A

MAJOR PROJECT REPORT

ON

“CRYPTOCURRENCY: A POSSIBLE FUTURE CURRENCY

(WITH ITS FUTURE IN INDIA) ”

SUBMITTED FOR THE COMPLETION OF THE REQUIREMENT FOR

THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

(Session 2016-2018)

Submitted By

Keshav Bansal

University Roll No.- 109

MBA

BABA FARID COLLEGE OF MANAGEMENT AND TECHNOLOGY

BATHINDA

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 CERTIFICATE

This is to certify that Keshav Bansal (Uni. Roll No.109) has preceded her major project under
my supervision on "Cryptocurrency:A Possible Future Currency (With Its Future in India)” as
Finance specialization.

The work embodied in this report is original and is of the standard expected -of an MBA
student and has not been submitted in part or full to this or any other University for the award
of any degree or diploma. He has completed all requirements of guidelines for research
project report and the work is fit for evaluation.

Name of the supervisor/guide:

Signature of Supervisor/Guide

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 DECLARATION

This is certified that I,Keshav Bansal, the student of Baba Farid College of Management and
Technology, Bathinda, studying in MBA (4th Sem.), has undergone research project on title
“CRYPTOCURRENCY:A POSSIBLE FUTURE CURRENCY (With its Future in
India)” for the completion of degree of Master of Business Administration.

I solemnly declare that the work done by me is original and no copy of it has been
submitted to any other university for award of any other degree/fellowship or a similar title
and topic.

(Keshav Bansal)

Uni. Roll No. 109

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 ACKNOWLEDGEMENT

It is great pleasure to present this report on the project entitled “Cryptocurrency: A possible
Future Currency (With its Future in India) ” undertaken by us as part of my MBA
curriculum.

The satisfactions that accompany the successful completion of any task would be incomplete
without mentioning the people who made it possible, whose consistent guidance and
encouragement crowned the efforts with success.

It is a matter of inordinate gratification and delectation for me to express my thankfulness to

my mentor for his adroit teachings and unceasing motivation. Whatsoever, appears in this
research work is the reflection of his vivacious involvement and critique frame of mind. I am
highly beholden for his direction, advice and support extended to me spontaneously and
decidedly beyond the call of supervision. I can never adequately express my feeling for him
as without his able, learned and impulsive guidance, the present work would not have seen
conclusion.

I would like to take this opportunity to express my deep sense of gratitude towards my family
and friends who supported me throughout during this research and writing.

I have tried my best to present this information as clearly as possible using basic terms that I
hope will be comprehended by the widest spectrum of researchers, analysts and students for
further studies.

(Keshav Bansal)

Uni. Roll No. 109

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 TABLE OF CONTENTS

Sr. No. Titles P/No.

1 Chapter-1 7-10
Introduction
2 Chapter-2 11-45
Crypto Currency:A possible future currency
3 Chapter-3 46-51
Review of Literature
4 Chapter-4 52-54
Research Methodology
5 Chapter-5 55-68
Data Analysis & Interpretation
6 Chapter-6 69-71
Findings , Conclusion & Suggestions
8 Bibliography 72-73

9 Annexure 74-76
Questionnaire

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 ABSTRACT

Nowadays, there is a vast and fast development in cryptocurrencies. Bitcoin is one of them
which is most popular and known as first decentralized currency.

The legal status of Bitcoin varies substantially from country to country and is still undefined
or changing in many of them. This paper mainly covers working with Bitcoin in India.
Bitcoin transactions are anonymous and most secure but on the other hand they fail to protect
consumers because of lack of regulations. Also the use of cryptocurrencies is very less
because of lack of its awareness and vendors. This paper also coveres the legality and
regulatory framework with respect to Bitcoins in India.

As a virtual currency and peer-to-peer payment system, Bitcoin may signal future challenges
to state oversight and financial powers.

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 CHAPTER- 1

INTRODUCTION

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WHAT IS MONEY ? :

Money is one of the most valuable and sought after commodities in the world. Most people
interact with money in nearly every facet of their life, whether a person intends to go to the
hairdresser, buy groceries or invest in a home, money is necessary in the modern economy for
transactions for goods and services. Money has had many forms in human history with the
oldest form of money being bartering. Without any official currency people would directly
trade one good for another, such as trading a horse for a cow. This form of money however is
very inefficient as the odds of finding someone that required a horse for the exact same good
that the other person required are quite low. Clearly a medium of exchange needed to be
developed. A medium of exchange acts as an intermediary instrument in order to make
trading more efficient. During the time of bartering this would include some easily traded
goods like weapons or animal skins. It was sometime around 600 B.C. that the first official
currency was minted.

Minted currency used to be made from a mixture of silver and gold which were stamped with
a picture to denote the face value of the coin. These coins were minted by Lydia’s (in today’s
Turkey) King Alyattes and it increased the countries trade significantly resulting in the
empire becoming one of the richest in Asia Minor. Around 600 B.C. the Chinese started
developing paper money and moving away from coins, however it took Europeans a much
longer time to start using paper money. Eventually banks would make bank notes for people
to carry around instead of coins which had their value backed up in silver or gold coins.
(Beattie, A. 2015.) Little by little printed paper money, as we know it today, became the
norm.

This way money eliminates the problems with bartering and acts as a stable medium of
exchange. Pricing goods and services, and trading, becomes much easier and more
convenient when everyone accepts the same money as currency. In today’s economy the main
source of money is fiat money, a legal tender protected by a government using regulations
and laws that create the much needed trust in money and thus creates its value. Fiat money is
supplied by a countries central bank which maintains the stability and supply of currency
through its monetary policy. With increasing technology and innovation new types of money
have been invented.

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Since societies transitioned from a barter economy to using a money as a medium of
exchange, individuals have tried to devise systems that allow for rational ways to exchange
value. In order to help make goods and services commensurable the Greek philosopher
Aristotle came up with four criteria that help to dictate what is considered to be ‘good money’
(Lee, 2009):

1. It must be durable

2. It must be portable

3. It must be divisible

4. It must have intrinsic value

One of the most controversial new innovations of money are Cryptocurrencies, a form of
internet currency often called digital money or cyber currency. The most important feature of
cryptocurrency is that it is not issued by a central bank, nor is it protected by regulations or
law, making it impervious to government interference. The most widely known and
controversial cryptocurrency is Bitcoin, which was launched in 2009. As Bitcoin is the most
widely known and used cryptocurrency in the world, the subject matter of this paper will
largely focus on Bitcoin. (Cryptocurrency, 2015) What is cryptocurrency and Bitcoin, why
does it have value, what is its future outlook and could it become an established mainstream
currency?

