After what appeared to be a silent prop up of Bitcoin by China, over the last one week, China announced a series of measures that are now seen as a regulatory backlash. In the process BTC climbed upto US$ 1300 and dropped down to around $528 (at the time of writing) within a week. The volatility would have hurt speculators who bought BTCs at the high points though for miners and other early entrants it is only an “opportunity loss”.
China has now announced two important measures. Firstly it advised Banks and Financial intermediaries not to support BTC trading. Now it has advised BTC exchanges not to accept Yuans for buying BTCs. (See Reuter article here)
Around the same time Denmark has indicated its desire to amend laws to cover Bitcoins as a regulated currency in some aspects. (See report here)
While some amount of regulatory concern is natural, the recent developments have indicated that Bitcoin is right in the center of regulatory radar all over the world. It has come to a situation that regulatory bodies can no longer ignore the development and have to stay focused and probably take a position sooner or later.
As discussed here, India also needs to break its silence at least to the extent of RBI releasing an advisory on the speculation involved in buying and selling BTCs against rupees and the foreign exchange considerations if the buying and selling is denominated in a foreign currency.
If Denmark comes up with a legislatory correction, it only means that it would have officially recognized BTC as a financial asset of some perceived value and exchange ecosystem.
The happenings in the China market appears intriguing however since it could either signal a change of heart by the regulators to come down heavily on BTC as an emerging currency for commercial transactions or a calculated strategy to increase its hold on the market at a reduced value.
It is eminently possible that while the official line in China would be negative on BTC, the Government may silently start acquiring BTCs mainly through mining and even purchases at lower value. It may be observed that China has not yet placed a complete ban on BTC. It has only restricted use of Yuans into BTCs. This could encourage Chinese people to convert their foreign currency assets to BTCs rather than the domestic assets. This appears to be a good strategy if China is not particular about conversion of such foreign currency assets of Chinese nationals to domestic currencies. If after some time some foreign country say Switzerland declares BTC as an accepted foreign currency, then China can convert its BTC holding to other foreign currencies through Swiss Francs. China is therefore only set to benefit by the fall in the exchange value of BTC in the short run. This is like the “Dump and Pump” scheme that Bears in the Stock market can employ from time to time.
India can also take a cue from this. The policy should consist of following objectives
a) Encourage local mining through a system of registered miners.
b) Tolerate trade of BTC in domestic currency amongst registered domestic miners through registered exchange houses
c) Tolerate export of BTCs (selling of BTCs mined in India in foreign exchange) ensuring receipt of proceeds in rupees in real time.
d) Set limits on import of BTCs (buying BTCs against foreign currency payments and from foreign nationals against rupee payments)
Investors may however be warned that at present BTC is considered as a “Virtual Asset” but not a “Currency issued by RBI”. It is not a “Promissory Note” or any form of a Negotiable Instrument. Hence there will be no “Holder in Due Course”. Every owner is subject to the defects in the title of the asset of the previous owner.
It is for this reason that Naavi is suggesting that Miners should be “Registered” so that they can be identified and buyers can fulfill the “KYC Obligation”. Buying from unknown sellers is risky. Buying through an identified exchange is acceptable since a “Good Faith, For consideration, without knowledge of defects in the title Buyer” can get himself indemnified by the exchange for any defects in the title identified later.
Exchange houses can be sued in such cases subject to their continued solvency. It is for this reason that Naavi suggests a system of registration for the exchange houses also.
The terms of registration of exchange houses may include “Capital Adequacy Controls”. Terms of registration of miners may include “Asset adequacy Controls”. More details of what could be a good regulatory scheme may be discussed if RBI initiates any discussion in this regard with experts or the Indian Bit coin community considers a “Self Regulatory Mechanism”.
For the time being, let us watch the developments around the world closely.
P.S: By the time this post was completed, BTC as raised to $551!