BITCOIN INVESTMENT IN INDIA

BITCOIN INVESTMENT IN INDIA

It is in the news that Income Tax department has issued the notice to 500,000 High net-worth Individuals trading Cryptocurrencies/bitcoin exchanges across India after surveyed the major bitcoin exchange and collect information about transactions from the angle of tax evasion.

RBI on Bitcoins

As of now, there is no regulation preventing trading/buying/holding in Cryptocurrencies / Bitcoin. The RBI notification issued in 2012 and 2017 only indicate the risk involved. The gist is as under

2013-14/1261 RBI

·         VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorized central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.

·         Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorized central agency which regulates such payments. As such, there is no established framework for recourse to customer problems/ disputes/chargebacks etc.

·         There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.

·         It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.

·         There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combat the financing of terrorism (AML/CFT) laws.

2016-17 2054

It is clear from the above that the Bitcoin is not illegal in India.  RBI itself has noted the operation of Cryptocurrency exchanges hence we can say that bitcoin is legal.  Although RBI in its regulation says that there are KYC issues involved in the Cryptocurrency, why there is no regulation.  Maybe RBI treats the Cryptocurrency as the commodity even if it so, there should be the regulation under forex regulation.

Government on Bitcoin

In April 2017 the government set up an inter-disciplinary committee—chaired by special secretary (economic affairs)—to examine the existing framework of virtual currencies. The committee was supposed to submit its report within 3 months. The committee was set up to take stock of the present status of virtual currencies both in India and globally, examine the existing global regulatory and legal structures governing virtual currencies, suggest measures for dealing with such virtual currencies including issues relating to consumer protection, money laundering and examine any other matter related to virtual currencies that may be relevant. In December 2017, finance minister Arun Jaitley told the media that the government doesn’t consider bitcoin as a legal tender and it is working on recommendations for such currencies.

SEBI on Bitcoin

 In the meantime, Bitcoin gets listed on US stock exchange even FED Reserve has not recognized it. Securities Exchange Board of India (Sebi) on 20 December said that if bitcoin is considered as a commodity derivative then Sebi might regulate it. In countries such as the US, the Sebi-equivalent regulatory body is looking into cryptocurrencies. Experts say, considering cryptocurrencies are looked at as a commodity, Sebi should look at regulating them. Chairman of SEBI also said the Bitcoins cannot be ignored

Bitcoin in capital market

Modelled on the initial public offers for issuance of new shares in the stock market, some entities have begun resorting to initial coin offers to raise funds from investors, including HNIs and other individuals, who are getting lured into claims of huge returns from bitcoins and other such variants--apparently getting minted in the digital world but also reaching the real world including as wedding gifts.

Conclusion 

Though there are still no clear regulations or proper jurisdiction, the income-tax department is clear that tax has to be paid on all cryptocurrency transactions. Though there is no mention of cryptocurrencies in the Act, income tax will still have to be paid on any gains accruing from cryptocurrency transactions.  Sooner or later, we will full regulation on Bitcoin either or both by RBI and SEBI as an investment option in India. Please remember it is a very high-risk investment and hence return is also very high.

BITCOIN--AN UNDERSTANDING AND RISK

Bitcoin 

What is BITCOIN

BITCOIN was invented by unknown person or group of people under the name of Satoshi Nakamoto through a Open source software in 2009. It  is  a crypto currency and worldwide payment system in decentralized digital currency works without a central repository or single administrator. The system is peer to peer and transactions take place between the users directly without an intermediary.  BITCOIN's smallest unit is a Satoshi, named after the creator. One Satoshi is one hundred-millionth of a BITCOIN, making it worth around $0.0001 at current exchange rates. 

Types of wallets

Few years ago buying BITCOIN was far-fetched. However, now with a market cap of approximately $180 billion and rising, even Wall Street investment bank Goldman Sachs has acknowledged that it's getting harder for institutional investors to ignore the digital currency.

Now it is easy to buy the BITCOIN just like signing up a mobile app. To invest in BITCOIN, one must open a wallet which is basically equivalent to a bank account to receive, store and sent BITCOIN. There are three main types of wallets, software wallet, web wallet and hardware wallet.

Software wallet should be installed in your computer or mobile which gives good control over the security of the coins but slightly tricky to install and maintain.

Web wallet is hosted by third party, easier to use but depends on the provider to maintain high level security to protect the coins.

Hardware wallet is small physical devise that can be stored in your wallet, keychain or safe. Since it is not connected continuously through internet and protected by PIN making it more secured option. However, there may be a cost involved as other two options are mostly free.

How to invest

The most popular BITCOIN wallet now is COINBASE whereas others including BITCOIN Core, Electrum and Breadwallet.

Let us see about opening wallet account in Coinbase.

