VIRTUAL CURRENCY Bitcoins

Is Virtual Currency paving way for parallel economy or acting as substitute for

conventional currency

Namrata Shah

namratakshah@gmail.com

http://finance-nams.blogspot.in/

Index • Introduction

– Virtual Currency & Bitcoin

• How Bitcoins works?

• Regulatory Authority

– Legal Status – SEBI – RBI – Income Tax – Ministry of Finance

• National Issue

Introduction - Meaning

• Unit of Exchange in Virtual Form.

• No Intrinsic Value

• Not regulated by central bank or backed by real – world commodity

• Based on decentralized peer-to-peer network

• Technology outpacing Law

• Used by vendors and service provider as barter means of exchange

• It can assume Forms like:- – Coupons – Credit Card Points – Online-Gaming Points – Loyalty Points – Peer-to-Peer Currencies

• Bitcoins

Introduction - Evolution

• Coupons: – 1887 – Coca-Cola issued First-Ever Coupon as Marketing Strategy.

• Credit Card Points: – 1984 – Diner’s Club introduced Credit Card Points.

– 1986 – Discover strengthened the same by offering Cash Back on Points.

• Peer-to-Peer Currencies: – 2003 – Linden Dollars were introduced as a Unit of Currency for all

Transactions on Virtual World “Second Life” followed by Lindex Currency Exchange in 2005.

• Facebook or other virtual game Credits

Introduction – Virtual Currency Family

Name Market Cap *($) Price * ($)

Bitcoin 7,420,402,864 610.420

Litecoin 408,915,259 16.930

Peercoin 65,970,990 3.150

Namecoin 31,052,948 4.110

Quark 21,740,375 0.088

Nxt 17,902,362 0.018

ProtoShares 14,859,788 12.610

WorldCoin 13,542,075 0.370

Megacoin 10,328,707 0.480

Primecoin 7,826,751 2.130

* Market Capital and Price as of Dec 21, 2013

Introduction - Bitcoin

• The Fastest Growing and All-Market Penetrating of all Virtual Currencies.

• Introduced in 2008 by a Group using pseudonym Satoshi Nakamoto. It became fully operational in 2009.

• Upto 21 Million Bitcoins will be created by 2020.

• 1 BTC = $623.20 and 1 BTC = Rs.38,860 (as of Dec 21, 2013)

• Bitcoins – most popular of over 50 crypto-currencies

Application of Bitcoins – Global & Local

• Globally - – Subway Sandwich – Allentown, Pennsylvania

– Auctioned Art & Antiques - aspireauctions.com

– Haircut – Barber Josh Arias

– Honey – Frangiosa Farms, Denver, Colorado

– Legal Representation – Ryan Hurley, Scottsdale, Arizona

– Martial Arts – Atlanta Kick – Atlanta, Georgia

– Flight Booking – CheapAir.com

– Other Online Websites like Wordpress, Reddit, 4Chan, The Pirate Bay, EZTV

• Locally – – Salon - Castlebloom in Chandigarh has started accepting Bitcoins

Benefits of Bitcoins

• Each transaction is time stamped

• Chain of records is retained for each transaction and can’t be changed.

• Each owner transfers the coin to the next signing a hash of the previous transaction and the public address of the next owner.

• All transactions are open and public.

• As it leaves trail behind, it would facilitates in forensic investigation

How Bitcoin Works?

• Concept

• Definition of terms used

• Making Payment

How Bitcoins Works? • The Concept uses Cryptography to Control its Creation and

Transactions, rather than Central Authority.

• It shares a Public Ledger called Block Chain, that stores every Transaction ever Processed, allowing a User’s Computer to verify the Validity of Each Transaction.

• In simple terms, it provides a Personal “Wallet” to each User to Send and Receive Bitcoins.

• Bitcoins can be acquired by:- – Bitcoin Mining – Purchase at Bitcoin Exchange – Exchange Bitcoins with someone near you – As Payment for Goods & Services

How it Works??

• Making Payment:

Regulatory Authority

• Legal Status

• SEBI – Introduction

– Other country outlook

• RBI – Introduction

– Other country outlook

– Suggestion for Application in Indian Context

• Income tax Authority – Introduction

– Other country outlook

– Suggestion for Application in Indian Context

• Ministry of Finance

Legal Status of Bitcoin Country Regulatory Authority Guideline Proposed

US (FinCEN) It regarded Bitcoin miner and Bitcoin exchange as Money Services Business (MSB)

US Senate regarded Bitcoin as ‘legal means of exchange’

Germany Regards it as ‘private money’ or ‘unit of account’

Australia National Australia Bank

Has most but not all qualities to be currency It would take years to achieve

mainstreamacceptance

Banned / Restricted Country Regulatory

Authority Guidelines Proposed

Thailand Bank of Thailand • Refused to license Bitcoin • Shut down of Thai Bitcoin exchange • Ban on buying and selling Bitcoins

