With countries like China and South Korea banning fund raising by companies through issue of cryptocurrency or initial coin offerings (ICOs); the credibility and legality of this so called ‘alternate money’ is under threat.
WHAT’S THE GIG HERE? WHY IS IT PARADIGM SHIFTING?
Cryptocurrency is a type of non-physical or digital money designed to work as a secure medium of exchange. People have started considering them as a safe haven along the same lines as gold simply because:
1. They’re not issued by any central bank or government
2. They are decentralised i.e. their movement is peer-to-peer and is not intermediated by the traditional banking infrastructure
3. There is a fixed ceiling on their overall circulation
The basic structure of cryptocurrencies has permanently changed financial infrastructure. If I need to transfer money to someone in another part of the world, I no longer need the intervention of a 3rd party organisation like a custodian bank or a clearing house. I can simply transfer “Bitcoins” to the recipient’s digital wallet which are easily convertible to cash. Each wallet address is unique and all transactions are secured via the underlying “Blockchain” technology across private and public networks.
Blockchain was first conceptualised and implemented as a core component of Bitcoin in 2009 by an unknown person or persons, under the pseudonym Satoshi Nakamoto. Though Craig Wright, an Australian entrepreneur recently claimed to be Nakamoto in an interview with the BBC, this has been challenged by the wider Bitcoin community.
Bitcoin was the first cryptocurrency to be decentralised allowing users to transfer value without relying on any central authority or clearing house for settlement of accounts or regulation of delivery. Numerous variants like LITECOIN, ETHEREUM, RIPPLE, DASH later emerged in the market.
BLOCKCHAIN & BITCOIN MINING
Bitcoins, like gold, needs to be “Mined” into existence. Bitcoin Mining serves to both add new transactions and for issuing new Bitcoins. Mining is therefore the process by which new Bitcoins are added to the cryptocurrency supply. In addition, Mining also secures the Bitcoin system against fraudulent transactions or double spend.
“Blockchain” is a digitised, decentralised public ledger which records all Bitcoin transactions. Every new transaction is recorded as part of a completed ‘Block’. A new Block is connected and secured to the existing Blockchain using cryptography. Each Block contains a unique reference (called Hash Pointer) linking it to the previous Block, along with a timestamp and the actual transaction data. Any computer connected to the network (also called a ‘Node’) receives a copy of the complete Blockchain ledger, thereby ensuring the entire database of transactions is shared across a common network.
This shared or distributed character makes Blockchain extremely resistant to tampering. Every new transaction or Block must be verified by the entire network “to hold data of precedent Blocks” before it can be added to the chain. Similarly, any illegitimate modification in the Blockchain at any Node would be immediately spotted and rectified by other Nodes due to the subsequent mismatch with respect to the shared ledger. Hence, the system is incentivised organically to self-police.
Miners validate new transactions and update the global ledger by solving computationally difficult puzzles. The underlying purpose of the math is to ensure everyone’s ledger agrees. The first Miner to solve the problem gets to add their transaction to the Block and earn a reward.
The reward come in two forms:
1. As Bitcoins newly issued with each new Block
2. As a transaction fee from all the transactions in the Block under consideration
On 2nd September 2017 the price of Bitcoin was at an all-time high of $5000 and the cryptocurrency market’s total value reached c.$180 billion. Recent fluctuations are indicative of their volatility, primarily due to bad press which affected adoption rates (read Jamie Dimon’s rant!), as well as varying investor sentiment over the cryptocurrency’s intrinsic and perceived value, owing to its digital nature unlike traditional fiat money.
To start buying and using Bitcoins, all you need to do is sign up with a trading platform.
Based on fee and the registration process in India, I would recommend a few:
1- UNOCOIN — lets you set a certain amount to be added to your wallet every day that can be used to average out the buying cost. Unocoin also provides a simple and powerful API to integrate Bitcoin payments to your business applications. It can also auto-sell Bitcoins. Low fee — 1%,
2- ZEBPAY- can be used at outlets such as Cafe Coffee Day, Pizza Hut, as well on Amazon and Flipkart, where you can purchase discount coupons directly from the app, assuming you have some Bitcoins topped up. They also provide additional support to process utility bill payments via Bitcoins e.g. broadband, landline and electricity.
