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MODULE 9

FINTECH IN THE INDIAN SCENARIO

Innovation in financial services has been growing across the value chain – from
product development, packaging, and delivery, to services. Technological
advancement coupled with commoditization trends has led to the development of a
new crop of nimble firms, providing services in each segment of financial institutions
offerings. Fintech startups are redrawing the traditional approach to banking services.
However, the ability of these startups to match and – in many cases – surpass the
offerings and trust the consumer has built with a bank will be a KPI in the long term.

A major role in kick-starting the evolution of Fintech in India was played by startups
offering digital mobile recharges. For a very long time, Indian consumers used
coupons purchased from retail outlets, largely by cash for prepaid mobile phone
recharges. This evolved to digital recharges, which in turn evolved into digital wallets
and usage of wallets for various other commerce activities. The fact that these new
offerings have strongly impacted consumer behaviour has not only attracted attention
from more technology savvy individuals, but also a lot of investments. An analysis of
Indian Fintech startups that have been founded post-2007 shows that investments in
these firms has grown from USD 25 million in 2013 to USD 109.1 million in 2014
and reached USD 364.6 million in 2015.

Interestingly, the investment in Fintech startups is not limited to mobile wallets. India
currently has over 600 Fintech startups in the space of lending, payments, InsurTech,
blockchain and RegTech. This number is expected to grow further with initiatives
such as focused accelerator programs by local and regional governments and banks,
and funding support by leading corporates and VCs.

Segment-focused VC firms or segment-focused arms of VC firms have only just
begun skimming the Fintech potential in India. This is in contrast to developed
markets like USA, where one can find Fintech-focused VC firms like Ribbit Capital,
QED Investors, Nyca Partners and more. However, not having segment-focused VC
firms does not imply a shortfall in investment for Indian Fintech startups – VC firms

in India have invested across segments, including Fintech. For example, Sequoia
Capital and Matrix Partners have invested in cab aggregators, Fintech startups and e-
commerce. Both these investors expect higher returns with the huge cross-industry
growth potential. The rise of cab aggregator services has resulted in the growth of the
number of cabs in India, which has led to an increased demand for auto financing
options in lending.

The growing digital penetration is driving e-commerce, and the usage of wallets for
enabling commerce transactions has led to an increased demand for payment
offerings. This kind of cross-industry growth has been driving VC firms to invest
across segments.1

The government and the regulatory bodies have recognized the changes that are
taking place in the Indian Fintech space and have constantly kept pace with the
rapidly changing environment in terms of technology and customer expectation. The
Indian government has launched a funding support initiative called ‘Startup in India’,
which has a dedicated fund of USD 1.5 billion to support Indian startups. Similar to
VC funding, this fund is expected to be disbursed across various segments, not limited
to, but including Fintech.

Furthermore, the Indian government has launched various tax and surcharge reliefs
such as income tax exemption for startups for the first three years, setting up
‘National Credit Guarantee Trust Company’ to provide credit guarantee mechanisms
via debt funding for startups, and exempting capital gain tax for investments in
unlisted companies for longer than 24 months.2

The increasing economic power, coupled with the sheer number of end-users in the
APAC region make an attractive case for Fintech. India, the fastest-growing economy
of the world is also home to the second-largest number of Fintech startups in APAC
with China leading the pack. The growth in Fintech solutions has seen huge uptick in
the last couple of years. This is further expected to grow with the renewed interest
from banks and regulatory bodies. Banks have started to actively participate in the

1 SwissNex India, FinTech in India <available at: https://www.swissnexindia.org/wp-
content/uploads/sites/5/2016/10/Fintech-Report-2016.pdf>.
2 SwissNex India, FinTech in India <available at: https://www.swissnexindia.org/wp-
content/uploads/sites/5/2016/10/Fintech-Report-2016.pdf>.

Fintech boom by looking for partnerships and investments with startups while the
government and regulators are drawing new frameworks and policies that incentivize
innovation and entrepreneurship.

Increasing financial inclusion and regulators opening up licenses for innovative
solutions are expected to drive India’s Fintech market. A few major areas that are ripe
for disruptive solutions in the Indian context are InsurTech, analytics, artificial
intelligence, and investments platform.

