Bitcoin in India..and hawala operations

The Enforcement Directorate officials who have raided on two Bitcoin traders in Ahmedabad have tried to justify their action by stating that “Bitcoin may be used by hawala traders”.  A senior official of the ED is reported to have stated that the “arrested traders will be charged under section 3 of the Foreign Exchange Management Act (FEMA)”

It is sad that the ED officials have been using their draconian powers to terrorize the small entrepreneurs who have been early adopters to the global phenomenon of a “Peer to Peer” crypto currency system.

Now that the ED has made the move, they may be reasonably expected  to go to any extent to twist the law to justify their arguments. In these circumstances, let’s see what are the provisions of FEMA which are being invoked.

Section 3 of FEMA states

” 3. Dealing in foreign exchange, etc.- Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall-

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
(b) make any payment to or for the credit of any person resident outside India in any manner;
(c) receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.

Explanation.- For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorized person) without a corresponding inwa d remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorized person;

(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

Explanation.- For the purpose of this clause,” financial transaction” means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt.

 The above section applies to dealing with a “Foreign Exchange” or “Foreign Security”, “Making or receiving to or from a person resident outside India”, “acquiring any asset outside India”, which can be done only as per the provisions of the Act.

This section is broad enough to cover several aspects of genuine business transactions. As people often say, if you take your foreign friend to a tea shop and pay the bill for his tea, there can be a deemed violation of FEMA. However we must appreciate that most laws are draconian by nature since they are drafted to “Empower” the law enforcement to act without inhibition for the good of the society. The discretion to use the law properly vests with the officials and if they exceed their authority the Courts can step in and censure the officials.

We cannot therefore question the authority of the ED to take action if there is a “reasonable suspicion” of a violation of law. However we need to ponder over the fact if ED had reasonable suspicion in the instant case particularly to call a citizen “Absconder” the movement he is not present in his office when there is a surprise raid by the officials. The officials need to explain to the public if this is how they are expected to behave with common citizens.

We suppose that the objection of the ED in this case is not that the traders were engaged in the trading of Bitcoins since “Bitcoin” is not yet declared as a “Currency” by the Indian Government or RBI. “Bitcoin trading” per-se is therefore not “Foreign Exchange Trading” and it is not possible for ED to launch any action under FEMA.

If however ED wants to launch action under Section 3 of FEMA on “Bitcoin trading”, then it should be deemed that they have accepted the status of “Bitcoin” as a “Foreign Currency”. In that case if some body applies to RBI for an Authorized Dealer’s license, RBI has to grant the same. Also all existing Authorized Money Changers and Authorized dealers may be deemed to be also authorized to deal in Bitcoins.

I therefore request ED to clarify in public if they have deemed Bitcoins as “Foreign Exchange”  as per the definition clause in FEMA. If ED remains silent on this subject, the silence should be construed as acceptance. I suggest that after waiting for the next 48 hours for a positive confirmation or denial, some body should approach a Court with a reference

1.”Whether the invocation of Section 3 of FEMA by ED to arrest two entrepreneurs engaged in Bitcoin Trading can be deemed as a recognition that Bitcoin is a currency and more particularly, foreign currency under FEMA?”

2.”Whether such recognition extend by implication to all other systems referred to as crypto coins?

3. “Whether any existing Authorized Dealer or Authorized Money Exchanger licensed by RBI can accept Bitcoin and other Crypto coins just as they accept US $, Euros and other foreign currencies without any further reference to RBI?”

I invite main stream media to query ED officials and RBI on this “Deemed Recognition”.

There is however a possibility that ED may change its tune and say that what they are objecting is not for “Bitcoin Tradng Per-se” but for exchange of bitcoins for foreign currencies such as US $ and not for Indian rupees.

In that case the “Reasonable Suspicion” warranting the surprise raid  need to be justified with appropriate documentation on suspected dealings in foreign exchange by the traders. If not, ED officials may be acting on the basis of press reports about Bitcoins and not on solid proof.

The possibility of Bitcoins being used for hawala operations cannot be denied. however this is not restricted to Bitcoins alone. Hawala has been in existence before the advent of Bitcoins and is continuing despite all the efforts of the ED. If ED had been effective then it would not have been possible for our politicians and others to build a fortune in Swiss Banks. The black money circulation in India is also huge and ED has not been able to control such circulation. To single out Bitcoin as a possible tool of hawala is therefore not very fair to the Bitcoin community. Instead ED should state what it wants the community to do to prevent Bitcoins being used for Hawala operations.

In the long term interest of the Bitcoin concept which is part of the Crypto Currency system, there is a need for a serious dialogue with the regulators on whether the action of ED was justified when there are no guidelines available to the community on how to deal with this entity called “Bitcoin” or more generally the “Crypto Currency.

Naavi is interested in developing a “Crypto Currency Foundation of India” that can develop self regulatory guidelines for all Crypto Currency stake holders in India which can also in due course be a starting point for more formal regulations. Interested persons or organizations who would like to promote such a concept may contact Naavi through email


Print Friendly, PDF & Email

About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
This entry was posted in bitcoin. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.