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By: Vijay Pal Dalmia, Advocate
Supreme Court of India & Delhi High Court
Email id: vpdalmia@gmail.com
Mobile No.: +91 9810081079
Linkedin: https://www.linkedin.com/in/vpdalmia/
Facebook: https://www.facebook.com/vpdalmia
Twitter: @vpdalmia
And Siddharth Dalmia
Email id: dalmiasiddharth1994@gmail.com
Mobile: +91 9971799250

Bitcoin is a cryptocurrency; it is a digital asset designed to
work as a medium of exchange that uses cryptography to control its
creation and management, rather than to rely on a central
authority. The transfer of this currency is like sending the e-mail
or text message to a person. To send a bitcoin, a wallet app is
used (app: ‘Bitcoin Wallet’), the amount to be sent is
typed in the wallet app and type the details for the recipient(
account number in this case), and you have sent the bitcoin which
can later be converted to fiat currency.

Let’s take the hypothetical case of Mr. X and Mr. Y. X pays
5 bitcoins to Y, X’s balance is reduced by 5 bitcoins and
Y’s increases by 5. This transaction, when completed will be
shown in public ledger. This ledger is maintained by Bitcoin’s
public network. When X filled the relevant details and pressed
send, the bitcoin network receives a message from X and the message
says that Y is being sent so and so number of bitcoins by me. If
some thief can replicate that message and send it to the bitcoin
network, then he might be able to steal X’s money i.e.,
bitcoins. But this message cannot be replicated because each
message comprises a unique signature, after encrypting this unique
signature, the message is sent to the Bitcoin network so that it is
impossible to replicate.

Cryptocurrency uses a system of cryptography (AKA encryption) to
control the creation of coins and to verify transactions.
Cryptography, in layman’s language, means the art of writing
and solving codes. So, each letter/ word/ any component of the
language can be mapped to arbitrary characters, letters, pixels and
numbers so that it is not readable without the proper key. When X
sent the message to bitcoin network, bitcoin account has two keys,
i.e. private key and public key. So, the message sent uses both
private and the public key. The ledger comprises both the public
key and the encrypted information from the X’s side. Every
transaction uses a different encrypted code. Therefore, it is
called a cryptocurrency.

Features of bitcoin:

Bitcoin is a currency that is not tied to a bank or government
and allows the users to spend the money anonymously.

No single institution controls the bitcoin network.

It is analogous to an online version of cash. Many products and
services can be bought by it.

Bitcoin network controls the bitcoin. Bitcoin network comprises
the common man who uses bitcoin, and anybody can become a part of
it. To understand this network, we must understand the
Bitcoin Public Ledger.

All confirmed transactions from the start of Bitcoin’s
creation are stored in the public ledger. This complete record of
the transaction which is a sequence of records called blocks.

On November 1, 2008, a man named Satoshi Nakamoto (a tentative
name whose existence is questionable) posted a research paper to an
obscure cryptography listserv describing his design for a new
digital currency that he called bitcoin. One of the core challenges
of designing a digital currency involves something called the
double-spending problem.

Bitcoin did away with the third party by publicly distributing
the ledger, which Nakamoto called the ‘block chain.’

Users willing to devote the CPU power to running a special piece
of software would be called miners and would form a network to
maintain the blockchain collectively. In the process, they would
generate new currency.

Bitcoin Mining

The maintenance of ledger takes up a lot of resources. It solves
many vital issues. The incentive to maintain this ledger and to
perform such an important task would pay you in the form of
bitcoins. They will have the privilege to mine the bitcoins.

Miners install software for bitcoin, this software, by utilizing
the power and resources, computes numerous mathematical algorithms.
After computing these algorithms, the software provides a reliable
algorithm to the ledger. The ledger will use these algorithms to
solve the complexity of maintaining it.

How to get ‘bitcoins.’

You can buy bitcoins by using real money.

You can sell things and let people pay you with bitcoins.

Or they can be created using a computer.