Payments and wallets are a highly competitive segment in India with a large number
of global and local players. However, with 80% of the transaction still being done by
cash, cost effective digital payment solutions specifically in the micro-transaction
services segment, have a good potential for growth. To fight the large established
Fintech players, access to capital would be a major requirement for new solutions
enabling plain wallet services. With simple value added services, startups can expect
higher customer loyalty and traction.

In addition to the main segment of ‘Payments Services’ where FinTechs in India seem
to be focused, lending is a growing segment in India. However, the major challenges
financial institutions and startups face are in underwriting the risk for unorganized
data. Any established analytics platform, which can provide such services, would be a
great success in the Indian context. Also, fraud and security are a major focus area for
banks as well as Fintech startups, especially in transaction and payment services.
With the launch of modern payment instruments such as UPI and the increasing usage
of wallets and cards, there is also the issue of fraudulent transactions that needs to be
tackled. Hence, major entities invest heavily in this space. Swiss startups in data
management, security, and fraud analytics space could consider providing their
solutions and establishing their presence in the Indian market.

The WealthTech Industry in India is at the cusp of a new era and the industry is
witnessing the emergence of startups with innovative technological and business
models. Our database shows that there are 442 startups active in India in the
WealthTech space with personal finance management, digital brokerage, financial
research, and robo-advisors surfacing as some key segments in which these startups
are active. Growing personal wealth, increased adoption of mobile & digital channels,

reduced asymmetry of information between small & large financial institutions and
investors, are some of the factors propelling the industry forward. However, at the
same time, low investor awareness and security concerns are acting as inhibitors.
Artificial intelligence would enable wealth managers in sentiment analysis, offering
customized products and robo-advisory services. We believe the wealth industry
would witness further growth in robo-advisory and crowdfunding platforms. AI
would be further adopted in trading and regulatory compliance.3

InsurTech startups that can provide digital services are expected to gain interest from
investors. Insurance is a 4.6-trillion-dollar-industry and has been largely conventional
– the current startups are working just on the surface; and the sector has a strong
potential to be disrupted by innovative ideas, business models and technology led
solutions

Reasons for Surge in FinTech innovations in India:

(a) Financial Inclusion and Enablement – The launch of ‘Jan Dhan Yojana’
scheme, aimed at providing a bank account for every individual and increase
banking penetration, was launched in 2014 and has added more than 240
million bank accounts in the past three years. Fintech startups with their asset-
light model can build on this infrastructure by providing easy-to-use and
efficient transaction services (P2P, C2B or B2C) across financial services
segments like micropayments, lending, insurance, mutual funds and others.

(b) A growing digital population: With around 370 million Internet users in
India, the Internet penetration still lies at less than 40%. This is expected to
grow in the near future continuing the 2x growth witnessed in 2015 in rural
population coupled with government initiatives such as ‘Digital India’ aimed
at penetrating digital services. The growth is expected to increase the
penetration of current Fintech startups as well as provide a new market for
potential new solutions and new players.

(c) Promoting non-cash transactions: In order to reduce the amount of paper
cash being used in day-to-day transactions, the government has taken certain

3 Medici Inner Circle, India FinTech Report: Executive Summary, <available at:

https://mediciinnercircle.com/wp-
content/uploads/2019/03/FintegrateReport_ExecutiveSummary_Final.pdf>.

proactive steps like tax rebates for merchants accepting more than 50% as
electronic payment.
(d) Biometric identification database: Aadhaar, the government’s initiative to
create a central identification database, now holds the information of over 1
billion Indian citizens. This is being leveraged for eKYC and financial benefit
transfer schemes. It also helps firms to reduce the time and effort required for
first-time customer verification. DBS, a global bank, has launched their
mobile-only banking platform called ‘Digibank’, which leverages Aadhaar for
customer verification.