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DEFINING THE CRYPTOCURRENCY

A bitcoin is a virtual currency first introduced in the year 2008 by an anonymous group called
Satoshi Nakamoto. It’s an open source peer-to-peer cryptographical system (direct
connections without an intermediary) where transactions happen through a public ledger
called blockchain, handling users’ data anonymously. Eight years since its introduction,
bitcoin is today the most widely used and accepted digital currency.

Bitcoins are the most sought after cryptocurrency in the market. However there are several
other currencies which have gained momentum ever since the concept has been introduced.
Below are some other of crypto currencies that exist:

1. Ethereum – Ethereum is the second most famous name in the virtual currency market. It
somewhat similar to the concept of bitcoins however it possesses some additional attributes.
It is purely a block chain based platform. What makes it special is the Ethereum Virtual
Machine. The blockcain in ethereum is used not to store the data of the transaction but to
make sure smooth run of a decentralized application.

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2. Ripple – Ripple is more in the nature of a payment protocol created and developed by a
company named Ripple, which is based on the concept of Real time Gross Settlement. It was
initially released in the year 2012.

3. NEM – Similar to bitcoin, NEM is also a peer-to-peer blockchain platform launched in the
year 2015. It uses the unique Proof-of-Importance algorithm , a way to validate transactions
and achieve the distributed concensus.

4. Litecoin – Initially introduced in the year 2011, litecoin is mostly identical to bitcoin.
What makes it stand out is the use of Segregated Witness and the Lightning Network. Some
other cryptocurrencies are bbqcoins and dogecoins which have not gained much significance
due to their technical shortcomings and inability to stand out.

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 CHAPTER – 2

CRYPTOCURRENCIES: A
POSSIBLE FUTURE
CURRENCY

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In 2009, a white paper was published online under the name Satoshi Nakamoto (probably a
pseudonym), proposing a new solution for something that some Internet enthusiasts had been
looking forward to since the beginning of the Internet: A form of digital cash that functions
based on principles dear to libertarian strands of the Internet community – non-state
administered, decentralized (“peer to peer”) and open source based. In this strand of thought,
cryptography and anonymous transaction systems are seen as important instruments to defend
privacy and freedom in the digital age. With trust in the monetary and financial system
shattered by the crisis, Nakamoto’s proposal was taken up in 2009 and implemented by a
significant number of supporters.

TYPES OF CRYPTOCURRENCY
1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin
and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT
graduate and former Google engineer. Litecoin is based on an open source global payment
network that is not controlled by any central authority and uses "scrypt" as a proof of work,
which can be decoded with the help of CPUs of consumer grade. Although Litecoin is like
Bitcoin in many ways, it has a faster block generation rate and hence offers a faster
transaction confirmation. Other than developers, there are a growing number of merchants
who accept Litecoin.

2) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Smart

Contracts and Distributed Applications (ĐApps) to be built and run without any downtime,
fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-
sale for ether which had received an overwhelming response. The applications on Ethereum
are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving
around on the Ethereum platform, and is sought by mostly developers looking to develop and
run applications inside Ethereum. According to Ethereum, it can be used to “codify,
decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016,
Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has

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a market capitalization of $41.4 billion, second after Bitcoin among all
cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

3) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016,
looks promising. “If Bitcoin is like http for money, Zcash is https," is how Zcash defines
itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash
claims to provide extra security or privacy where all transactions are recorded and published
on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash
offers its users the choice of ‘shielded’ transactions, which allow for content to be encrypted
using advanced cryptographic technique or zero-knowledge proof construction called a zk-
SNARK developed by its team. (Related reading, see: What Is Zcash?)

4) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more
anonymity as it works on a decentralized mastercode network that makes transactions almost
untraceably. Launched in January 2014, Dash experienced an increasing fan following in a
short span of time. This cryptocurrency was created and developed by Evan Duffield and can
be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which
stands for Digital Cash and operates under the ticker – DASH. The rebranding didn't change
any of its technological features such as Darksend, InstantX. (Related reading, see: Top
Alternative Investments for Retirement)

5) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost
international payments. Ripple “enables banks to settle cross-border payments in real time,
with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a
market capitalization of $1.26 billion. Ripple’s consensus ledger -- its method of
conformation -- doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since
Ripple’s structure doesn't require mining, it reduces the usage of computing power, and
minimizes network latency. Ripple believes that ‘distributing value is a powerful way to

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incentivize certain behaviors’ and thus currently plans to distribute XRP primarily “through
business development deals, incentives to liquidity providers who offer tighter spreads for
payments, and selling XRP to institutional buyers interested in investing in XRP.”

6 Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was
launched in April 2014 and soon spiked great interest among the cryptography community
and enthusiasts. The development of this cryptocurrency is completely donation-based and
community-driven. Monero has been launched with a strong focus on decentralization and
scalability, and enables complete privacy by using a special technique called ‘ring signatures.’
With this technique, there appears a group of cryptographic signatures including at least one
real participant – but since they all appear valid, the real one cannot be isolated.

II.BITCOINS- THE MOST POPULAR & TRENDING CRYPTOCURRENCY

HOW BITCOIN WORKS

Bitcoin offers a purely digital currency consisting of strings of numbers. An open source
software provides a platform where users can produce a private currency and make payments
in this currency without recourse to banks and central banks, based on encryption technology.
This setup is meant to make online payments comparable to cash payments offline. The
system is run by voluntary supporters that are attracted and governed by economic incentives
provided by the system architecture. With each supporter contributing computing power, a
network is formed. Network supporters are attracted by the prospect of engaging in
competition over receiving newly issued bitcoins. This process is inspired by gold extraction:
Like gold, bitcoins are “buried” in the system and may be unearthed and put into circulation
by “miners.” The mining process is designed in the following way: Every ten minutes, the
system provides a new amount of bitcoin units. In order to obtain them, network supporters,
i.e. miners, compete to solve mathematical problems with a random component. These
problems are hard to solve, but the correctness of the solution is easy to verify. In each of
these contests, the competitors coming up with the first correct solution receive the newly
issued amount of bitcoin units. They broadcast their solutions to the whole network, where
they are automatically verified by other members. The software provides for a fixed amount
of currency units (about BTC 21 million). A pre-established technical rule ensures the

