Virtual Currency of Virtual World Present Imperfect And Future Uncertain!!

They were the first Monday

morning blues of 2014! I was

getting ready for office. My

mother, who rescued herself

from Delhi’s chilling winter, paid a

visit to us to enjoy the warm winter

of aamchi Navi Mumbai. As a typical

Punjabi mom, she was in the kitchen

going to wrap hot aalu ka paranthas

in the light brown coloured business

newspaper that was about 10 days

old. She suddenly yelled looking at

that old newspaper,

‘hairabba gold

ka price 800 US dollar ho gaya aur

sarkar ne ban kardiya’

(Oh my God!! Gold price has touched US$ 800 and

government has banned the trading in

Gold). Hearing my mom, the face of

my wife who was planning to empty

a portion of my bank account to shop

for some gold jewellery for her cousin

sister’s wedding turned pale. Both

ladies of my house came to me for my

view (at least on a few matters they

consult me... what a great feeling).

Looking at the newspaper, I calmed both of them and told them that it's not a gold coin with an imprint of the alphabet B which has been cut from the middle by two vertical lines. It's BITCOIN!! a virtual currency for the virtual world allegedly invented by a pseudo character Satoshi Nakamoto. Both were impressed!

Next day, at a meeting in office, on some matter, I decided to take an opinion from a law firm in a predominantly non-English speaking country in Asia. I did not know any one locally in that country so decided to visit the virtual world through Google to find out and stumbled upon a law firm which in its published price list had indicated that the law firm accepts 'Bitcoins' for its legal fees. Wow... I got excited and as a 'digital economy lawyer' decided for virtual PhD on Bitcoins. Here I present my findings from the virtual world about Bitcoins and my own assessment of the present issues and future of Bitcoins in India.

1. The Craze About This Word 'Bit'

The word 'Bit' has given innovation and has caused both excitement and anxiousness. The first 'Bit' with a suffix in the virtual world was "BitTorrent" which has given the virtual world a technology to easily share files on a peer-to-peer network. This technology was initially condemned due to multiple copyright related lawsuits which led to the shutting down of Napster and Kaaza, but is now widely used for legitimate purposes, including by social media websites. Now it's time to put one more suffix to this Bit and that is Coin to make it 'Bitcoin', which also very recently got infamous due to illegal usage than for the legitimate usage.

2. What Is A Bitcoin?

Bitcoin is a digital currency / commodity that is not issued by any government, bank or central organization. Bitcoins are based on an open source math-based protocol existing on an online, peer-to-peer computer network that hosts the public transaction ledger, known as the "Blockchain," and the software source code that provides the rules for Bitcoins and the peer-to-peer computer network (the "Bitcoin Network"). The Bitcoin software source code includes the math-based protocols that govern the creation of Bitcoins and the cryptography system that secures and verifies transactions in Bitcoins. Bitcoins themselves have no physical existence beyond the record of transactions on the Blockchain. The Blockchain serves as a public record of the chain of custody of all Bitcoins and registers all Bitcoin transactions, including the initial creation, allocation of Bitcoins to a digital wallet and all subsequent movements of Bitcoins in later transactions between users. The Bitcoin Network utilises the Blockchain to evidence the existence of Bitcoins in any user's digital wallet. Bitcoin digital wallets are accessed and may be used to receive or send Bitcoins through a digital address together with a public key and private key that are part of the Bitcoin Network's cryptographic security mechanism.

