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While there is a discussion on one hand about the RBI regulations on Bitcoins, the promoters of Laxmicoin are reported to be waiting for RBI clarifications for launching their Crypto Currency. (See Economic Times)

Apart from the controversies surrounding Bitcoins in general, Laxmi Coin is likely to encounter another problem of using religious sentiments to promote the coins.

Should the name of the Goddess of Wealth be used for naming a commercial product?… It is worth debating.

Naavi

The press conference conducted in Mumbai by the Bitcoin alliance ended up with the media reporting ” Bitcoins Alliance India advices public to keep off, seeks legal clarity” (Economic Times). 

Investors need to look at what are the legal and financial risks. After the above announcement, Bitcoin moved up to cross US$1000 again with the announcement that Zynga which manages many of the popular Facebook games accepting Bitcoins for many of the requirements of the games such as Farmville. This development is very significant since this indicates that many other online operators may start accepting Bitcoins. This will lead to an increased demand for Bitcoins and it will possibly ride over the uncertainties arising out of the regulatory caution in India.

To answer the question “Should you invest in Bitcoins?” one has to keep in mind the non financial legal risks. The main legal risk is that purchases  may lead to an investor being in the radar of the Enforcement Directorate. If the purchases are made strictly out of legal funds and the seller is properly identified, the risk should be lower. However if there is any ED enquiry, there could be other unpleasant consequences which an ordinary investor may consider as annoying.

I suppose that it will take a month for the confusion to settle down. However, in the long run RBI may reconcile to the fact that Bitcoin is there to stay as a currency of the virtual world and may not go to the extent of bringing about amendments to law just for the fear of Bitcoins.

Naavi

After the high publicity received during what was termed “Global Bitcoin Conference” in Bangalore on 15th December 2013, it was natural that there should be some cooling down of passions. This happened with the twin actions of RBI releasing an advisory and the actions of the ED. Presently the industry has entered into a phase of consolidation.

The current operators seem to have come together to form a lose association and conducted a press conference in Mumbai on the 4th of January 2014. The press conference was aimed at communicating with the RBI  the industry views  on the Bitcoin concept. It has done its bit and it is now time to await the reaction of RBI.

During the conference it appears that the group has indicated that India is estimated to constitute about 1% of the  global market of Bitcoins and the trade is valued at the order of Rs 600 crores and constitutes about 50000 users.

If this estimates are true then there is a definite case for the regulators to show some concern on regulating the industry. Also if in due course other crypto currencies gain ground, the industry may easily become significant enough to regulated.

Regulation per-se is not detrimental to the industry since it will bring order. Whenever a new business idea comes up, in the early adopters there will always be certain irresponsible elements who may create an undesirable public and regulatory perception about the industry. Bitcoin community in India has also been passing through this phase. It is necessary that actions need to be taken to discipline the members and maintain a sense of respectability to the group.

The conference in Bangalore did bring out this need. There was enthusiasm and excitement amongst the young crowd about the concept. But the conference remained largely as a promotional event and failed to initiate an evaluation of the possible future developments. As a speaker I did raise the concerns but it was too late in the day and too little to lead to introspection. As the crowd disbursed in great spirits, they received a  rap on the knuckles through the developments of the last fortnight. This appears to have now driven home a sense of responsibility in the current industry players since most of them are otherwise techies with successful professional careers behind them and who would like to maintain their respectability in the society.

Naavi.org welcomes the current move of the industry players to come together and act responsibly with guidance from the legal fraternity.

I presume that M/S Nishit Desai associates have been retained by the community to represent them in the legal cases that are presently unfolding against some of the members. We can now wait for further developments to play out. Will the ED back out? Or will it take its investigations to the logical end? is the next question to be answered. If the investigations continue there will be an inevitable legal battle which will keep the industry concerned for some time.

It is likely that the issue will now go into hibernation and the activities in Bitcoins will be subdued for some time. In the meantime there will be further developments in the global front too which will be keenly watched by the regulators.  The regulators would also be making their own internal evaluations on the impact of these developments.

The regulator cannot look at this issue as an issue involving only the Bitcoin community. Whatever decision that is taken now will affect the Crypto Currency Industry in general and in due course at least two or three other crypto currencies are likely to emerge as significant players and the net impact of all these crypto currencies need to be taken into account by the regulator before they arrive at their decision on Bitcoin.

In the next two months we can expect some more action in this front which will define the future of Bitcoins in India. How the industry reacts to further developments will determine the maturity of the industry players and their commitment to shape the future.

Will Bitcoins just pass out as a fad? or will it develop roots and grow?… Let’s keep our fingers crossed and watch.

