A Regulatory Conundrum: The Effect of the Evolving Jurisprudence Regarding Virtual Currencies

With the increasing popularity of cryptocurrencies and their undeniable impact on economies worldwide, the response of regulators across jurisdictions is decisive in determining the effect of such currencies.

The white paper of the world economic forum: ‘macroeconomic impact of cryptocurrency and stable coins‘, from July 2022 suggests the incorporation of cryptocurrencies in the economy in a regulated manner to be the most appropriate response and the best way forward. For this purpose, it compares the impact of stablecoins and cryptocurrencies and finds it important to define the different types of digital currencies for forming competent regulations.

Considering the fundamental nature of money and the common characteristics of various cryptocurrencies, there have been some similarities as well as differences that academics, regulatory bodies as well as courts across the world have identified between the two. However, such identifications and analyses have been far from consistent, and there continues to be a gap in the understanding of such currencies, for effectively utilising them for advancing economies.

This paper considers the Indian Jurisprudence regarding the nature of cryptocurrency to determine its regulatory framework, in lieu with the jurisprudence in countries across the world. It then considers academic literature to better understand cryptocurrencies and their objects and implications on monetary policies and economies. For this, It reviews the literature regarding the same to determine the object of cryptocurrencies and their interpretations in the academia to deliberate regulatory frameworks. Furthermore, to understand the implications of such currencies across finance and economies, this paper also considers previous studies regarding the interactions of informal and formal finance on economies.

Indian Jurisprudence

While there has been limited litigation in the Indian courts with respect to cryptocurrencies and their regulation, the Courts have deliberated upon the nature and responsibilities associated with the trading of such currencies to some extent. Considering that it is still in nascent stages, there is much anticipation regarding the jurisprudence and approach of the Courts.

While adjudicating a criminal case regarding illegal transactions for the purchase of bitcoins, the Tis Hazari Court at Delhi in Hitesh Bhatia v. Mr. Kumar Vivekanand delved into the consideration of the nature and regulation of cryptocurrencies.

While adjudicating this case, the court has considered the nature and potential of cryptocurrencies to be similar to that of “Fiat Currencies” considering that there have been institutions that have been using them in transactions, in a manner similar to Fiat currency. The Court has acknowledged the threat that such currency systems pose, with their “potential of creating a parallel monetary system”.

Considering the unique conundrum that cryptocurrencies pose for having credibility but no legal backing as currency, the Court has acknowledged the requirement for the involvement of the RBI in regulating these while limiting their powers at the same time. However, while precluding the role and powers of the Reserve Bank of India (RBI) in regulating such currencies, the Court has stated that since these are not yet of the nature of “Fiat Currencies” they may not be regulated by the RBI.

In this case, the court held that crypto transactions in the country would have to comply with the general law in force in India including PMLA(Prevention of Money Laundering Act), IPC (Indian Penal Code), FERA (Foreign Exchange Regulation Act), NDPS Act (Narcotic Drugs and Psychotropic Substances Act), Tax laws, and with the RBI regulations regarding KYC (know your customer), CFT (Combating of funding of terrorism), and AML (Anti-money laundering) requirements.

While the object of some of these laws, like the tax laws and PMLA are explicitly related to goods and property, others like the FERA and the RBI Act are related to regulating monetary and associated transactions. It is, therefore, apparent that the decision of the Supreme Court of India as well as of the Courts in other jurisdictions have implied, to some extent, the status of virtual currencies to oscillate between assets and Fiat currencies.

The case of Hitesh Bhatia (Supra), follows the position taken by the Hon’ble Supreme Court of India in Internet and Mobile Association of India v. Reserve Bank of India, where it considered lengthy arguments to determine the nature of cryptocurrencies and the implications thereof under the law. The central issue, in this case, was the validity of the RBI circular dated April 6, 2018 restricting banks from dealing in cryptocurrencies. To determine the powers of the RBI to issue such a circular to effectively ban the trade of cryptocurrencies in India, the Supreme Court delved into the nature of such currencies.

For this purpose, the Supreme Court relied on decisions and laws regarding the nature of cryptocurrencies as determined in jurisdictions across the world and found the same to range from ‘having potential to be equivalent to fiat currencies’ and ‘financial instrument’ to ‘commodity’ and ‘property’.