9.1. Aadhar Enabled Payment Systems (AEPS) and Unified
Payment Interface of India (UPI)

The AEPS system allows interoperable financial transactions at Point of Sale (PoS)
through the Business Correspondent (‘Bank Mitra’) of any bank using the Aadhar
authentication.4 The system works by linking the user’s Aadhaar card to his or her
bank account. It allows for secure transactions by getting fingerprint authentication
with the bank Unique Identifaction Authority of India (UIDAI) system. Once the
authentication is concluded, the customer can perform basic bank functions such as
balance enquiry, cash withdrawals, cash deposit, remittances etc by utilizing their
Aadhaar card.5

UPI Services are also an instant real time interoperable payment system which is
linked to the customer’s bank account. It has been developed by the National Payment
Corporation of India (NPCI) and regulated by the RBI, and the interface allows for
the transfer of funds between two bank accounts through usage of the mobile based
UPI application. A huge number of digital payment services operating in India are

4 Aadhaar Enabled Payment Systems (AEPS), Cashless India <available at:

http://cashlessindia.gov.in/aeps.html>.
5 Shubham Borkar and Pranay Bhattacharya, Apple iCard and its Implications on the Indian FinTech

Industry, Mondaq<available at:

http://www.mondaq.com/india/x/802846/fin+tech/Apple+iCard+And+Its+Implication+On+The+India

n+Fintech+Industry>.

linked via a UPI based service such as PayTM, BHIM, Mobikwik, PhonePe,
JioMoney, Google Tez, Citrus Wallet, Amazon Pay etc.6

9.2 How E-Wallets work + How Startups can create e-Wallets

E-Wallets are essentially an intangible form of physical cards (debit or credit) that the
customer possesses. The benefit is that eWallets are easily accessible by merely
keying in some personal information and payment details. E-Wallets work in a two
step mechanism (based on two components, software and information). The software
stores the user’s personal information and provides security and encryption of data.
The information component is a database of the details provided by the user –
including details such as names, addresses, payment methods and card details which
enable the transaction.7

The first step in creating e-Wallets for startups is to adhere to the regulatory
requirements. The compliance requirements will vary across jurisdictions. For e-
Wallets operating in India, the company must apply for a license with the RBI. There
is no requirement for prior approval from the RBI in case the e-Wallet is a closed
payment system. Additionally, those entities that are authorized under the Foreign
Exchange Management Act (FEMA) are also exempt from the RBI guidelines. In case
the issuer of an eWallet is not a Bank or a NBFC which is compliant with the RBI
capital adequacy requirements, they must have minimum net owned funds of Rs 10
Lakhs. The e-Wallet must also have a requisite system that complies with the KYC,
Anti-Money Laundering and Combating Financing of Terrorism guidelines issued by
the RBI. 8 Additionally, such wallets cannot be used to conduct cross border
transactions. While designing e-Wallets, startups should focus on certain key aspects
which may make their e-Wallets more attractive to the consumers, such as the
simplicity with which money can be loaded, the range of uses available, and easy

6Shubham Borkar and Pranay Bhattacharya, Apple iCard and its Implications on the Indian FinTech

Industry, Mondaq<available at:

http://www.mondaq.com/india/x/802846/fin+tech/Apple+iCard+And+Its+Implication+On+The+India

n+Fintech+Industry>.
7 TSYS, Digital Wallets <available at: https://www.tsys.com/solutions/products-

services/merchant/payment-methods/digital-wallet/>.
8 Narendra Kumar, How to Apply for Mobile Wallet RBI License, EnterSlice<available at:

https://enterslice.com/learning/mobile-wallet-rbi-license/>.

accessibility. The ability to make auto-payments according to time periods and split
bill features may also help in setting such e-Wallets apart.9

9.3. Regulation of Payment Gateways

The problem is that these gateways are not recognized as payment system providers
by the RBI, which underlines the need for a comprehensive regulation owing to the
handling of sensitive data by these gateways. However, the RBI has released a vision,
wherein, it outlines that it aims to create a regulatory framework governing payment
gateways.10

It is worth noting that the NPCI enjoys regulatory exclusivity and is running several
of India’s critical payment infrastructure products, but is still not accountable under
RTI. The Watal Committee report had highlighted serious governance issues with the
National Payments Corporation of India, pointing out that the private company, which
is wholly owned by banks, needed to expand its shareholding, improve governance
standards and address its lack of neutrality. One might recall that it was disclosed that
wallets then hadn’t been allowed on UPI because banks wanted a head start. The
Watal committee report had said that: “Only bank-led PSPs (Payment Systems
Providers) have direct access to payment systems. Non-bank PSPs can access
payment systems only through a member bank“, highlighting that how the NPCI
operates creates a dependency of other payment service providers on banks. The RBI
has not addressed these issues.11

