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Bitcoins: is India ready for a change in currency?

Bitcoins: is India ready for a change in currency?

Wednesday January 03, 2018 , 5 min Read

Given the complexity of Indian economy, bitcoins may turn out to be a boon to India or a disaster. Breaking all barriers and taking the economy by storm these days are bitcoins and other cryptocurrencies.

Bitcoins have gained the attention of investors for reasons such as ease of transactions, lack of central authority in the network and its status as money without any limitations. This has obviously triggered deliberations on the evolution of cryptocurrency as the future of digital currency. There are though, regulatory and legal issues before the Central Banks of the nations. The Indian government has not recognised them as a legal tender mainly due to economic, financial and legal issues.

Acceptance of bitcoins

China, a year ago dominated the bitcoin global volume with about 90 percent share, had a complete crackdown on bitcoins in the recent past, banning initial coin offerings known as ICOs. On the other side, Japan has regulated bitcoin, and the regulations ensure exchanges to maintain capital reserves, keep customer funds separate, and implement KYC procedures; and now the country accounts for more than half the volume of global bitcoin trade, while the US accounts for a quarter.

In the Indian context, the issues have been mostly legal: using bitcoins in money laundering and transactions for acts of terrorism are the challenges in the use of bitcoin as legal tender.

Nevertheless, Institute for Development and Research in Bank Technology of RBI has taken the initiative of exploring the applicability of blockchain technology into the Indian banking and financial industry by conducting a workshop of academicians, bankers, regulators and technology partners, under a blockchain working group.

A committee constituted under special secretary, department of economic affairs, to examine existing global regulatory and legal structures governing virtual currencies and suggest the framework for regulation of these currencies in India, has submitted its report. The contents of the report have not yet been made public.

Why should India be careful?

RBI has sent out repeated warnings on virtual currencies such as bitcoins, on the potential financial, operational, legal and security related risks. It also states that bitcoins may pose many security risks — the possibility of the misuse of bitcoins are high, as there are no regulations. As bitcoins or virtual currencies are illegal and unregulated in the country, the income tax department has asked 4-5 lakh high net worth individuals for details of investment and sales of bitcoins and other cryptocurrencies in India and abroad.

Investors need to have complete knowledge on the legal and security aspects as well as the volatile nature of the bitcoins. The rise of the virtual currencies has enticed the fraudsters to lure people into ponzi schemes.

The popularity of bitcoin has also attracted investors in other currencies such as Ethereum, Ripple, and Litecoin. The changes are revolutionary with huge progressive moves. The current boom in bitcoin reminds the moments from 2013 when bitcoins tumbled by 40 percent-50 percent in a single day and then in April 2013 the currency fell by over 70 percent from $233 to $67. In 2017 from $1013 on January 2, 2017, bitcoin went to its peak at $19393 on December 17, 2017 before falling down by 27 percent to $13777 on December 25, 2017, the Christmas Day. Many have raised the concern over bitcoin and have flagged bitcoin as “a real bubble”.

Way Forward

Bitcoin being in a non-regulated format, is the major concern. It has been eluding its acceptability as a legal tender currency from sovereign governments in the world. Fundamentally, bitcoin transactions are akin to a commodity, with underlying value in terms of USD or another fiat currency. The fact that the bitcoin price in one country currency may be trading at a discount to bitcoin price in other currencies, at any given point of time, shows their resemblance to a commodity price variance in different geography.

Bitcoins growing usage, however, augurs well for putting in place a regulatory framework, rather than the Indian government remaining a silent spectator. The way forward is to treat it as a commodity and allow its operations on existing commodity exchanges in the country, where the market forces will drive bitcoin price without any government role in price protection. This will ensure KYC compliances and bring bitcoin trading under network of income tax department. The transactions will get tracked and be subject to taxation, on the lines of capital gain tax. Punitive clauses for non-compliances by traders/investors/commodity exchanges can be put up for ensuring regulatory observance.

Seeing the complexity of Indian economy, bitcoins may turn out to be a boon to India or a disaster. This depends on their extent of use allowed by governments of the world.

As an interesting new player in the world of finance, it is only a matter of time to see the right results of the impact of bitcoins and other cryptocurrencies.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)