Finance Minister Arun Jaitley says government do not recognize crypto-currency as legal tender, but he has not categorically declared crypto as illegal. However, there are many laws and regulations in India which may make life miserable of the persons dealing in Bitcoin. This article is an attempt to explain these laws which the persons dealing in crypto-currency must be aware of.
Crypto-currency, especially, Bitcoin has become controversial. A few countries, like US and Japan have allowed crypto exchanges, whereas China and South Korea have banned dealing in Bitcoin. India is in a fix- neither giving it a legal status nor declaring it illegal. Ministry of Finance formed a committee in April 2017 to submit its report within three months whether to allow crypto-currencies to be traded in India. If yes, how to deal with it- as a legal tender or as an asset; who would be the regulator; and the safe guards to be adopted to protect interest of the nation.
Union finance minister Arun Jaitley, in his Budget 2018 speech said that government does not recognize crypto-currencies such as Bitcoin, Ripple and Etherium as “legal tender” and as such will discourage their use. Mr Jaitley further said that his government “will take all measures to eliminate the use of crypto in financing illegitimate operations”.
The statement of Finance Minister has further confused the nation. Of course, no government will recognize crypto-currency as legal tender. FM has kept mum as to (a) whether he will treat crypto as an asset or an investment opportunity (b) whether unregulated crypto exchanges will be allowed to operate in India, and (c) what is the stand of the government if legitimate operations are conducted through the medium of crypto-currencies.
Due to this confused state investors are put to high risk area- if they don’t invest, they may lose a golden opportunity to earn handsome profit (people have become multi-millionaire over a short span by investing in Bitcoin) – and if they invest and lose their money, there is no authority to help them. Government has spared itself from responsibility by a simple statement that it considers Bitcoin equivalent to Ponzi Scheme. Similarly, Reserve Bank also keeps on issuing advisories periodically to desist investors dealing in crypto. Billion of rupees in the shape of Bitcoin are being traded through unregulated exchanges; government and the RBI are simply issuing advisories without taking any concrete steps to safe guard the innocent investors.
Let’s first analyze why the governments of nations are confused about the Bitcoin. After the US sub prime crises in 2008 and the fall of Lehman Bros; the trust on banking industry was shaken. Satoshi Nakamoto, an unknown entity, published a paper on peer to peer money transfer through the medium of Bitcoin, a virtual currency, using block-chain technology wherein the control of a single agency or the government or the nation was wished out. Under the new scheme, the transaction control was diversified in the hands of numerous participants spread over different corners of the world. Blockchain technology augmented peer-to-peer transactions eliminating the role of intermediate banking industry.
The concept of virtual currency was welcomed on many counts:-
One: The fiat currencies of nations are of national character whereas its citizens are becoming global in stature. Instead of exchanging currencies every now and then while travelling to different countries; these global characters were long wishing a global currency. Bitcoin fulfilled their wish being global in nature.
Two: In a family of four persons, if all are staying in different countries and one member wants to send some money to the other, one has to go through the banking channel paying their hefty charges. In international transactions, banks conduit a trust between two unknown entities and charge for this trust. But what trust banks give in a transaction between father and his son living in different countries. Why do they require a bank in between. Bitcoin facilitates peer-to-peer transaction.
Three: The circulation of Bitcoin are fixed in numbers, ie, maximum 21 million will come into circulation. It cannot be misused by the governments for meeting their deficit financing or populist election expenditure as is done in fiat currencies wherein governments print ‘n’ number of currency notes thus devaluing their own currency. Whereas the value of Bitcoin will always be increasing since its supply is fixed and demand will keep on increasing. Thus investing in Bitcoin is beneficial in the long run than investing in fiat currency.
In spite of so many benefits, no government would like to declare it a legal tender, because then it will lose its status of monetary authority. Bitcoin is posing a big threat to the monetary system of the nations. A day may come when all the governments the world over may join hands to combat this big demon but may not succeed.
