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    WORLD OF BITCOINS

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    INTRODUCTION

    We live in a world where transactions are made by traditional methods using separate

    currencies. This system has been implemented since the dawn of time. But for a more

    modern approach, a new form of currency called as crypto currency have been

    introduced by various organizations around the world. The first crypto currency to be

    introduced is the Bitcoin.

    Bitcoin is the creation of a computer programmer named using the pseudonym

    Satoshi Nakamoto that made its debut in January 2009. This is an open source, peer-

    to-peer, digital currency that has no physical manifestations. Unlike earlier digital

    currencies that had some central controlling person or entity, the USP of Bitcoin lies

    in its network being completely decentralized, with all parts of transactions performed

    by the users of the system. This is similar to the U.S. dollar so, Bitcoin is a fiat

    currency in that it is not redeemable for some amount of another commodity i.e.

    Bitcoin in itself does not any intrinsic value. But unlike the dollar, a Bitcoin is not

    legal tender nor backed by any government or any other legal entity, nor is its supply

    determined by a central bank. The Bitcoin system is a separate network, with no

    intervention of traditional financial institutions.

    In this report we are going to introduce Bitcoin. We will be talking about the different

    features of Bitcoin and the process by which bitcoin works. We will then continue to

    critically analyze the legal and the social aspect of bitcoin in different countries

    around the world. We would then conclude by talking about the possible introductionof Bitcoin in India and the legal aspect attached to it according to the Indian judicial

    system.

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    FEATURES OF BITCOIN

    Are Bitcoin Transactions Anonymous?

    Bitcoin transactions are not completely anonymous. An example of an anonymous

    transaction is an exchange of cash between two strangers. In this case, no personal

    information needs to be revealed nor does there need to be a record of the transaction.

    At the other extreme a non-anonymous transaction is a typical online purchase using a

    credit card. This transaction requires validation by a third-party intermediary who

    knows the identities of buyer and seller and about their financial information and who

    maintains a record of the transaction. A Bitcoin transaction falls between these two

    extremes.

    In a Bitcoin transaction there is no third party intermediary (such as Paypal or Visa in

    e-transactions). The buyer and seller interact directly but their identities are encrypted

    and no personal information is transferred to one another.

    However, unlike a fully anonymous transaction, there is a transaction record. A full

    transaction record of every Bitcoin and every Bitcoin users encrypted identity ismaintained on the public ledger. For this reason Bitcoin transactions are thought to be

    pseudonymous, not anonymous.

    If Bitcoin exchanges (where large transactions are most likely to occur) are to be fully

    compliant with anti-money laundering laws for complete safeguard like other

    financial intermediaries, then they will be required to collect personal data on their

    customers, limiting further the systems ability to maintain the users pseudonymity.

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    Reason for Interest in Topic

    The interest in topic of Bitcoin arises because of certain concerns about it, which can

    be enlisted as follows:

    1.

    Its use in illegal money transfers and questionable transactions. Its potential

    for facilitating money laundering

    2. Its effect on the ability of the Federal Reserve to meet its objectives (of stable

    prices, maximum employment, and financial stability).

    3. The protection of consumers and investors who might use it.

    Bitcoin offers users the advantages of lower transaction costs, increased privacy, and

    long-term protection of loss of purchasing power from inflation. However, there are

    also a number of disadvantages that could hinder wider use. These include sizable

    volatility of the price of Bitcoins, uncertain security from theft and fraud, and a long-term deflationary bias that encourages the hoarding of Bitcoins. Bitcoin also raises a

    number of legal and regulatory concerns, along with lack of clarity about its status in

    the regulation of foreign exchange trading.

    How Does the Bitcoin System Work?

    Bitcoin is sometimes referred to as a crypto-currency because it relies on theprinciples of cryptography (communication secure from view of third parties) to

    validate transactions and for the production of the currency itself. Each Bitcoin as

    well as every user is encrypted with a unique identity. Each transaction is recorded on

    a public ledger (called a Blockchain) that is visible to all computers on the network,

    but does not reveal any personal information about the parties involved. The public

    ledger is meant to verify that the buyer has the amount of Bitcoin being spent and has

    transferred that amount to the account of the seller.

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    The public ledger is a unique attribute of Bitcoin because it solves the so-called

    double spending problem (i.e. spending money you do not own by use of forgery or

    counterfeiting) and the need for a trusted third party (such as a bank or credit card

    company) to verify the integrity of electronic transactions between the transacting

    parties.

