One of the inevitable fall outs of the global outrage on ISIS after the Paris attack is an attempt by all countries to choke ISIS of its funding sources.  It is estimated that ISIS holds a huge stock of Bitcoins  which is the known standard currency for cyber criminals and terrorists.

After the Silk Road expose, Bitcoin suffered a major blow as it acquired the notoriety as the choice currency of the underworld. However it was slowly coming out of the reputation crisis and trying to re-establish itself on the strength of the momentum gained by a large number of non criminal owners of Bitcoin.

From its glorious days of 2014 when Bitcoins were valued at over Rs 65000/- in India, the value has now tumbled down to around 20940/-  at present. In the last two days, the international price of BTC has dropped from around $340 to around $315. In the current trend it may test the $250 support line and head further south.

The current crisis now has brought global attention on Bitcoins and many Governments are considering “Demonetizing” (Banning) Bitcoins.   It is interesting to note that the readers of mirror.co. uk have voted  in a 53% majority (as of now) that Bitcoin should be banned. (Read this article in mirror.co.uk). 

With Bitcoin having now been flagged as the currency used by ISIS, more countries may move in to ban the currency. This could seriously threaten the very existence of Bitcoin.

This does not mean that this is the end of the “Crypto Currency” as a means of digital payment system though for many Bitcoin is a synonym for “Crypto Currency”.  But Bitcoin has been tainted to such an extent that most of the Bitcoin holdings might have once passed through an illegitimate transaction and hence carry the tag of “criminality”. Legally, Bitcoin being a commodity, a “Stock once tainted remains always tainted”. Hence a majority of Bitcoins (unless they have been mined by the holder or a known source) will be considered as illegal even if the holder has bought it with his hard earned taxed and declared income. It is difficult therefore to see a recovery of the value of Bitcoins in the near future.

In the meantime, Anonymous Hacker group has vowed to take the war into the ISIS camps and is trying to identify the Bitcoin wallets owned by ISIS. It would be in the interest of the Bitcoin community if ISIS holdings of Bitcoins can be identified and disabled so that the ISIS taint can be removed to some extent.

It is therefore advisable for all genuine holders of Bitcoin who are holding Bitcoin as an investment to immediately exit and cut their losses. The value is expected to drop further in the next few days and it will be a long time before it recovers if it recovers at all.

Naavi

Bitcoin has been in discussion for some time. In India the response for Bitcoin has been mixed. While initially it attracted the attention of entrepreneurs setting up echange services, the RBI frowned upon the system and ED moved in to conduct raids on some of the exchanges because it was felt that there was violation of foreign exchange regulations involved in the exchange transactions. This dented the enthusiasm and more or less killed the initiatives.

One of the main reasons for the RBI responding to the system with an unapproving look was that Bitcoin had been earlier associated with criminal activities and continue to be the preferred currency of the underworld. Coupled with this the claim of the Bitcoin operators that it is an “Alternate to legacy currency” threatened the regulators that the economy could be adversely affected if Bitcoin popularity grows.

Naavi has held that Bitcoin as a category of “Virtual Currency” is an “Electronic Document” and is recognized as such under ITA 2000/8. Whether it is a currency alternative or a virtual commodity or just a “pointer” to which a closed community ascribes a value is a matter of how the community would like to use the concept. Naavi has also highlighted that the system of “Virtual Currency” is a technology which has a great potential to be used by the regulators themselves. In fact Naavi’s old patent applied system of “Digital Value Imprinted Instrument System” itself did place faith on a server based authentication of a transaction and conversion of legacy currency to customized currency by the user himself. Presently some form of such limited currencies are in use both in the form of prepaid virtual cards as well as closed payment systems.

Now, today’s report in news papers state that IBM is working on a “Bitcoin-like” system (Refer this article). This system is supposed to use the “Block Chain Technology” and will eliminate the need for Banks and Financial institutions to authenticate a transaction and use the Block chain type of authentication. From the reports it appears that the system will convert legacy currency into some form of virtual currency which the spokes person refers to as “Token”. It is not clear however how the availability of back end fund is being authenticated without involving the financial institution.

In contrast, what I would like to suggest is for the regulator like RBI to start a new Virtual Currency on its own or convert the current stock of notes into virtual notes gradually by withdrawing the paper currency in parts and replacing them with virtual currencies. What can be done in this system is to enable RBI to track every transaction. In such a system the availability of stock is authenticated against the base block authenticated by RBI and further authentication of transactions can be done by others who can be rewarded with appropriate commissions.

If RBI sheds it’s reservation on virtual currency, we can discuss the alternate possibilities which will satisfy the RBI as well as the Government and yet will make the technology work for revolutionalizing the nation’s currency system. This would be far more economical than printing new One rupee plastic notes which RBI seems to be thinking. The virtual currency system has not only the prospect of better economy but could be a better security against organized counterfeiting by enemy countries.

