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The Gen-next Money


Bitcoin, a virtual currency, is fast emerging as a favourite for the new generation of rich Indians both here and abroad. KS Narayanan delves into this esoteric idea which could catch on.
K S NARAYANAN | Issue Dated: January 5, 2014, New Delhi
Tags : The Gen-next Money | Bitcoin |

Several Indians, both at individual, group and corporate levels are increasingly hooked to a new virtual currency – bitcoins. Never heard of it? A beauty salon in Chandigarh said it would accept bitcoins as payment for its services. Nisha Singh, owner of CastleBloom Beauty Bar, says she wanted to give her customers another payment option and also attract publicity for being one of the first Indian stores to accept bitcoins.

In a country hooked to the internet, several youngsters and businessmen across India are exploring options to mine bitcoins.
With the heightened interest around this digital crypto currency, big corporates are interested. Dabur scion and managing partner at Elephant Capital Gaurav Burman has invested in itBit, a Singapore-based bitcoin exchange and plans to bring the platform to India.

Burman has bought in his personal capacity a minority stake in the exchange, which is building a global platform for trading in bitcoins with US and Singapore dollars and the euro with technology support from NASDAQ.

ItBit is a trading platform targeting bitcoin and other crypto currencies and is available to institutional investors globally. itBit trades between bitcoin and US dollars, Singapore dollars and euros, and claims it provides a higher level of security and compliance. It also promises enhanced liquidity in its marketplace, and also screens and monitors for suspicious activity.

CoinMonk organised India’s first bitcoin two-day conference in Bengaluru on December 14 and 15 where investors, enthusiasts and bankers gathered to convince the government and regulators that the bitcoin ecosystem would be a valuable economic innovation for unbanked India and for remittances.

They also talked of India’s laxmicoin, the Rs.1.20-crore bitcoin transactions. They sought government intervention in the form of recognition and Reserve Bank of India’s (RBI) framework for greater adoption of the virtual currency in India, home to world’s third largest internet users and biggest software talent pool. “What we want is a dialogue with the central bank for greater understanding of the system as well as what can be possibly regulated and what cannot be,” said Sathvik V, MD of CoinMonk Ventures, one of the organisers of the event and a bitcoin exchange that sells and buys the virtual currency.

Where do you buy bitcoins? In India, you can buy and sell this currency, owned and operated by Gandhinagar-based Seven Digital Cash LLP. As of December 4, the ‘buy’ price of one bitcoin was Rs 75,314, against Rs 74,449 on December 3. As of December 4, the ‘sell’ price was Rs 72,357.

Not unsurprisingly, bitcoins are attracting global attention. “How did we come to live in a world where most money is invisible, little more than numbers on a computer screen? Where did money come from? And where did it all go’’, questions Niall Ferguson, renowned historian wrote in his book ‘The Ascent of Money: A Financial History of the World.’

As the world struggles to emerge out of the global financial crisis and continues to move at snail’s pace towards recovery, a person under the pen name of Satoshi Nakamoto wrote a paper in 2008-09 outlining how a virtual currency can work without any central issuing authority.

Barely four years down the line, bitcoin is fast emerging as the new currency for Gen-Next. This is not the first time such a virtual currency has been issued. Earlier several global outfits were issued by firms for a specific purpose and for a limited time. What differs now is the nature of scale -and well - no central authority to regulate it unlike other traditional currencies.

To gauge its global popularity it is reported how several US cities have dumped the dollar in favour of bitcoins - to make payments and buy apartments to services. The frenzy appears to be catching up with the French, Chinese and others.

So is bitcoin merely a smart investment or is it a big bubble waiting to burst? There are both questions and probabilities galore.

It has found support among protagonists at the global level, both from experts and institutions, who support bitcoins. Bitcoin can become a significant tool for e-commerce transactions and has ‘clear potential for growth,’ analysts at Bank of America’s Merrill Lynch unit have predicted.

Virtual currency, which has been growing in popularity and value, could benefit from its low transaction costs and as an alternative to cash, says a report by David Woo, a foreign exchange strategist and other analysts at Merrill Lynch agreed last week.

According to Bitcoincharts, a website that tracks the digital money’s activity, bitcoin is being used to pay for everything from Gummy bears, digital cameras, cars, apartments, groceries, haircuts, club membership on the internet, with more than 10 to 12 million bitcoins in circulation.

The Merrill Lynch report pointed out that bitcoins have a maximum market value of $1300 assuming they become a major e-commerce instrument. The report also says that bitcoins need a significant ‘store of value’ similar to that of silver. “To the extent that bitcoin offers users many benefits and efficiency as a medium of exchange, this means it possesses some fundamental value that may increase over time as it gains wider use,” the report added.

Michael A Robinson, a top financial analyst in the US lists five big advantages of bitcoins over gold: its supply is limited, is has global recognition because it is being traded from Toronto to Singapore, central banks cannot manipulate its price and it has super-liquid currency - not only can you buy and sell 24-7, you can ‘chop it up’ into extremely small slices and it lives online at your hosted wallet and can access the funds from anywhere in the world with an internet connection.
So how are central banks across the globe dealing with this virtual currency? There are no final conclusions as yet.