    Why Would One Want to Use Bitcoins?

    Lower Transaction Costs

    In absence of any third-party intermediary, Bitcoin transactions are intended to be

    substantially less expensive for users than those using traditional payments systems

    such as Paypal and credit cards, which charge merchants significant fees for their role

    as trusted intermediary to validate e-transactions. Additionally, Bitcoin sales are non-

    reversible, which removes the possibility of consumer charge-backs, which merchants

    find costly. Merchants would presumably pass at least some of these savings on to the

    customer. While there is a lot of apparent evidence that this is true, there is no

    comprehensive data on the size of Bitcoins effective transaction cost advantage.

    Increased Privacy

    Those who seek a higher degree of privacy may feel more comfortable using Bitcoins

    for their (legal) commercial and financial transactions. The risk of identity theft can

    also be less, and some even may find the removal of government from a monetary

    system attractive. However, as discussed, Bitcoin transactions do not have theanonymity afforded by cash transactions, as there is a complete historical record of

    Bitcoin amounts and permanent encrypted data of all transactions on the Bitcoin

    system that is potentially traceable.

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    No Erosion of Purchasing Power by Inflation

    Inflation is broadly defined as an increase in the prices of goods and services. This is

    equivalent to saying that there is a fall in the real value of the currency. It is

    commonly believed to be a monetary phenomenon in which the supply of the

    currency outpaces the demand for the currency causing its value (in terms of what it

    can buy) to fall.

    Most often the central bank of an economy regulates the supply of money and credit

    and quite often some degree of mismanagement of this government function is at the

    root of a persistent high inflation problem. In the case of Bitcoin, however, there is nogovernment or central bank regulating the supply of Bitcoins. The supply of Bitcoins

    is programmed to grow at a steady rate regulated by the degree of mining activity and

    then is capped at a fixed amount.

    Inflation could occur if the demand for Bitcoin decreases relative to the fixed supply.

    If these digital banks move to a situation where held reserves stabilize, this source of

    inflation would diminish.

    What Factors Might Deter Widespread Bitcoin Use?

    Slow Transaction Confirmation

    Some of the transaction cost advantage could be offset by the slow speed at which

    Bitcoin transactions are processed confirmed, which, depending on the size of the

    transaction, can take a minimum of 5 minutes or as long as 20 minutes.

    Not Legal Tender

    Rupee is legal tender and by law can be used to extinguish public or private debts. Acreditor is required to accept legal tender for the settlement of a debt. At a minimum,

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    the payment of taxes forces Indian citizens to hold rupee. Arguably, for many, such a

    government endorsement is comforting and creates a strong underlying demand for

    the rupee. By contrast, a currency like Bitcoin that is linked to a complex computer

    program that many do not understand and that operates without accountability to any

    controlling entity could be an unattractive vehicle for holding wealth for many people.

    Price Volatility Discourages Its Use as Medium of Exchange

    Bitcoins price has been volatile since its creation in 2009, subject to sharp

    appreciations and precipitous depreciations in value. However, 2013 has seen a much

    higher level of price fluctuation than ever before. During March and April of 2013,

    Bitcoins dollar exchange rate moved from about $50 up to $350, and back to near

    $70. Bitcoins price has moved up evenmore sharply later during 2013, rising from

    near $50 in September to above $1,100 by early December, and down to near $800 by

    mid-December. This is a price pattern more typical of a commodity than a currency to

    be used as a medium of exchange, and suggests that the market for Bitcoin is

    currently being driven by speculative investors and not by a greater demand for

    Bitcoin due to increased transactions by merchants and consumers.

    A rising dollar price of Bitcoin is likely to deter potential buyers who would expect to

    see their purchasing power be greater in the future. A falling Bitcoin price is likely to

    deter potential sellers who would expect to see their potential sales receipts be greater

    in the future.

    The Systems Long-Term Deflationary Bias Will Deter Its Use as

    Currency

    Because the supply is capped in the long run, widespread use of Bitcoin would mean

    that the demand for Bitcoin would likely outstrip supply, causing Bitcoins price to

    steadily increase. The implication of that increase is that the Bitcoin price of goods

    and services would steadily fall causing deflation. Faced with deflation, there is a

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    strong incentive to hoard Bitcoins and not spend them, causing the current level of

    transactions to fall.

