Rise of Bitcoins: an Indian Perspective

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2017 a remarkable year that landmark a history of India, what a country crossing 1.3 billion population can accept the change, and move forward for the sake larger societal interests, and greater good. It’s a wow moment,

probably a very unique change in the recent world’s history to have larger reforms, monumental programs all in one year including Clean India initiatives, Demonetization, Startup India, One Nation One Tax (GST), Stricter Tax Reforms, Digital Economy, Digital Money…

a real salute to this nation in absorbing such a massive change. I guess, it’s a task for large transformation program directors to study.

Well, change never ends for India, and in fact it should be a continuous process for young, vibrant India that can regain its past glory. Less than a year after getting popular digital wallet technology and its adoption in the young, educated population, Bitcoin technology has arrived in India, and is much talked about in recent months among India’s progressive population. Latest news from TOI says “Income Tax department served the notices for 4-5L HNIs”, shows how popular it was in India already. This article is a try, to provide a means to enlighten our readers and make them ready for this paradigm shift.

Bitcoin is a Virtual Currency (VC) that are having no physical form, and store its value in electronic or digital media such computer databases. A virtual or otherwise a digital wallet such as Mobikwik, AirtelMoney, mPesa, Paytm are inherently store their value in terms of a specific physical currency such as Rupee, Dollar etc. which is different in the case of Virtual Currency. A Bitcoin value can be converted in to a physical currency thru specified exchanges, trading houses, but its value is measured in Bitcoins only. Bitcoin is also popularly called as bit in specified markets, like 5 Coins as 5 Bits.

In essence, Bitcoin is an unregulated (as on today), virtual, open currency, it’s value is based on its popularity … today, the valuation of Bitcoin is like a gold or a precious stone where it changes its value from time to time and is subject to the circulation of total currency and its demand.

One pessimistic analogy of current Bitcoin demand is like “Demand for Moon land is rising .. as one day we may need to leave Earth”.

Why so much demand?

Today, perception drives the value of Bitcoin that it holds superior crypto currency technology to restrict the third-party access, including regulatory bodies during the transaction. And the possibility to become a universally accepted currency in future that it can transact across borders and free flow among economies, and geographies. Another reason for the demand was that few people are having a wrong perception that it’s like buying a stock of a technology company, that is expected to grow.

Let’s compare

Bitcoin was presented in the media as an image like gold coin, there was a perception in India that it’s like a Hi-tech gold coin that appreciates its value over the time. Hence, to compare a) Gold, b) Electronic wallet c) Bitcoin

Gold – today’s demand is driven mainly thru the people’s sentiments largely in India, China and few other emerging economies, ornamental use, government’s support to treat it as a specific asset class, the feel of holding in its physical possession, and a partial industrial use in semi-conductor industry, pharma industry etc. the value of gold changes as it was considered as a hedge against inflation or a currency like dollar.

Electronic Wallet – a convenient way to store a physical currency such as rupee in an electronic form, typically a wallet only approved to store a single currency, and can generally operate in single country. In India, Google Tez, Mobikwik, Paytm store the currency value in Rupees. A Rs. 100 in a digital wallet doesn’t change its value over the time, except in case where a wallet provider provides some small interest on the digital money that was kept idle for a specific amount of time.

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Bitcoin – a Virtual currency, aka., Internet Money. The demand is mainly driven by the craze in the market that it’s a holy grail of currencies. Today, neither this payment system guarantees the rate of return nor provides assurance on the base value, unlike one Rupee in hand has the same value as one Rupee in bank.

RBI’s view, and its reservations on Virtual Currency (VC) technology

Reserve Bank of India (RBI) has not given any specific regulatory approvals to recognize Bitcoin as a currency that Indian residents can use, transact, but in fact, RBI has reiterated on Dec 05th 2017 that the concerns conveyed in the earlier press release December 24th, 2013 cautioning its users, people of India regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.

RBI’s concern might be partly thru the observations made from western world for the past 2 years,

and are a) Giving power to the dark web (hidden web for illegal activities such as drug trafficking, terrorism, weapons trade etc.) to transact across the borders to fund for anti-social activities, b) Possible increase in Black Money and Tax avoidance, as the currency is no longer in control of a specified government c) Difficulty in controlling speculative transactions, due to the treatment of an asset rather treating it as a mere currency and it’s limited Bits that the system can issue. d) By definition Bitcoins (or VCs, in general) are traded/exchanged/transacted in a P2P fashion, but for the sake of ease of doing transactions, and facilitating trades, the introduction of 3rd party exchanges, trading houses made the transaction key security a bit weaker, and may lead to secret key thefts, thereby loss of bitcoin currency.

Above observations are expected to have a compounding affect in India due to digital divide in the country. Today, with 2016 statistics, average literacy levels are around 78%, and the low computer literacy levels are hovering at 27% in the country, the loopholes, loose ends could be exploited further.

Some of the above apprehensions can be removed over the time, thru stricter KYC (Know Your Customer) norms, Aadhaar Integration, enforcement of stricter guidelines on Bitcoin exchanges, or trade houses.

