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Cryptocurrency: A Legal Perspective On A Misunderstood Technology – Fin Tech


The increasingly widespread adoption of cryptocurrency and
blockchain technology signals the onset of a new technological
revolution. As a result, governments around the world are
scrambling to understand and regulate cryptocurrencies and
blockchain technology. Some countries like Singapore, Japan, and
Switzerland have already enacted legislations promoting the use and
adoption of cryptocurrencies and blockchain technology alike1. In
contrast, India is yet to formally introduce any legislation
governing the use and adoption of cryptocurrencies. However, the
Reserve Bank of India has previously imposed a ban on the trading
of cryptocurrencies2 (now lifted by the Supreme Court3), and
the Indian government is in the process of publishing the draft
Cryptocurrency and Regulation of Official Digital Currency Bill,
which would, supposedly, prohibit the usage and trading of
cryptocurrencies outright but permit and promote the use of the
underlying blockchain technology.

Despite their name, the characteristics of cryptocurrencies are
closer to an asset like gold rather than fiat money, owing to their
popular adoption as a store of value. Cryptocurrency maximalists
argue that it is an effective hedge against inflation, owing to its
decentralised nature and limited supply. Incidentally,
cryptocurrency, much like gold, is speculative in nature and
derives its value from the market forces of supply and demand.
Therefore, the similarities between cryptocurrencies and a physical
asset like gold have given rise to a popular school of thought that
views cryptocurrencies as an entirely new asset class. It follows
then that, ideally, the law should not differentiate between the
possessor/ owner of cryptocurrencies and the owners of any other
conventional asset. However, at this juncture, the pertinent
question to be answered is whether cryptocurrencies fall under the
ambit of existing legislations that govern existing asset classes
or if new legislations need to be enacted to classify and govern
cryptocurrency as a new asset class.

But what are cryptocurrencies? Where do they derive their value
from? Can they be regulated? If so, how? The answers to these
questions will determine the nature of cryptocurrencies and serve
as our basis for attempting to predict the legislative treatment
cryptocurrencies may receive.

Cryptocurrency & Blockchain

Cryptocurrencies are a digital representation of value (i.e.,
virtual currencies) that use cryptography and specific mathematical
algorithms to encrypt information that can only be deciphered by
someone who possesses a secret digital key.5 They are also
decentralized, meaning there is no central authority where records
of transactions are maintained. Instead, transaction data is
recorded and shared across multiple distributor networks, through
independent computers. This technology is what is known as
blockchain – a type of “distributed ledger technology”
that can record and share data across multiple data stores
(ledgers), each of which have the exact same data records
and are collectively maintained and controlled by a distributed
network of computer servers, which are called nodes.6 It is
important to draw a distinction between cryptocurrencies and
blockchain technology, especially in terms of the regulatory
framework applicable to them. While cryptocurrencies employ
blockchain technology, blockchain technology itself has numerous
possible uses, independent of cryptocurrencies.

With the basic distinction between cryptocurrencies and
blockchains established, we can now attempt to identify a suitable
legal definition for cryptocurrencies based on the legal framework
currently existing in India.

Can Cryptocurrencies be regulated as a Currency?

In India, and around the world, numerous businesses have begun
accepting Bitcoin (the world’s largest cryptocurrency by
market capitalization
) as a form of payment, despite the
regulatory uncertainty surrounding the technology.7 Generally speaking,
a “currency” is a medium for the exchange of value
between two parties, i.e., goods and services on one hand and
payment for said goods and services on the other. However, to
ascertain whether cryptocurrencies qualify as legal tender or a
valid payment system in India, we must look to the legislations
enacted by the India in this respect. These are: (a) Reserve Bank
of India Act, 1934 (“RBI Act“); (b)
Foreign Exchange Management Act, 1999
(“FEMA“); (c) Coinage Act, 2011
(“Coinage Act“); and (d) Payments and
Settlement Act, 2007 (“PSSA“).

