Regulate bitcoins

Oversight will help prevent illegal activities

The government is considering setting up a regulatory structure to oversee trading of bitcoin, the digital crypto-currency. This would treat the virtual currency in a manner akin to gold, which is digitally traded on registered exchanges run under the oversight of the Securities and Exchange Board of India (Sebi). A move to formalise the thriving desi trade in bitcoin would not only bring it under the tax ambit but also help prevent its use in ransomware hacks, money-laundering and hawala transactions.

India generates high trading volumes and techno-savvy Indians view bitcoin as a convenient store of value, much like virtual gold, and an excellent way to circumvent currency regulations. Rupee traders are said to have transacted 11 per cent of all global bitcoin trades in June 2017, trading 16,750 coins worth about $39 million. Only Japan, which formally recognises bitcoin as currency, and the United States generated more volumes in June. Bitcoin is the preferred currency for many hackers and the recent series of ransomware attacks across the world has brought it notoriety. The need to keep tabs on criminal activity is another reason why more governments are seeking to establish regulatory controls. South Korea, for instance, released regulations recently for overseas money transfers denominated in bitcoin.

Besides, bitcoin has seen turbulence in 2017 and it is due for more volatility in the next few weeks. It has also gained a whopping 250 per cent in value since January and the market capitalisation was above $48 billion in mid-June when one bitcoin was being exchanged for about $3,000 (around Rs 1.93 lakh). Heavy selling has driven prices down and the market cap is now at about $38 billion, but that still means that each bitcoin is well over five times as expensive as 10 grams of gold.

There is another reason for the panic selling. The technology underpinning bitcoin is about to be overhauled drastically and this may cause a split in the currency. The so-called blockchain is a distributed ledger where every transaction ever made in every coin is recorded. Anybody can check the validity of all transactions, while anonymity is maintained. In fact, a transaction is not recognised as valid until it has been verified by many traders on the peer-to-peer bitcoin network. But the blockchain, as it stands, was conceptualised long ago. Each “block” — the locations where transactions are recorded — is small in size. Hence, verifying transactions is a tedious and slow process. There is a proposal to create larger blocks. A new “segregated witness” (or Segwit) protocol using bigger blocks will lead to much quicker verifications as well as reduce transaction costs and “mining fees” for generating new coins. 

But the community is divided on the proposal. Segwit’s advocates say it will be up and rolling by August 1 — a day when Indian exchanges are likely to be shut to allow for any chaos to settle. There is a fair chance that Segwit will be adopted by consensus. But if there is no consensus, the currency could split in two with some exchanges using the old protocol. Hence, many traders, who are wary of being caught in the technological crossfire of this potentially “hard fork”, are pulling out of bitcoin, at least temporarily.

The overall market capitalisation of crypto-currencies is now around $80 billion and trading in these instruments is likely to see continued growth. Bitcoin is the oldest and most popular. But other crypto-currencies designed along the same lines have similar pros and cons. A comprehensive policy for the oversight of all crypto-currencies is required to prevent these instruments being misused for illegal activities.