    This possible outcome highlights the importance of the economys principal currency

    being elastic, its supply increasing and decreasing to meet the changing needs of the

    economy, and of the important role of the central bank in implementing such a

    monetary policy.

    Uncertainty of Bitcoin Networks Security

    While counterfeiting is supposedly not possible, Bitcoin exchanges and walletservices have at times struggled with security. Undoubtedly, cash and traditional e-

    payment systems also have periodic security problems, but a high degree of security

    problems on a system trying to establish itself and gain customer confidence could be

    more damaging. Some notable examples of security breaches on the Bitcoin network

    have included the following:

    In September 2012, Bitfloor, a Bitcoin exchange, reported being hacked, with

    24,000 Bitcoins (roughly equivalent to 250,000 USD) stolen. As a result, Bitfloor

    temporarily suspended operations.

    On April 3 2013, Instawallet, a web-based wallet provider, was hacked, resulting in

    the theft of over 35,000 Bitcoins. With a price of 129.90 USD per Bitcoin at the time,

    or nearly 4.6 million USD in total, Instawallet suspended operations.

    On August 11 2013, the Bitcoin Foundation announced that a bug in software within

    the Android operating system had been exploited to steal from users wallets.

    On October 23 and 26 2013, a Bitcoin bank, operated from Australia but stored on

    servers in the USA, was hacked, with a loss of 4,100 Bitcoins, or over 1 million AUD.

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    BITCOIN MINING

    The word mining is used in analogy to gold mining that follows a curve like

    logarithmic function.

    Bitcoin transactions are happening all over the world/network but unless someone

    keeps a record of this no one will be able to know who paid what. Mining is the

    process of assembling the latest transactions from up to ten minutes ago so that they

    become permanent in the history of chained transactions. The bitcoin network deals

    with this by collecting all the transactions made during the 10 minutes into a list that

    is called a block.

    Miners receive these blocks. It contains all the transactions made between two bitcoin

    addresses at a given point of time. The blocks contain cryptographic hashes i.e.

    encrypted transactions. Miners use their computers to decipher the transactions. By

    deciphering the block they are verifying the transactions within it. They validate the

    transactions and do not allow conflicting ones.

    When such a block of assembled transactions is compiled and added to history, the

    ones that devoted computer resources i.e. the miners are rewarded. Miner is rewarded

    to his designated bitcoin address, but usually miners work in mining pools and share

    the rewards collectively. Bitcoins only exist as balances associated with a bitcoin

    address. What you actually keep is the private key of the address. A private key is like

    a password that enables you to spend from the corresponding bitcoin address, and is

    made of 256 bits, a string of 256 zeros and ones. It is usually expressed in more

    compact formats using hexadecimal numbering.

    Mining Tools

    a) Hardware

    To perform mining you need high spec computers. This is required to churn

    through and decipher the available bitcoin blocks. As value of currency appreciates,

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    more and more people are building server farms. This makes financial sense due to

    current value of Bitcoin to the cost of CPU grunt.

    a)

    Software

    To interface to the bitcoin marketplace you need software and a relevant

    bitcoin account. This includes having your own wallet. Many mining applications are

    available online. You can even join a mining pool and work with other miners to

    share in their rewards.

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    LEGALITIES OF BITCOIN IN DIFFERENT COUNTRIES

    There has been a different point of view of different Countries towards crypto-

    currencies but the most popular among them is Bitcoin. More than 25 countries in the

    world have accepted Bitcoin in one or the other way, but it is still restricted and

    declared illegal by many others. Legality of Bitcoins in some of the major Nations is

    briefed as follows:

    United States of America

    United States has accepted Bitcoin and its completely legal to trade and mine Bitcoin

    in USA. According to the declaration of Internal Revenue Service on March 25, 2014

    Bitcoin is treated as a property rather than a currency. General tax principles that

    apply to property transactions apply to the transactions using Bitcoin. However, they

    have also put restrictions on certain use of Bitcoins, like they cant be used as

    donations to political parties for their campaign. Also there are discussions going on

    about Bitcoin being a potential threat to the Nation, as it can increase illegal activities

    like drug, child pornography, etc.

    Instead of the ambiguity about authenticity of the complete process, there are many

    business tycoons who are investing in the field. Like recently, Richard Branson

    (founder of Virgin Group) along with Jerry Yang (Co-founder and former CEO of

    Yahoo Inc.) invested more than $30 million in BitPay (Leading payment processor

    company of Bitcoins).