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issuance of these units into circulation up to about 2140 according to a specified time path.
However, as the reward to miners will be reduced over time, more than 99% of all bitcoins
will have been mined in about 2032. In mid-October 2014, more than 13 million bitcoins
were in circulation. Once new bitcoin units are in the possession of a member (apart from
mining, bitcoins can be acquired on exchanges or by selling goods or services in exchange for
bitcoins), they can be kept or spent if other members accept them as payment in a transaction,
or exchanged for official currencies.
Bitcoins are stored in anonymous addresses in the form of strings containing numbers and
letters, equipped with two complementary keys, one public and one private. The public key
can be compared to the account number of a bank account, and the private key to the PIN to
access such account. If A wants to send a payment to B, A needs B’s public key and encrypts
a certain sum of bitcoins with B’s public key and A’s private key, so that only B can decrypt
the payment and make use of the sum. To transmit the payment and, at the same time, to
guarantee that A has not spent the same electronic string of numbers on another occasion
(double spending), the transaction partners rely on the network. It performs the functions that
payment intermediaries fulfill in conventional payment processes.
Every ten minutes new payment transaction orders are collected by the system and are
verified by the system supporters. To this end, new transactions are recorded in a public
ledger called blockchain that comprises all transactions ever operated in the Bitcoin system.
By comparing the new bitcoin payment orders with the history of all previous orders, the
legitimacy and accuracy of the orders are verified. For various technical reasons, a bitcoin
transaction can only be considered secure after a number of confirmations in the Bitcoin
network. The incentive for network members to participate in the verification process is the
above mentioned mining process. The mathematical problem to be solved to gain newly
created bitcoins or transaction fees depends also on information about the previous
blockchain and transaction. Mining for bitcoins therefore also helps check that new
transaction orders are legitimate and adds these new transactions to the blockchain.
Theoretically, the system offers an innovative method for solving the problem of producing
agreements among mutually distrustful parties. Technically, this process consumes significant
amounts of computing power and electricity. Competition among miners has led to
continuous innovation and investment in computer processing power. Consequently, entry
barriers have risen as well, given the cost of computer hardware and energy, which entails the
risk of increasing concentration in mining. Over time, it will be increasingly inconvenient to
save the ever growing blockchain. Fewer supporters might therefore be willing to support

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public record keeping, which would weaken the network and make it more vulnerable to
attack. Bitcoin mining continuously drives up energy consumption, and given low energy
efficiency, energy consumption per transaction is high. In the following section there are
some descriptions of some keywords related to the Bitcoin technology.
A. Blockchain
All Bitcoin transactions that have ever been executed are stored in a public ledger called
blockchain. The size of the blockchain is constantly growing as 'completed' blocks are added
to it with a new set of recordings. The blocks are added to the blockchain in a linear,
chronological order. Each user who is connected to the Bitcoin network and performs the task
of validating and relaying transactions gets the copy of the blockchain. It has complete
information about the address and their balances right from the genesis block to the most
recent completed block. Since it stands as proof of all the transactions on the network it is
seen as a main technological innovation of Bitcoin. The blocks are not randomly placed in the
blockchain, they are linked to each other like a chain with every block containing a hash of
previous block. The final digital signature in a given chain will be that of the current holder
of a bitcoin amount and the holder will be recognized by the network by a random but unique
string of characters which is the user’s public address.
B. Bitcoin Mining
It is the process by which verified the bitcoin transactions and information about those
transactions is stored in the blockchain. It is also a process through which the new bitcoins
are released. Anyone who can access through the internet and has suitable hardware can take
part in the mining. The mining process involves compiling recent transactions into blocks and
trying to solve a computationally difficult puzzle. . The participant who first solves the puzzle
gets 25 BTC as reward. Bitcoin miners stored the information of the transactions in the block
and verify them if the transaction is valid or not, if it is valid then select the header of the
most recent block and insert it into the new block as a hash. After that solve the proof of work
problem when the solution is found the new block is added to the local block chain and
circulate to the network.
C. Bitcoin Wallet
Bitcoins are stored in the Bitcoin wallet. A wallet is a randomly generated string of numbers
which consists two parts: the public key and private key. The first half of the Bitcoin wallet is
known as public key and the second half of the Bitcoin wallet is known as privet key. The
public key of the wallet is known to all. But the private key is intended only to the wallet
owner. Only the wallet owner can access the private key. If anyone gets a hold of private key

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of any other user’s, they will have access to all their bitcoins. There are three different types
of Wallets.
Online Wallet: It is used to store the digital keys on the Web. It means that Bitcoin wallet is
stored not on the computer, but on some faraway server of service provider. The main
advantage of online wallet is that it enables the users to enter the wallet in any place of the
world. Considered safe, but still susceptible to network failures and hacking. Someone can
take measures to increase security.
Local Wallets or Offline Wallets: A local wallet is an application that can be downloaded to
the personal computer. Private Keys are stored locally on the hard drive. Considered safe, yet
is important to make backups of the private keys in case that hard drive fails. Also carries a
risk of hacking or physical theft.
Paper Wallets: A paper wallet is a public/private key that is generated offline and printed on a
physical piece of paper and then stored in a safe location. Arguably the most secure way to
store your BTC. No record of the private key online or your hard drive. It is impossible to be
hacked. They are still susceptible to theft, fire and water damage.

III. BITCOIN AS A PAYMENT SYSTEM

Bitcoin claims to operate a retail payment system with no need for trusted intermediaries. The
latter are perceived to charge excessive fees for payment transmission, to lack adequate
protection of personal financial data (e.g. with regard to credit card fraud or disclosure to
public authorities) and to expose customers to financial risk by being prone to financial
crises. In this section, we discuss whether Bitcoin can legitimately claim to provide
improvements on these charges. Whereas users have over decades become accustomed to pay
with cash at zero financial transaction costs within national economies thanks to public
support for the underlying infrastructure, other forms of retail payments may involve
(substantial) costs. The established business model of inter-mediating electronic payments
can be characterized as a two-sided market, where a payment service provider links payer and
payee. In facilitating and recording transactions, the payment service provider is faced with a
choice concerning the allocation of the burden of fees among payer and payee.
In this context, Bitcoin has positioned itself as a low-cost alternative. With respect to cost,
bitcoin payments can currently be made at minimal or no financial cost to the two parties
engaged in a payment transfer. This is possible because the mining process described above is
devised to substitute for the role of banks and other established payment operators in the
Bitcoin system. Instead of a centralized intermediary, the payment transfer is operated by