Former US Federal Reserve Chairman Alan Greenspan views bitcoin as bubble after it surged 89-fold in a year and that the virtual money isn’t currency. “It’s a bubble,” Greenspan, 87, said in a Bloomberg Television interview from Washington. “It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it. Maybe somebody else can.”

The US Federal Reserve has already put bitcoins under its radar. It has announced the investigation on other online payment systems including the leading PayPal. “Bankers worry that these new online players could disrupt the financial system”, said an official at a meeting of the International Monetary Conference in Shanghai in mid-December. “We have been talking with banking organizations over the last year or two, trying more carefully to understand what the concerns are with these new payment mechanisms,” federal reserve vice chair Janet Yellen said.

Balancing the concern, she said that the US is already regulating online payment services like Coinbase and PayPal but the central bank is looking forward at providing best practices for consumer protection.

However, at a US Senate committee hearing, the US department of justice said bitcoins can be ‘legal means of exchange’  boosting prospects for wider acceptance of the virtual currency. “We all recognize that virtual currencies, in and of themselves, are not illegal,” Mythili Raman, acting assistant attorney general at the justice department’s criminal division, said at the hearing.

Global Currency: A timeline
3000 BC : Banking developed in Mesopotamia
640 BC : First coins were minted in Lydia (later part of Turkey)
269 BC : The Roman system of coinage was established.
697 AD : The first Arab Islamic currency was struck in Damascus by the Umayyad ruler Abd al-Malik ibn Marwan
794 BC : Charlemagne created a single currency for his empire.
1024 : In China the first state-backed paper money was introduced.
1661 : Sweden became the first European country to introduce bank notes
1690 : The first paper money in America was issued by the colony of Massachusetts. The currency was used to pay soldiers fighting a war against Quebec.
1785 : Dollar becomes US currency.
1948 : After Independence, the banking system is reorganised to fit the Indian environment
1950 : Diners Club Card issued.
1966 : MastersCard makes debut.
1967 : First electronic ATM
1996 : In 1996 Australia switched completely to polymer bank notes. Countries that have followed the polymer banknote route include Brunei, New Zealand, Papua New Guinea, Romania, Vietnam, Fiji and Mauritius.
 1999 : Euro is adopted.

Yet the Federal Bureau of Investigation (FBI) believes that drug deals and contract killings were conducted with the help of bitcoins. For instance FBI have shut down ‘Silk Road,’ an anonymous internet marketplace for illegal drugs like heroin and cocaine and criminal activities such as murder for hire, and arrested its alleged owner, Ross William Ulbricht, 29, known online as “Dread Pirate Roberts,”in San Francisco in October this year.

During the raid, authorities seized $3.6 million worth of bitcoin, which was used instead of cash or credit cards to complete transactions on Silk Road. The charges against Ulbricht, say FBI, is that he generated sales of more than 9.5 million bitcoin, roughly equivalent to $1.2 billion. Authorities seized the currency by taking control of the digital ‘wallets’ Silk Road used to store bitcoin.

The European Banking Authority (EBA) was more direct in its warning. It said virtual currencies such as bitcoins are risky for consumers because there’s no regulatory protection when such currencies are being used for payments or when exchanges fold.

The EBA, which is currently trying to figure out whether bitcoin should be regulated, also said there was “no guarantee that currency values remain stable.” It noted that hackers can sometimes steal digital wallets, and that law enforcement agencies may at any point decide to shut down exchange platforms over money-laundering fears. The authority also said some countries might also see bitcoin as taxable.

In Germany, it is considered a private currency while in China it is regarded as a virtual commodity and transactions are taxed. In Switzerland, it is treated as a foreign currency and Canada taxes gains on trade in bitcoins.

Observers in India fear that the bitcoin phenomenon could be of Chinese making as they had to shell off huge payments for its import of natural resources across the globe. However there are no solid facts to back such a hypothesis.

Nonetheless, it is interesting to note how China has dealt with bitcoins. In his blog, Na Vijayashankar, director of Cyber Law College, writes that after propping up bitcoins, China has announced a series of measures that are now seen as a regulatory backlash. In the process bitcoin climbed up to US$ 1,300 and dropped down to around $528 (at the time of writing) within a week. The volatility would have hurt speculators who bought bitcoins at the high points, though for miners and other early entrants it’s only an ‘opportunity loss’.

China has now announced two important measures. First, it advised banks and financial intermediaries not to support bitcoin trading. It has also advised bitcoin exchanges not to accept Yuans, Vijayshankar adds.

What goes up must come down? With the Chinese banning support to bitcoins and trading in Yuans on December 19, what followed was crash it the price of virtual currency globally. So on December 22, at the buy price had crashed to Rs 42,258 while the sell similarly had gone southwards to Rs 40,603 for every one piece of bitcoin.

