Navigating the Legal Landscape: Exploring legal implications of cryptocurrency and block chain technology

1. ABSTRACT

The rise of the digital economy is increasing day by day. Modern technologies have now become the necessity of business. This has developed the scope of internet and electronic communication that enables the trade of goods and services digitally. When it comes to legal implications of cryptocurrency and blockchain technology, there are few important things to consider. Government is still figuring to how to regulate these technologies, so legal landscape is constantly evolving. Privacy and security should be given more preference, as well as issues related to money laundering and fraud. It’s extremely interesting to see how various countries are approaching this implementing various regulations. This research paper aims to explore the legal implications surrounding cryptocurrency and blockchain technology. It deals with various legal challenges faced by governments, regulators, and businesses in adopting and regulating these emerging technologies. It mainly focuses on the potential benefits and risks associated with cryptocurrencies and blockchain, highlighting the need for a broad legal framework.

Keywords 

Cryptocurrency, blockchain technology, legal implications, privacy, security, legal landscape, money laundering, legal challenges.

2. Introduction

In early days, the internet was all about that counterculture vibe on the US west coast. It had a real libertarian attitude. But as time went on commercial and national interests took over, and it became more about state control and surveillance capitalism. Nowadays, though, we are seeing a revival of that political radicalism in the world of cryptocurrencies. They’re all about cyberculture, being resistant to inference from politicians and regulators, and building trust through distributed networks. It’s like the early internet’s rebellious spirit is making a comeback even in corporate world. 

What is cryptocurrency?

Cryptocurrency is used where the shops accept it as medium of exchange. It is a digital format; it does not have any physical form. They are made in encrypted form. For example, bitcoin, they are made by using encryption techniques i.e. they are in secured form, they are unbreakable. Hence, it means encryption techniques control the creation of monetary units and to verify the exchange of money. In traditional financial deals, where there are two parties one is the buyer and other one is the seller, here the third party is the organization who is the central bank i.e. RBI that records the transaction. Whereas while dealing with cryptocurrency there is involvement of a chain of private computers. There is constant network between these computers while doing transaction for approval by using mathematical solutions and cryptographic puzzles as medium.

Now, the question arise that why to solve these puzzles; what is the benefit for solving this puzzle? The answer to the question is by solving these puzzles, these systems are rewarded with cryptocurrencies, and this process is called MINING. For example, while doing a transaction of a bitcoin, to transact it needs to solve the puzzle and after you solve the puzzle the bitcoin is transferred and one bitcoin is added as a reward.  

Nowadays, BITCOIN is well known cryptocurrency which has become a nomenclature throughout the world. There are various types of cryptocurrency. Some of them are ETHEREUM (ETH), RIPPLE (XRP), LITECOIN (LTC), and BITCOIN CASH (BCH). 

What is blockchain technology?

Record keeping technique of bitcoin is called blockchain technology. Other than cryptocurrency it relates to banking and investing.

Blockchain is actually a type of database. The main purpose of blockchain is to give permission for spreading and recording the digital information. But not for editing. This technology was first introduced in 1991 by Stuart Haber and W. Scott Stornetta. But this technology got application in the year 2009 along with launching of bitcoin.

Why is it called a blockchain? The reason behind this is blockchain collects the information in groups and these groups are called as blocks. Every block has a limited storage capacity because of which one block gets attached to the previous blocks. This start forming a data chain. Therefore, it is called as a blockchain. Every block has a cryptographic hash of previous block.  This hash is generated after every transaction. Hash is a connection where the input of numbers and letters is converted to a fixed length encrypted output. It does only depend on the transactions but also in the previous transactions of the chain. If any minute change is done in the transaction, new has is generated. That means if anyone tries to do anything with data of blockchain, this will result into changing of the entire setting. This helps to know the loopholes into the records made. This is a secured option. Blockchain is spread in many computers and every computer has it’s a copy of blockchain. These computers are called as notes, these notes check the hash to recognize whether there are any changes made in the transactions or not.   