Recently, Income Tax Department raided crypto-currency exchanges in India with the sole objective to know whether investors have paid taxes on profits out of sale of Bitcoin. Income Tax Department is not concerned about the legality of the transaction. As per income tax rules, “Income is income, though tainted. For purpose of Income-tax, there is no difference between legal and tainted income. Even illegal income is taxed just like any legal income. By taxing such income, the state is not taking part in the crime or condoning it, nor would become a principal or a sharer in the illegality. The revenue merely looks at an accomplished fact, viz, on profits having earned and assess the same”.
Hence by paying tax over the profit earned on a transaction will not make it legal if otherwise it is not- the same is the case with crypto-currencies.
Naïve investors are attracted towards the price difference of Bitcoin in US and Indian exchanges; and resort to Arbitrage of crypto-currency. Let’s illustrate with example:-
A Non-Resident Indian staying in US comes across an arbitrage opportunity (on 02nd February, 2018) wherein he can buy a Bitcoin in US exchange Coinbase for USD 10085 and to sell in Indian exchange Koinex for INR 725000 (which is equivalent to USD 11382). He has two options available to complete this arbitrage:-
1. Buy in US exchange for USD 10085; transfer to Indian exchange in his own account; sells it for INR 725000; transfer rupee funds to his NRO account; finally remit these funds (USD 11382) to US from his NRO account. If he has to pay USD 500 for exchanges/banks’ charges and currency conversion cost etc, still he can pocket USD 797 as arbitrage profit. As a law-abiding citizen, he also pays income-tax on this profit, still a handsome gain.
Looks lucrative. But FEMA comes into picture. As per FEMA, permissible credits in NRO account are:-
a. Proceeds of remittances received in any permitted currency from outside India through normal banking channels.
b. Legitimate dues in India of the account holder like rent, dividend, interest, pension etc.
Now question arises whether (a) sale proceeds of Bitcoin in India is considered as remittance from outside India or (b) is it a legitimate dues in India. No bank will allow to deposit such funds in NRO accounts without clarification from RBI; and RBI will never permit. Hence this rout of arbitrage is partially blocked.
Even if RBI permits to deposit the sale proceeds in NRO account; whether the account holder can repatriate the funds abroad. As per FEMA, permissible debits in NRO accounts are:-
a. All local payments in rupee.
b. Remittance outside India of current income in India of the account holder like rent, dividend, pension, interest etc.
c. Remittance up to USD one million per financial year, for all bona fide purposes, to the satisfaction of Authorized Dealer Bank.
Again a question; whether AD Bank will consider this as remittance for bona fide purpose in the light of fact that government of India and RBI are against the crypto-currency.
2. The second option to complete this arbitrage is : NRI purchases Bitcoin from US exchange; gifts this to his blood relation in India; the relative sells Bitcoin in India; pays short term capital gain tax on the profits earned. As per US laws, gift tax is levied on the donor. A US resident is exempt from gift tax if he gifts maximum of USD 14000 to one recipient in a year. As per Indian laws, gift tax is applicable in the hands of recipient and any gift from blood relation is totally exempt. However, on the sale of gifted assets, while calculating capital gain, cost of the asset is taken as was incurred by the previous owner.
Here Foreign Contribution (Regulation) Act, 2011 poses hurdles. As per website of Ministry of Home Affairs , purpose of FCRA is to facilitate receipt of foreign contribution for genuine purposes, without compromising national security. Though foreign contribution received from a relative is exempt, intimation is required to be submitted to the Ministry of Home Affairs in form FC-1 if foreign contribution received in a financial year exceeds rupee one lakh.
In the light of aversion towards crypto-currency by the government, how many question will be asked to recipient of Bitcoin. Since Bitcoin was purchased in dollar from US exchange and sold in India, government may consider it foreign remittance in India.
Recently, Bank of International Settlement has exhorted the member Central Banks to deal strictly with crypto-currencies as these pose danger to the basic foundation of monetary system of the world.
Bitcoin will stay or not, only time will tell. For the time being, governments are confused how to regulate it.
I put this article for general debate seeking suggestions – for and against crypto-currencies; and possible safeguards to be taken – which can be escalated at the appropriate forum making it easy for the government to enact regulations.