X. Bitcoin – Contracts and
Enforceability
S. 23 of the Contract Act provides that certain considerations are unlawful and certain contracts may be opposed to public policy. Public policy has not been defined in the Contract Act and is an evolving expression. The Supreme Court has held that courts ought not to be quick to expand on the scope of what is public policy, they may, in the context of facts and circumstances take into account new developments and explain the same in the context of public policy.
Section 23 of the Contract Act provides:
What consideration and objects are lawful, and what not The consideration or object of an agreement is lawful, unless - it is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; of involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
The Supreme Court has held that courts would not arbiter on soundness or otherwise of general policy decisions. Further, courts ought not to engage in the exercise of whether one particular policy is good over the other.123
There is nothing in law to suggest that Bitcoin are opposed to public policy or otherwise unlawful. A contract relating to Bitcoin, prima facie, is not such that its enforceability would defeat the provisions of law or is otherwise fraudulent. Therefore, a contract respecting Bitcoin, whether it is in relation to mining of Bitcoin, transfer of Bitcoin or transfer of Bitcoin for consideration, is not per se illegal.
An interesting issue that arises is the implications of a contract that provides Bitcoin as consideration, i.e., payment, under the contract. Contract Act does not provide the form or manner in which consideration may be paid by one party to another party. However, in a contract for sale of goods under the Sale of Goods Act, consideration cannot be in kind. As held by the Supreme Court in Commissioner of Income Tax, Hyderabad v. Motors and General Stores (P.) Ltd.124 , Section 2(10) of the Sale of Goods Act defines “price” as meaning the money consideration for a sale of goods. The presence of money consideration is therefore an essential element in a transaction of sale under the Sales of Goods Act and not a transaction under Contract Act. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.
As long as Bitcoin are not currency / legal tender, they can only be considered as ‘value for money’ or goods. Therefore, Bitcoin would qualify as a consideration under the Contract Act but not as consideration under the Sale of Goods Act.
There is a growing need for adoption of a concrete regulatory policy regarding cryptocurrencies like Bitcoin in India. So far, the RBI has adopted a handsoff but cautious approach towards the regulation of Bitcoin. RBI on December 24, 2013, issued a press release cautioning users, holders and traders of virtual currencies (VCs), including Bitcoin, about the potential financial, operational, legal, security related risks that they are exposing themselves to.125 RBI mentioned that it has been looking at the developments relating to certain electronic records claiming to be “Decentralized Digital Currency” or “Virtual Currency”, such as, Bitcoin, litecoins, bbqcoins, and dogecoins etc., their usage or trading in the country and the various media reports in this regard. The creation, trading or usage of VCs including Bitcoin, as a medium for payment is not recognized by the central bank or any monetary authority. No regulatory approvals, registration or authorization is stated to have been obtained by the entities carrying on such activities.126 RBI in its press release also laid down several risks which included:
￭ VCs being in digital form are stored in digital/ electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorized central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
￭ Payments by VCs, such as Bitcoin, take place on a peer-to-peer basis without an authorized central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc.
￭ There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
￭ It is reported that VCs, such as Bitcoin, are beingtraded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
￭ There have been several media reports of the usage of VCs, including Bitcoin, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.
A similar approach was taken by People’s Bank of China that ordered financial institutions not to provide Bitcoin-related services and cautioned against its potential use in money-laundering.127 Following the RBI’s notice and similar actions carried out in foreign markets, India’s biggest Bitcoin Trading Platform “BuysellBitCo.com” closed its platform amidst growing concern surrounding the trading in digital currencies.128
KYC Norms – Applicability to Bitcoin In India,
KYC Norms are the norms set by the RBI that require banks to continuously monitor their customers’ transactions, keep an up-to-date record of their identity, and take steps simply in case any of the transactions of a customer break from his or her usual pattern of behavior.129 As already discussed above, the system of Bitcoin uses the block chain technology which allows the system to keep a proper track of the transactions being made. Due to its lack of physical presence, bringing Bitcoin under the current Indian laws can be difficult. The KYC requirements are also being followed by some Bitcoin exchanges before allowing customers to open accounts with them.130 Section 3 of the Prevention of Money Laundering Act, 2002 (“PMLA”) will lose its purpose if the authorities are not able to identify the person, making the investigation involving money laundering much more difficult. Financial Institutions, banks and intermediaries are mandated to collect information of the clients.131 However, it would appear that certain aspects of transactions in Bitcoin cannot be adequately regulated under the existing legal and regulatory framework.
Ultimately, both financial institutions132 and Intermediaries133 are poles apart from what the Bitcoin system is. With the advent of Bitcoin the idea that a person or entity handles financial instrument has changed. The question to be answered is, whether the KYC norms as prescribed today are capable of regulating such a system. Even in the event when such norms are applied strictly, there will be others who can, by simply working with the software, mine more Bitcoin.