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miners following the procedures of the Bitcoin protocol (engaging in competition to solve
problems, with the byproduct being the confirmation and recording of the payment transfer).
As mentioned before, Bitcoin miners incur substantial costs for hardware and electricity.
Stiffer competition and greater complexity of the problem to be solved imply a continuous
upgrade of computing power and increased electricity use. Miners incur that cost without
charging substantial fees to customers because successful miners are rewarded with new units
of the remaining bitcoin stock. So, the cost advantage for customers is based on systematic
cross subsidization of the payment system by the currency creation process.
Cross-subsidization may also be evident in traditional payment systems: Many banks, for
instance, allow customers to make payments free of charge, recovering costs through profits
in other areas. Most credit card operators charge merchants per-payment fees, while
customers – apart from a lump-sum annual charge – do not pay extra for individual payments.
In cash payments, important logistical costs are borne by central banks and by ATM
operators.
While there is no fixed charge for bitcoin payments, users can and do offer small fees to
miners. Because there is no obligation for miners to include all payments in their calculation,
more resourceful miners can be incentivized to include a payment when a fee is offered,
thereby increasing the speed of transaction for customers. Currently, transaction fees are of
minor importance. Calculations with data from blockchain.info show that less than 1% of
miners’ revenues are from transaction fees. However, while successful miners are currently
rewarded with 12.5 newly issued bitcoins, this amount will decrease to about 0.78 bitcoins in
2032 (when about 90% of all bitcoins will have been mined). Whether miners will be able to
recover their costs with such a reward, will depend on the bitcoin’s market value and the
production costs. The reward will eventually drop to zero in 2140 when the whole bitcoin
stock will have been put into circulation. Hence, eventually miners will have to fully recover
their costs from customer fees. Because all payment transfers are preceded by a race, where
many competitors attempt to solve the same task, the marginal costs in the Bitcoin system for
verifying transactions is higher than in centralized payment systems. All this implies that the
price advantage of bitcoin payments is not based on a cost advantage and is a transitory
phenomenon only. Moreover, if Bitcoin is merely used as a payment vehicle, the costs of
exchanging legal tender currency for bitcoins and back must be added.
Another important question is whether users of Bitcoin are exposed to risks. Bitcoin, which
does not eliminate financial and operational risks to customers, rather implies a transfer of
risks to the individual. The Bitcoin system’s efforts to ensure the integrity of the payment

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system concentrate on counterfeit control and securing anonymity. Bitcoin attempts to
digitally mimic cash in terms of anonymity, payment finality, transaction costs and
decentralized operation of transfers. To prevent double spending, a public record of all
transactions is kept against which every new transaction is checked. As long as users manage
to prevent detection of address ownership by outside observers, transactions can remain
anonymous. Anonymity in transactions could make the system suitable for money laundering,
tax evasion and the purchase of illicit goods and services. While other payment systems
(apart from cash) do not support such anonymity, they typically offer payment services as
part of a bundle of services. For example, banks offer deposit taking, account keeping, proof
of payment services and chargeback facilities together with payment services. In the Bitcoin
system, these services are unbundled. The core infrastructure only offers one-way payment
transfers and counterfeit checks. Related services must either be purchased from third-party
providers or be provided by users themselves. In light of the anonymous and decentralized
nature of payment transfers in Bitcoin, there is no intermediary to reverse payments that were
made erroneously or where counterparties did not fulfill their obligations in return.
Consumers who want their money back have to pay for third-party escrow services or go to
court in the case of complaints, provided anonymity does not prevent such measures.

Merchants, on the other hand, might be inclined to perceive the lack of chargeback risks as an
advantage. They may also benefit from the lower Bitcoin fees compared with card payment
services, where they usually bear the brunt of fees. Also, accepting bitcoins might serve as a
marketing move to attract additional customers and profit from the public attention the
project receives. The “no chargeback” feature of Bitcoin and the elimination of merchant fees
involved in credit card payments favor merchants. In contrast, consumers face a comparably
higher risk of non-delivery, and may or may not be offered discounts by merchants to share in
their fee advantage. In any case, these considerations apply mainly to online businesses.
In offline retail commerce, undue waiting times result from the fact that a bitcoin transaction
can only be considered secure after six confirmations in the Bitcoin network. This can be
expected to take up to one hour, which may in many cases be longer than customers are
prepared to wait for payment to be completed. In Bitcoin, users must store their holdings
either on their own computer or in wallets provided by third-party service providers.
Currently, the latter are private startups not (yet) subject to bank-like regulation and the
associated safety nets. Bitcoin users are therefore subject to risks from loss, theft and fraud of
their holdings to a greater degree than with established service providers.

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In February 2014, Mt.Gox, the biggest Bitcoin trading platform at that time, had to close after
significant amounts of user holdings had been reported to be lost or stolen. Furthermore, there
are significant risks and costs involved in exchanging bitcoins for official currency. As there
is no market maker, being able to buy and sell bitcoins depends on finding a transaction
partner on one of the private exchange platforms online. The exchange rate is very volatile,
and the market is rather illiquid. Exchange charges can be in the order of a few percent. Many
exchanges closed after a few months, with at least one involving severe losses for users.
Although various exchanges coexist, there are rarely any arbitrage opportunities, as these are
outweighed by the cost of moving funds between exchanges.

IV. BITCOIN AS A MONETARY SYSTEM

In economic theory, money is defined by three functions: unit of account, means of payment
and store of value. In modern economies, there is a single unit of account in every currency
area. This is considered to be an efficient solution: Having all prices in a currency area
denominated in the same unit makes them comparable and enables the operation of markets.
Usually, means of payment are issued as official currency by a central bank that is in charge
of ensuring the quality and quantity of that money according to a public mandate. In most
countries, such a mandate entails ensuring the functioning of these means of payment as
stable and most liquid store of value over the short to medium term. The acceptance of
official currency among the public is supported by the currency’s exclusive acceptance by the
state for the discharge of tax liabilities and its use by the state as (one of) the biggest single
transaction parties in the economy.
Apart from the central bank, private issuers can also offer means of payment as long as they
are accepted by the public. Such private means of payment, denominated in the official unit
of account, represent a claim on the issuer for official currency. Banks are the biggest
providers of private means of payment, as the bulk of daily transactions among economic
subjects is conducted by transferring bank deposits (which represent a claim on official
currency). In their role as the biggest providers of private means of payment, banks are
subject to regulation, supervision and monetary policy. The resulting monetary system is a
hierarchical construction, where the state-provided unit of account and means of payment
issued in that unit form the apex of the system, and private means of payment represent
claims on the official means of payment denominated in the official unit of account. The need