China People’s Bank of China

• Restricted financial institution from commercial Bitcoin transaction

• Banned clearance of payment in Bitcoins by third-party providers

Korea Bank of Korea • Rejected Bitcoin or any other cyber currency as real currency

SEBI • The Basic Function of SEBI is to:-

– protect the interests of investors in securities

– promote the development of, and to regulate the securities market

– and matters connected therewith or incidental thereto

• Buying and Selling Bitcoin is similar to Stock Trading – A must Watch for SEBI for a Currency without any Government Regulation. – A Website called BuysellBitco.in, based in Ahmedabad, Gujarat, is

already offering ‘Bitcoin Exchange’ type services in the Local Currency.

• Investors are unprotected as the Currency is neither Controlled nor Regulated by any Government Authority.

• Unscrupulous Operators may emerge, to make profit at the Cost of General Public.

• Investors may Loose heavily if the Bubble is not controlled on time.

Regulatory - Other Country Outlook

Country Regulatory Authority

Guideline

US SEC It has issued an investor alert warning investor about fraudulent investment schemes involving Bitcoins and other virtual currencies.

Sweden • Considers as a means of Payment. • Guidelines issued for Registration and Working of Exchanges dealing in Bitcoins.

RBI

• Reserve Bank of India is the Central Bank of the Country - – controlling the Issue of Currency

– Regulating and Supervising the Financial System

– Managing the Exchange Control

• Also, as Bitcoin is exchanged for INR and Other Currencies.

• Implication – Irregular Exchange of INR for Bitcoin will reduce the hold of RBI over

Currency Movements in the Country.

– Also, RBI will not be able to control Rupee Price if it starts getting traded on Exchange outside its Scope.

Monetary Authority – Other Countries Outlook

Country Regulatory Authority

Guidelines Proposed

US Federal Reserve

• Ben Bernanke said virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system”

UK • Bitcoin-based businesses would not have to register with regulators, at least for the time being, while they consider their regulatory position

India RBI “watching” Bitcoin and gathering information in an attempt to understand the virtual currency

Suggestion for Application in Indian Context

• Regulate – Bitcoin Miners – Bitcoin exchanges – Algorithm / servers

• Regulate Bitcoin circulation

• Establish link between INR, Bitcoin and other virtual currency • RBI should get hold of Money Exchangers and Foreign Exchange

Dealers.

• RBI should check that Bitcoin does not evolve as a New Currency parallel to INR in the Country.

Income Tax

• As Bitcoin Market is not regulated by any Government Authority, neither it has Reporting Requirements nor it is required to keep any Records.

• Bitcoins could be acquired in Cash, Credit card, through online fund transfer or in exchange of any other conventional currencies.

• Unaccounted Money can be utilized for buying the same.

• Bitcoin Market is not regulated by any Government Authority - neither it has Reporting Requirements nor it is required to keep any Records.

• Without any Reporting, all these Transactions go Unaccounted and the Country loses its Revenue Collection by way of Income Tax.

Taxation - Other Country Outlook

Country Guideline Proposed

Germany • Exempted Bitcoin transactions held for over one year from capital gains tax (25%)

Finland • Imposed capital gains tax on Bitcoins • Tax on Bitcoins produced by mining as earned income

UK • Declared that Bitcoins wont be treated as Money but as Single-Purpose Vouchers liable to VAT on Sales

US • IRS is studying virtual currencies and intends to provide guidance on tax consequences

Canada Levy of Tax on 2 Points: • Transactions on Goods & Services will be taxed under Barter Transaction Rules. • Profit on Commodity Transaction.

Suggestion for Application in Indian Context

• Capital asset like a stock - then long-term capital gains and losses—those on assets held for more than a year—would qualify for capital Gain Tax

• Considered as Currency – Gains or losses will be taxed at current Income Tax rates

• Tax when Bitcoins is used to purchase goods or services or given as gift

Ministry of Finance

• With Irregular Stock Exchange for Bitcoin, Free Exchange with INR and Other Currencies, and Easy Utilization of Unaccounted Money, the Finance Ministry has to get in Picture to have a Full-fledge Control of this speedily developing Currency.

• Utilization of Black Money for Purchasing increases the Consumer Demand thereby leading to Inflation.

• In order to control Rupee Value, control Inflation, protect Investors, the Finance Ministry has to Regulate the use of Bitcoins in India.

National Issue

• The National Threat that arises is the use of Bitcoins for Purchase of Controlled Items like Drugs, Narcotics, Illegal Liquor, Banned Tobacco, etc.

• Also, it can be used by Terrorists as it ensures complete Anonymity.