Why are bitcoins valuable?

There are a lot of things other than money which we consider
valuable like diamonds and gold. The Aztecs used cocoa for
money!

Bitcoins are valuable because people are willing to exchange
them for real goods and services and even cash.

Countries such as Russia and Japan moved to legitimize
cryptocurrency. But they can do so because most of their economy
has ‘white’ money and ours (Indian) run on considerable
amount of black money, so it would not be suitable for our economy
as people would use them to convert them from black to white. Japan
has passed the law to bitcoin as a legal payment method. Russia is
reportedly looking into ways to regulate bitcoin.

Is it anonymous?

Yes, to a point. Transactions and accounts can be traced, but
the account owners are not necessarily known. However,
investigators might be able to track down the owners when bitcoins
are converted to regular currency. But the people might be able to
spend that money online and might be impossible to trace.

Advantages

With bitcoin it is possible to be able to send and get money
anywhere in the world at any given time.

You are in control of your own bitcoin. There is no central
authority figure in bitcoin network.

With the blockchain, all finalized transactions are for anyone
to see.

Bitcoin disadvantages

Fact is many people are still unaware of digital currencies and
Bitcoin.

Bitcoin has volatility because there is a limited amount of
coins (21 million bitcoins), and demand for them increases by each
passing day.

Bitcoin is still at its infancy stage, with incomplete features
that are in development.

Legality of Bitcoins in India

As it stands, bitcoin buying, selling, trading, or mining is not
illegal by any law in India.

Tellingly, the publication’s source also adds that any
decision that ruled the cryptocurrency to be illegal in India would
mean that India’s nascent but growing bitcoin industry will
have to shut down.

Bitcoin has been the de facto currency of the Dark Web –
the ‘hidden’ Internet accessible only by Tor – since
the pioneering marketplace Silk Road, the ‘eBay of drugs,’
arrived in 2011.

But how much do we know about these new underground economies?
Who is buying and selling – and what? Here’s what
available data can tell us about bitcoin on the Dark Web.

According to the FBI, the Silk Road made a total of $1.2bn
between 2011 and 2013. The marketplace is widely understood to be
the first ‘killer app’ for bitcoin, and drugs still make up
a large proportion of transactions made using the digital currency
today. http://www.coindesk.com/bitcoin-on-the-dark-web-the-facts/.

What roles do bitcoin and Tor play in the Deep Web?

Both of them are the best available privacy and anonymity
protecting tools. Tor is used for browsing and Bitcoin for the
transaction. It becomes almost impossible to trace either of those
things. Let us say that you surfed a deep web version of amazon to
buy something illegal. You most certainly don’t want to get
caught in any way. You use Tor to access that site so that the
browser won’t leave any trails or history or cookies. You found
your product and want to buy it. Our standard secure banking can be
easily traced. So, bitcoin, which uses a massively encrypted and
mathematically complicated method of payment, helps you in keeping
your payment safe, sound, and untraceable.

Many hackings that take place in India ask for payments through
Bitcoins as anonymity is maintained. Many of these hackings go
unreported as companies do not want to ‘damage’ their
reputation. But the tremendous ransomware, aka wannacry, opened the
eyes to the truth behind the bitcoins to the world.1

