crystal-ball

Bitcoin Simplified and its Future

Posted on Posted in Finance, Startups, Trading

Say you’re planning a cross-continental trip to three different countries. The usual hassles accompanying such a trip would be the exchange of currencies and the inevitable fee that accompanies each exchange. Say you run short of cash, and now need to head to the nearest ATM, and pay ridiculously high international transaction fees. Frustrating, right? Now imagine an alternative scenario- one where you don’t need to convert your currencies, travel with actual cash in your wallet, or pay any fees to use it. Sounds like a dream, right? Well this may very well be the future of money- thanks to a unique little invention called the Bitcoin.

 

What is Bitcoin?

The Bitcoin has garnered a lot of international attention over the past few years. It is a virtual currency that is created and held electronically, and can be used at Starbucks to buy a cup of coffee, or even at Tesla Motors to buy their latest Model S automobile. Barely 8 years old, this revolutionary new-world currency was created by an anonymous person under the pseudonym Satoshi Nakamoto in 2008. Nakamoto subsequently disappeared in 2011. Earlier this year, his identity was claimed by Australian businessman Craig Wright, but he later proved to be a fraud. The true identity of Nakamoto is still unknown. 

Bitcoins do not have a physical existence and aren’t printed, or minted as coins, which allows them to offer a level of security unlike any other. They are nearly impossible to steal- unless you share your private user details of course. Bitcoin users need to create an e-wallet, which is basically the virtual equivalent of a bank account. It is a software program where Bitcoins are stored, and there are three kinds of e-wallets- desktop wallets, app-based mobile wallets and online wallets.

 

How does Bitcoin work?

Bitcoin users start off by creating an e-wallet. The virtual equivalent of a bank account, an e-wallet could be a software program or a mobile app. Once you have created an e-wallet, you are ready to send and receive bitcoins. Bitcoins uses peer-to-peer (P2P) technology to operate, and the issuing of Bitcoins is carried out collectively by the public Bitcoin network. The process of adding transaction records to the public Bitcoin ledger is called Bitcoin mining. This ledger is called a Blockchain- as it is made up of a chain of blocks of all the earlier transactions. This allows the highest possible level of transparency possible, as anyone can view the Blockchain online at any given time of the day. Computers around the world “mine” for coins by competing with each other. By allowing nearly instantaneous P2P transactions anywhere across the world, the Bitcoin allows exciting uses that could not be covered by any previous payment system.

Bitcoin is also unique as a payment system in that it is open-source. In other words, nobody owns or regulates it. The system is, in fact, based on software that uses mathematical logic to create, regulate and transfer bitcoins from the buyer to the seller. Such an arrangement, in turn, results in negligible transaction cost and complete transparency. Think of a banking system minus any regulators such as the Federal Reserve in the US or the RBI in India. However, the decentralised nature of Bitcoin and the freedom it enjoys in terms of regulation have become decisive factors for countries across the world to determine the extent of acceptability of this electronic payment system.

 

bc acceptanceCountries BCcontinents bc

Bitcoin in India 

The legality of the Bitcoin varies from country-to-country all over the world. While some have acknowledged it as a legally acceptable substitute for domestic currency, the Indian government has taken a stance against it as they see it as potentially destructive to the country’s economic stability:

“See, I think we’re still watching the evolution of these kinds of currencies, one of the problems that we envisaged with Bitcoin, one of course was security issues and you’ve seen that they’re not as secure as people thought they were and there have been stolen Bitcoins and so on.  But the second issue was the fluctuation in value.  For money, you require something called a stable store of value and something that fluctuates so much is less effective in use as money.”

-RBI Governer Raghuram Rajan, NDTV News

Even so, it is possible to buy Bitcoin in India. On coinsecure.in, which is India’s very own Bitcoin trading platform, you can buy a Bitcoin for Rs 39197.34 (as of this post). Other Bitcoin exchanges include zebpay.com, unocoin.com and btcxindia.com.

 

What can you do with Bitcoins that you buy in India?

Spending Bitcoins abroad

The Foreign Exchange Management Act (FEMA) regulates the inflow and outflow of foreign currency. However, the sale of Bitcoin to a person outside India is in violation of the provisions of FEMA. Additionally the rupee is not a fully convertible currency, so cannot be used in transactions that exceed the RBI’s regulated limit.

The US dollar is the world’s reserve currency- which essentially means that the Federal Reserve can keep printing more dollars when there is a domestic shortage. However, that is not the case with India. Coupled with potential security threats and the tumultuous state of the economy, the RBI tries hard to curtail the flow of unaccounted money outside of India. In 2014, the RBI permitted residents to carry up to ₹25,000 in Indian currency notes while leaving the country. This limit was imposed to restrict the movement of currency out of country and also to restrict illegal money-laundering.

 

The Grey Areas of the Law: Tax Issues regarding the Usage of Bitcoins in India

The Bitcoin may be considered to be currency or a capital asset. However, this is not yet clear under Indian law which makes it difficult to conclude how it may be taxed. Under Indian law when a capital asset is transferred, the profit/gain that arises out of such transfer is taxable as income. For service tax to apply, the Bitcoin needs to fall under the category of “taxable service”. The act of mining may be considered as a taxable service in terms of the clauses under the Finance Act (1994). However, mining should not be considered as an activity which is taxable considering that the Bitcoin is not covered by the exceptions provided by the Income Tax Act (1961), and so mining should not be taxed as capital gains or business income under the ITA.

It is also possible that tax authorities will treat the income that arises on sale as taxable business income, even though it might be difficult to determine the cost. The transfer of Bitcoin itself may not attract service tax since service tax is leviable on provision of services and not transfer of goods. Similar ambiguities arise in the case of The Central Sales Tax Act (1930).

 

The Future of Bitcoin:  Not as Good as we want it to be, but not as Bad as it seems

Naysayers state the lack of a structured regulatory system in developing countries as the cause of its inevitable demise. While many critics already claim that Bitcoin has failed, we believe it has just started opening the doors of opportunity.  No industry is impervious to change, and the coming disruptions in FinTech are sure to transform the landscape of the financial services industry.  Either in its current form, or in a subsequent shape, Bitcoin has the potential to make financial markets more efficient and better.

The uses of Bitcoin could go beyond peer-to-peer payment transactions. The block chain, for instance, keeps an eye on the movement of money. A buyer in location A paid, say, .0024 bitcoins to a seller in location B. The block chain could then serve as a means of recording transaction details such as ownership and title deeds, thereby obviating the need to bear costs of title registration and record keeping. It avoids black money, makes money transfer cheaper (almost free) and does not need expensive regulatory regimes. 

The potential of the Bitcoin is not limited to merely transactional cost savings. The Bitcoin could also help people in remote areas get easy access to the financial world. The World Bank reports a 13 percentage point rise in bank account ownership in developing countries, facilitated by the role of technology. In contrast, mobile cellular subscriptions have reached 96.9% of the world’s population. With the increase in the availability of affordable smartphones, the future may see Bitcoin payments through mobile wallets at no extra costs for a big chunk of the world’s population. Bitcoin (or Bitcoin 2.0 will), therefore, offers a unique opportunity to facilitate decentralization of economic power across the world.

 

Leave a Reply

Your email address will not be published. Required fields are marked *