22 International Company and Commercial Law Review

Government. However, bitcoins cannot be guaranteed as

The Dawn of the such by the government since they do not have any
physical form and legal backing. A cryptocurrency does
Digital Currency Era: not require a central clearing house,4 unlike
government-issued currency. This article attempts to
A Global Analysis of highlight the issues at hand with regard to the treatment
of bitcoins under the legally binding norms of various
Bitcoin and its jurisdictions, and presses for bringing in homogeneity in
the legal structures of the jurisdictions for the smooth
Implications in India flow and trade of bitcoins.

Samraat Basu Understanding virtual currency schemes

* Broadly speaking, there are three virtual currency
Sayan Basak
keywords to be inserted by the indexer
Introduction
There is a common confusion between virtual currency
and electronic fund transfers. It is important to understand
the difference between the two. In the latter, funds which
are stored in a bank in the form of traditional currencies
such as the euro, INR or the US dollar are transferred
from one bank account to another through electronic
means.1 These traditional currencies are associated with
an established government body that issues or guarantees
them, and they have a legal foundation. However, in a
virtual currency there is no central authority or
government body that issues or guarantees it.2 Further, it
has no legal foundation.3 The main concern that is acting
as a hindrance in placing Bitcoin within the legal
framework of a particular jurisdiction is the inability to
determine its functional perspective. It can be termed as
a currency, a commodity or a payment system, which will
attract different laws, thus creating a heterogeneous
system within a defined legal structure. Bitcoin, being a
cryptocurrency, can seriously affect the digital legal
framework of a country. It can easily bypass the weak
legal structures of poor countries and might have an
ominous impact on the economy of such countries.
Therefore, it becomes important for us to understand how
a virtual currency functions if there is no one to guarantee
it. On any INR note you will see that it is clearly written
that that particular note is guaranteed by the Central
schemes, categorised under “open-flow”, “closed-flow”
and “hybrid-flow” schemes.5 In the open-flow scheme,
government-backed funds can be converted into virtual
currency, which can be used on virtual or real platforms.6
They can also be reconverted into traditional currency.
This form of currency is quickly gaining followers.7
Bitcoin is an example of an “open-flow” system.8 A
“closed-flow” scheme refers to a scheme of currency in
which traditional money can be converted into virtual
money and can only be spent in that virtual environment.9
It cannot be re-converted into traditional currency. A
popular example would be buying coins or gold in a
gaming application such as Shadow Fight to purchase
in-game items such as swords and enchantments. Lastly,
in the “hybrid-flow” system, traditional currency can be
converted into virtual currency which can be used to
purchase goods and services in both the virtual and real
environments.10
The Bitcoin universe
Bitcoin is a cryptocurrency11 or virtual currency that does
not have legal backing. It exists in a system of
peer-to-peer virtual network of nodes. Bitcoin may be
defined as
“a chain of transactions between members of a
virtual network that achieves, or is attributed value
through or as a result of, the verification of the
bitcoin’s transaction history”.12

