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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

Countering the recent enforcement enquiries on two of the Bitcon traders in Ahmedabad and one in Tumkur/Bangalore, some of the operators in Bitcoin community have tried to organize themselves into an interest group so as to take up their case with the regulators.

In this connection it appears that one such group “Bitcoin Alliance of India” lead by Satvik Vishwanath who was the main organzier of the recent Global Bitcoin conference in India is conducting a press conference in Mumbai on 4th of January 2014. Mr Nishit Desai an advocate of Mumbai is assisting the group. The group has also given a press release to explain the Bitcoin concept for the information of the regulators.

A copy of the press release is available here: 

In addition to this Bitcoin Alliance there is another group “Bitcoin Foundation of India” guided by Mr Pavan Duggal in Delhi.

Certain persons are also in touch with the undersigned in Bangalore and organizing themselves as another group.

It is good that many stakeholders have shown interest in getting together and representing their cause to the regulators. In due course these different groups may find a way to coordinate their activity in the form of a federation.

In the meantime while Naavi will provide his assistance to any group which seeks assistance, personal focus for Naavi will be to develop a private regulatory framework for Bitcoin operators which ultimately helps the regulators to find a way to work with the industry in a mutually beneficial manner.

Naavi beilieves that there is a need for two types of Bitcoin related group activity. The first would be an alliance to support the business promotion. The present alliances fall into this category. The second type of a group of professionals who may presently be not associated with the Bitcoin industry but are otherwise involved in Finance, Technology and Law.  This “Techno Legal Financial Group” is considered desirable to develop the “Voluntary Regulatory Framework” for Bitcoin operators such as “Miners”, “Traders”, “Merchants”, “Exchange Gateways” and any other service providers.

The objective is to ensure that the regulators and the community would be able to find a middle path that is beneficial to the economy. To his extent this group should be able to work with both the commercial alliances as well as the regulators. A suitable format for such a set up is being contemplated.

P.S: Naavi has been invited to be a member of Bitcoin Alliance of India. However he is not yet a member as reported in the The Hindu.

Naavi

While RBI is trying to formulate regulations for the Bitcoin, it is time to start thinking of the benefits of India formally recognizing the Bitcoin as a currency of exchange.

According to coinmarketcap.com, the total market capitalization of Bitcoins today is about US$ 9.35 billion or roughly around  Rs 50000 crores.

At present there are 181 official currencies of different countries of the world and following represents the amount of currency circulation in different monetary zones (Source: http://www.marketoracle.co.uk/Article11576.html)

It may be observed that the total value of Bitcoins amounting to less than US $ 10 billion is around 0.25% of the total currency circulation. Out of this what may be in circulation is much less and what may come for circulation within India today and even in future  is very negligible.

Before Indian economists jump at the threat of Bitcoins to the Indian Currency system they need to take a look at this data.

Naavi

Related Articles:

The Economic Case for Bitcoin

Mapping Bitcoin Adoption: A Global Perspective In 11 Graphs

Distribution of Bitcoin transactions by country/exchange

Bitcoin Currency Surpasses 20 National Currencies In Total Value

One of the arguments of Bitcoin community is that the fiat currencies which carry the backing of a Government are being produced without any consideration to the inflationary aspects. After the de-linking of the Gold standard, the supply of fiat currency has become an administrative decision of the political party in power. With deficit budgeting being the order of the day, each year large quantities of currency are simply printed out from the Government mints and released to the market. Additionally, in countries like India, fake currencies printed in Pakistan also enter circulation. As a result the inflation becomes uncontrollable.

The latest development in India that adds to this inflationary push is the decision of the Aam Admi Party (AAP) in Delhi to provide electricity subsidy. So far other political parties have been doling out TVs, laptops, free power to agriculturists etc. Now AAP has introduced competitive sop distribution to the cities also. This will be as dangerous as the policy of division of the society based on castes with Mr V.P.Singh introduced into the Indian politics.

With some Congress members demanding a similar subsidy in Mumbai, it is likely that many other Governments may consider free power as a part other political agenda. With the Lok Sabha elections due in 2014, it is expected that there will be many more Sops announced by ruling parties in all states to attract the voters.