9.4. Working on Payment Banks (Airtel/PayTM) – Case Study

It can’t be predicted exactly whether this payment banks will prove to be a disrupter
to the existing public sector and private banks. Some believe that they will be a
disrupter to the public and private banks. The Governor of RBI stated that the
payment banks will complement the existing banks rather than competing them. It

9Noman Shaikh, Developing a Mobile Wallet That Would Be Loved By Millions, PeerBits<available at:

https://www.peerbits.com/blog/build-mobile-wallet-app-for-digital-payment-solution.html>.
10RBI, Payment and Settlement Systems in India: Vision 2019-2021: Empowering Exceptional

(E)Payment Experience <available at:

https://www.rbi.org.in/Scripts/PublicationVisionDocuments.aspx?Id=921>.
11 Nikhil Pahwa, RBI on Payments and Settlements in India, Medianama <available at:

https://www.medianama.com/2019/05/223-5-key-talking-points-from-the-rbis-vision-2019-2021-for-

payments-and-settlements-in-india/>.

further added that public and private sector banks can provide all banking facilities,
but payment banks cannot. Thus, as a result, the public and private banks have to
bring some changes in their working process by making some technological
advancement to provide similar facilities to retain and satisfy their customers. These
banks will increase competition among public and private sector banks. These
payment banks will be providing the needs to people, who have limited funds at their
disposal. Payment banks with more advanced facilities and availability of resources
can focus on high net worth of clients.

Challenges For Payments Banks:12

(a) Selling of insurance and mutual funds: Generally the selling of securities is
done by the regulatory authorities i.e. Insurance Regulatory and Development
Authority (IRDA) and Securities and Exchange Board of India (SEBI). For
reducing the chance of mis-selling they require certified and well trained
employees. This will increase the expense of the banks to train them. And,
further it is difficult for the banks to take risk in this cross selling, as there is
difficulty in judging the ability of the borrower that whether he will pay the
loan back.

(b) Restrictions in the payment model: The payment banks are restricted to
offering service of deposit up to 1 lakh. The customer can’t raise more funds
in deposits. Further, without any lending service it is a big challenge for the
payment banks to earn money. They have decided to provide 7.25% interest
on the saving accounts.

(c) Restrictions in the fund deployment: Payment banks have to mandate 75%
investment in their current account savings account (CASA) balances
Statutory Liquidity Ratio in the government bonds or treasury bills. This is for
safety purposes but will restrict their ability to optimize treasury operations.

(d) Earning of profit without lending: The most challenging factor in the concept
of payment bank is that if they will not lend money, then how they will earn
and run its operations. As they will not receive any loan interest or IRR like
the other banks, it is difficult to make profit. Other commercial and scheduled

12 Kahlon Amritpal Parmjeetsingh, Kajal Chaudhary, Surjan Singh and Amit Kumar, A Study on Airtel
Payments Bank a Step Towards Digital India, International Journal of Innovative Studies in Sociology
and Humanities 2017 <available at: http://ijissh.org/wp-content/uploads/2017/07/IJISSH-020411.pdf>.

banks earn 4-10% of loans on working capital and up to 30% on the business
loans. Payment banks are not allowed to lend so they can only from
government securities or cash withdrawals.
(e) Threat of competition: Due to the effect of digitisation, commercial and
scheduled sector banks have also adopted the banking services through mobile
and web. The services of these banks are also provided through electronic
transactions. The threat to the payment banks is that, the services which are
going to be provided by them are also being provided by the other existing
banks to its customers.

