Bitcoin – An emerging Currency?
What is a Bitcoin?
Bitcoin is one of the many cryptocurrencies currently in circulation in the world economy. Cryptocurrency is a type of digital or virtual currency that uses cryptography (coding) as a form of security. It is not issued by any central regulatory authority and needs an approval of the authority of an economy to be declared as a legal tender. Like traditional currencies are backed by gold or a surety from the Central Bank, these currencies don’t possess any such feature.
The first cryptocurrency to be invented was ‘Bitcoin’ launched in the year 2009 by an unidentified person or group of persons named Satoshi Nakamoto. These currencies are decentralized in nature i.e. there is no specific controlling authority and the prices are determined by the free forces of market. The infusion of currencies in the cryptocurrency environment is determined by a function known as mining whereby on performance of some tasks, cryptocurrencies are credited to your account.
How does Bitcoin work?
Under the traditional payment there needs to be a presence of a centralized mediator to complete the transactions and keep a track of transactions. This function is generally performed by the commercial banks which are regulated by the Central Bank of the economy. Whereas under the new regime of payment mechanism i.e. cryptocurrencies there is no such existence of any centralized mediator and the transaction are directly done in peer to peer.
For example, under traditional payment system, if A wants to make a payment to B he will direct his banker to make the payment whether through electronic route or any other mode; but under cryptocurrency payment system, payment is made directly to B by some cryptography and no mediator is required. This is done by generation of a message which is authorized by 2 types of keys viz. Public and Private Keys. Each and every account holder has a list of balances of every other account holder in the form of account numbers. Whenever a transaction takes place the balances are updated in each and every ones ledger. For example, let’s say there are 3 account holders,
|Account Holder||Account Number||Account Balance|
The above ledger is seen by each of the account holders except the account holder name. Now, if A wants to send B 100 Bitcoins, A will transmit a message containing his intention to transfer the funds. This transaction is approved by a public and private key. After the transaction is completed the ledger of each and every account holder is updated and it will look as follows,
|Account Holder||Account Number||Account Balance|
As no mediator is involved the transaction costs are substantially lower as compared to the traditional payment system which is making Bitcoin more and more popular.
Determination of status of a currency as legal tender of an economy is subjective matter of individual economy. Same is the case with Bitcoin. Legal status of Bitcoin differs from country to country. Status of some economies is as under-
- United Status of America (USA) – Currently Bitcoin is considered as a capital asset and taxed accordingly. A draft bill is presented in the parliament for regulation of Cryptocurrencies and treating them as currency.
- United Kingdom-No circular is issued by the Bank of England but the economy has started treating as ‘Goods’ and taxing it accordingly.
- European Union- No law has been passed in EU. In a circular by European Banking Authority, users are warned by the potent threats by the use of these currencies.
- Germany- Bitcoin is recognized as a financial instrument and not a currency.
- China- It has defined Bitcoin as a ‘Virtual Commodity’ and not a ‘Virtual Currency’. Notices have been issued to financial institution for not trading in Bitcoins.
Through Constitution of India, the Central Government is allowed to legislate in respect of currency, legal tender, foreign exchange, bills of exchange, cheques, promissory notes and such other instruments. The principal laws that would get attracted in regard of the Bitcoin are-
- The Constitution of India, 1950;
- The Foreign Exchange Management Act, 1999 (“FEMA”);
- The Reserve Bank of India Act, 1934 (“RBI Act”);
- The Coinage Act, 1906 (“Coinage Act”);
- The Securities Contracts (Regulation) Act, 1956 (“SCRA”); and
- The Sale of Goods Act, 1930 (“Sale of Goods Act”).
- FEMA, RBI and Coinage Act-The three laws together regulate the issuance, utilization and disposal of currency.
- SCRA- These currencies are traded on exchanges like the stock markets. Therefore if treated as a security, SCRA will get its role to play.
- Sale of Goods Act- Bitcoin though not Goods, can be construed as commodity thereby enforcing the Sale of Goods Act.
People in most of the developed and developing countries have started accepting Bitcoins as a mode of payment and India is no exception to this change. As of now, nor the central government nor the Reserve Bank of India have notified anything about Bitcoin. On the contrary RBI through its press release dated 24th December, 2013 and 1st February, 2017 has issued warnings about the use of the cryptocurrencies. Main issues pointed out by RBI are as follows-
- These currencies are stored in E-wallets. These wallets have potential cyber crime and as these are not regulated by authorized central registry/agency, the loss may be permanent.
- As these are peer to peer transactions there exists no established framework of consumer complaints redressal.
- There are no underlying assets. Their value is prone to speculation, high volatility. Further, the legal status of the platforms where these currencies are traded is also not clear.
- RBI has not given any license / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. The users of these currencies will be doing this a their own risk.
Crypto / Virtual Currencies are gaining popularity considering the pros side of these currencies but one also needs to take into consideration the cons of these types of currencies. Even RBI has issued press release warning the threats of the currency!. Though no law has been made in India for such currencies there are institutions which are operating Bitcoin Exchange/Trading platforms in buying, selling, storing, using and accepting Bitcoins. Government needs to take this into consideration and enact a law governing such currencies. Till then users need to be in caution in using these currencies.