Section 2(h) of FEMA defines currency to include
currency notes, postal notes, postal orders, money
orders, cheques, drafts, travellers’ cheques, letters of
credit, bills of exchange and promissory notes, credit cards or
such other similar instruments, as may be notified by the Reserve
“. Further, “foreign currency” has been
defined in Section 2(m) of FEMA to include any ‘currency’
other than Indian currency. Similarly, Section 26 of the RBI Act
states that “every bank note shall be legal tender at any
place in India in payment, or on account for the amount expressed
therein, and shall be guaranteed by the Central
“. As per Sections 24 and 25 of the RBI Act,
the Central Government, after taking into account the
recommendations of the RBI, has the power to specify the
denomination, form and substance of such bank notes, with RBI being
the sole issuer of such bank notes. Likewise, Section 6 of the
Coinage Act affords the status of legal tender to only those coins
which are (a) made of metal or a material approved by the
government8; and (b) minted by an organisation
and place authorised to do so by the Central Government, in the
manner and dimensions prescribed by the Central Government.

In India, payment systems relating to electronic funds are
regulated by the PSSA, which unlike legislations in other
jurisdictions, does not define the terms “digital
currency” or “virtual currency” despite the now
normalised use of “in-game currency” in video games which
facilitate in-game purchases by users. In 2002, however, the RBI
issued a report9 which defined electronic money as
an electronic store of monetary value on a technical
device used for making payments to undertakings other than the
issuer without necessarily involving bank accounts in the
transaction but acting as a prepaid bearer instrument”
While the aforesaid definition is wide enough to seemingly apply to
cryptocurrencies, Section 2(i) of the PSSA defines a payment system
as “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
“. If we apply the aforesaid definition to a
simple cryptocurrency transaction, where the
two parties involved in the exchange of value are the payer and
beneficiary, and the mining of blocks to validate the transaction
between these two parties, this effectively serves as a clearing
mechanism which triggers the settlement upon which the funds in
question are then transferred from one party to another. If the
Central Government were to adopt a similar view and a desire to
regulate cryptocurrencies as electronic money, it would have
consequential implications for such currencies in terms of the PSSA
including inter alia requiring them to register themselves
with the RBI, incorporation of an entity in India and compliance
with various anti-money laundering and
“know-your-customer” regulations, which, presently, are
not mandatorily applicable to cryptocurrencies.

Taking the above into account, it is clear that for a
‘currency’ to be considered a valid payment system and/or
legal tender in India, it must receive the assent of the Central
Government and RBI, something which cryptocurrencies currently
lack. This does not mean that using and trading in cryptocurrencies
are ipso-facto illegal or prohibited in India; rather, it
means that cryptocurrencies like Bitcoin will continue to exist
outside of the purview of the Indian banking system and RBI’s
mandate until they are guaranteed by the Central Government or a
notification is issued bringing them under the purview of the

Can Cryptocurrencies be Regulated as a Security?

The advent of cryptocurrency exchanges in India, and around the
world, validates the view held by many that cryptocurrencies are
actually a form of investment. However, in classifying
cryptocurrencies as an investment, it is important to determine
whether cryptocurrencies and crypto exchanges can be brought under
the purview of the Securities and Exchange Board of India
(“SEBI“). This is where Initial Coin
Offerings (or “ICOs“) come in, a
relatively recent phenomenon adopted by players in the blockchain

ICOs serve as a fundraising mechanism where digital tokens
(i.e., coins) are issued by an entity (usually a body corporate) in
exchange for fiat currency, or cryptocurrencies such as bitcoin or
ether10, which once issued can be traded
on cryptocurrency exchanges. These digital tokens often represent a
utility (known as utility tokens) and can be used by the recipient
to access products and services within the blockchain ecosystem
designed and implemented by the issuer. More recently, the types of
tokens being issued by these blockchain companies has increased
manifold, with the emergence of ‘security tokens’ being one
such development. Security tokens are on-chain instruments serving
a similar purpose for blockchain projects and/or digital assets
that traditional securities serve for companies, for instance: (a)
recording an ownership interest; or (b) serving as evidence of a
debt; (c) offering a right to a share of earnings; (d) a right in
property distribution, or other similar legal rights.11