Airtel Payments Bank

The Airtel Payments Bank was the first payment bank in the country to go live. The
Airtel Payments Bank (APB) catered to users by offering several services that could
be considered its ‘USP’. It was a digital banking model which allowed users to open
accounts quickly through the completion of Aadhaar-based e-KYC formalities. It was
a paperless format wherein the only thing required was the customer’s Aadhaar
number. To make its services more attractive, it offered one minute of talk-time for
every rupee deposited in a customer’s account. There was minimal need for other
documentation, and a customer’s phone number was to be their account number under
APB. It also provided its users with a staggering 7.25% interest rate on savings
deposits into the payments bank, which was higher than even what traditional banks
were offering their customers. Additionally, it provided free money transfer between
two numbers registered under the payments bank system. This were some of the
several key features of Airtel Payment Bank that enabled it to gain a foothold in the
FinTech payments sector:13

i. Digital Banking: Airtel payment bank allows quick and paperless
account opening using Aadhaar based E-KYC (Electronic-Know Your
Customer). A customer’s Aadhaar number is required and no other
document is required.

13 Kahlon Amritpal Parmjeetsingh, Kajal Chaudhary, Surjan Singh and Amit Kumar, A Study on Airtel
Payments Bank a Step Towards Digital India, International Journal of Innovative Studies in Sociology
and Humanities 2017 <available at: http://ijissh.org/wp-content/uploads/2017/07/IJISSH-020411.pdf>.

ii. Free Talk time: Airtel provides one minute of talk time with every one
rupee of deposit while opening an account.

iii. Account No.: Customer’s Airtel mobile number will be his/her bank
account number.

iv. Interest Rate: Airtel provides interest rate of 7.25% p.a. on deposits in
savings accounts, the highest rate of interest in India.

v. Money Transfer: Airtel payment banks allow free money transfer from
Airtel to Airtel numbers within any bank account in India.

Advantages of Airtel Payment Bank:14

i) Personal Accidental Insurance of Rs. 1 lakh with every savings account.
ii) Wide Network: Airtel payment bank provides easy deposits and

withdrawal facility across a wide network of Airtel retail outlets.
iii) Banking Points for cash deposits/withdrawals: For encouraging people to

deposit money in Airtel Payment banks, Airtel has announced new offer in
which Airtel will provide free talk time on their Airtel number with
deposit/withdrawal of one rupee in their account.
iv) Interest Rate: Airtel payment bank is offering interest rate of 7.25% on
their savings account to all the people, which is highest rate of interest
compared to other banks.
v) Transaction limit: Airtel payment bank allows the user to transact amount
up to 1 lakh, while other payment apps have the limit up to Rs. 20000.
vi) Free talk time: As discussed earlier, Airtel payment bank provides free talk
time of one minute for every one rupee of deposit and withdrawal of
money.
vii) Accidental insurance: Another benefit of Airtel payment bank is that it
offers accidental insurance of Rs. 1 lakh, while other payment apps do not
provide this facility.
viii) Works on all handsets: Airtel payment banks collaborate with all set of
handsets i.e. android or simple handset. While other payment banks does
not provide facilities on all handsets.

14 Kahlon Amritpal Parmjeetsingh, Kajal Chaudhary, Surjan Singh and Amit Kumar, A Study on Airtel
Payments Bank a Step Towards Digital India, International Journal of Innovative Studies in Sociology
and Humanities 2017 <available at: http://ijissh.org/wp-content/uploads/2017/07/IJISSH-020411.pdf>.

ix) O.T.P. based secure transactions: The transactions are secure and consist
of two way verification process. The transaction done through Airtel
payment banks are secure O.T.P. based.

PayTM

PayTM is by far India’s largest FinTech company focused on payments and
settlements. Launched initially as a mobile recharge service provider in 2010, it has
evolved gradually to an e-commerce marketplace in 2014. The company then
increased its services by providing bus tickets in 2015 and introduced movie tickets
and flight tickets in 2016 through its portal.

After providing various value-added services for telecom operators, Vijay Shekar
Sharma launched Paytm in 2010 as an online prepaid mobile recharge portal. As they
were one of the first to provide this service, they increased the customer base rapidly
and soon expanded Paytm as a semi-closed wallet in 2013–14. PayTM seized on the
‘first-mover’ advantage to gain a strong foothold in the Indian market, tapping their
existing customer base as they diversified. They then moved into multiple business
ventures – movie tickets, wallet integration to other commerce applications (online &
mobile), e-commerce and others.