*
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
acceptance of the currency in exchange for goods or
services of a certain value.13
An internet currency or a currency which is used in the
virtual world is a type of online money which is accepted
as a means of exchange in the virtual world.14 The origin
of Bitcoin can be traced to a paper entitled “Bitcoin: A
Peer-to-Peer Electronic Cash System” by Satoshi
Nakamoto.15 The purpose of Bitcoin was to reduce the
cost of transactions by removing the third-party
intermediaries who facilitate transactions.16 To that end,
the Bitcoin system enabled a self-regulating e-exchange
between members of the online community in which each
member verifies the authenticity of every transaction
without relying on banks, payment facilitators, payment
processors or any other third-party intermediary.17 It was
thought that a purely peer-to-peer version of electronic
cash would allow online payments to be sent directly
from one party to another without going through a
financial institution.18 The creators of bitcoins felt that
the transaction cost could be reduced with the help of
such a currency where there would be no need of any
mediator. In the words of Satoshi Nakamato, “with
e-currency based on cryptographic proof, without the
need to trust a third party middleman, money can be
secure and transactions effortless”.19 The need for bitcoins
was seen as they offered more protection to buyers as
well as to sellers. The transactions that were
computationally impractical to reverse would protect
sellers from fraud, and routine escrow mechanisms could
easily be implemented to protect buyers.20 The creators
of bitcoins also offered a pragmatic solution to the
double-spending problem. The need for programmable
cash arose from people’s experiences of thefts of physical
currencies and frauds on internet banking.21 This creation
ensured that anyone and everyone could have a “bitcoin
wallet” and have petty cash which would be charged to
their browser. The decentralised ledger system of this
payment system facilitated the use of bitcoins in “smart
contracts” and other contracts requiring trust between the
two transacting parties.22 The other factors that contributed
to the inception and development of this concept were
the need for greater privacy, self-governance and the
riddance of a debt-based currency. However, there are
two sides to every coin, and although bitcoins provide
greater privacy, they have posed the threat of illegal
anonymous transactions through various proxies to
obfuscate users’ IP addresses23 and tumbler software to
render transactions obscure.24 This anonymous nature of
the internet may also provide a platform for nefarious
activities such as arms sales, drug dealing,25 human
trafficking and money laundering.26
The internal mechanics of the mega
cryptocurrency—Bitcoin
Bitcoin has no physical existence and it is completely
electronic in its existence.27 It exists as a computer file
which is possessed by the owner.28 The transfer of the
currency involves an e-transfer of the electronic file
between the owner and the recipient of the bitcoins.29 An
essential software to obtain bitcoins is Bitcoin Mangement
Software30 which helps you connect to the Bitcoin network
of connected peer-to-peer computers called nodes.31
According to this system, an electronic coin is defined as
a chain of digital signatures.32 Each bitcoin is subdivided
down to eight decimal places, forming 100,000,000
smaller units called satoshis. The “blockchain” is a shared
public ledger on which the entire Bitcoin network relies,
while a transaction is the exchange of value between
bitcoin wallets.33 Transactions let users spend satoshis.
Each transaction is constructed out of a number of parts
which enable both uncomplicated direct payments and
compound transactions.34 Bitcoin wallets keep a secret
piece of data called a private key or seed, which is used
to sign transactions, providing a mathematical proof that
they have come from the owner of the wallet. All definite
transactions are included in the block chain. Each and
every program contains the history of all Bitcoin transfers,
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.

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24 International Company and Commercial Law Review