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to maintain the ability to keep the promise underlying these claims serves as a major
disciplining device for the issuers.
While Bitcoin represents one of many private means of payment, it entails three peculiarities:
It introduces a separate unit of account, it has no single and identified issuer and its quantity
is ultimately fixed once and for all. Built around the model of gold, the bitcoin is a pure asset
not related to credit creation processes. It has no central issuer and does not represent
anybody’s liability. This implies that its quantity cannot be adjusted to variations in demand,
and it does not come with anybody’s promise to convert it into official currency at a certain
rate. Given its operation based on cryptographic mechanisms described above, the term
“cryptocurrency” has been introduced to characterize Bitcoin type systems.
Bitcoin governance is not completely decentralized: There is the Bitcoin Foundation, which
describes its tasks as standardization (e.g. funding the Bitcoin infrastructure, including a core
development team), protection (e.g. maintenance, improvement and legal protection of the
integrity of the technical protocol underlying the operation of Bitcoin) and promotion of the
Bitcoin system, but does not represent the issuer of the currency. The latter is replaced by a
decentralized process of mining as described above. The Foundation is based on voluntary
membership, whose voting and other rights depend on the size of the fee (based on four
membership classes with different rights). Whereas central banks’ role in the monetary and
payment system is based on a legal mandate of the polity of the currency area and its ability
to issue currency, the Bitcoin Foundation lacks such ingredients and therefore cannot fulfill
the role of a central bank.
Indeed, deliberately designing a system without a central bank is one of the cornerstones of
the Bitcoin concept. Being nobody’s liability is a feature the bitcoin shares with gold. But in
contrast to gold, which is customarily used for various products (e.g. electronics, industry,
dental fillings or jewelry) and has a commodity value, the bitcoin has no use value other than
serving its role in the Bitcoin system. Therefore its value is determined only by the subjective
valuation of users, exhibiting substantial volatility in terms of official currency. The fixed
increase, up to a predefined final level, of supply makes demand effects dominant. This has
led some observers to invoke the “greater fool theory” as basis for the bitcoin’s valuation.
Economists in the tradition of Friedrich A. Hayek have called for the abolition of the
prevailing monetary system in favor of competing private units of account. Such a conception
entails a number of problems, however. A newly introduced rival private unit of account is at
a huge disadvantage against an established unit, all the more if it has an unstable exchange
rate against the official unit of account. A unit of account is subject to significant network

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effects, which entails switching costs for users. If a merchant were to start to price goods and
services in bitcoin, she would incur substantial exchange rate and conversion risks. With
inputs and taxes being priced in official currency, bitcoin income from sales would have to be
at least partially converted into official currency. But their value would fluctuate in terms of
the official currency according to the daily exchange rate, and conversion costs would accrue.
As a result, while there are a number of online merchants accepting bitcoins in payment, none
of them is known to use the bitcoin as a unit of account. Instead, prices are fixed in official
currency and bitcoin prices are adjusted according to the bitcoin’s fluctuating exchange rate,
possibly including additional costs for the conversion spread. While several (mainly online)
merchants accept payment in bitcoin and the Bitcoin network has attracted a significant
number of payment transactions, there are strong reasons to suspect that bitcoins are not
widely used as a means of payment. Due to the anonymity of transactions, no direct
observation on the motives underlying bitcoin payments is possible. But the fixed supply of
bitcoins is designed to attract users with the promise of value appreciation in the face of
growing demand. Whereas official currency is managed with a view to serving as a stable
store of value over the short and medium term, Bitcoin builds on the promise of long-term
value appreciation, not stability. In the short term, it even exhibits extraordinary volatility in
comparison with most other financial assets. There is no market maker willing or able to
ensure the stability usually expected from a currency by users. Rather than a store of value,
the bitcoin can be better characterized as a speculative asset. In light of this, economic
incentives for hoarding are far greater than incentives for spending bitcoins. Exceptions are
transactions where using official currency is not applicable or disadvantageous (e.g. illicit
transactions and small-denomination online payments).
A number of cryptocurrencies have emerged in the wake of Bitcoin, most of them modeled
after the latter with small variations in design. If there were an emerging market for
cryptocurrency as a substitute for money, network effects would entail a winner takes-it-all
dynamic. But although Bitcoin was the first and is by far the largest network in terms of
market capitalization, several hundred competitors have since then been established by
various entities and some have succeeded in gathering some support. This could be
considered evidence that the financial asset function is a more prominent motive than
currency adoption among users.

V. OPINION OF GOVERNMENT OF INDIA, REGULATORY AUTHORITIES &

MARKET PLAYERS ON BITCOIN

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The Bitcoin craze is catching on in India. While tech geeks and young investors eye the
digital cryptocurrency as its value soars, the government, too, is contemplating a course of
action surrounding its regulation. In a move expected to boost financial inclusion, the
Department of Economic Affairs in the Ministry of Finance in India has formed an inter-
disciplinary committee to examine the framework on virtual currencies. In addition, the
government initiated a discussion on its forum My Government to seek public opinion on
virtual currencies.
Clearly, despite some initial reservations, the Indian government is keen on understanding
how Bitcoin works and is willing to deploy resources to build frameworks. So, if Bitcoins are
legalized in India, the following would happen: (i) Bitcoins would fall under the purview of
RBI’s 1934 Act.
(ii) Bitcoin investors would be taxed.
(iii) RBI would issue guidelines regarding investment and purchase of Bitcoins.
(iv) If any foreign payment is made through Bitcoins, it would fall under the purview of
FEMA Act.
(v) Returns from investment in Bitcoins would be taxed.
Interestingly, the news comes around the same time when the Bitcoin trade analyst, Chris
Burniske, highlighted that trades from India accounted for 10% of global cryptocurrency
trade, in May. He tweeted a chart tracking cryptocurrency trades that show India accounted
for 16,754.76 coins by trade volume. It has also been ranked fourth on the Bitcoin
cryptocurrency trading market.
Over the past few years, despite the lack of regulations in the Indian digital currency industry,
a few Bitcoin exchanges have sprung up and started operating with self-regulated trading
platforms with strict Know Your Customer (KYC) and anti-money laundering systems in
place. These include startups like Zebpay, Coinsecure and Unocoin. These startups have also
raised funding from investors and have slowly been building faith in the Bitcoin and digital
currency sector despite skepticism from the government. Blockchains which have the
potential to transform how bank back-end operations function as well as increasing the speed
of payments. The bank said that with its potential to fight counterfeiting, the blockchain is
likely to bring about a major transformation in the functioning of financial markets, collateral
identification, and payments systems.
In December 2015, former RBI Governor Raghuram Rajan had stated that digital currency
was ‘fascinating’ and that India’s central bank could use digital currencies. He had said, “I
have no doubt, that down the line, we will be moving towards primarily a cashless society