3. Research methodology:   This research paper is based on secondary sources for analyzing the use of cryptocurrency and blockchain technology. Secondary sources such as websites, journals, articles. Newspapers, books, blogs and so on.
4. Literature review:   

 Cryptocurrency: Cryptocurrency is a form of currency, but it is in the digital form. It is a form of payment which uses the encryption technologies. Crypto currency was introduced in 2009 and first popular cryptocurrency was the ‘Bitcoin”. Crypto currency is not like the coins or notes that mean we can’t touch it or put in our pocket or keep in any type of wallet.  But it is saved in our digital Wallet; therefore it can also be called as online currency. As we know that the Indian rupees or Euros or dollars all of these currencies have governmental control, but crypto currency don’t have any such control over it. These virtual currencies do not have any control of centralized banks or agencies.  That means it does not follow any traditional banking system. Here the transactions are done through one computer wallet to another. There are more than 5000 crypto currencies. Some of them are bitcoin, ethereum, ripple, litecoin, tether, and Libra. These coins are easy to buy and sell. You can invest in any of these bitcoin easily.  By using these currencies one can do shopping, trading, food delivery etc. Slowly, in India, there is rise in the use of bitcoin. The reason behind this slow speed was, crypto currency being illegal. Because the crypto currency was banned by RBI, but now in March 2020 Supreme Court held that, all cryptocurrency activity will be legal in India. This raised the number users of cryptocurrency in India. As Bitcoin is popular in other countries, unfortunately, this is not the same case within India, the another reason for this is; whenever we think of investing the first thought that pops in mind is either of FD, Mutual Funds, Shares or Gold. This is not wrong at all, but investing into these new currencies in this upgrading generation has their own different benefits. Such as International transactions can be easily. There is no third party involvement. They are secured transactions. The most popular companies like Facebook, Pay Pal, Amazon, and Walmart are connected with cryptocurrencies. Moreover, the famous personalities like Elon Musk, Jack Dorsey, Mike Tyson, Kanye West uses cryptocurrencies. Countries like USA, China, Japan, and Spain have the highest number of users of cryptocurrencies.

How to use cryptocurrency: By using ‘coin switch Kuber’ application, within one click you can use bitcoin. You can buy it or sell it. This is as easy as you buy any product on amazon or flipkart. This application is used by million users across the world. Although the value of purchasing one bitcoin is 32 lakhs Rs, but by using this application you can start investing from 100 Rs. Though investing into crypto currency has number of benefits along with high number of risks. So before investing into any cryptocurrency we should invest our time in doing a short research on the any of the cryptocurrency wishing to purchase. Try to find out the last month or week record of that particular cryptocurrency. 

Blockchain technology: Remember the date: 8^th November 2016? On this day, Government of India declared the demonetization of all 500 Rs and 1000 Rs notes. It was announced the new issuance of 500 and 2000 notes. This lead to big ques in front of banks and ATM. This would not be the case if there would be earlier emergence of blockchain technology. Blockchain technology has gained extensive attentions. It serves immutable ledger which allows transactions take place in a decentralized manner.

Regulatory challenges and concerns:

1. Lack of clarity and uniformity in regulatory framework: As we know cryptocurrency and blockchain technologies used worldwide. Different countries use different cryptocurrency.it also varies in blockchain technology. Some countries have established cryptocurrency and have different regulations for it. On the other side some of the countries are still in the process of establishing a due process for regulating these cryptocurrencies. As there is no uniformity in the regulation, it leads to create a challenge for business and the individuals too because they need to fulfill the legal requirement and comply with various regulations. 
2. Money Laundering and illicit activities: when it comes to cryptocurrency, the name itself concerns with money laundering and illicit activities. As the nature of cryptocurrencies being attractive to the individual, leads to illegal activities. Cryptocurrencies can hide the origin of funds which are obtained in an illegal way. This makes difficulties in tracing the money. To handle these cases, many countries have start working on implementing rules and regulations to prevent money laundering. Instances of measures taken involves, Customer (KYC) , Anti-Money Laundering (AML) which ensures the identity of  individual involved or businesses involved in the transaction of cryptocurrencies. Moreover, blockchain can be used for such purpose because this is the easiest way to detect the illegal activities. Illegal activities also include fraud and scams. People are deceived by frauds and scams for purpose of stealing money. Cryptocurrencies are also used for drug trafficking, weapons trading, and other such illegal activities. Evasion of taxes can be done through cryptocurrencies. 