Further to aware

  1. While USA, Japan and few other small economies accepted as a form of currency, Japan being the first country to accept Bitcoin as a legal tender goods and services, though it was not accepted by the main stream businesses yet.
  2. Bitcoin is still in an experimental stage in India, no guarantee from RBI for any loss in value, theft from computer or exchange hacking of the payment systems etc.
  3. Once the transaction happened, such as money moved from your account to another, there is no guarantee, warranty from the Bitcoin exchanges to return that money. The record is permanently stored in a block (similar to an account).
  4. Requires legal status as an Indian Citizen with a PAN & Aadhaar numbers to open an account in India to buy, hold, and sell.

Transactions do have a possible tax implications once the gains are converted in to local currency.

What are tax implications?

As RBI has not approved Bitcoin as a legal currency, and Income Tax Department has not further issued a notification to classify as a legal currency, the value you hold in Bitcoins is not taxable but once you sell, based on the period of holding, it may attract either short term or long-term capital gains tax. The actual tax rate may depend on your other taxable income for that specific year of tax filing.

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If you are an NRI who is purchasing and/or selling Bits in foreign countries, you are not attracted towards Indian Income Taxes at this time.

Due to emergence of GST, Govt of India, and regulatory bodies are looking at the aspect of imposing GST, as it is not considered as a currency but a possible asset categorization.

Read Tax Blog from EZTax.in on the tax impact and related coverage.

Buying Bits is easy!

Like any other purchase today, buying and selling Bits is easy. One way it’s easier than buying stock from your Demat account.

  • First you need to have a bank account, pan, now Adhaar (in many cases) to open an account with specified trading, exchange houses.
  • Move the local currency (Rupees) in to your new Bitcoin account from bit exchanges
  • Start buying Bits in its full form or partial form such as 1/10th of a coin etc.
  • The current value of 1 Bitcoin is approximately Rs.10,00,000 (as on 21st Dec 2017)

Off course, to buy 1 bit today exchanges are charging around Rs.500, to 1000 based on a full Bit or partial Bit (such as 1/10th of a Bit) as a transaction fee. Buying a bit today may appreciate its value over the time due to its limited issuance, and growing circulation.

Can India absorb the change coming?

Change in India for next 10 years is inevitable, as in last 5 years, we have seen wide spread use of debit/credit cards, digital wallets, net banking, and the new trend of virtual wallets (combining several accounts, and digital wallet money), and now the Bitcoin technology all giving convenience to the people in general. With a thrust from government of India to run towards modern economy, and the new millennials (young population), India has vim, vigor to adopt to the change.

But, like any other country, Indian government may need to weigh the pros & cons. Any person who transact Bitcoins (as it is an Internet Currency) may choose a lower tax regime there by higher tax regimes such as India (in certain cases) may lose the tax on the capital gains, or tax on transactions. Once RBI accepts Bitcoin as a form of currency, income tax department may eliminate capital gains tax portion in future.

The good, bad, and ugly of Bitcoin technology?

Bitcoin, today is an experimental technology, we expect it to be in the current state for another two years to come out of current technology limits such as number of transactions per second, and its scalability, transaction fees etc. and later gets a nod from RBI/Finance ministry to set the direction.

The good part of this technology is it’s a) transaction security, privacy, record management (using block-chain), b) peer-to-peer transaction without any government, agency involvement, c) verification of transactions by the nods. Another major advantage is in the ability to cross-border transactions, may open new horizons to make a true new world economy without geographic (country) limits. Another good part is in its strict KYC being followed while on boarding a client at the Bitcoin exchange, to make sure who their customer is.

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The bad part of this technology is it’s in current form of open money where the circulation can max out to 21 million (hard limit today), and from there people can re-sell to others who are in need. This creates higher valuation to the current Bits, and a case for deflation in Bit-market. This may be one of the possible reason where this currency stops for further circulation where the value may decrease due to stagnated currency market.

The ugly part of it that it takes years for major economies to accept this as currency, and new legal framework to be arrived, which was not required in case of digital wallets. This means, if something gone wrong with your key, like key stolen etc. there is no coverage for you. To have this legal, regulatory framework in-place, an enormous co-operation needed between the major economies in coming years, which is highly unlikely due to various Geo-political reasons. More to it, the increase in valuation of Bitcoin in the last year, emergence of other VCs backed by major banks or corporations, indicate a possible bubble to burst in near future.

Overall, whether it’s a Bitcoin or other VC, it enables us to transact without boundaries, which is the fundamental difference, and a comfort that the global citizens may favor.

This pushes the currency controlling power from the governments, central banks to common people like you and me.

Conclusion

New technologies that touches people must go thru the initial acid test for it to be truly integrated, accepted in India. From a distance, it would be naive to accept, and trust an invisible currency, but at the same time, as the economy grows, increasing NRI population, whose roots with India are stronger by the day, and a cross border trade that is reaching to new billions every day, an internet currency, universal currency, cross border currency such as Bitcoin (or similar technology) may soon be accepted by the Indian government, and the people of this great nation. In fact, as I write this article, ICICI bank is venturing in to block-chain technology for its new generation currency. Also, believed a soft corner in some circles of the decision makers not to put lids on the trades in India. In addition, corporate such as Google, Amazon are also seems to be working towards similar technologies.

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