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and we’ll have some kind of currencies like this which will be at work.” But in February this
year, the RBI issued a cautionary press release, on the back of an earlier one issued in
December 2013. The release warned users of the risk they are likely to already be aware of.
Namely, that the RBI does not regulate and has not licensed any virtual currencies in India.
Hence, anyone using them does so at their own risk. A month later, on March 1, 2017, RBI
Deputy Governor R. Gandhi also raised concerns over virtual currencies. He said that
cryptocurrency poses potential financial, legal, customer protection and security related risks.
Blockchain technology Most cryptocurrencies are based on blockchain technology. In simple
terms, it is a system to transfer and store data or information that is generated while
transacting in a cryptocurrency. A recent Whitepaper on Blockchain has broken down the
concept of blockchain technology in detail.
As per the paper, “a Blockchain may be described as a tamper-evident ledger shared within a
network of entities, where the ledger holds a record of transactions between the entities. To
achieve tamper-evidence in the ledger, Blockchain exploits cryptographic hash functions.”
Blockchain technology is at the heart of how cryptocurrencies work. It helps to evade any
possibility of fraud and makes any kind of tampering infeasible for the users. It is a support
system for the encrypted currency, whereby the transactions are recorded and stored on the
ledger. So even if the users are anonymous, it still becomes difficult for anyone to possibly
change the data without involving other members on the network.
Bitcoin Pricing
Since pricing in bitcoin transactions is demand based, it is exceptionally volatile. Volumes of
trading happen every second. The price of a bitcoin is largely dependent on the trading i.e.
demand and supply factors. More the demand, higher is the price.

The prices remained under the range of US$ 300 until late 2015 In the following year, around
June 2016, in a positive hunch, the price rose to US$ 755. After March 2017 the prices have
only increased. The more than 11 percent decline marked the lowest price observed on the
BPI since Nov. 26 when bitcoin hit a low of $8,757 However, the price soon rebounded, with
buy orders beginning to appear again around $9,300, according to exchange data service
BitcoinWisdom.

At press time, the price of bitcoin is $9,651.

Chart 1.1

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Following similar trend, price of bitcoin in Indian crypto-market has recently gained remarkably
in recent months.

Chart 1.2

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When bitcoin crossed above $10,000 late last year, it was seen as a watershed moment for the
cryptocurrency, which is moving from the fringes to a mainstream force that Wall Street and
venture capital have to confront.

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Toronto’s housing market, dubbed one of the riskiest housing bubble cities by UBS Group
AG, has slumped over the past few months amid government rules and harsher mortgage
guidelines aimed at curbing demand. That’s coincided with a sharp increase in supply with
new listings up 37 per cent from a year earlier. Yet, the data are now indicating the lower
prices have also begun to boost demand and fuel sales.
Market Capitalisation of bitcoins

Market capitalization of bitcoin as on 8 June 2017 has been computed to come up at US$
46,476,054,493, while the maximum supply in the market is limited to 21,000,000 BTC as of
now.

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Bitcoin Exchanges

Typically, a bitcoin exchange is a business platform that facilitates exchange of bitcoins for
another currency including a fiat currency, thereby allowing the users to trade and make profit.
Bitcoin exchanges quickly spread in the market in early 2011, as more and more people started
exchanging bitcoins, mostly for speculative purposes. Given the high volatility and a ready
market without any regulatory intervention, people find it suitable to trade, invest and hold and
make profits out of the same.
Also bitcoins are not backed by any particular asset or security, because of which its value is not
driven by any factor but demand and supply in the market.
Business Model
Not much later after the inception of bitcoins, bitcoins exchanges quickly spread into the market.
Since then several bitcoin exchanges in India and elsewhere have come into picture.
At a preliminary level, a bitcoin exchange is simply a common platform to the users for the
purpose of buying and selling while matching mutual needs, in order to earn profits.
For instance take an idea of a stock exchange, where a person has an account and he buys stock,
by paying consideration in money, from a person who wants to sell it. Stock exchanges provide a
place for buyers and sellers where they can trade. On similar lines, a bitcoin exchange works by
essentially providing ‘service’ to its users, however unlike stock trading where a broker may as
well come into picture and charge commission in return for his services, in case of bitcoin
exchanges, there is no third party involvement, this service is provided by the exchange itself
which thereby charges commission for the trade conducted and earns revenue. A basic business
model of a bitcoin exchange is reiterated in the chart below. (Chart 6.1 below)

29 | P a g e
Chart 6.1: Bitcoin Exchange trading

The model explained above is the basic model adopted by most of the exchanges operating in
the market. In addition to trading services in bitcoins, these exchanges also facilitate the users
to hold or own bitcoins, for which they provide the basic service of arranging a wallet which
is nothing but an account.
Services provided by bitcoin exchanges in India
Amongst the plethora of services (including core and non-core services and including those
driven by profit or not) provided by different exchanges in India, following are the services
that are common in the market:
1. Storing bitcoin in a bitcoin wallet after deposit/receipt of the same in the wallet.

2. Exchange of bitcoin with other currency like a fiat currency.

3. A Merchant gateway service used to pay to merchants in bitcoins and acceptance by them
thereon.

4. Mobile application providing ease of accessing bitcoin wallets.

5. Sending bitcoins stored in the wallet to another wallet/withdrawing.

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Major exchanges operating in India
India has seen a positive growth in the cryptocurrency market vis-à-vis other countries. In
line with recent growth in the global markets, bitcoin exchanges in India are very much
operational and successful. Their business models range from basic trading platforms to
comprehensive service providers. The type of services being offered in the current market is
listed in one of the above sub-topics (supra).
Volumes of Trading in Bitcoins
Chart 6.2: Trading Volume in Local Bitcoins in INR

LocalBitcoins is an internationally renowned bitcoin exchange, primarily used for trading

purposes by users round the globe. Presented in chart 6.2 above is data showcasing volume of
trading in bitcoins in Indian Rupee (INR) in the given exchange since the beginning till June
27, 2017. As on the date, the aggregate volume in trades is equivalent to almost INR 2.5
million. Evidently, high trading volumes can be ascertained in late 2015 compared to pre
2015, however the numbers reduce and then move on a normal pace while gradually
increasing up to the beginning of the year 2017, where excessive trading is evident. Trading
came up abnormally in the year 2017 in India and everywhere else too.