Naavi

In a huge blow to the Bitcon community, MtGox, the biggest Bitcoin exchange has gone offline following what is believed to be a hacker’s attack leading to loss of critical information which may affect the transactions of its customers.

More details available here

It is expected that the closure is temporary and the exchange may start functioning again shortly. However the exchange value of Bitcoin took a heavy beating and came down to around $437 creating concerns amongst the investors.

Naavi

During the last one month the Bitcoin community is waiting to see how the regulatory uncertainties in India are shaping up.

RBI has come up with it’s advisory with a rider that it may  revise its view on Bitcoins any time in the future. Given the tendency in India to come up with retrospective legislations, Bitcoin community cannot make any further insvestments in India until the air is cleared.

In this connection a demand for clarification has been made with RBI and response is awaited. (See report in coindesk)

Naavi

Also Read: FM’s comments

In a telling blow to the Bitcoin community, Apple has taken a policy stand to remove all applications from the app store stating that “they may not include content that enables, facilitates or encourages an activity that some countries deem illegal. App Store Review Guidelines require that apps be legal in all locations in which the app is available.”

Since there will always be some country in which Bitcoin may be illegal, this policy means that Bitcoin apps will go out of app store permanently.

The guideline may not be easy to follow in respect of all apps since there is no way Apple can ensure that no apps will enable illegal activity. After all the SMS application or e-mail itself can be used for illegal purpose. Similarly the Bitcoin can be used for both legal and illegal purpose. In this context the stand taken by Apple presumes that Bitcoin can be used only for illegal purpose and not for any legal purpose.

We need to observe if the popularity of Bitcoins is strong enough to make Apple change its guideline in the coming days.It would be interesting to see how the Bitcoin community responds to this challenge. If they fail to convince Apple, it is possible that in future some Governments may convince Microsoft that all Bitcoin applications must be blocked by Windows OS. This would be a back door way of banning Bitcoin.

Related Article

Naavi

A Canadian resident Venugopal Badarawada has sent a notice to RBI seeking clarifications on RBI’s stand on Bitcoins, and opened a window of opportunity for RBI to come out with a clarification on its stand on Bitcons.

The earlier press release warned the public of the possible consequences of violation of law as well as the financial risks involved in dealing with Bitcoins. The warning given to public was in order since it is the duty of RBI to keep the public warned of such risks.

However while releasing the advisory, RBI also stated that they may review the regulatory structure by saying

“The Reserve Bank has also stated that it is presently 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.”

It is the uncertainty that RBI has introduced through these lines that has invited the action of Mr Venugopal.

The undersigned has already clarified that at this point of time, Bitcoin is an “Electronic Document” as per Information Technology Act 2000/8 (ITA 2008) and hence carries “Legal Recognition”. If this “Legal Recognition” has to be removed, it would be necessary to amend ITA 2008. It is in this context that the undersigned has stated that RBI has no rights to ban Bitcoins.

This “Legal Recognition” of Bitcoins as per Section 4 of ITA 2008 makes it an “electronic document” which can be produced as evidence in a Court of law to whatever it represents. Whether this electronic document is a “Currency” or a “Commodity” or a “Derivative” is left to the community to decide based on their perception on its usage. For want of a better description, it is better to consider Bitcoin (as in deed any Crypto Currency) as a “Commodity in electronic form which the public may use for any legal purpose”. No other conclusion is logical.

It is true that Bitcoins can be used for money laundering and so is any other currency or commodity.  If RBI is concerned about money laundering usage of Bitcoins, it has to stop at giving such an advisory and say that Bitcoin is otherwise not illegal to mine, possess and transact.

RBI’s vagueness is detrimental to the constitutional right of an individual in India to carry on a business of his choice. If he wants to do business with Bitcoins, he has to presently live under the constant fear that RBI may at any time change the regulation and more so with retrospective effect and render him a criminal ab-initio. Hence RBI’s silence cannot be considered acceptable.

Since there is no other way that the public can force RBI into giving a clarification, Venugopal has rightly declared his intention to approach a Court to direct RBI to clarify.

In case RBI now comes up with a view that Bitcoin is illegal, it has to state the ground under which it is considered illegal. Merely the fact that the commodity is used by some as “Virtual Currency” may or may not be considered as sufficient ground to ban it. If however RBI takes such a stand the Courts can be moved to clarify if RBI is right. It is only when the Supreme Court gives its clarification on the matter that the issue would be settled.

Let’s wait for the RBI’s reply and further action that M Venugopal contemplates.

Naavi

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Updated on 3rd Feb: Reference in ET