A cryptocurrency is a digital, decentralised, encrypted form of currency. The price of cryptocurrencies is not set by a central authority. The value of a cryptocurrency is instead decided by its online users. Cryptocurrency is decentralised because it is operated by a network of many computers. This means that no single entity, such as a government or central bank, has complete control over the currency.

The first cryptocurrency was Bitcoin, which Satoshi Nakamoto first conceptualised in a 2008 paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. An electronic payment system based on cryptographic proof rather than faith was how Nakamoto defined the proposal.

Introduction
Cryptography is used to safeguard financial transactions, manage the generation of new units, and verify the transfer of assets in a digital or virtual currency known as cryptocurrency. Cryptocurrencies typically function on a technology called blockchain and are decentralised, in contrast to conventional currencies that are issued by governments.

Blockchain technology is a distributed ledger that maintains an immutable record of all transactions across numerous computers, or nodes. This technology is used by cryptocurrencies to establish a decentralised, trustless system that allows transactions to be confirmed and recorded without the involvement of middlemen like banks or financial institutions.

The fact that cryptocurrencies are digital, rather than real like coins or banknotes, is one of their distinguishing characteristics. The first decentralised cryptocurrency, Bitcoin, was introduced in 2009 and is still the most popular and frequently used. Since the launch of Bitcoin, dozens of additional cryptocurrencies, often known as altcoins, have been developed, each having a distinctive set of features, functions, and underlying technologies.

Due to their promise for financial privacy and security as well as their capacity to support quick, inexpensive international transactions, cryptocurrencies have grown in popularity. Due to their erratic character and potential for huge price volatility, they have also garnered interest as speculative investments.

It's crucial to remember that while cryptocurrencies have many benefits, they also have hazards like regulatory uncertainty, cybersecurity flaws, and the possibility of fraud or illegal activity. Therefore, those who are interested in cryptocurrencies should proceed with caution, do their study, and be aware of the hazards.

Legal position of cryptocurrencies in India

The future of digital currencies is a hotly debated subject because India is one of the nations that uses cryptocurrencies the best. The security vulnerabilities with cryptocurrencies like Bitcoin have been the subject of numerous press releases from RBI. In India in 2017, a committee was also established under the leadership of Shri Subhash Chandra Garg to examine the legal problems related to virtual currencies. The Committee Report recommended against allowing any private cryptocurrency in India.

In April 2018, the RBI issued a circular prohibiting commercial and cooperative bank, small financing banks, payment banks, and NBFCs from not only engaging in their own virtual currency trading, but also from supplying services to any organisations that engage in such trading. The Internet and Mobile Association of India (IMAI) submitted a writ petition to the Supreme Court on May 15, 2018, requesting the withdrawal of the RBI Circular. The earlier ban imposed by the RBI was overturned by a ruling from the Supreme Court.[1]

The government then unveiled the 2019 Digital Currency Bill. The bill stipulates that anyone found guilty of mining, owning, selling, issuing, transferring, or utilising cryptocurrencies faces a maximum 10-year sentence in prison. The statute made it possible for the government to launch its own digital currency, the Central Bank's Digital Rupee.

According to the Bill, a cryptocurrency is any piece of data, code, or token that can be used as a store of value or a unit of account that contains a digital representation of value.

The Indian government just suggested a new law on January 29, 2021, in Circular Number 2,022, in the E' new bills area under Legislative business. A new bill that would outlaw all private cryptocurrencies in India and provide the groundwork for the formation of an official digital currency that will be issued by the Reserve Bank of India has been listed by the government. The Reserve Bank of India (RBI) would issue an official digital currency under the terms of the new bill, which will be known as The Cryptocurrency and Regulation of Official Digital Currency Bill 2021.

Additionally, the measure contains clauses that would outlaw all private cryptocurrencies, including Bitcoin, Ether, and Ripple, with the exception of some purposes and the promotion of the underlying technology. The establishment of a digital version of the Indian rupee was also discussed by the government in an RBI brochure on payment systems.