This, coupled with the rapid rise in mobile penetration in India, allowed PayTM to
move into multiple business offerings and exploit its position. It has also refined its
online-to-offline and offline-to-online business strategy (O2O) which helps
consumers search and buy across multiple channels.

For instance, a consumer may search for products online and buy the same at the
nearest offline outlet and vice versa.15 It has also spurred its growth by investing in
other ancillary startups such as Near.in, Jugnoo and Little. In addition, it has been
able to exploit the data available to increase margins by focusing on data science and
fighting card fraud.

With its payment bank license granted from the RBI, Paytm will be able to open
checking/savings bank accounts. It plans to use this as a platform to further enable

15 SwissNex India, FinTech in India<available at: https://www.swissnexindia.org/wp-
content/uploads/sites/5/2016/10/Fintech-Report-2016.pdf>.

micro transactions via its wallet and also as a revenue source by cross-selling
financial products..16

9.5 Legal Validity of Bitcoin and Cryptocurrency

While cryptocurrencies contain the eponymous suffix – are they really currencies in
the correct sense of the word at all or not? An identifying feature of any ‘currency’ is
that it is a generally accepted token which is readily exchangeable with products and
services (a feature known as liquidity) and has a commonly accepted value – which,
in most cases, is strongly protected against volatility by a statutorily empowered
central or reserve bank. Since, they are completely decentralised, cryptocurrencies
have no such price anchor. As a result, the price of a cryptocurrency is directly
tethered to uncontrolled fluctuations in its demand and supply.17

For example, Bitcoin, which was exchangeable for around USD 1000 per token at the
start of last fiscal year, closed the year at almost USD 20,000, before falling to and
reaching a plateau at around USD 6000 since March 2018. In a centrally issued
currency like INR, volatility in exchange rate (for example, against the USD) is
countered by the Reserve Bank of India by buying or selling USD in the international

forex markets – in an act known as ‘intervention’18. Without a central regulator,

Bitcoin functions in a free-float and its price can skyrocket (and equally likely, crash)
depending upon its demand (discussed below) in the market.

Hence, while cryptocurrencies demonstrate certain characteristics of currencies – like
being a store of value, having easy liquidity, demonstrating usability as medium of
exchange – they lack many others. For one, the unchecked volatility and lack of
recognition as legal tender continually prevent users from undertaking any serious
mercantile activity through cryptocurrencies. Second, cryptocurrencies do not seem to
be able to inspire people to use them as ‘money’. In fact, it is ironic that
cryptocurrencies have gained mainstream global attention not as intermediary-free

16Chhavi Tyagi, PayTM Looks to be the largest digital bank in the world, ET Online <available at:
https://economictimes.indiatimes.com/small-biz/startups/paytm-looks-to-be-largest-digital-bank-in-the-
world-says-10-mln-customers-ready-to-bank/articleshow/61437874.cms?from=mdr>.
17 Pranav Tolani, The Curious Case of Cryptocurrencies, India Corp Law <available at:
https://indiacorplaw.in/2018/08/curious-case-cryptocurrencies-part.html>.
18 What Exactly is RBI Intervention? <available at: https://www.ndtv.com/business/rupee-what-
exactly-is-rbi-intervention-304471> .

alternatives to traditional currencies (which is what they were anticipated to be used
as), but as speculative too-good-to-miss kind-of investment opportunities. For the
above reasons, it can be argued that cryptocurrencies are not currencies (or money)

India has faltered in its approach to regulating bitcoins and cryptocurrencies.
Although, there is no specific regulation directed towards cryptocurrencies, the RBI
has stated in a policy statement that regulated entities, i.e. banks and NBFCs, must not
deal with or provide services to individuals or entities involved in dealing or settling
of virtual currencies. Yet, formal guidelines for the same are yet to be issued. The
finance minister had stated that the Indian government does not consider
cryptocurrency to be ‘legal tender’ under Indian law. This means that those investing
in cryptocurrencies in India do so at their own peril; and additionally, that there is no
bar on the usage of cryptocurrencies, but the investor may not seek redressal for
matters involving the same.19