bitcoin transactions as Bitcoin is a system which does not
have a central authority. Therefore, all these transactions
are verified using the blockchain. This provides a
time-stamped record of all confirmed transactions as well
as modifying to the preceding transactions. A single
transaction can spend bitcoins in manifold outputs, as
would be the case when sending satoshis to multiple
addresses, but each output of a particular transaction can
only be used as an input once in the blockchain.36
Transfer of bitcoins
The entire process of transferring bitcoins starts with the
initial file that contains the bitcoin which is in the
possession of the owner. This file that stores the bitcoin
is known as the “wallet”.37 A simpler way to visualise the
wallet is to imagine a certain space in the computer which
is used to store bitcoins. To transfer bitcoins, every wallet
has two cryptographic keys, one of which is private and
the other which is a public key.38 The public key is the
address of the wallet to which bitcoins are sent or from
which bitcoins are received. This aids in increasing
transparency as it allows all users to trace prior bitcoin
transactions. To transfer bitcoins, the process is to add a
hash, the amount of the transfer and the transferee’s public
key.39 The private key is used for authorisation and
verification of every transaction. The transfer is signed
by the sender’s private key and authorised. Once verified,
the transaction is time stamped and cemented.40 It is then
transmitted to the entire network of nodes.41 However,
the public key does not disclose the owner’s personal
identity; therefore, it is a completely anonymous system.
Eventually, the transaction is recorded and becomes a
part of the blockchain, and collectively the twin engines
of transaction information and time stamp help in the
verification of each transaction, which is critical in
ensuring the credibility of the Bitcoin system.
Creation of bitcoins—understanding the
concept of virtual mining
Bitcoins are not a discovery; they are essentially a
computer program which has been created. In order to
mine or create new bitcoins, extremely complex
verification puzzles are required to be solved by the
“miner”. Mining is a distributed consensus system that
is used to confirm waiting transactions by including them
in the blockchain. It enforces a chronological order in the
blockchain, protects the neutrality of the network, and
allows different computers to agree on the state of the
system. The mining of bitcoins is, in a nutshell, the
processing of Bitcoin transactions and the updating of
the blockchain. In addition to archiving transactions, each
new ledger update creates some newly minted bitcoins.
An individual or a group of individuals have to create
and run software that matches the cryptographic
information of all current and previous transactions on a
blockchain.42 These puzzles have numerous solutions;
therefore a significant amount of computing power needs
to be used by each node to find a solution. Further, there
is an inbuilt variable that is adjusted in order to make the
task of solution discovery either easier or more difficult.43
Finally when the software finds the solution by correctly
matching the information, this is forwarded to the entire
network as part of the new blockchain.44 Then the network
either rejects or approves the solution to the puzzle.45 If
the solution is approved, it is accepted as part of the
blockchain. This process is known as bitcoin mining, as
this is the method through which new bitcoins can be
entered into circulation.46 The individual network
members who undertake this difficult task and emerge
successful are rewarded.47 The reward for block
verification commences at 50 bitcoins, with this amount
being halved every time 210,000 blocks are verified.48 It
is projected that in the year 2140, all bitcoins would have
been mined and introduced into the system.49 At that time
no more bitcoins will be added into circulation and the
total number of bitcoins will have reached a maximum
of 21 million.50 Thus, bitcoin mining is limited to a certain
period and number.
The advantages of using
cryptocurrencies
The absence of a central authority has certain positive
consequences, the most important being the reduction in
transaction costs since bitcoins can be verified
independently by miners. This also allows for freedom
of payment, and grants a certain degree of autonomy to
the user himself. The signature system also prevents the
transaction from being altered by anybody once it has

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.