3. How One Gets Bitcoins?

1. Minting: One can get Bitcoin in his/her digital wallet (analogous to a Bitcoin account) by minting the same through cracking algorithms. It's like a reward to the miner for having solved the math-based algorithm. It's not a 'game of chance' but a 'game of skill' and I would say 'really great and complex skill' and I don't know whether better than winning the grand prize of KBC.
2. Trading: One can receive Bitcoin in his/her digital wallet through peer-to-peer transfer or when a seller of goods or services (virtual or actual) receives Bitcoins from the buyer as sale consideration.
3. Currency exchange: One can buy Bitcoin through exchange of a fiat currency. The currency of Bitcoin is denominated as "BTC" or "XBT" or "฿". At present 1 BTC = ~850 US$ or 52700 INR (through www.coinmill.com on 13th Jan 2014). Wait... you don't need to shell out this huge amount to experience Bitcoin trade (if you are legally permissible to do so). Bitcoins are easily divisible, as the smallest unit of the currency is one-hundred-millionth of a Bitcoin.
4. Limits on the number of Bitcoins: As generally known, there can be a total of 21 million Bitcoins and no more!! So limited supply. However, 21 million Bitcoins multiplied by its smallest unit can create 21 trillion Bitcoin units... I hope my math is correct!

4. Are There Any Benefits Of

Bitcoins To The Economy?

1. Bitcoins can never be counterfeited.
2. Bitcoin Exchanges record all transaction data about all trades of a Bitcoin and this data is publicly available. In nutshell, the creator, transferor or transferee of Bitcoin may remain anonymous but the exchanges of a Bitcoin is a public information.
3. Bitcoin can be used by the people who have access to Internet but are not bankable i.e. those who don't have bank account or credit cards.
4. Bitcoin payment processing is far cheaper (or sometimes NIL) than the processing or transaction fees presently charged by the existing payment gateways. This could potentially reduce the price of goods and services which can be traded online.
5. Being a global virtual currency, Bitcoins are immune to exchange rate fluctuation of a typical fiat currency which depends upon the economic status of its sponsored country.
6. Payment for cross-border trade can be more hassle-free and cheaper, which is a great incentive for global ecommerce. Wow... I can use Bitcoin to buy on eBay / Amazon on the Cyber Monday!!

5. So What’s The Legal And Regulatory Fuss About Bitcoins?

Bitcoin is money, and money has always been used both for legal and illegal purposes. The real damage has been caused when Bitcoins were used by online marketplace The Silk Route to facilitate trading of illegal drugs while hiding the identity of the payer and payee. Also, there have been instances of hacking into the private keys of Bitcoins (stealing the Bitcoins from digital wallet). The recent extreme volatility in the exchange rate of Bitcoins has given shivers to the financial and securities regulators world over. Wait wait wait... isn't the same being experienced with the real (technically 'fiat') currencies and commodities? The real currencies and existing financial and security systems of the world have seen more damage / illegality than 12 million Bitcoins can cause. Don't forget sudden uncontrolled surge in oil, gold, property prices and a sudden slump in 2008. The billions of $ exchanged by underworld and used for terrorist financing... the recent Indian political agenda to bring unaccounted wealth back home from offshore havens. And, hacking!!! Indian newspapers are full of news of bank account hacking, Nigerian frauds, credit card frauds and phishing scams. All these exist in the real world with real currency.

6. What's Happening In India On Bitcoin?

Let's look into retrospect. The power to mint coins and issue paper currency has been bestowed on Indian Government right since the British raj. The Paper Currency Act of 1861 conferred upon Government of India the monopoly to issue paper currency. Government of India continued to issue currency notes till the Reserve Bank of India was established on 1st April, 1935 and presently RBI issues paper currency notes. Also, Government of India has the sole right to mint coins. The responsibility for coinage vests with the Government of India in terms of the Coinage Act, 1906 as amended from time to time. The coins are issued for circulation only through the Reserve Bank in terms of the RBI Act.

It all started for Bitcoin in India when RBI took away the Christmas cake from Bitcoin industry by issuing a negative guidance on 24th Dec immediately followed by Enforcement Directorate raids spoiling the New Year party. I guess Income tax and Service tax department would also be warming up to spoil the Valentine's-day party.

As per my knowledge, no Bitcoin is mined in India. Bitcoins are only traded or exchanged in currencies in India. The major issues in India on Bitcoin, as reported, are centred on money laundering and perhaps tax evasion.

