Regulation of Bitcoins under Indian Regulatory Frameworks

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This presentation provides a comprehensive account of meaning of Bitcoins, their intended use, mechanism behind the payment through peer to peer transaction system alonwith an overview on the means or heads under which Bitcoins can be regulated under Indian regulatory regime

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Regulation of Bitcoins under Indian Regulatory Frameworks

  1. 1. NATIONAL LAW UNIVERSITY, JODHPUR LL.M DISSERTATION PRESENTATION REGULATION OF BITCOINS UNDER EXTANT REGULATORY FRAMEWORK OF INDIA – A CRITICAL ANALYSIS SUPERVISED BY: PRESENTED BY: DR.MANOJ KUMAR SINGH NISHTHA ASST. PROFESSOR ROLL NO. 512 FACULTY OF LAW LL.M 1 YEAR (CORPORATE LAWS)
  2. 2. PRESENTATION OVERVIEW  SIGNIFICANCE OF RESEARCH.  RESEARCH OBJECTIVES  RESEARCH QUESTIONS  HYPOTHESIS  BITCOINS – THE MECHANISM, ADVANTAGES AND DISADVANTAGES  NEED FOR REGULATING BITCOINS  HOW OTHER JURISDICTION HAVE TREATED BITCOINS  EFFECTIVE MECHANISM OF BITCOINS IN INDIA  CONCLUSION AND SUGGESTIONS
  3. 3. SIGNIFICANCE OF THE RESEARCH  Reserve Bank of India has cautioned the Users, Holders And Traders of the Virtual Currencies Of the following potential Risks vide a Press Release dated 24.12.2013:  FINANCIAL  OPERATIONAL  LEGAL  CUSTOMER PROTECTION  SECURITY RELATED  Apprehensions raised by RBI has accelerated the curiosity to understand and regulate bitcoins in India  Therefore the main aim is to :  Analyze the acceptability of bitcoins as a tradable currency in India ;  Analyze the risk associated and identified by RBI to bitcoins ;  Examine the regulation of bitcoins under various acts and legislations in India
  4. 4. RESEARCH OBJECTIVES  To examine the scope of the term “Virtual Currency”;  To define “Bitcoins” and “bitcoins”;  To identify the mechanism behind bitcoins ;  To examine the level of anonymity that can be maintained while dealing in bitcoins ;  To analyze whether the concept of bitcoins can be replicated under Indian Economic Model;  To critically analyze the potential impact of bitcoins on Indian Rupee ;  To Find out whether the usage of bitcoins has been authenticated by any regulatory bodies;  To find out the applicable laws and regulations under which bitcoins may or can be
  5. 5. RESEARCH QUESTIONS  What are the implications that bitcoins may have on Indian Rupee ?  Will a currency with no governing body be accepted in India ?  Does the level of anonymity involved in the encrypted transaction of bitcoins pose a national threat to the security of the country in terms of its assumed illegal usage ?  Whether the trading, holding and usage of bitcoins illegal in India ?  If the trading, holding and usage of bitcoins is not illegal, can it be regulated by a regulatory authority ?  How can it be regulated under the extant regulatory frameworks in India ?  What is the legal status of the exchanges facilitating the bitcoins trading in India ?  What all statutory acts and provisions can be invoked to regulate bitcoins in India ?
  6. 6. IF BITCOINS ARE AN OPEN SOURCE CRYPTOGRAPHIC PROTOCOL MANAGED IN A DECENTRALISED MANNER, THEN REGULATING IT UNDER EXISTENT REGULATORY FRAMEWORK OR CREATING NEW FRAMEWORK WILL RESULT IN LOSS OF ITS DECENTRALISED HYPOTHESIS
  7. 7. WHAT ARE BITCOINS ? Bitcoins is a digital or virtual currency based on a peer to peer payment system that facilitates instant payment between two parties. * * In a peer-to-peer network, tasks are shared amongst multiple interconnected peers who each make a portion of their resources directly available to other network participants, without the need for centralized coordination by servers  A community is defined by the cooperation of its participants, and efficient cooperation requires a medium of exchange (money) to enforce contracts which is traditionally provided by the government to legal entities.  Opposing which Wei Dai, a Cypherpunk described a protocol by which these services can be provided to and by untraceable entities.  Basing on the findings of Wei dai, Satoshi Nakamoto, in 2009 came up with the concept of Bitcoins.
