Virtual Currency, Bitcoin

1. VIRTUAL CURRENCY
Bitcoins
Is Virtual Currency paving way for parallel
economy or acting as substitute for
conventional currency
Namrata Shah
namratakshah@gmail.com
http://finance-nams.blogspot.in/

2. Index
• Introduction
– Virtual Currency & Bitcoin
• How Bitcoins works?
• Regulatory Authority
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–
–
–
–
Legal Status
SEBI
RBI
Income Tax
Ministry of Finance
• National Issue

3. Introduction - Meaning
•
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•
•
•
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Unit of Exchange in Virtual Form.
No Intrinsic Value
Not regulated by central bank or backed by real – world commodity
Based on decentralized peer-to-peer network
Technology outpacing Law
Used by vendors and service provider as barter means of exchange
• It can assume Forms like:–
–
–
–
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Coupons
Credit Card Points
Online-Gaming Points
Loyalty Points
Peer-to-Peer Currencies
• Bitcoins

4. Introduction - Evolution
• Coupons:
– 1887 – Coca-Cola issued First-Ever Coupon as Marketing Strategy.
• Credit Card Points:
– 1984 – Diner’s Club introduced Credit Card Points.
– 1986 – Discover strengthened the same by offering Cash Back on
Points.
• Peer-to-Peer Currencies:
– 2003 – Linden Dollars were introduced as a Unit of Currency for all
Transactions on Virtual World “Second Life” followed by Lindex
Currency Exchange in 2005.
• Facebook or other virtual game Credits

5. Introduction – Virtual Currency Family
Name
Market Cap *($)
Price * ($)
Bitcoin
7,420,402,864
610.420
Litecoin
408,915,259
16.930
Peercoin
65,970,990
3.150
Namecoin
31,052,948
4.110
Quark
21,740,375
0.088
Nxt
17,902,362
0.018
ProtoShares
14,859,788
12.610
WorldCoin
13,542,075
0.370
Megacoin
10,328,707
0.480
Primecoin
7,826,751
2.130
* Market Capital and Price as of Dec 21, 2013

6. Introduction - Bitcoin
• The Fastest Growing and All-Market Penetrating of all
Virtual Currencies.
• Introduced in 2008 by a Group using pseudonym Satoshi
Nakamoto. It became fully operational in 2009.
• Upto 21 Million Bitcoins will be created by 2020.
• 1 BTC = $623.20 and 1 BTC = Rs.38,860 (as of Dec 21, 2013)
• Bitcoins – most popular of over 50 crypto-currencies

7. Application of Bitcoins – Global & Local
• Globally –
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Subway Sandwich – Allentown, Pennsylvania
Auctioned Art & Antiques - aspireauctions.com
Haircut – Barber Josh Arias
Honey – Frangiosa Farms, Denver, Colorado
Legal Representation – Ryan Hurley, Scottsdale, Arizona
Martial Arts – Atlanta Kick – Atlanta, Georgia
Flight Booking – CheapAir.com
Other Online Websites like Wordpress, Reddit, 4Chan, The Pirate Bay,
EZTV
• Locally –
– Salon - Castlebloom in Chandigarh has started accepting Bitcoins

8. Benefits of Bitcoins
• Each transaction is time stamped
• Chain of records is retained for each transaction and can’t be
changed.
• Each owner transfers the coin to the next signing a hash of the
previous transaction and the public address of the next
owner.
• All transactions are open and public.
• As it leaves trail behind, it would facilitates in forensic
investigation

9. How Bitcoin Works?
• Concept
• Definition of terms used
• Making Payment

10. How Bitcoins Works?
• The Concept uses Cryptography to Control its Creation and
Transactions, rather than Central Authority.
• It shares a Public Ledger called Block Chain, that stores every
Transaction ever Processed, allowing a User’s Computer to verify
the Validity of Each Transaction.
• In simple terms, it provides a Personal “Wallet” to each User to
Send and Receive Bitcoins.
• Bitcoins can be acquired by:–
–
–
–
Bitcoin Mining
Purchase at Bitcoin Exchange
Exchange Bitcoins with someone near you
As Payment for Goods & Services

11. How it Works??
• Making Payment:

12. Regulatory Authority
• Legal Status
• SEBI
– Introduction
– Other country outlook
• RBI
– Introduction
– Other country outlook
– Suggestion for Application in Indian Context
• Income tax Authority
– Introduction
– Other country outlook
– Suggestion for Application in Indian Context
• Ministry of Finance

13. Legal Status of Bitcoin
Country
Regulatory Authority
Guideline Proposed
US
(FinCEN)
It regarded Bitcoin miner and Bitcoin exchange
as Money Services Business (MSB)
US
Senate
regarded Bitcoin as ‘legal means of exchange’
Germany
Australia
Regards it as ‘private money’ or ‘unit of
account’
National Australia
Bank
Has most but not all qualities to be currency
It would take years to achieve
mainstreamacceptance