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 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
not regulate them.66 In the UK, HM Revenue & Customs
(HMRC) has categorised virtual currencies as assets or
private money, reversing the earlier ruling which
classified the virtual currencies as gift vouchers.67 Income
generated from bitcoin mining activities will not attract
Value Added Tax (VAT) since they will not constitute
an economic activity for VAT purposes. Bitcoins
themselves will not be subjected to VAT when exchanged
for foreign currencies. Moreover, income generated by
activities incidental to the mining of bitcoins by bitcoin
miners will be covered under the exemption provided
under art.135(1)(d) of the EU VAT Directive.68 These
incidental activities will be covered under art.135(1)(d),
which provides exemption to “transactions, including
negotiations, concerning deposit and current accounts,
payments, transfers, debts, cheques and other negotiable
instruments”. Thereby, this implies a direct exemption
of VAT on digital currency transactions in the UK.
However, France is one of the noteworthy dissidents
with regard to the Bitcoin in terms of its regulation.
France’s central bank issued a report that states “that the
bitcoin cannot be considered a real currency or means of
payment under current French laws, and criticizes it as a
vehicle for speculation as well as an instrument for money
laundering and other illegal activities”.69 The report
proposes that bitcoin-to-fiat transactions should be limited
to French authorised payment service providers, therefore
reducing the risk of money laundering and fraud.
While there are some countries like the US, Australia70
and Canada71 that have specified laws and regulations to
supervise onshore transactions and exchanges of bitcoins,
their regulatory powers are also limited when it comes to
offshore services. The Financial Crimes Enforcement
Network of the US took on itself the onus of regulating
Bitcoin services, and chose to employ a selective method
of determining the legality of transactions.72 The legal
considerations depend on the threefold categorisation
provided by the network. The stakeholders are, namely,
the user, the miner and the exchanger.73 The user is the
one who hoards bitcoins and uses them to make real or
virtual purchases. Such users are not subject to any
regulations, as opposed to the miners who are classified
as money transmitters and are liable to face the legal
consequences of the irregularities in transactions. The
Internal Revenue Service of the US, in March 2014, made
its position very clear by declaring Bitcoin to be
“property” and not a currency, and therefore tax policies
would be irrevocably enforced.74 Bitcoins are to be treated
as property and would be subject to tax as ordinary
income or subject to capital gains tax as on assets. This
treatment of Bitcoin as property implies that the wages
paid to the employee are taxable and are subject to federal
income tax withholding and payroll taxes. Payments made
to independent contractors and service providers using
virtual currency will be taxable, and self-employment tax
rules will apply.75
The EU released a clear warning notification to its
Member States in December 2013, warning them of the
risks of tax evasion, fraud and misuse that threaten the
legal implementation of virtual currency.76 It emphasised
the irretrievability of consumer funds, and the lack of
legal enforcement agencies to safeguard Bitcoin
consumers.
Indian perspective
India had adopted a very non-commital stand towards the
issue of bitcoins, until December 2013,77 when the apex
banking authority, the Reserve Bank of India, released a
warning to the major exchanges, cautioning them of
malware attacks and security-related risks, to the effect
that several notable exchanges even suspended all virtual
currency transactions.78 But several experts have noted
that market demand for trading in bitcoins has not
diminished much, a lot of which can be attributed to the
entry of new Bitcoin operators such as Unocoin and
BitQuick.in.79 Bitcoins have not yet been legitimised, and
continue to have the legal status of an unauthorised
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].