  8. 8. PECULIARITIES OF BITCOINS  It is a Virtual Currency supported by high end computer algorithms ;  It is not regulated or controlled by any Centralized Bank ;  They are limited to a figure of 21 millions (total bitcoins in circulation as on 25.04.2014 is 12,68,3425 );  The buyer and seller interacts directly with no third party intermediary in between ;  Promotes non reversible payments – cannot be spent more than once;  Identity of Bitcoin users are Pseudonymous and not anonymous;  All the record of the transactions in bitcoins are recorded in a transaction log called “Blockchain”  There is no fixed value to bitcoins as its value fluctuates through supply and demand chain;  Hence they are volatile with the value seeing its extreme highs and lows;
  9. 9. BITCOINS – FLUX Of SUPPLY AND DEMAND The following graph shows the fluctuation in value of bitcoins going as high as 1150 to as low as 69 explaining its volatile 102 307 780 122 130 434 1151 69 203 560 491 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Months (May ‘13 – Apr ’14) Value of bitcoins in USD
  10. 10. BITCOIN TRANSACTION CHAIN All the transaction are facilitated through an e-wallet generated specially to store bitcoins  There are two parts to a bitcoin address –  the public key and  the private key  the public key can be freely given but the private key is to be retained with oneself.  When someone makes a transaction to send bitcoins to an address, a message is broadcast from the owner of the sending address to the network that X amount of coins from that address now belong to the new address.  This operation is authorized by the sender’s private key which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet.  The signature also prevents the transaction from being altered by anybody once it has been issued.
  11. 11. BITCOIN TRANSACTION CHAIN All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining. Bitcoins can be obtained through : -Bitcoin exchanges in exchange of conventional money ; - merchants in exchange for the sale of goods or services ; - user can generate it through mining
  12. 12. BENEFITS OF USING BITCOINS  LOWER TRANSACTION COST FOR ELECTRONIC ECONOMIC EXCHANGES - Absence of third party intermediary such as paypal completely eliminates third party intermediary fee  INCREASED PSEUDONOMOUS PRIVACY -Less risk of identity theft as no material information regarding the identity is transferred between the parties. However a permanent and complete full record of  NO EROSION OF PURCHASING POWER BY INFLATION - Due to the fixed amount of bitcoins in circulation i.e. 21million
  13. 13. NEED FOR REGULATING BITCOINS  Its absolute Laissez faire nature – renders bitcoins unregulated ;  Bitcoins are currency created on a peer to peer network supported by algorithms – which makes it prone to anti cyberspace activities such as hacking : MT GOX COLLAPS  The Bitcoin platform and its pseudonymous character provides safe haven to the illegal activities concealing the identity of the transactor : USA v. Ross William Ulbricht, 14 CRIM68  It can be used for money- laundering activities and running Fraud ponzi scheme – SEC v Trendon Shavers, 4:13-CV-416, Florida criminal case involving Pascal Reid and Michell Espinoza
  14. 14. MT GOX COLLAPSE - Mt GOX: the biggest bitcoin exchange in Japan responsible for 70% of the total bitcoins in Circulation suspended its operation in February 2014 ; - The CEO Mark Karpeles cited reasons of Slowing down of the server due to heavy transaction On the exchange -Few days later an anonymous document was floted namely _ Crisis Strategy Draft, which Claimed that approx. 7,44,408 bitcoins were stolen from the exchange (6% of the total bitcoin In circulation amounting to $480 million ; -The above information was finally confirmed by the CEO resulting in MT. GOX filing its Bankruptcy papers.
  15. 15. SPECULATION OF TREATMENT TO BITCOINS  CAN BITCOINS BE TREATED AS :  CURRENCY under section 2(h) of Foreign Exchange Management Act, 1999 ;  SECURITIES under section 2(h) of Securities Contract Regulation Act, 1955;  DERIVATIVES under section 2(ac) of Securities Contract Regulation Act, 1955 and section 17(6A) of Reserve Bank of India Act, 1934;  NEGOTIABLE INSTRUMENT under Negotiable Instruments Act, 1881;  GOODS under section 2(d) of The Forward Contracts (Regulation) Act, 1952;
  16. 16. WHO CAN REGULATE BITCOINS IN INDIA  Reserve Bank Of India - “ one of the values of currency is stability and the extent a currency is the target of speculation as opposed to primary means of exchange does create some concerns for the user” – Raghuram Rajan  Income Tax department - Conducted raids at the Bengaluru Bitcoin exchange – Coinmonk and Unocoin which ended up as an inquisitive meeting showing its intention of taxing the mining activity of bitcoins.  Enforcement Directorate - Conducted raids at Ahmedabad office of BuySellBitCo.in for the violation of FEMA provisions as RBI does not authenticat such transactions.  All three institutions are filled with dilemma and speculations and have expressed concerns over the regulation of digital currency and resorted to preventive measures to understand the bitcoin phenomena
  17. 17. REGULATION OF BITCOINS UNDER OTHER JURISDICTIONS  UNITED STATES -Internal revenue Services, has issued guidelines to tax bitcoins as a “property” and not a currency ; - a tax payer who receives virtual currency as a payment for goods or services must in computing gross income , include the fair market value of the virtual currency ; - the fair market value would be in terms of U.S. Dollars as on the date of receipt.  CANADA -Bitcoins are not “legal tenders” as reported by the Department of Finance, Canada ; -Factsheet issued by Canada revenue Agency dated 05.11.2012 on virtual currencies states that transactions involving bitcoins are of the nature of barter transaction and hence are to be treated as “commodity” for the purpose of levying tax. - federal Budget was unveiled on 11.02.2014 which included a brief mention of Canadian Govt. plans to introduce anti- money laundering and anti -terrorist financing regulations for virtual currencies such as bitcoins.
