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.