Friday, 14 February 2014

Emergence of Virtual Currency in India–Bitcoin

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Virtual currencies, a phenomenon triggered by technological developments and increased use of internet has been gaining momentum. There are close to 70 digital currencies in the world with a total market valuation of $15 billion (Rs.90,000 crores) out of which Bitcoin has the biggest share of $10 billion. India, currently has no regulatory framework to reap the benefit of such Virtual Currencies (VCs).

Bitcoin is a digital currency designed and implemented by Japanese programmer Satoshi Nakamoto in 2009. Bitcoins are obtained through mining which is done on powerful servers by solving solutions shared on network. Users can send and receive payments using this decentralised and peer to peer network. It has no intermediaries, which makes the process very fast and efficient.  All the transactions made are recorded in a public ledger. This makes the whole process transparent which enables to track even a smallest unit of the currency. Since the transaction process only requires a unique address which is not linked to the identity, it thus maintains the anonymity of the user. Its prices are determined by the supply and demand of the market just like any other fiat currency

According to some experts, it can overcome the limitations of traditional currencies that result from the monopolistic supply and management by central banks. If there are more issuers of the currency the demand for the money can be speculated more accurately eliminating the risk of high inflation. On the other if currency is open to competition it can guarantee a stable purchasing power and would eliminate other less stable currencies from the market. The result of this process of competition and profit maximisation would be a highly efficient monetary system where only stable currencies would coexist.

In a short span of three years, it has become one of the most expensive currencies of the world. It is currently being traded at around $900, and there are 12 million (57% of the eventual supply) of such coins in the market. The supply of Bitcoin mimics the supply of gold. A finite supply of 21 million units of such coins is expected to be produced by 2040. Many economists believe that it might be a bubble but a bubble occur when assets are overpriced, since the fundamental value of Bitcoin is still unknown it is too early to say it is a bubble.    

The phenomenal success of this model and extreme volatility of the prices has grabbed the eyes of regulatory authorities around the world. The regulatory authority of India, Reserve Bank of India (RBI) recently stated that it will not regulate any virtual currency including Bitcoin and warned the people of the financial sector as there are legal and security risks involved.

Main concerns raised by RBI are:
· It has no intrinsic value like gold; they are mere bits stored in the computer
· Its high volatility, a result of speculative activities, is hindering its general acceptance as a means of payments for on-line commerce.
· Since they are not created by or traded through any authorised central registry or agency, there is no way to get back stolen coins.
· There is no established framework for recourse to customer problems / disputes / charge backs etc.
· Usage of VCs for illegal activities. Users subjected to unintentional breaches of laws such as Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) laws. Most importantly in the absence of any authentication from RBI the money cannot be transferred in the users’ account hence making it less liquid.
The Reserve Bank is currently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations. Income Tax Department is also interested in imposing taxes on Bitcoin businesses in the long run and is awaiting RBI’s clean chit. India’s indigenous digital currency Laxmicoin is also waiting for a green signal from RBI to proceed.

A recent study (2013) by Bank of America claims that Bitcoin has a potential to grow and give a tuff competition to the traditional payment networks. Considering the demographic changes and increasing internet crowd in India virtual currencies can play a vital role in the e- commerce industry. Due to recent warnings from RBI, many Bitcoin operators in India have suspended their operations- temporarily or indefinitely. Any irrational approach without knowing its economic consequences will send a negative signal to the business.
The global economics platform has been aggressively debating complex questions- ‘Are virtual currencies capable of self regulation- free from government intervention – or if government regulation is indispensable for their effective management’. It is believed that the government intervention can stabilize its value to some extent. 

In the time when internet has become an unstoppable force and economics has been experimenting with alternative models, the Bitcoin phenomenon poses an urgent need for concrete government directions on its stance. India can no longer afford to ignore the issue of VC. It is only with clear understanding of the origin and the need of virtual currencies that India can take a stand on the issue and fully tap the benefits of such e-payment networks. Simply ignoring of an idea would not serve any purpose. It is perhaps useful to have a detailed document by RBI on the viability of VCs in India.
Neha Singh

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