Bitcoin, the most talked about cryptocurrency, entered the tenth year of its existence last week. While the world grapples with its meteoric rise and attendant risks -- from fears of a bubble to its use by unsavoury entities (especially the North Korean regime) -- a large number of Indians have taken a shine to cryptocurrencies, with reportedly 2.5 million registered traders and Rs 178 billion (Rs 17,800 crore) worth of them having been traded.
The most popular of them, bitcoin, which was launched nine years back and was worth a few cents and produced on a simple computer, now needs graphic cards and high-end computers with high use of power. Today, as on January 11, 2018, a single bitcoin is worth Rs 863,242.70. At present, among the clutch of cryptocurrencies, bitcoin has a market share of 36.6 per cent and a market cap of $250 billion.
Currently, blockchain is used by three million users every day, with that number expected to increase to 200 million within just seven years, according to projections. In fact, Japan has already legalised Bitcoin. The Russian central bank plans to produce its own cryptocurrency, which will be known as crypto rouble. Recently, Belarus legalised cryptocurrencies. India still officially says bitcoin is not a legal tender, but hasn't categorically called it illegal either. The Indian government is waiting for a report from a committee which is expected to offer recommendations on regulating cryptocurrencies.
Here's all you need to know about bictcoins and cryptocurrencies in India:
1) Is it a Ponzi scheme? The government thinks it is:
As the year 2017 came to a close, the Union government cautioned investors against trading in cryptocurrencies like bitcoin, and likened such investments to "Ponzi schemes". In its statement, the finance ministry had said: "The VCs [virtual currencies] don't have any intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices... Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes."
Experts said the government was taking a cautious stance against the use of cryptocurrencies, and suggested a need for regulations to monitor such transactions. "There is definitely the potential of cryptocurrencies being used as Ponzi schemes, but the government shouldn't go against an evolving technology. We need to plug the loopholes. We need strong regulations and will have to ensure that all bitcoin dealers in India have to register with the Reserve Bank of India (RBI) and all the transactions are traceable," said Rohinton Sidhwa, partner, Deloitte, Haskins & Sells LLP.
Raising concerns, the finance ministry said there was a "real and heightened risk of investment bubble" as witnessed in Ponzi schemes, which could affect investors, especially retail consumers, who might lose money due to the risk involved in digital currency investments. Virtual currencies, it said, were stored in digital or electronic format, making them vulnerable to hacking, loss of password, malware attack, etc, which might also result in the permanent loss of money.
2) Bitcoin is not a legal tender, says the government:
Further elaborating on the issue, Finance Minister Arun Jaitley last week said that bitcoins and such cryptocurrencies were not legal tender and those indulging in such transactions were doing it at their own risk. Jaitley's response came during the winter session of Parliament after some MPs expressed concern over trading on these platforms.
During the Question Hour in Rajya Sabha, DMK member Kanimozhi sought to know whether the government was considering regulating cryptocurrencies like bitcoin and ethereum, as India "accounts for more than 11 per cent" of such trade globally.
Jaitley emphasised that the Centre's consistent position was that such currencies were not legal tender. "The government is examining the matter. A committee under the chairmanship of secretary, department of economic affairs, is deliberating over all issues related to cryptocurrencies to propose specific actions to be taken," he said, adding that more detailed steps would be taken once the report of the committee was submitted.
3) The hard numbers:
If you think bitcoin and its ilk have yet to make their mark in India, you might be surprised.
The Income Tax (I-T) department, which conducted a survey into the trading of cryptocurrencies in India, found that there are 600,000 active cryptocurrency traders in the country and a total of 2.5 million people have registered to trade in the asset class, the Indian Express reported. These were the numbers the tax sleuths unearthed from nine cryptocurrency exchanges across the country.
Further, according to the national daily, the I-T department survey found that Rs 178 billion (Rs 17,800 crore) in cryptocurrencies has been traded on the exchanges.
Here's the real news though. 'Get rich' via bitcoinc stories are dime a dozen, but the survey found a legitimate case: A 25-year-old, who had invested Rs 2.5 million (Rs 25 lakh) in bitcoins, currently holds Rs 3.6 billion (Rs 360 crore) in the cryptocurrency. If that doesn't surprise you, the person in question reached that current amount after conducting trade worth Rs 7.6 billion (Rs 760 crore), according to the survey.
Further, the majority of people active on the cryptocurrency exchanges are aged between 25 to 35 years.
4) Under the tax scanner:
Of course, the I-T department's survey, which was carried out by its Bengaluru unit, was meant to look at cryptocurrencies for the purpose of taxation.
The national daily reported that the survey, which was carried out in the second week of December, was part of an exercise aimed at "establishing the identity of the investors and traders, transaction undertaken by them, identity of the counterparties, related bank accounts used, etc".
Based on its findings, the report said, the Bengaluru unit has formulated a method for assessing cryptocurrencies for tax purposes: cryptocurrencies held for long periods of time by investors should be seen as capital assets while cryptocurrencies of frequent traders of such assets should be seen as business income. The state unit, the report added, has communicated this method to its counterparts across the country.
5) The future ahead:
While emphasising that the Centre's consistent position was that such currencies were not legal tender, Jaitley said that more detailed steps in their regard would follow in the course of time.
"The government is examining the matter. A committee under the chairmanship of secretary, department of economic affairs, is deliberating over all issues related to cryptocurrencies to propose specific actions to be taken," he said, adding that more detailed steps would be taken once the report of the committee was submitted.
Indian bitcoin investors should hope that the government will not take a hardliner position, akin to what the South Korean government appears to be heading towards. As reported by Reuters, the South Korean government on Thursday said it plans to ban cryptocurrency trading altogether. The move sent bitcoin prices plummeting and threw the virtual coin market into turmoil as the nation's police and tax authorities raided local exchanges on alleged tax evasion.
The clampdown in South Korea, a crucial source of global demand for the cryptocurrency, came as policymakers around the world struggled to regulate an asset whose value has skyrocketed over the past year.
However, currently, there are no indications that Indian authorities are planning something so drastic.