Bitcoins in India: An Overview

Context:

• The rising popularity of crypto currencies and the increasing number of entities looking at raising funds through Initial Coin Offerings (ICO) has caught the attention of the capital market regulator, which is evaluating whether such instruments and offerings can be brought under its regulatory purview.

Introduction:

• Crypto currencies like bitcoin, ethereum have been under government radar for long and discussions have been held between various bodies, including SEBI and the Reserve Bank of India (RBI), on the possible ways in which this segment can be regulated.
• The regulator is evaluating whether these instruments can be regulated under the current SEBI Act or if there is a need for the government to give additional powers or amend the existing law.
• According to recent study, more than 2,500 Indians invest in bitcoin daily.
• Start ups like Zebpay, Unocoin, Coinsecure, Searchtrade, Belfrics and Bitxoxo are some of the well-known players in the bitcoin and blockchain segment in India.

Initial Coin Offerings (ICO):

• An ICO, like an equity initial public offer (IPO), is an issuance of digital tokens that can be converted into cryto currencies and are mostly used to raise funds by start-up firms dealing in blockchain technology and virtual currencies like bitcoins and ethereum.
• Unlike an IPO, which is governed by SEBI regulations, there is no regulatory body for ICOs in India.
• According to data from UK-based CoinDesk, nearly $2.7 billion has been raised globally through ICOs since 2014.
• China recently banned such offerings after its central bank said that ICOs are “illegal public finance” mechanism used for issue of securities and money laundering.

What is crypto-currency?

• Crypto currency, which planned to be brought under a regulatory regime, is a digital currency.
• Bitcoins is one of the kinds of Crypto currency recently in news.
• It allows transacting parties to remain anonymous while confirming that the transaction is a valid one.
• It is not owned or controlled by any institution including both government institutions and private institutions.
• Multiple numbers of such currencies are used globally such as Bitcoin, E thereum, and Ripple.
• Crypto-currency can also be used for a lot of legal activities depending on which retailers accept such currency.

What is bitcoin?

• Bitcoins are the virtual currencies used for various financial transactions.
• They are backed by the diversified and decentralized system of Block Chain Technology.
• In recent times, Bitcoins have become a topic of debate. Bitcoin prices in the past one year have only headed north. In the last five months since January 2017, the value of BTC has doubled in absolute value compared to the dollar.
• Bitcoin is a digital currency system. Bitcoin transactions are sent from and to electronic bitcoin wallets, and are digitally signed for security. Everyone on the network knows about a transaction, and the history of a transaction can be traced back to the point where the bitcoins were produced.
• It is an attempt by a firm, using blockchain technology, to create a set of shares in a trading entity that had an initial set value and fixed number (much like the face value and number of shares offered in an initial public offering), in the hope that these shares would become the medium of exchange through which people trade goods and services.

Advantages of Bitcoins:

• Freedom in Payment.
• Allowing users to be in control of their transactions help keep Bitcoin safe for the network.
• Bitcoin protocol cannot be manipulated by any person, organization, or government. This is due to Bitcoin being cryptographically secure.
• Currently there are either no fees, or very low fees within Bitcoin payments.
• Due to the fact that Bitcoin transactions cannot be reversed, do not carry with them personal information, and are secure, merchants are protected from potential losses that might occur from fraud.

Disadvantages of Bitcoins:

• Lack of Awareness & Understanding.
• Bitcoin has volatility mainly due to the fact that there is a limited amount of coins and the demand for them increases by each passing day.
• Bitcoin is still at its infancy stage with incomplete features that are in development.
• It undermines the authority of banks and financial institutions on the financial system.
• Bitcoin prevents any government and financial institutions from acting as a trusted third party to facilitate transactions.
• There is still no legal framework protecting the rights of users of these technologies or overseeing the institutions that use them.
• Bitcoins have been banned in several countries on grounds that these currencies could be used for money laundering, terror funding and drug trafficking.
• It’s very much still an experimental currency and is a high-risk environment for consumers and investors at the moment.
• Problems such as losses arising out of hacking, no sources of customer recourse and the general financial volatility surrounding Bitcoins.
• As currently, the exchange rates are not stable. Its volatility impacts its long-term sustainability
• Being the free market, its rates could lead to high because not everyone is involved in mining such coins which would create huge demand hence huge price.

Is Banning of Bitcoins a good idea?

• Banning will give a message that all related activities are illegal and will disincentivise those interested in taking speculative risks.
• It will impede tax collection on gains made in such activities.