India followed its neighbour China in taking legal actions against Bitcoin traders. That's why we say Hindi-Chini bhai-bhai. Actually, India was a step ahead as compared with China as China also prohibited trades in Bitcoin whilst India just issued a caution note to the general public. The RBI press release of 24th Dec gives a ray of hope as RBI indicated that it is evaluating the virtual currencies under the extant regulations, which is in line with the thought process of other developed and fast developing nations.

Coins and paper currency is 'legal tender' and guaranteed by the sovereign. If your coin or note gets torn or mutilated, the RBI will issue you a new one. Bitcoins, as issued by private organizations are not legal tenders and are not guaranteed by the sovereign. If your Bitcoin wallet gets hacked then you have lost the Bitcoin and no one will replace it. It's like burning the paper currency. Also, it's not mandatory for any commercial establishment or trader to accept Bitcoin while it cannot refuse to accept legally issued coins or paper currency. A question which I ask myself, do I really use coins and paper currency for all my transactions? The answer is no. Perhaps my usage of coins and paper currency is primarily limited to those establishments who do not maintain any account of transactions like local grocery shop, house maids, newspaper vendor, milk man etc etc. otherwise I end up transacting in actual currency but through virtual mode like credit, debit or prepaid cards or mobile wallet.

Usage of instruments other than coins and paper currency for trade and commerce in India started through the use of Negotiable Instruments like Hundis, promissory notes and bill of exchange. The next known non-coin-non-paper based payment instrument was magnetic strip cards popularly known as credit / debit cards. The market then matured to paper-based food coupons and gift coupons. And now, prepaid payment instrument of all kinds from paper to electronic to mobile including travellers' cheque. All the above, when introduced, were not formally regulated but adopted by trade and commerce. Gradually, appropriate regulations were enacted to regulate these instruments. These regulations include Negotiable Instruments Act, 1881; RBI circulars on usage of international debit / credit cards / travellers cheque; RBI circulars on cross border money remittance services; enactment of Payment and Settlement Systems Act, 2007 and various regulations made thereunder esp for intermediary payments and pre-paid payment instruments. To formally legalise Bitcoins, I assume appropriate regulations would soon be made.

If legalised, who should regulate Bitcoins?

1. as a currency - RBI
2. as a payment and settlement instrument - RBI
3. as a commodity - Forward Market Commission
4. as a security - SEBI
5. FDI in Bitcoin mining and Bitcoin exchanges - DIPP
6. Taxation of Bitcoin - depending upon the characteristic of Bitcoin, whether a currency, a commodity, a security or a payment instrument.

7. My 2 Cents (Oops... 2 Bitcoins) On This Issue

As with all destructive innovation, benefits outweigh the darker side in the long run. Bitcoin wasn't really developed to be a replacement for fiat currency. Bitcoins are here to stay in the long run and there is a need for governments coming together to frame uniform and flexible regulations for development of Bitcoin as a payment currency for the virtual world. In my view, there is an immediate need to check the volatility, blatant abuse by money launderers and technical compatibility and interoperability for world-wide acceptance. Further, apart from framing enabling regulations, the International standards setting body for payment industry and internet should frame and adopt standards for worldwide uniform adaptability of Bitcoin and protocols for minting and running the exchanges. Also, flexible and innovative means should be found to comply with KYC and AML regulations. One way could be to link the IP address under the new IPv6 regime to an individual or organization against proper KYC and such IP address to be recorded at the Blockchain.

The internet community of aam aadmis getting more powerful. Don't forget the protest of internet community against SOPA and PIPA. Governments need to quickly adopt a balancing approach to cater to the payment system needs of this community.

Disclaimer – The views expressed in this

article are my personal views and are neither

subscribed to nor endorsed by my present or

previous employers. I don’t own or trade in

any Bitcoin.