      Jurisdictional issues:

1. Cross-border transaction and conflicting law: Transactions of cryptocurrencies are bit difficult due to the non-uniformity in the regulations of different countries. It acts as challenge. Every country has own rules and regulation. For instance, countries that have embraced cryptocurrency are Japan and Switzerland and they have their own clear regulations to regulate the transaction of cryptocurrency. Whereas china have strictly restricted cryptocurrency trading. Europe provides guidelines for data privacy. China and Iraq have established strict internet censorship laws, to put restrictions on accessibility of certain websites. This will lead to conflicting interest of free speech and open accessibility to information in other countries. IPR can also lead to conflicting laws for cross border transactions.
2. Challenges in enforcing regulations globally: the most important challenge is the scattered nature of cryptocurrencies, which leads to difficulties for regulating the rules of cryptocurrency by any one authority. As it is different in different jurisdiction, this leads to lack of clarity. The authorities who are making these laws enforceable faces challenges in investigating and prosecuting the crimes related to cryptocurrencies. Technologies often creates problem in constructing legal frameworks and regulating them. Different organizations are working to solve these problems. These organizations include Financial Action Task Force (FATF), Anti-Money Laundering (AML), Know-Your-Customer (KYC). 
3. Privacy and security concerns: 
4. Anonymity and pseudonmity in cryptocurrency transactions: Anonymity means the identity of the person is not known but whatever transactions made by him are not trackable. Whereas pseudonmity means the identity if the person is unrevealed but whatever transactions are made by the person can be linked. Block chains like bitcoin and ethereum are pseudonymous. There are some privacy-coins like Monero or Zcash that allow for real anonymity through cryptography. Here their actions cannot be traced. 

2. Protecting personal data and preventing identity theft: nowadays there is increase in the crime of stealing identity and deceiving people for money. Stealing identities of many people and making fake id is called as synthetic identity fraud. This has increased the cybercrime rate. Online shopping scams are not rare, while buying products from such a digital platform. Payment card details are also stolen for the same purpose. Medical identity thefts are the unnoticed crimes which needs strict vigilance. Social security numbers (SSNs) is another way of conducting identity theft. The fraudster acquires the numbers which consist of nine digits to obtain financial information, to create fake accounts and to gain tax refunds. Here the block chain technology prevents such crimes as it has the record keeping function.
3. Smart Contracts: Smart contracts are executed in blockchain technology. Smart Contracts are conditioned based contracts. These are based on two words i.e. ‘If’ and ‘Then’. If a condition is satisfied then automatically the stated action is executed. This is called smart contract. There are many advantages of these contracts. Smart contract is not time consuming process. There is no involvement of third party. There is efficiency, accuracy and immutability in the smart contract. But it has some disadvantages too; which includes: if there is any mistakes in the contract it cannot be changed as it act as a permanent data. It is not independent i.e. is relies on the person to first enter the code and then it works accordingly. These contracts can also be conducted even if there is any b ad faith. The traditional legal system do not have jurisdiction on smart contract. So the dispute resolution concerned with smart contract faces challenges. But now there some upcoming solutions such as decentralized arbitration platforms to resolve disputes concerning the same. 

Central Bank Digital Currencies. It is a form of digital currency which is issued by the central bank of a country. They are same as cryptocurrencies. But their value is fixed by the central bank. The implementation of CBDCs may affect the economic conditions, financial networks and stability of the country who are thinking of exploring it. The main aim of CBDCs is to increase the privacy status of the user of digital currencies. It also aims at reducing the risk while using cryptocurrencies. Government act as a strong backbone for CBDCs. They provide security to the businesses, consumers, etc. CBDCs can be relied on blockchain. Cryptocurrency have made expertise to come up with the idea of CBDCs. 

Case laws

1. Internet and Mobile association of India v. Reserve Bank of India, 2020:

Here there had been discussion over banning the cryptocurrencies. This case was started on 6^th of April 2018. On this day RBI passes a circular, in which it says that it has prohibited the central banks and all other such entities from dealing with virtual currencies. Furthermore, it states that it will not provide any services to such entities. So overall they mean to say that either such entities take over the deals of virtual currencies or help the person who is dealing with virtual currency. This affected that no bank can deal in any matter of cryptocurrency and the activities such as trading, getting loans against virtual currencies and so on of that person whose account is there in the bank which is related to cryptocurrency will get banned and now he can’t take any help from the bank. 

RBI was having a concern that there are greater chances of hacking in cryptocurrencies. So they were of the opinion that these currencies better be banned. These risks were already highlighted in the year of 2013 and now it makes no sense again highlighting the same in 2020. So this was the main problem related to ban. 