The following are legal problems relating to cryptocurrencies:

• Parties to transactions are anonymous.
• Issues stemming from improper authority.
• Lack of clearly defined laws.
• Tax evasion and money laundering issues.
• Phishing attacks users encounter.
• Data loss.
• Unsafe trading and buying platforms.

Impact of Cryptocurrency on Tax Regime

The financial elements of cryptocurrencies are another topic that has authorities' interest. The legal classification of cryptocurrencies is crucial in establishing their tax implications. The primary difference is whether bitcoin is considered a currency or a commodity (capital asset like a stock), in which case capital gains regulations apply. Taxes apply to cryptocurrency transactions just like they do to any other kind of asset or money.

Transactions involving cryptocurrencies may be subject to wealth tax, transaction tax, income tax, and capital gain tax. Even if a bitcoin transaction is invalid and illegal, the tax code has the authority to impose taxes on it. Despite the fact that Bitcoin serves as a medium of exchange, a unit of account, a store of value, and behaves like real currency in some environments, the Internal Revenue Service of the United States decided in March 2014 that it will be treated as property rather than currency for tax purposes. Bitcoin will therefore be liable to capital gains tax.

Speaking globally, certain nations concentrated on determining which category Bitcoin should belong to. For instance, Canada came to the judgement that Bitcoin fails the currency test and should be treated as a commodity for tax reasons since it lacks the attribute of being a legal tender. The Canadian Revenue Agency specifically stated in January 2014 that when using Bitcoin to pay for products or services, "transactions involving bitcoins should be reported as would any other barter transaction."

Lastly, depending on what would be commercially viable, Germany and the United Kingdom have decided to modify their tax systems. In fact, Germany elected to recognise Bitcoin as an equal to private money and gave it the tax regulations of a currency even though it is not a currency because it has been denationalised. 

Cryptocurrencies can therefore be viewed as a form of payment, a legal tender, a piece of property, or a contract's object. Accordingly, it may depend on the type of transaction and the legislative authority to tax such a transaction. Property tax, inheritance tax, transaction tax, service tax, value-added tax (VAT), gift tax, wealth tax, capital gain tax, income tax, and many more taxes are a few that may draw cryptocurrency users.[2]

Conclusion
Given all the above-mentioned difficulties, it is true that the majority of people are not rushing to invest in digital currencies, but there are still some people who are eager to use digital currencies while taking some risk.

Because virtual currencies lack the same regulatory oversight as traditional currencies, their safety and security are perpetually in doubt. If the government enacts appropriate legislation to address the related difficulties, cryptocurrency use can be done bravely once. It's usually wise to learn everything there is to know about digital currencies before joining the league.

If utilised legally, cryptocurrencies have the potential to be highly beneficial to the average person. To strengthen the legitimacy of the use of digital currencies, the government can create a permanent law that closes all the gaps and security flaws already present.

References:

• https://www.legalserviceindia.com/legal/article-4720-cryptocurrencies-and-related-legal-issues-in-india-with-special-reference-to-bitcoin.html
• https://anvpublication.org/Journals/HTMLPaper.aspx?Journal=International+Journal+of+Reviews+and+Research+in+Social+Sciences%3bPID%3d2019-7-2-13
• https://www.imf.org/en/Publications/fandd/issues/2022/09/Regulating-crypto-Narain-Moretti
• https://www.sciencedirect.com/science/article/abs/pii/B9780128021170000138

End-Notes:

1. Legal Service India, https://www.legalserviceindia.com/legal/article-4720-cryptocurrencies-and-related-legal-issues-in-india-with-special-reference-to-bitcoin.html (last visited June. 21, 2023).
2. Akanksha Singh & Sharan Chawla, Cryptocurrency Regulation: Legal Issues and Challenges, 7 International Journal of Reviews and Research in Social Sciences 365, 365-375 (2019).