14. Banned / Restricted
Country
Regulatory
Authority
Guidelines Proposed
Thailand
Bank of Thailand
• Refused to license Bitcoin
• Shut down of Thai Bitcoin exchange
• Ban on buying and selling Bitcoins
China
People’s Bank of
China
•
Restricted financial institution from commercial
Bitcoin transaction
• Banned clearance of payment in Bitcoins by
third-party providers
Korea
Bank of Korea
•
Rejected Bitcoin or any other cyber currency as
real currency

15. SEBI
• The Basic Function of SEBI is to:– protect the interests of investors in securities
– promote the development of, and to regulate the securities market
– and matters connected therewith or incidental thereto
• Buying and Selling Bitcoin is similar to Stock Trading – A must Watch
for SEBI for a Currency without any Government Regulation.
– A Website called BuysellBitco.in, based in Ahmedabad, Gujarat, is
already offering ‘Bitcoin Exchange’ type services in the Local Currency.
• Investors are unprotected as the Currency is neither Controlled nor
Regulated by any Government Authority.
• Unscrupulous Operators may emerge, to make profit at the Cost of
General Public.
• Investors may Loose heavily if the Bubble is not controlled on time.

16. Regulatory - Other Country Outlook
Country
Regulatory
Authority
Guideline
US
SEC
It has issued an investor alert warning investor
about fraudulent investment schemes involving
Bitcoins and other virtual currencies.
Sweden
• Considers as a means of Payment.
• Guidelines issued for Registration and
Exchanges dealing in Bitcoins.
Working of

17. RBI
• Reserve Bank of India is the Central Bank of the Country – controlling the Issue of Currency
– Regulating and Supervising the Financial System
– Managing the Exchange Control
• Also, as Bitcoin is exchanged for INR and Other Currencies.
• Implication
– Irregular Exchange of INR for Bitcoin will reduce the hold of RBI over
Currency Movements in the Country.
– Also, RBI will not be able to control Rupee Price if it starts getting
traded on Exchange outside its Scope.

18. Monetary Authority – Other Countries
Outlook
Country
Regulatory
Authority
Guidelines Proposed
US
Federal
Reserve
• Ben
UK
India
Bernanke said virtual currencies “may hold long-term
promise, particularly if the innovations promote a faster,
more secure, and more efficient payment system”
• Bitcoin-based
businesses would not have to register with
regulators, at least for the time being, while they consider
their regulatory position
RBI
“watching” Bitcoin and gathering information in an attempt
to understand the virtual currency

19. Suggestion for Application in Indian
Context
• Regulate
– Bitcoin Miners
– Bitcoin exchanges
– Algorithm / servers
• Regulate Bitcoin circulation
• Establish link between INR, Bitcoin and other virtual currency
• RBI should get hold of Money Exchangers and Foreign Exchange
Dealers.
• RBI should check that Bitcoin does not evolve as a New Currency
parallel to INR in the Country.

20. Income Tax
• As Bitcoin Market is not regulated by any Government Authority,
neither it has Reporting Requirements nor it is required to keep any
Records.
• Bitcoins could be acquired in Cash, Credit card, through online fund
transfer or in exchange of any other conventional currencies.
• Unaccounted Money can be utilized for buying the same.
• Bitcoin Market is not regulated by any Government Authority neither it has Reporting Requirements nor it is required to keep any
Records.
• Without any Reporting, all these Transactions go Unaccounted and
the Country loses its Revenue Collection by way of Income Tax.

21. Taxation - Other Country Outlook
Country
Guideline Proposed
Germany
• Exempted
Finland
• Imposed capital gains tax on Bitcoins
• Tax on Bitcoins produced by mining as earned income
UK
• Declared
US
• IRS
Canada
Levy of Tax on 2 Points:
• Transactions on Goods & Services will be taxed under Barter
Transaction Rules.
• Profit on Commodity Transaction.
Bitcoin transactions held for over one year from capital
gains tax (25%)
that Bitcoins wont be treated as Money but as SinglePurpose Vouchers liable to VAT on Sales
is studying virtual currencies and intends to provide guidance
on tax consequences

22. Suggestion for Application in Indian
Context
• Capital asset like a stock - then long-term capital gains and
losses—those on assets held for more than a year—would
qualify for capital Gain Tax
• Considered as Currency – Gains or losses will be taxed at
current Income Tax rates
• Tax when Bitcoins is used to purchase goods or services or
given as gift

23. Ministry of Finance
• With Irregular Stock Exchange for Bitcoin, Free Exchange with
INR and Other Currencies, and Easy Utilization of
Unaccounted Money, the Finance Ministry has to get in
Picture to have a Full-fledge Control of this speedily
developing Currency.
• Utilization of Black Money for Purchasing increases the
Consumer Demand thereby leading to Inflation.
• In order to control Rupee Value, control Inflation, protect
Investors, the Finance Ministry has to Regulate the use of
Bitcoins in India.

24. National Issue
• The National Threat that arises is the use of Bitcoins for
Purchase of Controlled Items like Drugs, Narcotics, Illegal
Liquor, Banned Tobacco, etc.
• Also, it can be used by Terrorists as it ensures complete
Anonymity.