    China

    China is the country where they had the biggest Bitcoin market initially. It was the

    best time for Bitcoin industry when the price of a single Bitcoin reached about $1000.

    But in December 2013, Central Bank of China, Peoples Bank of China and many

    other financial institutions and banks rejected Bitcoin and said that no transactions

    can be done using Bitcoins. Thereafter, the price of Bitcoin fell to almost $500 in one

    day.

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    China has not rejected Bitcoin but they state Bitcoin as Highly speculative digital

    virtual good. China has not banned the use of Bitcoin official but they have issued

    instruction for their citizen to be careful about the use of Bitcoin. Some of the

    instructions are as follows:

    1.

    Not to use it as a real currency,

    2. It must be treated as special Virtual goods.

    3.

    Beware of theft of your electronic wallet.

    Canada

    Use of Bitcoins in Canada was illegal initially; there was this statement by an official

    of Canadas finance department that stated as Only Canadian bank notes and coins

    are recognized as legal tender in Canada. Bitcoin digital currency is not legal tender

    in Canada.

    Earlier, on 5th November 2014, Canadian Government released tax regulation for the

    use of Bitcoins; it said that the rules of barter transactions would be applied whenever

    its used for payment of goods and services. When two or more people exchange

    goods and services, it termed as Barter Transaction.

    According to Canadian Tax system, the value of the goods or services that are used

    for barter transaction should be specified in the details of taxpayers income and

    according appropriate tax will be deducted from his/ her income.

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    PROS AND CONS OF RECENT DEVELOPMENTS OF BITCOINS

    PROS:

    The advent of Bitcoin is clearly made visible with the increasing reach and

    acceptance by many major companies such as Zynga, PayPal, Tesla, not-for-

    profit organizations like Wikipedia, and educational institution like University

    of Nicosia, to name a few.

    Recently Expedia, one of the worlds largest online travel agencies has

    become the latest company to accept Bitcoins as form of payments, limited

    only to hotel bookings, and restricted to its US site. This has been one of the

    biggest moves for the benefit of this organization as Bitcoins become more

    and more widely accepted. However certain conditions have been levied over

    processing of these transactions, namely that Bitcoins would not be held by

    the company, but would be converted to US Dollars after every 24 hours.

    Denmarks Tax Board recently held a discussion where they concluded that

    any gains (taxed) and losses (deductible) made through Bitcoin trading should

    be exempt from taxation, as Bitcoins are a virtual currency, and not real

    money. Exception to this is the ruling, would be for the Businesses whose

    primary focus is in digital currencies, who are obliged to declare their

    winnings and losses to the government.

    Bitcoin seem to be the most viable candidate to become a possibly universal

    virtual currency, as they cover over 76% of total alternate virtual coin market

    cap.

    CONS:

    The major negative aspect of Bitcoins is the question on its legality across

    different nations, and lack of a central authority to overlook/maintain the

    sanctity/security of the entire system. Theoretical research [5] has been done

    to understand the weak points of the Bitcoin currency network, and one

    possible defect in the system, has been unearthed, is known as the 51per

    center. This research talks about how, if a single entity were able to control

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    more than 50% of the mining sources, would potentially be able to forge

    transactions in the public ledger, as a transaction deemed to be correct and

    verified by more than half the miners, is classified to be true. However,

    although such instances of a single consortium or entitycontrolling over

    half of the worlds total mining haveoccurred earlier (by the group GHash.io),

    no incidents of fudging of the public ledger have been reported.

    Also the security of the computers, mobile phones and servers storing the

    wallets and passwords will become of paramount importance, which is

    contrary to the recent trend of rise of cloud based services, where every app is

    given permissions to access to the locally data stored. This need is clearly

    demonstrated by the recent cases of Mt. Gox Bitcoin Exchange and an

    Australian Bitcoin Bank, who were collectively hacked and in the process

    looted of 654,100 BTC (valued at $406,800,000 as on 14-July-2014).

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    make jihadist donation untraceable. As per Sky news, ISIS is keen to employ bitcoin

    as a mode to finance their terrorist activities. Unlike traditional currency Bitcoins do

    not have central controlling authority and do not require banks and other

    intermediaries for money transfer. So it can be used for evading tax, as bitcoin is not

    so easy to trace. There are numerous ways through which bitcoin transactions can be

    made anonymous. It can become mean to pay for criminal activities because of its

    higher degree of anonymity. It can be used for money laundering, as the source of

    money is secret to some extent.