While considering the approach taken by the RBI in regulating Virtual currencies to be exceedingly broad– considering the diversified nature and functions of some such currencies, the Supreme Court held that the decision of the RBI was not without reason and was taken only after years of analysis of the impact of such currencies on the economy and financial systems of the country; the purpose for which the RBI has been statutorily empowered. It is pertinent to note here that the Supreme Court, in this case had held the role of the RBI in regulating the banks dealing in cryptocurrencies to be valid under the law, and not the role of the RBI in regulating cryptocurrencies. The nature of virtual currencies notwithstanding, the Supreme Court set aside the RBI circular subject of dispute in the present case on grounds of proportionality.

While the Supreme Court in this case has not conclusively decided upon the nature of such currencies, it has considered them to have some semblance of financial instruments while deciding upon the powers of the RBI to regulate them. This is for the mere fact that they require the assistance of banks and institutions under the purview of the central authority to operate effectively, and for the lack of empirical evidence of harm suffered by regulated entities at the behest of such currencies.

Foreign Jurisprudence:

While countries like the UK for instance, have established the nature of virtual currencies as commodities, others like the USA haven’t conclusively decided upon the nature of such currencies. While the District courts of some of the States in the USA have held virtual currencies to be “payment instruments” and in some ways resembling legal tender; District Courts of other States have held them to be equivalent to commodities or property.

The Singapore International Commercial Court in B2C2 Ltd. v. Quoine Pte Ltd, on the other hand, has held virtual currencies to be properties capable of being held in trusts.

Jurisprudence in the United Kingdom, which was previously ambiguous in determining the nature of such currencies, clarified its position in AA v. Persons Unknown & others Re Bitcoin. The present jurisprudence in the UK considers virtual currencies to be property. In establishing this position, the court considered four classic criteria for property laid down in National Provincial Bank v. Ainsworth: (i) definable; (ii) identifiable by third parties; (iii) capable in their nature of assumption by third parties; and (iv) capable of some degree of permanence.

On the other hand, the European Court of Justice has held virtual currencies to fall under the definition of non-traditional currencies.

Considering the close association of money with property, it is reasonable to anticipate all these interpretations from across jurisdictions to eventually intersect at a position between ‘property’ and ‘money’; one that is unique to the existing systems as we have known them.

This is owing to the unique nature of such currencies for being an anonymous means of settling debt while also being decentralised and autonomous; and for the nature of its characteristics being contrary to the characteristics of money/legal tender– the fundamental character of which is the security it offers for repayment of debts, majorly owing to the backing of government institutions.

The conundrum, therefore, is owing to the security that these currencies offer to large parts of markets despite being autonomous– a unique case in the history of money or property.

Academic Deliberations:

Research across industries/subjects in India, as well as internationally have also studied the nature of cryptocurrencies while studying their implications on economies.

The FTAF (Financial Action Task Force), in its report, has considered Virtual Currencies to be representation of value that can be traded digitally, while functioning as medium of exchange, and/or Unit of account; and/or Store of value but not having a legal tender status. This was also the original intention of the cryptocurrency– bitcoin, as stated in the white paper of Satoshi (Anonymous) from August 2008, which cited the need for a decentralised and autonomous currency. Similar positions have been taken across such communities of academics etc. who have identified the need for a ‘fully anonymous, ultra-low transaction cost, transferable units of exchange’, while deliberating upon the goal of creating digital currencies.

Virtual currencies have been considered to have potential “financial stability implications” despite presently lacking key attributes of sovereign currencies according to the 2018 Communique of G-20; while the RBI has deemed it to be “unregulated digital money issued and controlled by its developers and used by the members of a specific virtual community.”

According to F.A. Walker’s treatise of money – an authority in understanding the theories of finance, the essential characteristics of money include – (i) freely passable from hand to hand, (ii) for final discharge of debt, and (iii) acceptable without the intentions and/or credibility of the giver or receiver. However, Andreas Rahmatian in Critical Legal Theory of Money, finds the legal nature of money to be closely associated with property. Considering such accepted characteristics of money, and the confounding credibility assigned seemingly arbitrarily to virtual currencies, determining its nature, especially legal one, is the logical progression for anticipating the needs and threats for the economy.

The conflicting considerations of virtual currencies across jurisdictions could potentially impact financial stability and economies across the world adversely. There is uncertainty in the perceived legal nature of cryptocurrencies owing to the contradictory stand of regulatory institutions, laws, and jurisprudence across the world, and their interactions with the formal monetary systems and thus, the economy. These factors may potentially contribute to the possible adverse impact of such currencies in economies across the world. There is thus, a dire and desperate need for uniform, technologically informed and comprehensive laws and regulations regarding the same.

Authored by Shruti Singhi, a Lawyer, Author and Founder at Society for Impact and Policy Research