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 The Dawn of the Digital Currency Era: A Global Analysis of Bitcoin and its Implications in India 27
of code generated by computerised devices, as per the
legal nomenclature, they would be “computer programs”.80
But virtual transactions using bitcoins cannot be governed
by the same laws as would transactions using real money.
Bitcoin as a currency
The Foreign Exchange Management Act 1999 has defined
currency to include
“all currency notes, postal notes, postal orders,
money orders, cheques, drafts, traveler’s cheques,
letters of credit, bills of exchange and promisory
notes, credit cards or such other instruments as may
be notified by the RBI”.81
Therefore, bitcoins do not fall under the conventional
definition of currency or real money or extension of real
money.
Section 26 of the Reserve Bank of India Act 1934
provides that a bank note issued by RBI is to be
considered as a legal tender. There is no definition of
legal tender under Indian law. A bank note issued by RBI
is termed as legal tender. Since bitcoins are not issued as
bank notes by the RBI they will not fall under the ambit
of legal tender. Section 2(i) of FEMA defines currency
notes as coins and bank notes. Bitcoins as such are not
included within the definition; therefore, it is clear that
bitcoins are not a currency.
Bitcoin as a payment system
Section 2(i) of the Payment and Settlement Systems Act
2007 provides that “payment system means a system that
enables payment to be effected between a payer and a
beneficiary, involving clearing, payment or settlement,
service or all of them, but does not include a stock
exchange”. In India the RBI controls the payment system
through the above Payment and Settlement Systems Act
2007. In India, although Bitcoin is a peer-to-peer payment
system, it does not have the authority to settle the payment
between the payer and the beneficiary in India as provided
by the Payment and Settlement Systems Act 2007.
Moreover, since bitcoins can be created through the use
of software, they will not fall under any of the three
permitted categories of prepaid systems in India. These
systems consist of “open”, “closed” and “semi-closed”
payment instruments.82 Under the statute, the issuer can
only be a bank, NBFC or a person. Since the software
cannot be regarded as a person, bitcoins issued by
software cannot be classified as a pre-paid payment
instrument.
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].
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Bitcoin as a commodity
Bitcoin can be termed as a good as defined under Sale of
Goods Act 1930. Section 2 defines “good” as
“[e]very kind of movable property other than
actionable claims and money; and includes stock
and shares, growing crops, grass and things attached
to or forming part of the land which are agreed to
be severed before sale or under the contract of
sale”.83
Moreover, in Tata Consultancy Services v State of Andhra
Pradesh,84 the Supreme Court held that:
“Computer Software is Intellectual Property whether
it is conveyed in diskettes, floppies, magnetic tapes
or CD-roms, whether canned (shrink-wrapped) or
uncanned (customized), whether it comes as a part
of a computer or independently, whether it is
branded or unbranded, tangible or intangible; is a
commodity capable of being transmitted, transferred,
delivered, stored, processed etc. and therefore as a
‘good’ liable to sales tax.”
Therefore, Bitcoin, being intangible in nature, can fall
under the ambit of the term “goods”.
As discussed above, bitcoins are neither a currency nor
legal tender. Rather, under law, they can only be treated
as goods, and the transfer of bitcoins can be said to be a
barter exchange.
Income tax treatment of
Bitcoin—proposed
The taxation and regulation of the creation of bitcoins
and other similar virtual cryptocurrencies is not governed
by any formal statute or legislation. This raises vital
questions about the treatment of Bitcoin within the
existing tax regime. How should Bitcoin be taxed? Should
it be taxed at all? If it is to be taxed, what should be the
taxation procedure or treatment? Currently, there is no
formal legislation which addresses income tax reporting
requirements associated with virtual cryptocurrencies,
such as Bitcoin, which raises important questions in
relation to the treatment of Bitcoin within the current
existing tax regime. There are numerous challenges which
face the 21st-century phenomenon of cryptocurrencies.
An example of one such challenge would be the fact that
a significant number of Bitcoin transactions are
anonymous; there are higher risks with regard to income
tax compliance as compared with traditional currencies.
In fact, Bitcoin in particular and cryptocurrencies in
general have the potential to be used for tax evasion.
28 International Company and Commercial Law Review
Cryptocurrencies such as Bitcoin are an effective tool
for evading taxes. This is for two most important reasons.
Primarily, bitcoins are not limited to any particular
jurisdiction and therefore are not subject to tax in the
source jurisdiction. Secondly, the transactions in bitcoins
are anonymous. Moreover, the operation of Bitcoin is not
dependent on the existence of financial intermediaries,
which makes it more difficult for the authorities to find
out the point of taxation.
As India embraces and embarks on the future with
plans of internet-connected smart cities,85 addressing the
issue of Bitcoin taxation increases with each passing year.
We are already aware of the immense problem of black
money that India already faces; it is only a matter of time
before tax-evaders start using the Bitcoin route to stash
unaccounted wealth. This demonstrates the rising concern
for a clear formal guidance for the taxation of Bitcoin.
Owing to a lack of established laws on the taxation of
virtual currencies, we have to look at the various taxation
structures already in place so that bitcoins can be treated
under a particular head of income tax.
Proposed taxation of income from bitcoin
mining