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Data above forms part of the volume in trading over exchanges outside India since 2011 till
Jan 2017. Similar to the Indian trends, it is evident from chart 6.3 above that trading volumes
spiked during 2016 and 2017.

▪ Either bitcoin has to be physical and movable, and fungible. It is movable and fungible but
not physical.
▪ Electronic money or digital cash may include bitcoin but then it needs a legal backing from
an authorized entity, which is not the case in India as of now.
Legal and Taxation Issues
Regulatory Status in India
The Reserve Bank of India has neither declared bitcoins as illegal in India nor has it accepted
bitcoins as a currency. The RBI has only stated the risks that are associated with virtual
currencies and cautioned that people dealing in it should do so at their own risk.

Legal Status of Bitcoins

Currency?
Currency is generally defined as tokens used as money in a country. In addition to metal
coins and paper bank notes, money orders, traveler’s checks, it also includes electronic
money or digital cash.
To fit in this definition, which is not exhaustive, “Currency” includes all currency notes,
postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit,

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bills of exchange and promissory notes, credit cards or such other similar instruments, as may
be notified by the Reserve Bank, as per Section 2(h) of Foreign Exchange Management Act,
1999
As is evident from the above definition, bitcoin doesn’t fit in any of the illustrative names,
however if RBI wants, it can certainly notify it to be included in the above definition.

RBI hasn’t notified bitcoin as legal tender in India and therefore it couldn’t be termed as real
currency for the time being.
Coins?
Provisions under law:
Coins in India are governed by the Coinage Act, 2011.
Section 2(a): "coin" means any coin which is made of any metal or any other material
stamped by the Government or any other authority empowered by the Government in this
behalf and which is a legal tender including commemorative coin and Government of India
one rupee note.
Explanation.--For the removal of doubts, it is hereby clarified that a "coin" does not include
the credit card, debit card, postal order and e-money issued by any bank, post office or
financial institution; (b) "commemorative coin" means any coin stamped by the Government
or any other authority empowered by the Government in this behalf to commemorate any
specific occasion or event and expressed in Indian currency;
On study of above, bitcoin is certainly not metal or even any other material for that matter.
Moreover, it’s not legal tender. If it was to become e-money in the near future, still it could
not be coin as per the Coinage Act, since e-money is specifically excluded from the above
definition. Consequently, bitcoins cannot be considered as coins now or in the days to come.
Online transactions in bitcoin and FEMA
If one transacts into export/import transactions in bitcoin, the provisions of FEMA will get
attracted. Transactions in FEMA are categorized as ‘Current account transaction’ and ‘Capital
account transaction’. First we analyze current account transactions defined under FEMA
(Section 2(j)). A “current account transaction” means “a transaction other than a capital
account transaction and without prejudice to the generality of the foregoing such transaction
includes,—

(i) payments due in connection with foreign trade, other current business, services, and short-
term banking and credit facilities in the ordinary course of business,
(ii) payments due as interest on loans and as net income from investments,

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(iii) remittances for living expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents, spouse
and children;”
Highlighting ‘a transaction other than a capital account transaction’ from the above definition,
capital account transaction (Section 2(e)) means “a transaction which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or assets
or liabilities in India of persons resident outside India, and includes transactions referred to in
sub-section (3) of section 6; Section 6(3) of FEMA lists out the following:
(a) transfer or issue of any foreign security by a person resident in India; ; (c) transfer or issue
of any security or foreign security by any branch, office or agency in India of a person
resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name
called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between
a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease exceeding five years, by a
person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding
five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred
—
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.”
Whether foreign trade in bitcoins will be treated as a current account transaction or a capital
account transaction depends on assessment of whether bitcoin is a ‘good’ or an ‘asset’.
As already discussed, we prefer not to call bitcoins a good. If it is not a good, then foreign
transactions in bitcoin shall be treated as capital account transactions. Thus, such transactions
are not allowed unless there is explicit nod from the RBI.

Receipts and Payments in Bitcoins:

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Considering the fact that bitcoins are not legal tender in India, receipts and payments in this
virtual currency in a domestic transaction as well as in imports/exports is a separate issue.
As far as receipts and payments in bitcoins are concerned, following are the possible
questions that need to be answered:
Is it possible to buy goods or services in India and make payment in bitcoins? Certain
companies in India are accepting bitcoins as payment against purchase of goods or services.
Even if as per the Reserve Bank of India Act, 1934 (“the Act”), payment made in legal tender
is a valid discharge of an obligation or debt one has towards a payee, the Act however does
not specifically exclude any other form of consideration. Meaning thereby that any form of
payment other than legal tender in India is allowed since it is not prohibited specifically,
subject to the condition that there is consensus between the parties involved.
Is it possible to export and receive payment in bitcoins? Any international transaction which
involves payment or receipt shall attract the provisions of FEMA and rules made there under.
If one was to export outside the Indian territory and receive payment in bitcoin, one shall first
examine what bitcoins shall be treated as, for that matter. Foreign Exchange Management
(Manner of Receipt and Payment) Regulations, 2016 clearly specify the modes of payment in
different cases.
Regulation 3(2) of these Regulations state the following:
“(a) In respect of an export from India, receipt shall be made in a currency appropriate to the
place of final destination as mentioned in the declaration form irrespective of the country of
residence of the buyer.
(b) Any other mode of receipt of export proceeds for an export from India in accordance with
the directions issued by the Reserve Bank of India to authorized dealers from time to time.”
Bitcoins are not legal tender in India, by virtue of which, they are not recognised as real
currency. Also, RBI hasn’t directed anything pertaining to receipt of bitcoins for such
transactions.
Clearly, this leads one to the conclusion that anyone cannot receive bitcoins as a manner of
receipt for any exports made outside India.
Is it possible to import and remit payment in bitcoins? Regulation 6(1) states that:
“(1) Notwithstanding anything contained in Regulation 5, a person resident in India may
make payment for import of goods in foreign exchange through an international card held by
him/ in rupees from international credit card/ debit card through the credit/ debit card
servicing bank in India against the charge slip signed by the importer/ as prescribed by
Reserve Bank from time to time.”