The RBI Report on Electronic Money, which defined e-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”.20 This definition can cover within its
ambit both e-wallets and digital cash. However, when viewed in conjunction with the
PSS Act and the Master Direction on Issuance and Operation of Prepaid Payment
Instruments, it becomes evident that to be a payment system, the instrument must
store some monetary value. Hence, cryptocurrencies cannot be considered a payment
system under Indian law – since they do not have any value stored in them, and any
value is contingent on market speculation.21

(a) Payment and Settlements Act 2007:

This legislation gives the Reserve Bank of India (RBI) the power to certify any kind
of pre-paid payment instrument. The RBI defined ‘Pre-paid Payment Instrument’
as: “Payment instruments that facilitate purchase of goods and services against the

19 Sannat Chandna, Legality of Cryptocurrency in India, India Corp Law<available at:
https://indiacorplaw.in/2018/02/legality-cryptocurrency-india.html>.
20 RBI, Report of the Working Group on Electronic Money (2002) <available at:
https://www.rbi.org.in/scripts/publicationreportdetails.aspx?id=290>.
21 Ashwin Ramanathan, Anu Tiwari & Rachana Rautray, Blockchain & Cryptocurrency Regulation
2019: India, Global Legal Insights <available at:https://www.globallegalinsights.com/practice-
areas/blockchain-laws-and-regulations/india#chaptercontent3>.

value stored on such instruments. The value stored on such instruments represents the
value paid for by the holders by cash, by debit to a bank account, or by credit card.”

Now, upon comparison with cryptocurrency, it is seen that virtual currency is not
stable and keeps changing on a regular basis. Further, it may or may not be accepted
as a means to facilitate a purchase of goods and services. Since it does not fulfil the
requisites of a ‘Prepaid Payment Instrument’, it cannot be categorized as such, under
the purview of the Payment and Settlement Systems Act, 2007.

(b) Negotiable Instruments Act 1881:

The Act defines a negotiable instrument under section 13 as “a promissory
note, bill of exchange or a cheque payable either to order or to bearer.”22 On
a careful interpretation of the instruments given under section 13, it is amply
clear that a cryptocurrency does not have the characteristics to be included
within a promissory note, bill of exchange and a cheque. And, thus, its
specifications are not sufficient to be included under the ambit of the said
Act.

(c) Securities Contracts (Regulation) Act, 1955

After a close and critical analysis of the provisions under section 2(h), it is seen that
cryptocurrencies do not fall within any of the sub-clauses mentioned under the
section. The only means by which a cryptocurrency can be included within the term –
“securities” is by using the sub-clause (ii)(a), which grants the Central Government
the authority to declare certain instruments as securities. But, as the situation stands,
the Central Government does not see it as legal tender, nor has it been given any due
recognition and, thus, cannot be used as a part of the aforesaid Act as well.

(d) Reserve Bank of India Act, 1934 (RBI Act)

The only manner for inclusion of cryptocurrency within the sphere of the RBI Act,
1934 is upon its scrutiny with respect to the definition of “derivative”. A
cryptocurrency fulfils the first part of the definition, coming under the term
instrument and having its value derived from a change in combination of several

22 S. 13, The Negotiable Instruments Act 1881 <available at: https://indiankanoon.org/doc/1275897/>.

factors. But, the factors mentioned in the definition have no bearing upon the value of
a cryptocurrency. Its value, i.e., its price goes higher upon greater demand for it,
along with other factors such as its recognition; it being declared illegal will also
affect its value. Hence, only if it is interpreted under the category of a variable of like
nature, will the RBI Act deem to include cryptocurrency within its ambit under the
definition of a “derivative”.

(e) Foreign Exchange Management Act, 1999 (FEMA)

None of the Indian statutes interpret or define virtual currency and thus, to evaluate
the status of cryptocurrency, the definition of “currency” is to be looked at. Section
2(h) of the Act defines the term “currency” as follows:

“Currency” includes all 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 Bank.23

On a careful perusal of the aforesaid, it is clear that cryptocurrencies do not fit within
any of the instruments in the given definition, but it does not exclude the possibility of
the same being notified as currency by the Reserve Bank. But, until that happens, the
situation has to be viewed from the fact that Japan has declared Bitcoin as a legal
tender in its country and thus, any currency other than the Indian one will have to be
considered as “Foreign Currency” under the FEMA and will have to comply with the
rules and guidelines set under it.