         Against the same ban Internet of Mobile association was basically the representative of persons having interest in online and digital service industries. They filed petition arguing that RBI do not have the power to prohibit any trading activity related to virtual currencies. They stated this because cryptocurrencies are not legal tender and RBI can only look after legal tender. This means RBI cannot regulate cryptocurrencies. In the same way RBI cannot pass any law or any circular relating to it. They further argued that even if RBI could regulate cryptocurrencies in any some or the way but it still violates article 19 (1) (g) and this circular is going against the test of reasonableness and  test of proportionality and so it should not be allowed.

RBI states their response that they agree that the petitioner have got the fundamental right through Article 19(1) (g). But these fundamental rights are not absolute and we can put reasonable restrictions on it because they are protecting larger public interest.it further argued that there are some institutions that believe cryptocurrencies as a valid payment; and because they accept it as valid payment, the cryptocurrencies become legal tender. So as it becomes a legal tender, RBI gets the power to pass circular. 

Issues of the case: 1. Whether RBI has the power to pass any rule or circular on cryptocurrencies? 2. Whether the circular was proportionate or not?

Judgment held by Supreme Court: relating to then first issue the court first referred to definition of term ‘money’. The term money consists of store of value, unit of account, medium of exchange and final discharge of debt. The court said that if we put cryptocurrencies against this definition, it follows the first two characteristics of the definition i.e. it cane stored with a value and secondly cryptocurrencies has a unit of account, we can identify the amount of these currencies in the market. Moving to the third characteristics it not widely spread medium of exchange but it is accepted as   medium of exchange because in India we don’t have high level users of cryptocurrencies like other countries. Therefore we can say that it is capable of widely spread medium of exchange. Coming to the fourth characteristics, can cryptocurrencies be used as a legal tender or not? The court stated that for now we can’t state these currencies as legal tender. But the court felt devious about the statement that cryptocurrencies can never be seen as real money. Cryptocurrencies has the power to get converted in real money but just because it is not getting that much support through our economy they are unable to become legal tender. Further the court stated that if in some case we provide this power to cryptocurrencies to get converted then they can become legal tender and therefore, RBI has the power to regulate anything which can function as real money and because virtual currencies functions as real money, RBI can have control over it. 

 One thing is to be notice that the Court has never stated cryptocurrencies as fiat money. It has stated that under some circumstances it can be considered as real money and so it can be regulated by RBI.

Coming to the second issue, Court applied Doctrine of Proportionality which consist of four principles; 1. Measures and objects must have proportion. 2. Measures should be rationally connected with objectives. 3. Apply less intrusive measure.4. Whenever we create a balance between severity of measure and violation of rights of person, that balance will be brought because of importance of objective. 

The Court said that there was no need of putting ban because we have less intrusive measure, we can regulate and direct people for buying or selling the cryptocurrencies. For this court referred to the 2018 report of European Union which relied on cryptocurrency and blockchain. The ultimate recommendation of this report was, no parliament should put total ban because we have less harsh alternatives like self-registration. The person investing in cryptocurrencies first do registration, this will acknowledge RBI about the deals of cryptocurrencies made by that particular person. The court said that RBI can put regulations on cryptocurrencies but putting ban is unreasonable and disproportionate. Along with this the Court said that RBI has not submitted any report concerning the loss of entities or adverse effects.so The blanket ban by RBI is not in their favor was finally stated by the Court.

The court ruled that RBI has the right of discretion and on this basis it can make rules but they were unable to show any loss or damages suffered, so this circular will be quashed and whatever the ban was put down on cryptocurrencies was uplifted by the court. 

Suggestions: 

1. There should be strict laws for prevention of money laundering, consumer protection, taxation.
2. It should not only have punishment of fine but also of imprisonment. 
3. The blockchain technology should be made more advanced.
4. Government should make take reference of other counties for exploring legal implications.
5. More focus should be given for reducing risks of investing into cryptocurrencies
6. Different sessions or programs should be conducted to make people aware about cryptocurrencies and blockchain technology by providing proper knowledge about how to invest, what are then securities provided by the government and how does the blockchain work. .
7. People should first invest their time in researching about any of the cryptocurrencies they are interested in. 
8. They should be updated about the latest legal developments. 

Conclusion: Cryptocurrencies are worldwide spread currencies. Their security is backed by blockchain technology. There is no uniformity for the regulation of cryptocurrency. The nature of cryptocurrency is decentralized.

By- Shruti Deolalikar