Already the populist schemes such as the Food Security Bill has drained the resources of the Government completely. Now with the fresh bout of sops for the urban population spearheaded by AAP, the supply side of currencies is completely under political influence and there is no limit to the new stock of currencies that will reach the Indian markets by 2015.

In this context the Crypto Currency system which comes with a cap on the total stock assumes a special value.  However it must be remembered that while each crypto currency comes with a cap dictated by the respective protocol, there could be no limit on the number of Crypto coins that may come into the market. However it is not going to be easy for different crypto coins to gain the critical acceptability of the community to gain in status as a credible currency. Bitcoins which has already established a certain level of credibility has only 9 million more units to be mined across the globe. This “limitation” may itself contribute significantly to the increase in the value of Bitcoins in the coming days.

Naavi

One of the doubts that the Bitcoin community in India face is its taxability. They wonder how will the Income Tax department treat Bitcoin transactions for tax purpose.

While it is the prerogative of the Income Tax department to interpret the taxability in whatever manner they think fit, our views on the same are as follows.

1. A Merchant receiving Bitcoins as revenue:

When a merchant receives Bitcoins either online or offline in exchange of his services, the Bitcoins will become part of his revenue. In the event he converts it into Rupees before the end of the financial year, the realized value may be booked just like any rupee sales.

If there is a  time gap between the date of sale and the date of conversion, the value of the Bitcoin might have varied during this period and it is open to the IT (Income Tax) department to treat the value on the date of sale as the realized sale proceeds and the difference upto the date of conversion as “investment profit/loss”. There can therefore be a business revenue and short term gain or loss on investment.

In other words, if the seller has a quote for his services in Rupees as on the date of the sale, the IT department can consider it as the “Notional Sale Value” and the difference in the  actual realized sale value as short term gain/loss.

In case the merchant does not convert the Bitcoin holding into rupees before the end of the financial year, he may declare it as an “Inventory” of “Stocks” and value it in terms of rupees using any of the exchange rates available in major Bitcoin exchanges. If IT department wants to be harsh, it may take the highest quote of the day for valuation. If they are reasonable, they may accept the weighted average price of a basket of quotes from top exchanges. The constitution of the basket needs to be decided.

The Merchants may file their returns on the basis of the US dollar quote from MtGox converting the dollar to rupee as per their Banker’s dollar purchase rate and let the department dispute the valuation if they want.

If a trader receives Bitcoins and then sells it in an exchange and realizes a foreign currency and then converts the foreign currency back to rupees, the transaction may be deemed as an “Export”. The exchange will be paying in fiat currency on behalf of the buyer though the choice of the exchange was that of the Merchant.

This transaction may have similarity to a situation where a buyer says “I will receive the goods through a courier but the Merchant can decide on which courier to use”. A delivery of goods in such case will be acceptable as a constructive delivery when the goods are handed over to the courier by a Merchant. Similarly the trader uses MtGox at his choice for exchange of Bitcoins to dollars but Mt Gox may be deemed to exchange the Bitcoins to dollars at the instance of the buyer rather than the Merchant.

2. Traders/Investors

Trading in Bitcoins is like any other commodity trading and the profits and loss are computed on the basis of cost of purchase plus related expenses and the realized or realizable value (as discussed in the previous paragraph).

If a person buys Bitcoins by paying in any currency other than Rupee, then it would amount to an “Import” of Bitcoins. To the extent Bitcoin may not be in the restricted list of imports it may be considered that the import does not require specific license. However the call has to be taken by the Authorized dealer who coverts the rupee to the foreign currency.

3. Miners

Mining of Bitcoins is deemed as a “Production Activity”. It will generate Bitcoin stocks which will have realizable value as discussed earlier. There will be a cost of production that includes direct expenses if any and the depreciation of computers and other resources used.

If the mined coins are sold, it may be either a domestic sale or an export. If it is held as inventory at the end of the financial year, then the usual rules regarding advance taxation based on the realizable value or on cash basis on sale can be adopted.

Probably more clarity will emerge as the days go by.

Naavi