Why is there urgent need for regulations? “Currently bitcoins bypass the banking system and hence drives it to black market and results in thriving illegal transactions,” notes Sunny Ray, director of business development at Buttercoin, a white label bitcoin exchange backed by funds, including Google Ventures, the investment arm of the internet giant Google.

He further argues that unlike other illegal activities every bitcoin transaction can be traced and stored in millions of computers across the world.
Over the next few months Buttercoin will be setting up a bitcoin exchange in Mumbai with partners. He is mulling on getting a NBFC licence for running the exchange even though it is currently not a necessity in India.

Can bitcoins be used for illegal purpose? Asserts Sathvik of CoinMonk:“Anything can be used for illegal purposes. If RBI forms a framework, this will be one of the easiest systems out there that can be monitored by government agencies and there is no way one can destroy the trail of the currency.” If that is the case, it could help out with a way to counter the vast and gigantic hawala transations that Indian financial investigators are constantly grappling with.

According to Amir Ullah Khan, president Glocal University and author of ‘The WTO Deadlocked: Understanding the Dynamics of International Trade’ bitcoins need a fairer assessment than what has been accorded to them. “Any currency can be used in such a fashion, as is the case now,’’ he points out (See interview).

However the RBI which was represented by a lawyer at the Bengaluru conference refused to identify or comment on the issue. In a sense, their refusal to take notice of bitcoins is a bit strange because it normally takes a good look at all currency trends in the world, no matter what their origin.

Experts say RBI has three options. First is to reject bitcoins entirely, which would be the easiest option; to accept bitcoin, which would mean that someone will have to make that call and defend it politically -- either to this government or the next and finally, to adopt bitcoin, to embrace the whole idea, allow transactions and encourage its use.

Thailand had banned virtual currency in July this year “Due to lack of existing applicable laws, capital controls and the fact that bitcoin straddles multiple financial facets.’’ Will India follow suit?

The RBI and other government agencies are closely studying the subject. A senior RBI official told TSI that the bank would soon issue an advisory on bitcoins. it could well happen in 2014.

In the meantime, it would be pertinent for central banks and intelligence agencies to study how funds used for buying bitcoins are being utilised? Their trail in India could throw up some interesting leads. Officials also need to ask whether bitcoin is emerging as a renegade currency to disrupt global economies and weaken central banks? Even more breathtaking is the theory that it is a global ponzi scheme. To be sure, this one needs watching in 2014.

Important: This article in no way should be perceived as being financial advice for or against either bitcoins or any other form of financial instrument. This article is purely a journalistic review of bitcoins and associated literature and should not be followed for any financial or investment decision making.

How it works

Bitcoins are the most successful and controversial virtual currency scheme to date. A primer.

esigned and implemented by the Japanese programmer Satoshi Nakamoto in 2009, the scheme is based on a peer-to-peer network similar to BitTorrent, the famous protocol for sharing files, such as films, games and music, over the internet. Nakamoto outlined in a paper how a virtual currency can work without any central issuing authority.

How does it operate?
Operating at a global level currency can be used for all kinds of transactions (for both virtual and real goods and services), thereby competing with official currencies like the euro or US dollar. The scheme maintains a database that lists product and service providers which currently accept bitcoins. Also known as ‘crypto currency it is created by painstaking mathematical computations and policed by millions of computer users. Once you own bitcoins, they behave like physical gold coins: they possess value and trade just as if they were gold coins for purchasing goods and services online.
Experts claim bitcoins are tremendously secure, because they are tagged and tracked with the digital signature of every person who touches that bitcoin: permanent histories of each bitcoin is stored as part of the coin itself.
Bitcoins’ worth:

It is estimated that one bitcoin is currently worth around US $ 200. There are approximately $1.9 billion US $ worth of bitcoins in existence, with approximately $2 billion more to be created. They are made through a very interesting self-limiting system called 'mining'.  It is self-limiting, because only 21 million total bitcoins will ever be allowed to exist by 2150, with approximately 10 million bitcoins already mined and in current circulation.

How to buy and sell?

Several trading platforms guide on how to buy and sell bitcoins for Indian currency.
•  Enter your bitcoin address and mobile number. Your deposit of bitcoins will be sent to this address.
•  Select your payment mode: Pay through National Electronic Funds Transfer system or cheque and provide a copy of your PAN number.
•  The website will then send the bitcoins to your online address. This could be your computer, smartphone or even stored in the cloud.
•  Place the price and quantity for selling bitcoins here as well as the additional details.
•  Hit the ‘go’ button to calculate loyalty bonus, transaction charges and fees.
•  Check on the ‘terms and conditions’ box, click on the ‘book order button’
•  The system would generate a unique order ID, send across deposit instructions.
•  Deposit ensures that only serious buyers and sellers place an order, thereby eliminating spam orders which distort the order book. A deposit also ensures that once a trade is executed, both the buyer and seller honour the trade. Consequently, if they do not, they risk losing 10 percent deposit.
•  Complete payment in one hour
•  Upload a copy of the payment slip in an hour else the order will get cancelled
•  Once funds are received, bitcoins will be sent to you on deduction of commission.

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Issue Dated: Feb 5, 2017