With the Supreme Court recognising virtual currencies as a legal tender and allowing people to trade in them, a new dimension has been added to various Indian codes, thereby creating a paradoxical situation as to how such trading would be regulated in the absence of a centralised regulatory authority. With no legislation in force till date and no amendments made in the existing codes, it has become inevitably essential to determine the future of cryptocurrencies in developing nations, especially India. Till now various attempt have been made by several international and national agencies to define virtual/ crypto currencies but the classification of such currencies into money, token, securities, and commodities has acted a major impediment. Solely because of the lack of a proper definition and categorisation, there is an absence of a proper regulatory framework for crypto currencies in the global business community. The FATF in its report published in June 2014 has tried to define cryptocurrencies as a digital representation of value that is digitally traded and acts as a store of value, is a medium of exchange and a unit of account but lacks the status of being recognised as a legal tender.
The contention to recognise virtual currencies as a “legal tender” was recognised by the US Supreme Court in “California Bankers’ Associations v. Shultz”, whereby, it clearly laid down the definition of currency and stated that for any monetary instrument to fall within its ambit, two criterion must be fulfilled; firstly, its circulation and customary usage and, secondly, its acceptance in the country where issued. Since the bitcoin was not issued and sanctioned by the concerned US authorities, it was not accepted as a legal instrument for the transaction purposes. A similar position was opted by the US Supreme Court in “Wisconsin Central Ltd. v. United States”, wherein it clearly stipulated that for a monetary instrument to be accepted as a legal tender, it has to fulfil the criteria of being socially acceptable and must be classified as a form of money as per either of the statutory provisions.
But the Sherman Division Eastern District Court of Texas in the case of “Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust” adopted a more holistic and pragmatic approach in recognising transactions involving cryptocurrencies and opined to surpass the essential requirement of such currencies being legal tender; an approach which made the courts to view them in terms of their convertibility and the consensus of the parties carrying out trade in them. It stipulated that virtual currencies fall within the ambit of money and they are only traded in limited markets and their use is restricted to places which accept them as a currency. The days after, the US Supreme Court in “Commodity Futures Trading Commission vs My Big Coin Pay, Inc.” ruled that the virtual currencies fall within the ambit of a commodity because as per the Commodity Exchange Act, it is clearly stipulated that for an asset to qualify as a commodity, there must be trading at a future date and the virtual currency is traded undisputedly in the commodities market. From the two US rulings, it is evident that how the differentiated views have put the courts in a dilemma to ensure which codes would regulate the trading and dealing in virtual currencies. The uncertainty and confusion to classify and categorise virtual currencies and the risks associated thereof, is the sole reason, why RBI has repeatedly declined to recognise them as a legal tender and making all the business entities and consumers to discourage their use. An analogy could be drawn with respect to the contention raised by the RBI and other instruments of money exchange that act in tandem to virtual currencies. § 2(h) of the Foreign Exchange Management Act, 1999 lays down the definition of money and stipulate “other similar instruments”. The expression is open enough to interpret “monetary instruments” as promissory notes, cheques, bills of exchange, etc. which don’t per se fall within the ambit of “currencies” but their continuous use over time has made them to be recognised as a legal medium of exchange; often used by the parties to discharge their contractual obligations towards each other.
§ 10 of the Indian Contract Act 1872 lays down the definition and essentials of a contract. The definition doesn’t specify the type of agreements that would be classified as contracts and is open to the widest possible interpretation and thus also covers the smart contracts as legal contracts entered between the parties. A smart contract, as defined by Nick Szabo, is one governed by a set of rules and data protocols for transferring the information using the mathematical algorithms so that a transaction is automatically executed once the said conditions are met and fulfilled on the part of both the parties to such contract. The essential ingredients of a smart contract are same as that of a traditional contract and are governed by § 2(d) of the Indian Contract Act, 1872, but the element of consideration has a totally different notion. Consideration in smart contracts is in the form of virtual currencies such as Bitcoin, Ethereum, Litecoin, etc., functioning of which is governed by the blockchain technology. Though, the Indian Contract Act doesn’t stipulate any particular definition of consideration but the English laws in the prominent case of “Currie v Misa” has defined it as something which is considered to be of some value in the eyes of law in the form of some interest, profit, benefit right accruing to any one party or some loss, responsibility given by the other. Though the Supreme Court ruling has provided a sigh of relief to all the corporations involved in trading through the use of virtual currencies, the absence of any regulatory framework to govern such transactions acts as a major deterrent. The creator of a well-known virtual currency (Ethereum) explained the exchange of consideration in the form of crypto assets/ currencies from one party to the other.
Though the virtual currencies are being used as a form of money, they aren’t still being recognised as a currency for exchange purposes, carrying out transactions, sale and purchase of goods and services, etc. Bitcoin being a global currency and a universal method of payment, has no fixed value and suffers with the price volatility due to the fluctuations in the foreign currency exchange markets; thus, creating an apprehension in the minds of the contracting parties and thereby discouraging it use. In case of dispute arising between the contracting parties (traditional contracts), it is a general perception that the laws of that country would apply where such tangible property is situated because it is assumed that the property is easily identifiable and the laws of that jurisdiction are competent enough to determine such property/ asset issues because of its control over the same. This is not the situation in case of virtual/ crypto currencies because they being intangible and having no centralised authority to regulate their affairs, it has become absolutely impossible to determine the set of rules and laws that would be applicable in case the dispute arises between the contracting parties.
The lack of a proper regulatory and compliance mechanism in the Indian Codes to effectively deal with the contractual disputes involving virtual and crypto currencies as a form of consideration is the sole reason why dealing in such currencies is in the grey areas, thereby, posing a question on their lawfulness, besides being categorised as legal.