WHAT IS BITCOIN?
In January 2009, a decentralized virtual currency was formed, widely known today as ‘Bitcoins’. Bitcoin is based on some ideas set out in a white paper by a person known as Satoshi Nakamoto. The identity of the person who formed the technology is still unknown. Bitcoin claims lower transaction charges as compared to the conventional payment systems and is operated by a decentralized authority, unlike government-issued currencies which is controlled and regulated by government.
Cryptocurrency uses a system of cryptography (encryption) to regulate the creation of bitcoins and to check upon transactions. Cryptography, in basic terms, refers to the art of writing and solving codes. Cryptography is in connection with the process of converting ordinary plain text into unintelligible text and vice-versa. It is a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it. Cryptography not only protects data from theft or alteration, but can also be used for user authentication. In a case, where A sent the message to bitcoin network, bitcoin account has two keys, i.e. private key and public key.
Let's consider an example of Mr. A and Mr. B, where A makes payment of 50 bitcoins to B, thus, A's balance decreases by 50 bitcoins and B's balance increases by 50. This transaction, on its full completion would be listed in public ledger, which is maintained by Bitcoin’s public network. When A filled the necessary details and opted for ‘send’, the bitcoin network receives a message from A that B is being sent so and so number of bitcoins by A. If some thief can replicate that message and send it to the bitcoin network, then he might be able to steal A's money bitcoins. But this message cannot be replicated as each of the message consists of a unique signature, and only after encrypting this unique signature, the message is sent to the Bitcoin network. Therefore, it is called a cryptocurrency, which is impossible to copy.
The growing popularity for bitcoins has come under the government's lens. Bitcoin can be a simple way to evade tax or snare unsuspecting small investors in ponzi schemes. Moreover, the government has begun a crackdown on illegal uses of this unregulated virtual currency. There is a suspicion that some so-called cryptocurrencies and bitcoin investments may actually have nothing to do with any blockchain-developed virtual currency and are just new ways devised by scamsters to ride the wave and what they may be offering could be 'e-ponzi' schemes.
FEATURES OF BITCOIN
Bitcoin is a virtual currency that allows the users to spend their money anonymously.
No single institution controls the bitcoin network.
It is quite similar to an online version of cash, where several products and services can be bought by it.
Bitcoins are controlled by a bitcoin network, which comprises of common people, who use bitcoins, and anybody can become a part of it. To understand this network thoroughly, one must first study the Bitcoin Public Ledger.
All confirmed transactions from the start of Bitcoin's creation are stored in the public ledger. This complete record of the transaction is a sequence of records called blocks.
On November 1, 2008, a man named Satoshi Nakamoto (a tentative name whose existence is still unknown) posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called bitcoin. One of the core challenges of designing a digital currency involves something called the double-spending problem.
Bitcoin abolished the third party by publicly distributing the ledger, which Nakamoto called the 'block chain.'
Users willing to devote the CPU power to running a special piece of software would be called miners and would form a network to maintain the blockchain collectively. In the process, they would generate new currency.
With the use of bitcoins, it is possible to be able to send and get money anywhere in the world at any given time.
People are in control of their own bitcoins as there is no central authority figure in bitcoin network.
With the blockchain, all finalized transactions are for anyone to see.
Many people are still unaware of digital currencies and Bitcoin.
Bitcoin has volatility as there is a limited amount of coins (21 million bitcoins), and demand for them increases by each passing day.
Bitcoin is still at its infancy stage, with incomplete features that are in development.
POSITION OF BITCOINS IN VARIOUS COUNTRIES
The operation of bitcoins differs from one place to another. While there are countries like Australia, United States, Canada etc. who have legalized bitcoins operations within their territories, there also exists countries like China and Japan, who have adopted a restrictive approach. China has restricted only financial institutions from dealing directly in bitcoins without making it illegal. Chinese citizens are permitted to still invest in bitcoins and the cryptocurrency market, despite their government’s heavy crackdown.
In September 2017, Chinese cryptocurrency exchanges BTCC China, Huobi and OKCoin were ordered by the government to shut down and end their businesses. There were also instances when executives of the three cryptocurrency exchanges were prevented from leaving the country, due to a government investigation into local cryptocurrency exchanges. To the fact that it is relatively easy for investors to set up their businesses in Hong Kong. Businesses can be legally created with less than $1,000, which allows the opening of business bank accounts at Hong Kong-based financial institutions. This is the reason why from December 2017, many Chinese investors shifted their funds from their Chinese bank accounts to Hong Kong bank accounts and started to trade cryptocurrencies more actively, evidently forfeiting China’s restrictions.
In November 2013, the United States Senate held a committee meeting to discuss virtual currencies. In that meeting, it was illustrated that bitcoin is a legal means of exchange and that online payment systems, both centralized and decentralized. Moreover, the Internal Revenue Service made its stand clear on bitcoins in March 2014 by stating that it would consider bitcoin a form of "property" rather than a currency. Thus, every bitcoin transaction would be looked upon and taken as capital gain and accordingly taxed. While cryptocurrencies have been a topic of discussion at many World Economic Forum conferences, they have come to the fore in Davos this year. Following a path-breaking year which made Bitcoin rise to an almighty high of $20,000, alongside the incredible growth of other altcoins, it’s not at all surprising that one of the key discussion issue at WEF would be the future of cryptocurrency. UBS Chairman, Axel Weber, in an interview with Bloomberg, clearly mentioned and laid down that his firm would not recommend cryptocurrency adoption or investment to its clients, till the time there is any clarity on its future regulatory procedures.