Naavi

P.S: Naavi is not a member of Bitcoin Alliance as has been wrongly reported by The Hindu in one of the recent reports.

Whenever press writes an article about Bitcoin, they use pictures similar to the following. 

This picture immediately invokes the thought of a fiat currency and regulators start thinking  how anybody can “mint” such coins  without their permission.

However the correct visual depiction of a Bitcoin would appear more like the following picture.

This is the depiction of an “Electronic Document” in binary language. Bitcoin is actually an electronic document and not a minted metal coin. It is produced through a computer process just like any other electronic document.

If media persons  consistently use  the above picture whenever an electronic document needs to be visualized, then there would be a better understanding of the real nature of Bitcoins (and Crypto Coins in general) and the regulator’s perception may change for the better.

Naavi

India is a country which tops in the annual inward remittances. In 2012, the total inward remittances were estimated at US$ 69 billion. China with US$ 60 billion was the second best. (Refer article).

In the year 2013, despite the appreciation of the $ exchange rate the total remittances is likely to exceed $70 billion. Many analysts expect that monthly remittances have even reached as high as $20 billion in the last few months of 2013.

NRIs in particular are using various channels such as Banks, Western Money Union and Paypal to transfer funds to India. It is stated that “According to an RBI survey, SWIFT (an international wire transfer system) is costlier vis-a-vis drafts and cheques. While the cost of sending up to $500 from the US to India through SWIFT is less than 1-5% of the funds transferred, the comparative rates for demand drafts/cheques is just 2% of the remitted amount. Money transfer services like Western Union charge a higher commission, nearly 25-30% more than banks.” (Reference: Economic Times Jan7, 2013).

Bitcoin transfer is however  nearly instantaneous and the costs are negligible. Bitcoins fly from one wallet to another across the globe in Internet speed (subject to the delay for confirmation in the form of block chain addition which is perhaps about 15-30 minutes).

Hence the Bitcoin community is very bullish on the public acceptance of Bitcoins.

RBI as well as the IT (Income Tax) department are however concerned that while the current system is Bank dependent and information about any remittance can be easily obtained from them, a similar advantage is not there in Bitcoins since it is a peer to peer system.

It must however be recognized that it is possible to track the transactions through the Block chain analysis to identify the wallet addresses. Hence if the wallet maintenance agencies cooperate with the law enforcement agencies whenever a suspicious remittance is reported, it is possible to address the concern of the Government. However this is a privacy issue and many Netizens are very sensitive about loss of privacy and would be unhappy with the ability of the Government to snoop around.

We need to find out a solution for this mutual distrust between citizens and the Governemnt. Naavi had in the past suggested a system of “Regulated Anonymity” where the disclosure requests are controlled through a non government agency. It may not be a perfect solution but it indicates the direction. It is possible to use such a concept to build a trust between the regulator and the Bitcoin community so that the long term benefits of Bitcoin or Cryptocoins to the economy in general is not lost.

However, if bitcoins come into the hands of Indians and remain as Bitcoins, the holdings are unlikely to have any effect on the economy. It is only when such assets are liquidated and converted into rupees or rupees are used to buy bitcoins that the system of bitcoin influences the physical economy. Hence all the regulatory concerns should be directed at the conversion of Bitcoins to rpees and vice versa.

For the same reason, Bitcoin mining is of no concern to the regulator except for the possible leakage of foreign exchange revenue that should flow in when an Indian Bitcoin miner sells his holdings to a foreigner. Similarly, a Merchant receiving Bitcoins for his services is also of no concern to the regulator.

When it comes to taxing the Bitcoin holdings, the IT department can easily value the holdings on some standard method of asset valuation or tax it only on conversion to a fiat currency.

As long as the persons converting Bitcoin holdings into other currencies are properly identified so that they can be taxed if required and penalized if necessary there appears to be no risk for the economy arising out of Bitcoin usage as the currency for inward remittances.

If RBI is not worried about the potential loss of revenue for Banks if part of the remittances presently coming through the Banking system switches to Bitcoins then there is no reason why RBI should not make a “Neutral” statement clarifying the regulatory view on the acceptability of Bitcoins as a commodity which some may use as an “Asset” or  “Currency”.

Perhaps the Bitcoin community needs to take steps to address the concerns of the regulators so that the regulator can move half way and allow the Bitcoin industry in India to flourish.

If and when the regulators gain the courage to accept the benefits of cryptocurrencies for the economy and  the political masters are also able to support a professional team of the regulator to take the necessary decision, we can also discuss how the Indian economy can really benefit by the regulators positively supporting Bitcoins instead of simply remaining neutral.

Naavi