtual+Currency+Activities [Accessed 10 May 2015].
73
Poindexter, Rogers and Mandell, “United States: Fincen Issues Additional Regarding Bitcoins and Other Convertible Virtual Currency Activities” (13 February 2014).
74
Kevin Drawbaugh and Patrick Temple-West, “Bitcoins Are Property, Not Currency, Says IRS Regarding Taxes” (25 March 2014), Reuters available at: http://www.reuters
.com/article/2014/03/25/us-bitcoin-irs-idusbrea2o1lr20140325 [Accessed 27 October 2016].
75
Pete Rizzo, “IRS to Tax Digital Currencies as Property, Not Currency” (25 March 2014), CoinDesk available at: http://www.coindesk.com/internal-revenue-service-treat
-digital-currencies-property [Accessed 27 October 2016].
76
Agence France Presse, “The European Union has Issued a Warning about Buying Bitcoin” (13 December 2013), Business Insider India available at: http://www
.businessinsider.in/the-european-union-has-issued-a-warning-about-buying-bitcoin/articleshow/27305776.cms [Accessed 27 October 2016].
77
Reserve Bank of India, “RBI Cautions Users of Virtual Currencies against Risks”, (24 December 2013), Press Release available at: http://rbi.org.in/scripts/bs
_pressreleasedisplay.aspx?prid=30247 [Accessed 27 October 2016].
78
“Bitcoin Exchanges Shut Shop in India”, The Hindu available at: http://www.thehindu.com/business/industry/ bitcoin-exchanges-shut-shop-in-india/article5504407.ece
[Accessed 5 June 2015].
79
“Indian Bitcoin Operators Resume Operations Cautiously” (15 January 2014), The Hindu available at: http://www.thehindu.com/business/indian-bitcoin-operators-resume
-operations-cautiously/article5578640.ece [Accessed 27 October 2016].
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
The Dawn of the Digital Currency Era: A Global Analysis of Bitcoin and its Implications in India 27
80
Vipul Kharbanda, “Can Bitcoins be Banned by the Indian Government?” (December 2013), Centre for Internet and Society available at: http://cis-india.rrg/internet
-governance/bitcoin-legal-regulation-india [Accessed 13 May 2015].
81
Foreign Exchange Management Act 1999 s.2(h).
82
Available at: http://www.rbi.org.in/scripts/bs_viewcontent.aspx?id=1902 [Accessed 27 October 2016].
83
Sale of Goods Act 1930 s.2.
84
Tata Consultancy Services v State of Andhra Pradesh (2004) 271 I.T.R. 401 at [84].
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
28 International Company and Commercial Law Review
Cryptocurrencies such as Bitcoin are an effective tool We can take an example from Leonardo di Caprio’s
for evading taxes. This is for two most important reasons. film Blood Diamond, in which the story revolved around
Primarily, bitcoins are not limited to any particular the diamond business, specifically the mining and
jurisdiction and therefore are not subject to tax in the smuggling of diamonds.90 Imagine a person who is mining
source jurisdiction. Secondly, the transactions in bitcoins for diamonds in order to earn money by selling the
are anonymous. Moreover, the operation of Bitcoin is not diamonds. He puts in months of research, survey and
dependent on the existence of financial intermediaries, labour. He probably employs a few people to help him
which makes it more difficult for the authorities to find find the diamonds. Finally, he unearths the diamond
out the point of taxation. which he is later able to sell for a profit. This situation is
As India embraces and embarks on the future with akin to that of the bitcoin miner. The bitcoin miner also
plans of internet-connected smart cities,85 addressing the employs labour and effort to mine bitcoins exactly like
issue of Bitcoin taxation increases with each passing year. the diamond miner. After considerable effort, he is
We are already aware of the immense problem of black rewarded with a new set of limited bitcoins. Subsequently,
money that India already faces; it is only a matter of time with regard to taxation of bitcoins, they can be taxed when
before tax-evaders start using the Bitcoin route to stash he sells the bitcoins for traditional currency, goods or
unaccounted wealth. This demonstrates the rising concern services. Therefore, it is proposed that Bitcoin should be
for a clear formal guidance for the taxation of Bitcoin. treated as a capital asset and taxed under the head income
Owing to a lack of established laws on the taxation of from capital gains when initially mined income is put into
virtual currencies, we have to look at the various taxation circulation. Following this, the transfer of bitcoins for
structures already in place so that bitcoins can be treated payment of goods or services should be treated as any
under a particular head of income tax. legal currency and taxed accordingly.