Legal position in India

The IMAI vs RBI2 shows the most recent position of
law in India regarding the stance of cryptocurrencies. Reserve Bank
of India (RBI) first issued its ban on banks’ dealings with
crypto businesses back in April 2018 (the ‘order’), which
took effect in July of that year 20183. The RBI
notification was then challenged before the Supreme Court of India
by the Internet & Mobile Association of India (IAMAI). The
Court, whilst deciding the matter, looked at the draft bill which
has been proposed (but not passed) by the legislature, namely
Banning of Cryptocurrency & Regulation of Official Digital
Currency Bill, 2019. The Court held that the stand of the
legislature cannot be gauged from this bill as the bill, on the one
hand, imposed criminal liabilities on the users of cryptocurrencies
and criminalized certain activities like mining, holding, selling,
trade, issuance, disposal or use of cryptocurrency in the country.
On the other hand, the bill paved the way for the government to
introduce its own digital currency, namely ‘Digital Rupee,’
by the Central. Bank. The Court also emphasized that The
Crypto-token Regulation Bill, 2018 initially recommended by the
Inter-Ministerial Committee contained proposals (i) to prohibit
persons dealing with activities related to crypto tokens from
falsely posing these products as not being securities or investment
schemes or offering investment schemes due to gaps in the existing
regulatory framework and (ii) to regulate VC exchanges and brokers
where sale and purchase may be permitted. The key aspects of the
Crypto-token Regulation Bill, 2018, found in paragraph 13 of the
‘Note-precursor to report’ shows that the Inter-Ministerial
Committee was fine with the idea of allowing the sale and purchase
of a digital crypto asset at recognized exchanges. Therefore, the
intention and the stand of the legislature remains unclear on the
matter of cryptocurrencies.

The Court first determined the reason because of which the
notification by the RBI had been issued. The reason given by the
RBI is the cryptocurrencies might disrupt the existing financial
institutions. As reported during the January hearings, IAMAI’s
legal counsel had argued before the court that RBI had itself
failed to adequately research the matter before deciding to take
action. “Opinion cannot be formed on imaginary grounds,”
the counsel had argued.

The Court agreed that the RBI had failed to prove or bolster
(through reasonable grounds) how the functioning of existing
institutions could be disrupted through cryptocurrencies. The Court
relied on its decision in State of Maharashtra v. Indian Hotel and
Restaurants Association; there must have been at least some
empirical data about the degree of harm suffered by the regulated
entities (after establishing that they were harmed). It is not the
case of RBI that any of the entities regulated by it has suffered
on account of the provision of banking services to the online
platforms running VC exchanges. The Court further iterated that the
administrative orders, like the order in question, should be well
reasoned and have a rational and cannot be ambiguous.

Without the backing of any sort of reasoning, such orders or
notification need to be quashed. The Court then applied the
doctrine of proportionality before finally deciding the issue in
favour of cryptocurrency. The doctrine of proportionality includes
the following:

  1. whether the objective of the measure is sufficiently important
    to justify the limitation of a protected right,
  2. whether the measure is rationally connected to the
    objective,
  3. whether a less intrusive measure could have been used without
    unacceptably compromising the achievement of the objective,
    and
  4. whether, balancing the severity of the measure’s effects on
    the rights of the persons to whom it applies against the importance
    of the objective, to the extent that the measure will contribute to
    its achievement, the former outweighs the latter.

The court held that RBI needed to pass the above test and to
show at least some semblance of any damage suffered by its
regulated entities. But the RBI could not show any. The Court
finally held that the consistent stand of RBI is that they have not
banned VCs and when the Government of India is unable to take a
call despite several committees coming up with several proposals
including two draft bills, both of which advocated exactly opposite
positions, the Court cannot hold that the impugned measure is
proportionate.

The impugned order by the RBI was hence quashed and, the order
seems well reasoned. It would be a welcome move for
cryptocurrencies, blockchain technology and exchanges across the
country, though the future of the cryptocurrencies still seems to
be shrouded in the mist because of legislative uncertainty.

Footnotes

1. https://qz.com/982993/watch-as-these-bitcoin-wallets-receive-ransomware-payments-from-the-ongoing-cyberattack/

2. Writ Petition (Civil) No.528 of 2018

3. ‘Prohibition on dealing in Virtual Currencies
(VCs)’, Notifications, RBI, April 6, 2018.

© 2019, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy
Marg New Delhi-110001 (India).

The content of this article is intended to provide a general
guide to the subject matter. Specialist professional advice should
be sought about your specific circumstances. The views expressed in
this article are solely of the authors of this article.

(Excerpt) Read more Here | 2020-03-27 14:56:32
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