But what constitutes a security under Indian laws? Can ICOs be
regulated in the same way that initial public offerings
(“IPOs“) are? In this regard, section
2(h) of the Securities Contract (Regulation) Act 1956
(“SCRA“) may be referred, which provides
for an inclusive definition of securities:

i. shares, scrips, stocks, bonds, debentures,
debenture stock or other marketable securities of a like nature in
or of any incorporated company or other body corporate;

ia. derivative;

ib. units or any other instrument issued by any collective
investment scheme to the investors in such schemes;

ic. security receipt as defined in clause (zg) of section 2
of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002;

id. units or any other such instrument issued to the
investors under any mutual fund scheme;

ie. any certificate or instrument (by whatever name called),
issued to an investor by any issuer being a special purpose
distinct entity which possesses any debt or receivable, including
mortgage debt, assigned to such entity, and acknowledging
beneficial interest of such investor in such debt or receivable
including mortgage debt, as the case may be;

ii. Government securities; and

iv. rights or interests in securities

The Supreme Court has previously held12 that
“marketable securities of a like nature” means that the
securities should be freely transferrable and/or capable of being
sold. Therefore, while tokens or coins may not fall within the
definition of “shares, bonds, stocks, scripts, or
debentures”, they may still be classified as a security and
fall within the jurisdiction of SEBI if the tokens are issued by a
body corporate / incorporated company and are “capable of
being sold”. Further, a body corporate, as defined under the
Companies Act, 2013 includes a company incorporated outside India13.

There is also a plausible case to be made for ICOs and
cryptocurrencies to be interpreted as an “investment
contract” or “collective investment schemes”. In
Paramount Bio-Tech Industries v. Union of India14,
the division bench of Allahabad HC utilised the Howey Test to gauge
whether an instrument was a “collective investment
scheme” (“CIS“). The Howey Test,
established by the U.S. Supreme Court15 to determine the
existence of an investment contract, prescribes four conditions
which must be satisfied for an existing arrangement to be
interpreted as an investment scheme: (a) an investment of money;
(b) in a common enterprise; (c) with the expectation of profit; and
(d) to come significantly from the efforts of others. The statutory
definition of collective investment schemes given under Section
11AA of the Securities and Exchange Board of India Act, 1992
(“SEBI Act“) takes inspiration from the
principles established in the Howey Test. As per Section 11AA, a
CIS is one which involves contributions, or payments made by the
investors with a view to receive profits, income, produce or
property, which are then pooled and utilized solely for the
purposes of the scheme or arrangement. It is also essential that
the investment forming part of the scheme is managed on behalf of
the investors and that such investors do not have day-to-day
control over the management of the scheme or arrangement. While
some would debate if funds raised by an ICO are being utilised and
pooled solely for the purpose of the scheme or arrangement, there
is undoubtedly contributions being made by investors towards one
scheme or arrangement with expectation of profits and/or property,
over which they do not have day-to-day control or management. In
any event, the Central Government may even consider amending the
definition of a CIS to address the differences between a
traditional CIS and an ICO and thereby eliminate any ambiguities or
gaps which are likely to arise, should an unamended definition of
CIS be applied to ICOs or cryptocurrencies.

Are Cryptocurrencies Goods or Property?

The ‘transfer of property’ is defined as “an
act by which a living person conveys property, in present or in
future, to one or more other living persons, or to himself [or to
himself] and one or more other living persons; and “to
transfer property” is to perform such act
.” 16

Transactions involving cryptocurrencies could fall within this
definition as they satisfy the main ingredients required to qualify
as a transfer:

  1. any living person (which includes companies, association and
    body of individuals) which in a cryptocurrency transaction would
    mean the owner of such tokens; and

  2. in present or future, determines that such owner transfers
    cryptocurrency; and

  3. to one or more living person which would mean the receiver of
    the cryptocurrency in the transaction.