According to s.2(13) of the Income Tax Act 1961,
Proposed taxation of income from bitcoin business “includes any trade, commerce or manufacture
mining or any adventure or concern in the nature of trade,
commerce or manufacture”. Section 28 of the Act is the
Every government has the sole statutory right to issue charging section, which taxes the profits and gains of any
currency notes for their respective jurisdictions. Unlike business or profession carried on by the assessee.
the earlier system, in which only the government had the Therefore, it can also be taxed under the purview of
power to create currency, Bitcoin users have the potential business income in cases where bitcoin mining acts as a
to mine bitcoins and bring them into circulation. There source of business for the miners. Further, service tax
is no requirement for governmental interference. This cannot be imposed on the transfer of bitcoins since service
also undermines the statutory authority of the Reserve tax is not applicable to the transfer of goods. However,
Bank of India to create legal tender under the RBI Act if the transfer of bitcoins is included in the meaning of
1934.86 This creates a unique taxation dilemma with regard the word “service”, then it can also be taxed as such.91
to the taxation of the creation of bitcoins. This aspect of taxation is in consonance with the domestic
One such method could be accession to wealth by law. Internationally, taxation on income is governed by
successfully solving the Bitcoin puzzle. Bitcoin mining the various bilateral tax treaties signed between the
is a process which creates an intangible and scarce asset. countries.
The bitcoin miner eliminates the role of the Reserve Bank
of India, as now the miner creates the currency and claims International taxation
ownership of the created bitcoins. When there is a creation
of value, the net worth of an individual increases. Bitcoin is recognised as a global currency and traded
Therefore, there is an “accession to wealth”.87 In across various jurisdictions globally. Hence, a uniform
Commissioner v Glenshaw,88 the US Supreme Court held concept of taxation should be drawn up in order to tax
that income includes “undeniable accessions to wealth, the cross-border transactions which are undertaken by
clearly realized, and over which the taxpayers have using the global currency. The guidelines regarding
complete dominion”. Under this rule, three elements must taxation that are followed globally are laid down in the
be satisfied to trigger a taxable event: a taxpayer must OECD MC 2011.92 Countries have incorporated these
experience an increase in net worth, a taxpayer must have guidelines in their treaties. Article 13 of the OECD MC
control over the new value, and there must be a realisation 2011 deals with capital gains arising from the transfer of
event.89 capital assets (movable and immovable) from one
85
Available at: http://www.smartcities.gov.in/ [Accessed 27 October 2016].
86
Reserve Bank of India Act 1934 s.22.
87
Commissioner v Glenshaw Glass 348 U.S. 426 (1955).
88
Glenshaw Glass 348 U.S. 426 (1955).
89
Glenshaw Glass 348 U.S. 426, 431 (1955).
90
Blood Diamond available at: http://www.imdb.com/title/tt0450259/ [Accessed 27 October 2016].
91
Nisith Desai Associates, “Bitcoins—A Global Perspective: Indian Legal and Tax Considerations” available at: http://www.nishithdesai.com/fileadmin/user_upload/pdfs
/research%20papers/bitcoins.pdf [Accessed 4 September 2015].
92
OECD Model Tax Convention on Income and Capital (2011).
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors
The Dawn of the Digital Currency Era: A Global Analysis of Bitcoin and its Implications in India 29
contracting state to another and its subsequent taxation.93 that its scope has not yet been discovered as it has only
Therefore, it is proposed to insert the concept of bitcoins demonstrated a fraction of the benefits of using such a
into the above-mentioned article since, as has already currency. Hence, an alternative that would allow some
been discussed, bitcoins can be treated as a capital asset regulatory help to the Bitcoin should be developed,
in the hands of the owner and any gain arising out of the instead of banning it entirely. Therefore, the creation and
transfer of such bitcoins shall be treated as a capital gain. exchange of bitcoins in all forms of systems should entail
Inserting this provision into the convention will assist in tax consequences. This will enable governments to
tackling the lacuna of taxing transactions in bitcoins. increase their revenue sources and ensure that there is
regulation of this cryptocurrency. There is explosive
Conclusion growth of this unique currency all around the world, and
it will continue to grow as the internet and technology
Virtual economies continue to grow at an exponential continue to penetrate throughout the country. The legal
rate. Countries around the world are grappling with the grey areas enveloping the viability of bitcoins can be
new challenge of Bitcoin taxation. As each month passes easily eliminated through legal entrepreneurship, which
by, bitcoins continue to create novel legal problems for is already on the rise, whether it be tax regulations, or
the legislators of various jurisdictions. multi-signature agreements. Hence, we need to act
In today’s global economy, there is a genuine need for immediately and effectively in order to sufficiently
cryptocurrencies. Banning such an idea at this stage of address this modern economy.
infancy would be a counterproductive move, knowing
93
Articles of the OECD Model Tax Convention on Income and Capital art.13 available at: http://www.oecd.org/tax/treaties/47213736.pdf [Accessed 27 October 2016].
[2017] I.C.C.L.R., Issue 1 © 2016 Thomson Reuters (Professional) UK Limited and Contributors