Even the notable American investor, Bill Gross suggested that the uprise of bitcoin and cryptocurrency has somewhere formulated a move away from the centralized institutions and controlling money. As a result, people seem to be keenly devoting their trust in technology over the many government-run establishments. Joseph Stiglitz, a well-known economist, was once caught addressing to the Davos crowd that Bitcoin is used for "secret use cases" & that fiat currency is superior.
I believe that the rise of bitcoins in the coming times may reflect a monumental transfer of social trust away from human institutions backed by government towards well-tested computer codes.
“The sheer value of capital that has been poured into the overall cryptocurrency market has made it impossible to ignore.”
John Kerry, the 68th US Secretary of State
LEGAL POSITION OF BITCOINS IN INDIA
The history of the Indian rupee travels all the way down to the time of Sher Shah Suri (1486-1545) who first introduced rupee in India, which at that time was equivalent to the forty copper-coin pieces (paisa). The entry of 36 and 46 of 7th schedule of the Constitution of India gives the authority to the Central Government to control Indian currency including foreign exchange legal tender etc. Thus, following laws need to be cross-checked before determining the legal status of cryptocurrency:-
The Foreign Exchange Management Act, 1999 (“FEMA”)
The Reserve Bank of India Act, 1934 (“RBI Act”)
The Coinage Act, 1906 (“Coinage Act”)
The Indian Contract Act, 1872 v
The Payment and Settlement Systems Act, 2007 and
The Securities Contracts (Regulation) Act, 1956 (“SCRA”)
The Sale of Goods Act, 1930
The major question behind deciding the legal status of bitcoins is whether they are a currency, security, commodity, or something different. While bitcoins are generally referred to as a "currency" because of their commmon features to it, the legal definition needs a currency to be issued, used and accepted by a country, which is not the case with bitcoins. Another issue with bitcoins is regarding its legality as all the countries have not legalized its use. Some countries like Australia, Canada, Finland and Germany have legalized its use and have applied normal earned income rules on Bitcoin, while many countries have not made a clear statement with the legalization and use of bitcoin. Thailand has made the use of bitcoins illegal in its territory.
The disproportionality in the legalization of bitcoin in different countries is a major issue. In March 2019, RBI Deputy Governor R Gandhi warned the population against crypto-currencies such as Bitcoins stating that:
"They pose potential financial, legal, customer protection and security-related risks."
Thus, there is no legal status present in its case. Bitcoins are not authorized, but there definitely exists scope for them to be legalized under different legislations. As per the Foreign Exchange Management Act, 1999, currency is defined as "all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank."
According to the definition, RBI has the power to include bitcoins within its ambit of currency. Currency other than "Indian currency" is termed as "foreign currency", and regulated by foreign exchange laws. In most of the cases, bitcoins can be governed by foreign exchange laws. Further, Bitcoins can also be included within the definition of "security" which states that "such other instruments as may be declared by the Central Government to be securities".
Additionally, the Indian Copyright Act, 1957, defines the term "computer programme" as ‘a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.’
Analysing these definitions, it can be concluded that there is enough scope for legalizing bitcoins in the coming time. However, the approach of the Indian government towards bitcoins is still to be witnessed. In the Union Budget 2018, Finance Minister Arun Jaitley illustrated that cryptocurrencies are not recognised as legal tender. During his budget speech, the Finance Minister stated, “The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”
However, Jaitley also referred to the government trying and exploring the blockchain technology in future. The recognition of blockchain technology for future use in the digital economy has received positive reactions from the industry. Though the budget does not specifically talk about how blockchain will be explored, it should be noted that in digital economy the major use for this has been around crypto-currencies like Bitcoins.
Ever since the bitcoins came into existence the countries have tried to control and even ban the transactions of bitcoins, but with the passage of time countries have started to consider bitcoins regulation instead of banning it which is a rational direction. The major problem in implemention of bitcoin regulation is that it’s main feature i.e., anonymity, as Skelton of blockchain, leaves the parties involved in transaction anonymous by only assigning a randomly generated virtual key and address. Because of this, bitcoin regulation becomes near impossible as it is not possible to know the parties involved. Since the bitcoin currency is decentralised or does not have a centralized agency certain critics argue that even if the agencies want to regulate bitcoins it will be impossible due to absence of a nodal regulatory institution which the governments can go after. However this argument is wrong as the authorities regulate or control the functioning online transactions which are websites by individuals or entities which have a physical presence. One more problem that has come up is parties dealing in Virtual Currency are non-co-operation with regulators; India is also making progress in achieving the goal of regulating or controlling digital currency with current developments like the creation of inter-disciplinary committees. It is a step closer in the direction of regulating bitcoin/cryptocurrinces in India, even though it is believed that the report might lay down some strict regulations based upon the government’s statements till now.
By Saurav Kumar