    The major action taken by the Indian government is the advisory issued by the

    Reserve bank of India on 24th of December 2013. In the advisory the RBI warned the

    users of bitcoin against financial, legal, and security risks and losses due to hacking,

    price volatility and lack of a central controlling authority to address consumer

    complaints. On 27th December 2013, the Enforcement Directorate raided the bitcoin

    exchange buysellbitco.in in Ahmedabad.

    WAYS TO BRING BITCOIN IN THE AMBIT OF INDIAS LAW:

    Theft Of Bitcoins By Unauthorized Access:

    Bitcoin is a form of crypto-currency and it is based on the principles of cryptography.

    As cryptography comes under the provision of IT Act, 2000; bitcoin can also be

    brought under this act after some research and amendments. In this way we can stop

    unauthorized access and hacking, and prevent theft of Bitcoins from virtual wallets.

    THE INFORMATION TECHNOLOGY ACT, 2000

    An Act to provide legal recognition for transactions carried out by means of

    electronic data interchange and other means of electronic communication, commonly

    referred to as "electronic commerce", which involve the use of alternatives to paper-

    based methods of communication and storage of information, to facilitate electronic

    filing of documents with the Government agencies and further to amend the Indian

    Penal Code, the Indian Evidence Act, 1872, the Bankers' Books Evidence Act, 1891

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    and the Reserve Bank of India Act, 1934 and for matters connected therewith or

    incidental thereto

    Money Laundering:

    Bitcoins can be used for money laundering. The goal of a large number of criminal

    activities is to generate profit for an individual or a group. Money laundering is the

    processing of these criminal proceeds to disguise their illegal origin

    The following point has the relevant provision of the prevention of money laundering

    Act, 2002, which can be applied to crypto-currencies - Section 3 of the Act explains

    the offence of money laundering as under: " Whosoever directly or indirectly attempts

    to indulge or knowingly assists or knowingly is a party or is actually involved in any

    process or activity connected with the proceeds of crime and projecting it as

    untainted property shall be guilty of offence of money laundering." Here it talks about

    proceeds of crime and not only money

    PREVENTION OF MONEY LAUNDERING ACTS, 2002

    An act to prevent money-laundering and to provide for confiscation of property

    derived from, or involved in, money laundering and for matters connected there with

    or incidental theyreto.

    Tax Evasion:

    Bitcoins are perfect for tax evasion. Unlike real currency, they are not controlled by a

    central bank and they do not require banks and intermediaries for money transfer. So

    it is very difficult for tax authorities to track such money. There are numerous ways to

    make bitcoin transactions completely anonymous. This makes them suitable for the

    purpose of tax evasion. There is no mechanism to make transactions in bitcoin report

    the income to tax authorities.Charging tax for income made through Bitcoins can

    solve this. If someone sells Bitcoins after keeping them for long period of time then he

    should be charged capital gain tax. If anyone charges bitcoin for any service

    rendered then he should pay income tax after converting them in Rupees.

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    You cannot export goods from India and get paid in Bitcoin and keep your money

    outside India. Payment of exports must repatriate in India in foreign exchange

    through normal banking channels. The Foreign Exchange Management Act can place

    this regulation.

    THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999

    An Act to consolidate and amend the law relating to foreign exchange with the

    objective of facilitating external trade and payments and for promoting the orderly

    development and maintenance of foreign exchange market in India.

    CONCLUSION

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    Bitcoin has the potential to make a significant impact on the market only through

    widespread acceptance. This may seem like an unlikely scenario because all the

    countries use a non-digital form of currency. It would also have to depend on 3 main

    significant factors:

    Stability

    Acceptance

    Trust

    Bitcoin has the potential to become a universally accepted virtual currency. Its about

    high time, the countries start taking the use of Bitcoins seriously. This can only be

    achieved by creating widespread awareness among the masses. The countries need to

    introduce the use of digital currency in their legal and economic systems.

    In conclusion we would like to state that Bitcoin offers a huge window of opportunity

    for the evolution of financial systems in this Internet era, and act as a catalyst to

    reshape the way businesses and individuals make transactions worldwide. To adopt

    bitcoin or not is still open for debate.

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