3- COINSECURE — is an Indian Bitcoin exchange and trading platform. It offers low fees, amounting to 0.3% per buy and a number of deposit options, including NEFT, RTGS, IMPS and cash deposit.
Anyone living outside India could use COINBASE or EXODUS or ELECTRUM.
Step 1- registration — sign up with an email and verify the same.
Step 2 — verification — Once registration is complete, you may have to provide requested details such as, Name (as mentioned in your PAN card), PAN number, phone number and your address.
For buying Bitcoins from your account you will have to provide your account no. and IFSC code. Once the account is verified you can trade Bitcoins up to a set limit until you upgrade to a premium account membership.
Note — privacy could be a concern and you may instead prefer using more secure options such as transferring the Bitcoins you have on your Zebpay wallet to a wallet where you get a private hardware key for security. I recommend using Copay or Trezor hardware wallet. This is just a suggestion.
There is certainly a transaction fee that you must pay for buying or selling Bitcoins.
An illustrative example:
Assuming,
Seller fee- 0.20%
Buyer fee — 0.40%
Hitesh trades 8 BTC @ Rs.2,00,000/BTC (Total Rs.16,00,000) of gross volumes over thirty (30) calendar days on the BTC/INR order book. As a result, Hitesh is now eligible for a Seller fee of 0.20% and a Buyer fee of 0.40%.
a) If Hitesh buys 2 BTC at Rs.2,25,000/BTC,
The base price is 2 x 2,25,000 = Rs.4,50,000
Trade fee (0.40%) = 4,50,000 x 0.0040 = Rs.1,800
Total Amount Payable = 4,50,000 + 1,800 = Rs.4,51,800
b) If Hitesh sells 2 BTC at Rs.2,25,000/BTC,
The base price is 2 x 2,25,000 = Rs.4,50,000
Trade fee (0.20%) = 4,50,000 x 0.0020 = Rs.900
Total Amount Receivable = 4,50,000–900 = Rs.4,49,100
Both apps are available on Google Play and the Apple Store. For more insights about the crypto market you can follow coindesk.com and other trading applications.
SECURITY AND REGULATIONS
While the Indian government is yet to frame regulations governing exchange of cryptocurrencies in India, current regulations do not prohibit their trade and possession.
A committee of officials from the Finance Ministry, Ministry of Information Technology, NITI Aayog, and the RBI met earlier this April to discuss the risk within cryptocurrencies and the potential regulatory framework. Fundamental issues such as their treatment as securities vs currencies stays unresolved.
EXPECTED REGULATIONS (still under discussion)
The Government’s concerns over cryptocurrencies being misused and their anonymity remain. The Government of India may consider legalising cryptocurrencies with sufficient KYC (know your customer) norms in place within the suggested framework:
- Rules regarding investment and purchase as per the 1934 RBI Act
- Foreign payments under the FEMA Act
- Potential tax on returns from Bitcoin investments
Logically profits on sale of Bitcoins should be treated as a ‘capital gain’, unless the person is in the business of trading Bitcoins in which case it would likely be treated as ‘business income’.
Under capital gains, presently there are two domains:
- Short-term capital gains are taxable @30% on income more than Rs.10 lakh.
- Long term capital gains are taxable @20%, but the time-period for investment should be at least 12 months.
CONCLUSION
Considering the overall positive sentiment in the Indian market, cryptocurrencies should have a bright future. Zebpay has become India’s largest Bitcoin exchange with over 500,000 downloads, adding 2,500 users per day. China has already come up with its own cryptocurrency prototype predicted to hit the market by end of 2017. India is currently ranked the 4th largest cryptocurrency market in the world and may soon follow.
By Prabhat Negi, a marketing executive and business graduate