Uses of Bitcoins:

• Bitcoin is used for multiple purposes including funding companies, investing cash and transferring money without fees.
• It is commonly associated with criminal activity such as drug dealing, cyber crime and money laundering,
• In 2015, RBI published a financial stability report on disruptions in financial technology. In the report, it highlighted the importance of ‘private blockchains’ which have the potential to transform how bank back-end operations functions, as well increasing the payments.
• The digital currency can be used to move money inexpensively across borders within a matter of minutes without even having a bank account.

Use of Bitcoins in financial services:

• Used as the money for purchase, sale and exchange of the goods and services.
• The records of financial transactions are easily kept through Blockchain Technology over which bitcoins are used.
• Such currency are digital , therefore promotes cashless economy.
• Bitcoins are considered as future of global currency hence investment over it could really boost participation of financial services.
• Transaction cost: Low transaction cost as compared to normal fiat currency transaction, so Bitcoin can be used as money.
• Smarter contracts because of highly adopted programming features enables it to work in different environment.
• Easy record keeping: As compared to fiat currency transaction Bitcoin transaction requires easy record keeping with creation of separate blocks by blockchain technology.

Are Bitcoin legal in India?

• Even countries such as Japan and Russia had legalised the use of Bitcoins, India, despite being at the cusp of a digital revolution is yet to officially recognise the cryptocurrency.
• Reserve Bank of India, had earlier cautioned users, holders, and traders of virtual currencies including Bitcoins.

What will be implications if Bitcoins are legalised in India?

• Bitcoins would fall under the purview of RBI’s 1934 Act.
• Bitcoin investors would be taxed.
• RBI would issue guidelines regarding investment and purchase of Bitcoins.
• If any foreign payment is made through Bitcoins, it would fall under the purview of FEMA Act.
• Returns from investment in Bitcoins would be taxed.
• The new regime may possibly bring trading under the domain of the stock market regulator, Securities and Exchange Board of India (SEBI).
• The idea is to treat such currency in a similar manner like gold sold digitally.
• It can be treated on registered exchanges in a bid to “promote” a formal tax base.
• It will keep an eye on their use for illegal activities such as money laundering, terror funding, and drug trafficking.

What are Blockchains?

• Blockchains are a new data structure that is secure, cryptography-based, and distributed across a network.
• The technology supports crytocurrencies such as Bitcoin, and the transfer of any data or digital asset.
• Blockchains achieve consensus among distributed nodes, allowing the transfer of digital goods without the need for centralized authorization of transactions.
• The present blockchain ecosystem is like the early Internet, a permission less innovation environment in which email, the World Wide Web, Napster, Skype and Uber were built.
• The technology allows transactions to be simultaneously anonymous and secure, peer-to-peer, instant and frictionless. It does this by distributing trust from powerful intermediaries to a large global network, which through mass collaboration, clever code and cryptography, enables a tamper-proof public ledger of every transaction that’s ever happened on the network.

Benefits of blockchain technology:

• As a public ledger system, blockchain records and validate each and every transaction made, which makes it secure and reliable.
• All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
• Blockchain technology discards the need of any third-party or central authority for peer-to-peer transactions.
• It allows decentralization of the technology.
• Some telecom firms in places such as India and Kenya are already using their networks to help people settle cash transactions, but these are proprietary and meant largely for poor and underbanked areas with considerable mobile penetration.

Concerns associated:

• Blockchain is still a (relatively) new technology and is not without its problems.
• There are ongoing concerns about privacy in the settlement and storage of securities .blockchain providers are working hard to address.
• Banks are also at threat with blockchain, since more and more firms (using their IT service providers from India and elsewhere) will build systems that can create and exchange ‘blocks’ with one another completely legally, without ever having to use the banks as a financial intermediary.

Way Forward:

• In many western countries, Bitcoins are treated as properly and capital gain tax is imposed on it.
• India should also treat it as property and impose capital gains tax.
• Implementing strict KYC norms and eliminating secrecy of transactions.
• Encourage the development of a supervision ecosystem that tracks legal activities and also assist in tackling illegal activities.
• A more realistic scenario in future could be both bitcoins and fiat money are used side by side, with bitcoins used mainly to pay people or businesses who can accept bitcoins, and fiat money used to pay for basic goods and services.
• Extremely well regulated process is required.
• Self-regulatory regimes for trading of bitcons and other blockchain based digital assets apart from standardizing Know Your Customers (KYC), Anti Money Laundering (AML) and Suspicious Transaction Repors (STR ) norms for the members companies.
• Urgent need of a self-regulatory organisation (SRO) that could formally lay down principles to take care of concerns like money laundering and other possible misuse.