(f) Copyright Act, 1957

The Copyright Act, can be co-related with cryptocurrency in the manner it defines a
“Computer Programme”. As per section 2(ffc), a computer programme is “a set of
instructions expressed in words, codes, schemes or in any other form, including a
machine readable medium, capable of causing a computer to perform a particular
task or achieve a particular result”.24

23 Section 2(h), Foreign Exchange Management Act 1999 <available at:
at:
https://indiankanoon.org/doc/6663237/>.
24 Section 2(ffc), The Copyright Act 1957 <available
http://www.copyright.gov.in/Documents/CopyrightRules1957.pdf>.

If cryptocurrency is analyzed in a broad manner, then the definition stated above,
which includes a set of instructions expressed in codes or any form will be sufficient
enough to bring virtual currencies within its purview.

(g) Information Technology Act, 2000 (IT)

The Information Technology Act has a term called asymmetric crypto system within
its sphere. The term asymmetric crypto system has been defined under section 2(f) of
the Act as a system of a secure key pair consisting of a private key for creating a
digital signature and a public key to verify the digital signature.25

Now, the system of cryptocurrencies functions through the issuance of a private key
to each owner and holder of a cryptocurrency. Further, cryptocurrency can be
categorized in two forms i.e.:

(1) A symmetric-key system which uses a single key that the sender and recipient
both have; and

(2) A public-key system which uses two keys, i.e., a public key that is known to
everyone and a private key which only the recipient of messages uses.

From the aforementioned, it is comprehensible that virtual currencies can be assessed
and used as a part of the IT Act under the definition of the expression- “Asymmetric
Crypto System”.

(h) General Clauses Act, 1897

The General Clauses Act defines a movable property under Section 3(36). The section
states the term to include a property of every description, except immovable
property.26 Now, Immovable property has been defined under section 3(26) and shall
include land, benefits to arise out of land, and things attached to the earth, or
permanently fastened to anything attached to the earth.27

25 Section 2(f), Information Technology Act 2000 <available at:
https://indiankanoon.org/doc/1752240/>.
26 Section 3(36) of General Clauses Act 1897 <available at:
http://www.delhihighcourt.nic.in/library/acts_bills_rules_regulations/General%20Clause%20Act.pdf>.
27 Section 3(26) of General Clauses Act 1897 <available at:
http://www.delhihighcourt.nic.in/library/acts_bills_rules_regulations/General%20Clause%20Act.pdf>.

As has been stated above, a cryptocurrency has the requisites to fit within the
definition of a computer programme, but, the same cannot be categorized under the
definition of an immovable property. But, at the same time, it clearly seems good
enough to be included under the definition and be treated as a movable property
within the General Clauses Act.
To be able to consider a cryptocurrency within the scope of ‘money’, there is no need
to look further than the ratio pronounced in the case of The Central Warehousing
Corporation v. Central Bank of India Ltd. (1972)28, in which it was held that “money
can be considered as a movable property under section 3(36) of General Clauses Act.”
Hence, upon the usage of a mathematical equation where cryptocurrency comes
within the definition of a movable property and money too, it can be considered to be
a movable property. Hence, upon putting the two together, it can be concluded that
cryptocurrency is a form of money.
Before concluding, it is imperative to look at the grey areas surrounding the use of
cryptocurrency in India. Virtual currencies can be taken to be goods of intangible
nature under the Sale of Goods Act, 1930 or may even be considered as an asset under
the Wealth-Tax Act, 1957. Whichever manner in which a cryptocurrency is classified,
the imposition of tax upon its transfer and applicability of the Income Tax Act, both
as a short-term as well as a long-term capital gain is an area which remains in the dark
as of now.29

28 AIR 1974 AP 8 <available at: https://indiankanoon.org/doc/1250432/>.
29 Sannat Chandna, Legality of Cryptocurrency in India, India Corp Law<available at:
https://indiacorplaw.in/2018/02/legality-cryptocurrency-india.html>.