One may understand and analyse cryptocurrency as a property by
understanding some of the theories of property. The bundle theory
of property classifies property as an amalgamation of tangible and
intangible rights associated with it. This essentially includes all
the rights that are associated with such a property. As of today,
since cryptocurrency is not backed or recognised by the RBI or the
Government, it will not be classified as an asset under this theory
as no legal rights are vested with an individual owning
cryptocurrency. The exclusion theory classifies property based on
the right to exclude. This means that the owner of the property has
the exclusive right to dispose the same and exclude others of the
rights enjoyed by the owner. In the context of cryptocurrency,
owners have the exclusive right to dispose the property and thus it
may qualify as a property under this theory.

Cryptocurrencies may even be classified as a ‘good’.
Section 2(7) of the Sale of Goods Act, 1930
(“SGA“) reads “goods means
every 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”.

Cryptocurrency may fall under the meaning of movable property under
this provision. However, under this classification, cryptocurrency
cannot be used as consideration (excluding the instance when
transferring it in terms of monetary value). The rationale for the
same is provided under Section 2(10) of the SGA, which explicitly
states that ‘price‘ would mean the money
consideration for a sale of good. This means that the SGA
classification of cryptocurrencies as a “good” is
mutually exclusive from it being used as a currency/ price for
purchase of a good or service, i.e., classifying cryptocurrencies
as a good would disqualify the use of cryptocurrency as
consideration under a contract for provision of goods or services.
Therefore, it unlikely that cryptocurrency will be treated as a

Before legislating, analysing and comparing the characteristics
of cryptocurrencies to currency, security, property or goods, it
would be more pragmatic to recognise its diverse nature and refrain
from trying to shoehorn it into an existing asset class. Since,
‘asset’ is a broad term covering a lot of items of value,
the understanding of its basic features and comparing the same to
cryptocurrencies would provide a more suitable and comprehensive
legislation which would recognise the development and establishment
of a new asset class.

For example, ‘Capital Asset‘ as defined under
Section 2(14) of the Income Tax Act, 1961, would include
cryptocurrency like other speculative assets such as jewellery and
paintings. The speculative nature of cryptocurrency is also an
important reason for the Indian Government’s stance on
contemplating banning it. The Government’s view is that the
tremendous increase in value of certain cryptocurrencies is a
bubble that could lead to the public, especially retail investors,
losing a substantial portion of their monies. Despite the highly
speculative nature of cryptocurrency, it can be regarded as an
asset due to the similarities in its utility, basic functioning,
and characteristics with other assets. Some of the characteristics
cryptocurrencies share with physical assets (including currency,
security, goods and property) are:

  • Transferability: Cryptocurrency, just like
    gold or land can be transferred to another owner in exchange for
    something else.

  • Medium of Exchange: One should be able use an
    asset to facilitate the sale, purchase or trade of goods. Though
    this utility of a cryptocurrency has not reached the adoption
    levels of fiat money, in the not-so-distant future it may well be
    used as any other currency/money issued by governments across the
    globe. Currently, most cryptocurrencies are used simply to trade
    other cryptocurrencies, with only Bitcoin and Ethereum being
    afforded the privilege of being exchangeable for fiat money or to
    purchase goods and services.

  • Extrinsic Value: The value of a cryptocurrency
    is determined by demand and supply. For example, the price of
    cryptocurrency can be related to price of a property or land, both
    are limited in supply and the price increases based on demand. The
    value of property too, many a times, is affected by the speculation
    of investors.

  • Exclusive Ownership: Property under the
    exclusion theory is the owner’s right to exclude others from
    the usage or enjoyment of the exclusive rights he possesses over
    it. Just like other traditional assets, cryptocurrency owners
    possess absolute rights over it (barring the exception of the
    State’s exercise of eminent domain over property, but as it
    stands it is difficult to say whether the State would be able to
    exercise such a right over an individual’s cryptocurrencies,
    like it can, for example, with land).

