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Bitcoin regulation: Why it makes sense to recognise it as a currency

It is likely that Bitcoin has been used to facilitate enormous capital flight out of India, especially after demonetisation; rupee volume of Bitcoin trades has risen considerably over 12-18 months

Devangshu Datta 

Photo: Shutterstock

The widely anticipated launch of futures trading in Bitcoin, the world's largest cryptocurrency, got off to a positive start on the Chicago Board Options Exchange on Sunday, with the price rising nearly nine percent after briefly slipping below its opening level. The futures trading launch gives Bitcoin the potential to win long-awaited legitimacy and a wider usage. In the second of a special two-part series, Devangshu Datta looks at the need for a regulation

One of the challenges that Bitcoin poses is that it lends itself very easily to bypassing currency regulations. It was designed that way, with its decentralised verification network and built-in anonymity. As a result, the has also been used for all sorts of criminal transactions on the Copycat designed on the same principles have also been used for similar purposes. The first time Bitcoin was known to facilitate currency flight on a large scale was during the Greek euro crisis of 2015. As the Greek economy went into a meltdown, there was an attempt to prevent currency flight by barring the exchange of euros for other currencies within Greece. The loophole was that Bitcoin isn't considered a currency. So, Greek traders got around this by buying and swapping those for the US dollar. have even facilitated enormous capital flight out of China in the past couple of years. Mainland traders have bought using the Chinese renminbi and then swapped those for hard currencies. It is likely that Bitcoin has been used for the same purpose by Indians as well, especially after the government’s demonetisation decision late last year. Rupee volumes of Bitcoin trades have risen considerably over the past 12-18 months. News reports also confirm that Bitcoin has been used as an alternative to conventional remittances as well. This avoids paying bank charges and arbitrages on the considerable premium of 5-10 per cent that Bitcoin receives in rupee-denominated trades. Non-resident Indians (NRIs) can buy Bitcoin in dollars and sell in rupees, picking up premiums. Another major trend has been that of initial coin offerings (ICOs). There have been multiple types of ICOs. One is that of a start-up doing an IPO, which raises subscriptions in Bitcoin. These range from normal business ideas to wild schemes or frauds. This is actually less popular now because the rise of Bitcoin has made investors reluctant to use it. Another type of ICO is the launch of yet another digital – there are hundreds of Bitcoin imitations available now.

Many of these ICOs are outright Ponzi schemes or based on dubious "blockchains" which are not actually blockchains and open to rampant manipulation. The advantage for a fraudster is that the ICOs are completely outside of normal regulatory controls because, after all, digital cryptocurrencies are not recognised as currency. China has overtly banned ICOs but it required special regulations. Japan recognised Bitcoin as a currency back in September which is probably a sensible thing to do. Australia is following suit, and so is South Korea. Japan has brought exchanges under supervision by its market regulator, imposed net worth norms and KYC norms. It has also brought them under the purview of money-laundering laws. At the same time, it allows Bitcoin to be used in transactions. South Korea and Australia are headed in the same direction. Chances are that other large economies will also impose similar controls. This is very likely to happen in India as well. Once a signification proportion of India's major trading partners recognises these instruments and imposes controls, India will follow suit – it will have to. It would be good if that happened proactively, but the country is far more likely to follow in the footsteps of such controls being imposed abroad. Will such recognition drive out a certain class of speculators? Sure. It will also make Bitcoin less attractive as a clandestine cross-border instrument. But it will enable its use for legitimate purposes. Right now, for example, you cannot buy a new car in India using Bitcoin because no auto-dealer would accept it. Ditto for Flipkart, Ola, Zomato, Paytm, etc, to name some businesses at the forefront of India's digital economy. If it is a recognised currency, that situation might change and allow for a more widespread usage. This could in itself reduce the arbitrage premium on rupee-denominated Bitcoin trades. So, be prepared for that particular shock if you are involved in Bitcoin trading.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

First Published: Mon, December 11 2017. 10:04 IST