Every government has the sole statutory right to issue
currency notes for their respective jurisdictions. Unlike
the earlier system, in which only the government had the
power to create currency, Bitcoin users have the potential
to mine bitcoins and bring them into circulation. There
is no requirement for governmental interference. This
also undermines the statutory authority of the Reserve
Bank of India to create legal tender under the RBI Act
1934.86 This creates a unique taxation dilemma with regard
to the taxation of the creation of bitcoins.
One such method could be accession to wealth by
successfully solving the Bitcoin puzzle. Bitcoin mining
is a process which creates an intangible and scarce asset.
The bitcoin miner eliminates the role of the Reserve Bank
of India, as now the miner creates the currency and claims
ownership of the created bitcoins. When there is a creation
of value, the net worth of an individual increases.
Therefore, there is an “accession to wealth”.87 In
Commissioner v Glenshaw,88 the US Supreme Court held
that income includes “undeniable accessions to wealth,
clearly realized, and over which the taxpayers have
complete dominion”. Under this rule, three elements must
be satisfied to trigger a taxable event: a taxpayer must
experience an increase in net worth, a taxpayer must have
control over the new value, and there must be a realisation
event.89
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).
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We can take an example from Leonardo di Caprio’s
film Blood Diamond, in which the story revolved around
the diamond business, specifically the mining and
smuggling of diamonds.90 Imagine a person who is mining
for diamonds in order to earn money by selling the
diamonds. He puts in months of research, survey and
labour. He probably employs a few people to help him
find the diamonds. Finally, he unearths the diamond
which he is later able to sell for a profit. This situation is
akin to that of the bitcoin miner. The bitcoin miner also
employs labour and effort to mine bitcoins exactly like
the diamond miner. After considerable effort, he is
rewarded with a new set of limited bitcoins. Subsequently,
with regard to taxation of bitcoins, they can be taxed when
he sells the bitcoins for traditional currency, goods or
services. Therefore, it is proposed that Bitcoin should be
treated as a capital asset and taxed under the head income
from capital gains when initially mined income is put into
circulation. Following this, the transfer of bitcoins for
payment of goods or services should be treated as any
legal currency and taxed accordingly.
According to s.2(13) of the Income Tax Act 1961,
business “includes any trade, commerce or manufacture
or any adventure or concern in the nature of trade,
commerce or manufacture”. Section 28 of the Act is the
charging section, which taxes the profits and gains of any
business or profession carried on by the assessee.
Therefore, it can also be taxed under the purview of
business income in cases where bitcoin mining acts as a
source of business for the miners. Further, service tax
cannot be imposed on the transfer of bitcoins since service
tax is not applicable to the transfer of goods. However,
if the transfer of bitcoins is included in the meaning of
the word “service”, then it can also be taxed as such.91
This aspect of taxation is in consonance with the domestic
law. Internationally, taxation on income is governed by
the various bilateral tax treaties signed between the
countries.
International taxation
Bitcoin is recognised as a global currency and traded
across various jurisdictions globally. Hence, a uniform
concept of taxation should be drawn up in order to tax
the cross-border transactions which are undertaken by
using the global currency. The guidelines regarding
taxation that are followed globally are laid down in the
OECD MC 2011.92 Countries have incorporated these
guidelines in their treaties. Article 13 of the OECD MC
2011 deals with capital gains arising from the transfer of
capital assets (movable and immovable) from one
 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
Therefore, it is proposed to insert the concept of bitcoins
into the above-mentioned article since, as has already
been discussed, bitcoins can be treated as a capital asset
in the hands of the owner and any gain arising out of the
transfer of such bitcoins shall be treated as a capital gain.
Inserting this provision into the convention will assist in
tackling the lacuna of taxing transactions in bitcoins.
Conclusion
Virtual economies continue to grow at an exponential
rate. Countries around the world are grappling with the
new challenge of Bitcoin taxation. As each month passes
by, bitcoins continue to create novel legal problems for
the legislators of various jurisdictions.
In today’s global economy, there is a genuine need for
cryptocurrencies. Banning such an idea at this stage of
infancy would be a counterproductive move, knowing
that its scope has not yet been discovered as it has only
demonstrated a fraction of the benefits of using such a
currency. Hence, an alternative that would allow some
regulatory help to the Bitcoin should be developed,
instead of banning it entirely. Therefore, the creation and
exchange of bitcoins in all forms of systems should entail
tax consequences. This will enable governments to
increase their revenue sources and ensure that there is
regulation of this cryptocurrency. There is explosive
growth of this unique currency all around the world, and
it will continue to grow as the internet and technology
continue to penetrate throughout the country. The legal
grey areas enveloping the viability of bitcoins can be
easily eliminated through legal entrepreneurship, which
is already on the rise, whether it be tax regulations, or
multi-signature agreements. Hence, we need to act
immediately and effectively in order to sufficiently
address this modern economy.

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].

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