  18. 18. REGULATION OF BITCOINS UNDER OTHER JURISDICTIONS  CHINA -Central bank of China and four other government ministries issued a notice on 03.12.2013 stating bitcoins are virtual commodity and not a currency ; -Bans and payment institution are prohibited from dealing in bitcoins.  EUROPEAN UNION - No specific legislations or tax treatment has been accorded to bitcoins ; - European banking Authority just like RBI in India has issued a warning on the dangers associated with transactions involving virtual currency viz. bitcoins ; - The EBA pointed out that since bitcoins are not regulated , consumers are exposed to the risk of losing their money.
  19. 19. REGULATION OF BITCOINS UNDER OTHER JURISDICTIONS  RUSSIA - Ranks comes second China in banning of bitcoins and radically clarifying that no other currency be it virtual can foster other than Ruble. - The use of bitcoins and other cryptocurrencies carries the risk of violating citizens’ property rights and cannot be used in Russia, the country’s Prosecutor General's Office concluded after meeting with the Central Bank, FSB, and Interior Ministry. - The monitoring of the use of virtual currencies shows an increasing interest in them, including for the purpose of money laundering, profit obtained through illegal means - Russia’s official currency is the ruble. The introduction of other types of currencies and the issue of money surrogates are banned under Article 27 of the federal law ‘On the Central Bank of the Russian Federation.’
  20. 20. CONCLUSION - Although still in its nascent stages, Bitcoin and other digital currencies like it are projected to become important players in the future of e-commerce. - Satoshi writes in his white paper—“as long as there are more honest nodes than dishonest nodes, the dishonest ones are suppressed and Bitcoin remains whole”, but the fact of the matter remains that in reality the entire mechanism of bitcoins is supported by algorithms and computer programming and given the current graph of technical innovations in the areas coding and decoding computer algorithm and programmes, bitcoins is almost all the time exposed to the anti-cyber vulnerabilities. - How, when, and to what extent bitcoins will grow remains to be seen. But the potential consequences of widespread adoption of it are already palpable.
  21. 21. CONCLUSION - The peer-to-peer, decentralized, and largely unregulated system of Bitcoin contains the potential to threaten the global economic stability. The threat posed by Bitcoin is no more theoretical, as the system has already fallen in wrong hands. - The lack of an underlying legal framework posits additional problems. Because digital currencies like Bitcoin lack regulation or public oversight, they are subject to credit, liquidity, and operational risks, as well as risk of fraud. - Sooner or later these problems would have to be addressed as leaving the issue unaddressed would create much hue and cry. India should seek to create an instrument at place in order to deal with the upcoming break through’s of the bitcoins – be it positive or negative. It is the demand of the principle of Caveat Emptor that India must make available guidelines for informing the buyers and the users of bitcoins to be aware of pros, cons, consequences and legality of their act.
  22. 22. SUGGESTIONS The entire globe is at a standstill and is in aghast with the entire peer to peer mechanism on which the bitcoins operate. Therefore it is suggested that Bitcoin is a cosmopolitan currency that has not only affected India but worldwide. Almost all the countries are facing similar doubts as to under which head can they categorize bitcoins and likewise regulate – do they accept it as an alternate virtual currency, or as a commodity and subject it to the consumption tax unlike Japan. That the global skepticism of regulation of bitcoins must be addressed at an international platform and international agreements under the Comity of Nations almost parallel to the scheme of World Trade Organization and International Monetary Fund.
  23. 23. SUGGESTIONS Such international platform will provide for addressing the issues relating to bitcoins and also range of deliberations considering the participation of all the Developed and Developing Nations . Attaining and implementing such a model is time taking and requires the extremes of cooperation among the participating nations however it must be noted that the results shall be far reaching as such an approach will not only provide an uniform solution to the regulation of Bitcoins but would also help in creating an international obligation on the member nations and giving to the world a global jurisdiction to govern bitcoins and virtual currencies.
  24. 24. THANK YOU

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