If one is skeptical about the multi-faceted nature of
cryptocurrencies and their viability as a commodity or asset, the
recent sale of a tokenized artwork for $69 million17 will make them
reconsider. The digital art piece is the first of its kind to come
up for auction, owing to its classification as a non-fungible token
(“NFT“), which, simply put, means that
unlike cryptocurrencies which are fungible, i.e. any Bitcoin is
equivalent in value to any other Bitcoin, just like a dollar is
equivalent to any other dollar, non-fungible tokens are unique and
differentiated from one another, and capable of being bought and
sold just like any other token18. This relatively new concept of
issuing NFTs for art revolutionizes ownership of art and other
collectibles, as they are brought ‘on chain’ and therefore
are certifiable and indisputable as proof of ownership. Going
forward, such phenomena may be common and NFTs holding value may
even be used as collateral to obtain a loan. The use case for NFTs
may be unlimited as the value for the same may be backed by any
item, good or asset (in the instant scenario, the digital artwork).
Recent developments in the blockchain space have also given rise to
entirely new categories of cryptocurrencies: governance tokens,
platform tokens, stablecoins, utility tokens, security tokens, and
transactional tokens, each of which serve completely different
functions, offering their holders different rights and
entitlements, both in the blockchain ecosystem and the real

Cryptocurrencies & the ‘Currency’ Debate

All of the above further validates the view that
“cryptocurrency” is a buzzword, reflective of a host of
misconceptions held by society; attributable to a lack of clarity
and awareness on the underlying technology and its capabilities.
This technology is multi-faceted and can be utilised as a currency,
security, or asset. Thus, it is imperative that the Indian
Government resists the urge to legislate cryptocurrencies using a
broad-brush approach. Instead, one would hope for a
fundamentalistic approach from the Government, wherein it engages
with the industry stakeholders and attempts to understand the
implications of each use case before taking a stance either for or
against the widespread adoption of cryptocurrencies. There is a
real risk that misclassifying the technology or implementing
prohibitive legislation would restrict the promotion and
development of blockchain technology in India.

Without a doubt, stakeholders in the industry and the public in
general are anxiously awaiting the Indian Government’s proposed
legislation on cryptocurrency in India. Given India’s
population and potential to be one of the largest crypto-markets,
whatever decision the Government takes will have a massive impact
on the entire cryptocurrency community at large and will decide the
course, development, rights and reliefs associated with this
revolutionary technology in India. The upcoming cryptocurrency bill
will clearly indicate whether India will take a step forward, by
recognising and affording legal recognition to cryptocurrencies and
blockchain technology or fall behind allowing other nations to get
a head start in the game changing potential of blockchain
technology. A balance must be struck between regulating the more
negative aspects of cryptocurrencies like the possibility of
money-laundering, and lack of governance; and nurturing the
technological innovation cryptocurrencies will unquestionably bring


(Department of Economic Affairs, Ministry of Finance, New Delhi
India “Report of the Committee to propose specific actions to
be taken in relation to Virtual Currencies”, 2019)

2. Prohibition on dealing in Virtual Currencies
(VCs), Circular No. RBI/2017-18/154.

3. Internet and Mobile Association of India v.
Reserve Bank of India Writ Petition (Civil) No.528 of 2018.


5. World Bank Group (H. Natarajan, S. Krause and
H. Gradstein), “Distributed Ledger Technology (DLT) and
blockchain”, 2017, FinTech note, no. 1. Washington, D.C.,

6. ibid


8. Section 2 (a) of the Coinage Act, 2011

9. RBI’s Report of the Working Group on
Electronic Money dated July 11, 2002

(Department of Economic Affairs, Ministry of Finance, New Delhi
India “Report of the Committee to propose specific actions to
be taken in relation to Virtual Currencies”, 2019)


12. Bhagwati Developers Pvt. Ltd. v. Peerless
General Finance
(Civil Appeal No.7445 of 2004) reiterated in
Sahara India Real Estate Corporation Limited v. Securities and
Exchange Board of India
(Civil Appeal No. 9813 OF

13. Section 2 (11) of the Companies Act, 2013

14. (2004) 2 CompLJ 446 All

15. SEC v. W. J. Howey Co., 328 U.S. 293

16. Section 5 of the Transfer of Property Act,


18. Chevet, Sylve, Blockchain Technology and
Non-Fungible Tokens: Reshaping Value Chains in Creative Industries
(May 10, 2018).

Originally published Jun 11, 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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