After sign in the wallet, one has to add the payment option, which can be either Paypal account, Bank Account and credit /debit card. Bank account option is simple and cost effective whereas the other two options will have low purchasing limits along with long verification process and high transaction fees.

Purchasing of BITCOIN will be through Established exchanges (need to choose the exchange at the time of signup and link to payment method), or through third party web pages (which act as exchange) or one to one transaction from the local individuals.  

Exchanges

While choosing the exchange one need to take into account the transaction fees, accessibility, liquidity conditions, reputation, transparency and country where the exchange is located. . Some of the most reputable and popular exchanges include U.S.-based Poloniex , Bittrex and Coinbase-owned  GDAX, as well as Asia-based Bithumb and Bitfinex.  There were cases that around 980,000 BITCOINs have been stolen from exchanges, either by hackers or insiders and few were also recovered. Until earlier this year, it was thought that Chinese exchanges accounted for around 90 percent of trading volume. But it has become clear that some exchanges inflated their volumes through so-called wash trades, repeatedly trading nominal amounts of BITCOIN back and forth between accounts. Since the Chinese authorities imposed transaction fees, the volumes started falling.

Now it is ready to start buying and selling BITCOIN. Purchases and sales can be handled in a variety of ways, ranging from fiat currencies, such as dollars and euro, to credit and debit cards, to wire transfers. The BITCOIN Purchased will reflect in your account.

HOW MANY ARE THERE? 

BITCOIN's supply is limited to 21 million - a number that is expected to be reached around the year 2140. So far, around 16.7 million BITCOINs have been released into the system, with 12.5 new ones released roughly every 10 minutes via a process called "mining", in which a global network of computers competes to solve complex algorithms in reward for the new BITCOINs. 

Price movement of BITCOIN 

BITCOIN has been around since late 2008 but it only started making the news in early 2013. The price has moved from USD 50 in 2009 to USD 11000 (peck achieved) in 2017 and corrected to USD 9000. BITCOIN has performed better than every central-bank-issued currency in every year since 2011 except for 2014, when its performed worse than any traditional currency. So far in 2017, it is up around 1000 percent. If you had bought $1,000 of BITCOIN at the start of 2013 and had never sold any of it, you would now be sitting on $80 million. Many people consider BITCOIN to be more of a speculative instrument than a currency, because of its volatility.

  

Disadvantage :

Given its pseudonymous nature and that BITCOIN address owners are not explicitly identified, such transactions are effectively anonymous. Hence, KYC cannot  be ensured and hence, may be used for Illegal activities and terrorism financing.   This has been a problem with regulators and officials, as they recognize it as a medium for illegal transactions.

BITCOIN has been recognised as currency in many countries and as of today it’s the most liquid & widely accepted crypto currency in the world. However, there is a long list of alternate crypto currencies that are eager to grab market share and challenge BITCOIN’s dominance.  What about the 21 million BITCOIN limit? It’s possible that once that ceiling becomes severely limiting, users will turn to other crypto currencies, effectively increasing the global supply.

BITCOIN trades continuously on exchanges around the world in a very quick and straightforward manner, and it is conveniently stored electronically in “wallets”. However, having online wallet providers introduces an extra risk factor that cannot be ignored. This potential security vulnerability that makes many people skeptical.

What does the future hold for BITCOIN?

So what’s next for BITCOIN? As outlined previously, it has many advantages and for this reason it will remain relevant as a currency.

We see the biggest risk to BITCOIN being its substitution and/or parallel use by other crypto currencies. BITCOIN die-hard fans claim that this is never going to be an issue since BITCOIN was the pioneer and as such enjoys first-mover privilege.  Is BITCOIN simply a 21^st century version of gold, only without the storage issues? Or is it just a short-lived popular fad that may soon evolve into something quite different? Only time will tell. The only certainty is that its price will remain very volatile in the future.

Regulatory stand:

Most of the regulators do not recognize the BITCOIN but the  growing adoption and acceptance, investments in BITCOIN start-ups and products being launched around the digital currency have ultimately raised investor acceptance and confidence in BITCOIN. However, it’s still very early stages for the cryptocurrency market progression. One should also note that BITCOIN cannot be purchased through credit card in India, though it is possible to do so in select countries around the world. “It is not possible to buy BITCOIN through credit card in India 

Conclusion:

Till now BITCOIN is not under any control or regulations and are traded between individual or through exchange. Like Currencies, there is no guarantee by any government regarding value as BITCOIN is commodity and volatility cannot ruled out. Hence the risk investing BITCOINs is very high.  It is advisable to take only calculated risk in investing in BITCOINs subject to regulatory permission.

This write-up is based on news and reports in various web pages along with my perception on the subject.