S. 23 of the Contract Act provides that certain considerations are unlawful and certain contracts may be opposed to public policy. Public policy has not been defined in the Contract Act and is an evolving expression. The Supreme Court has held that courts ought not to be quick to expand on the scope of what is public policy, they may, in the context of facts and circumstances take into account new developments and explain the same in the context of public policy.
Section 23 of the Contract Act provides:
What consideration and objects are lawful, and what not The consideration or object of an agreement is lawful, unless - it is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; of involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
The Supreme Court has held that courts would not arbiter on soundness or otherwise of general policy decisions. Further, courts ought not to engage in the exercise of whether one particular policy is good over the other.123
There is nothing in law to suggest that Bitcoin are opposed to public policy or otherwise unlawful. A contract relating to Bitcoin, prima facie, is not such that its enforceability would defeat the provisions of law or is otherwise fraudulent. Therefore, a contract respecting Bitcoin, whether it is in relation to mining of Bitcoin, transfer of Bitcoin or transfer of Bitcoin for consideration, is not per se illegal.
An interesting issue that arises is the implications of a contract that provides Bitcoin as consideration, i.e., payment, under the contract. Contract Act does not provide the form or manner in which consideration may be paid by one party to another party. However, in a contract for sale of goods under the Sale of Goods Act, consideration cannot be in kind. As held by the Supreme Court in Commissioner of Income Tax, Hyderabad v. Motors and General Stores (P.) Ltd.124 , Section 2(10) of the Sale of Goods Act defines “price” as meaning the money consideration for a sale of goods. The presence of money consideration is therefore an essential element in a transaction of sale under the Sales of Goods Act and not a transaction under Contract Act. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.
As long as Bitcoin are not currency / legal tender, they can only be considered as ‘value for money’ or goods. Therefore, Bitcoin would qualify as a consideration under the Contract Act but not as consideration under the Sale of Goods Act.
There is a growing need for adoption of a concrete regulatory policy regarding cryptocurrencies like Bitcoin in India. So far, the RBI has adopted a handsoff but cautious approach towards the regulation of Bitcoin. RBI on December 24, 2013, issued a press release cautioning users, holders and traders of virtual currencies (VCs), including Bitcoin, about the potential financial, operational, legal, security related risks that they are exposing themselves to.125 RBI mentioned that it has been looking at the developments relating to certain electronic records claiming to be “Decentralized Digital Currency” or “Virtual Currency”, such as, Bitcoin, litecoins, bbqcoins, and dogecoins etc., their usage or trading in the country and the various media reports in this regard. The creation, trading or usage of VCs including Bitcoin, as a medium for payment is not recognized by the central bank or any monetary authority. No regulatory approvals, registration or authorization is stated to have been obtained by the entities carrying on such activities.126 RBI in its press release also laid down several risks which included:
￭ VCs being in digital form are stored in digital/ electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorized central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
￭ Payments by VCs, such as Bitcoin, take place on a peer-to-peer basis without an authorized central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc.
￭ There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
￭ It is reported that VCs, such as Bitcoin, are beingtraded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
￭ There have been several media reports of the usage of VCs, including Bitcoin, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.
A similar approach was taken by People’s Bank of China that ordered financial institutions not to provide Bitcoin-related services and cautioned against its potential use in money-laundering.127 Following the RBI’s notice and similar actions carried out in foreign markets, India’s biggest Bitcoin Trading Platform “BuysellBitCo.com” closed its platform amidst growing concern surrounding the trading in digital currencies.128
KYC Norms – Applicability to Bitcoin In India,
KYC Norms are the norms set by the RBI that require banks to continuously monitor their customers’ transactions, keep an up-to-date record of their identity, and take steps simply in case any of the transactions of a customer break from his or her usual pattern of behavior.129 As already discussed above, the system of Bitcoin uses the block chain technology which allows the system to keep a proper track of the transactions being made. Due to its lack of physical presence, bringing Bitcoin under the current Indian laws can be difficult. The KYC requirements are also being followed by some Bitcoin exchanges before allowing customers to open accounts with them.130 Section 3 of the Prevention of Money Laundering Act, 2002 (“PMLA”) will lose its purpose if the authorities are not able to identify the person, making the investigation involving money laundering much more difficult. Financial Institutions, banks and intermediaries are mandated to collect information of the clients.131 However, it would appear that certain aspects of transactions in Bitcoin cannot be adequately regulated under the existing legal and regulatory framework.
Ultimately, both financial institutions132 and Intermediaries133 are poles apart from what the Bitcoin system is. With the advent of Bitcoin the idea that a person or entity handles financial instrument has changed. The question to be answered is, whether the KYC norms as prescribed today are capable of regulating such a system. Even in the event when such norms are applied strictly, there will be others who can, by simply working with the software, mine more Bitcoin.
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