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What is “foreign exchange”? Section 2(n) of FEMA defines foreign exchange as, “foreign
exchange” means foreign currency and includes,— (i) deposits, credits and balances payable
in any foreign currency, (ii) drafts, travelers, cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts,
travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or
persons outside India, but payable in Indian currency; ”

Virtual currency v. Cryptocurrency

Digital currency is largely backed and regulated by the Central Bank, more like electronic
money. Virtual currency, on the other hand is unregulated and decentralized. Financial Crimes
Enforcement Network’s ruling on ‘Application of FinCen’s regulations to virtual currency
mining operations ’ clarifies that virtual currency is a medium of exchange that operates like a
currency in some environments but does not have all the attributes of a real currency. It does
not hold any legal tender status anywhere6. Similar view was expressed in European Central
Bank’s publication, ‘Virtual Currency Schemes’7.
❖ Bitcoins could be termed as virtual currency- they have been categorized as such by
ECB8. They are decentralized, unregulated and have few attributes of a real currency.
Then there are crypto-currencies and non-crypto currencies. Since, bitcoin is purely based on
crypto-graphical system, where you have a private and a public key, and each transaction gets
recorded on the ledger, it is said to come under the definition of crypto-currency.
Decentralized currency
Currency is further classified into centralized and decentralized. Those which are governed
by a central repository or a designated entity for sake of trust over transactions taking place
are termed as centralized currency. Bitcoin doesn’t work like that. Transactions in bitcoin
happen on a decentralized P2P system, where all entities operate independently, and hold the
entire risk of dealing in the same.
Convertibility
In the words of Internal Revenue Service (IRS) Virtual Currency Guidance10: ‘Virtual
currency that has an equivalent value in real currency or which acts as a substitute for a real
currency is called ‘convertible’ virtual currency’. European Union has categorized bitcoins as
a convertible decentralised virtual currency. Since it is convertible into fiat currency or legal
tender of the country, it is prima facie convertible or fungible.
Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016
enumerates the following:

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“5. Manner of payment in foreign exchange : -
(1) A payment in foreign exchange by an Authorised Dealer, whether by way of remittance
from India or by way of reimbursement to his branch or correspondent outside India against
payment for import into India, or against any other payment, shall be as per the way
prescribed thereunder segregating between few countries and others, where payment also
includes in some cases, the payment made in any freely convertible cuurency
To understand the word ‘freely convertible currency’, one shall look into the definition of
‘permitted currency’ in detail defined under EXCHANGE CONTROL MANUAL- Permitted
Currencies and Methods of Payment.It states that “the expression 'permitted currency' is used
in the Manual to indicate a foreign currency which is freely convertible i.e. a currency which
is permitted by the rules and regulations of the country concerned to be converted into major
reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists
for dealings against the major currencies. Accordingly, authorised dealers may maintain
balances and positions in any permitted currency. Authorised dealers may also maintain
positions in Euro of the European Currency Area.”
Considering above, if bitcoins are treated as a freely convertible currency only in case it is
declared to be currency under any foreign legislature, the payment made will be covered
under the above regulations, thereby categorizing bitcoins as foreign exchange.
If it’s a virtual currency, could bitcoin be treated as property?
Bitcoin is not currency in general parlance but is treated as a virtual currency. In a notice
dated March 25, 2014, the Internal Revenue Service, Washington stated that virtual currency
is treated as property for U.S. federal tax purposes. To apply the same concept India, first has
to be examined the definition of property. As per Section 29(c) of Benami Transactions
(Prohibitions) Act, 1988, property means property of any kind, whether movable or
immovable, tangible or intangible, and includes any right or interest in such property.
❖ This is an inclusive definition of property, where both movable and immovable properties
are included. Bitcoin is movable and intangible thus it can be called a property as per this
definition. However, any idea to levy tax on it as a property will require extensive reasoning
and research.
The Supreme Court of India discussed the expression ‘property’ in detail. ‘Property’ is said to
be understood in a vast and expansive manner. To start with, one can say that property
includes everything that has an extendable value. It includes the item in question and all
rights and liabilities associated with it. An element which is material to the expression is

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‘ownership’. While the property has all interests in it, it is the ownership that lets the owner
exercise such interest, where the interest extends to doing everything, an owner is capable of
doing to exercise his right in the property.
➢ Is it a movable property? Sale of Goods Act does not define movable property. It is
however defined in the General Clauses Act, 1897. As per which, movable property shall
mean property of every description, except immovable property. Bitcoin is not immovable.
So, yes. It may be called movable.
➢ Is it an actionable claim or money? No. It does not impose a claim on anybody, so it is not
an actionable claim. And, precisely, since it is not legal tender, it is not money even though it
represents value in money.
Goods
Under Indian law, Sale of Goods Act, 1939 defines ‘goods’ u/s 2(7)12. Accordingly, “Goods”
means every kind of movable property other than actionable claims and money; and includes
stock and shares, growing crops, grass, and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale. To answer whether
bitcoin is a good or not, first, we shall answer the following questions:
One important aspect for any item to be a good is that it should have an intrinsic value in
itself. While bitcoins might fall under the term ‘goods’ as per Sale of Goods Act, 1930 but it
does not seem to have any value in itself-- in other words it does not have any value or
attribute which could be the reason why people would buy for its own sake. People would
buy bitcoins to store value but to trade and earn profits. It is not bitcoin that has fundamental
value, but the transactions in it which help earn something. Therefore, to categorize bitcoins
as ‘goods’, will be an incorrect stance to take.
Digital Goods
Similar to digital currency, we have digital goods and virtual goods respectively. Digital
goods are goods existing in electronic format. Examples could be e-books, e-newspapers,
internet coupons, online traded instruments, e-tickets, downloadable software, mobile apps,
etc. For bitcoin to become a digital good, it has to have the respective features. If we analyze,
we find that bitcoin is being used to buy digital goods, in that way it becomes a medium of
exchange to purchase digital goods rather than being a digital good itself.
Under Foreign Exchange Management Act, 1999 (‘FEMA’)

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Given its attributes, the closest we could define bitcoin as is ‘virtual currency’ or more
particularly ‘cryptocurrency’. As far as FEMA is considered, there can be two possible
scenarios:
When there is no regulatory framework: Section 2(h) of the Act defines ‘currency’. RBI
hasn’t declared bitcoins to fall under that definition. Then there’s ‘foreign currency’. Section
2(m) defines, ““foreign currency” means any currency other than Indian currency”. Now
what is Indian currency? FEMA (Section 2(q))also defines Indian currency. Accordingly,
‘“Indian currency” means currency which is expressed or drawn in Indian rupees but does not
include special bank notes and special one rupee notes issued under section 28A of the
Reserve Bank of India Act, 1934 (2 of 1934)’. When there is a regulatory framework: As
mentioned before, the RBI can explicitly declare bitcoins to be currency; in this case it would
fall under the definition of foreign currency and be dealt with accordingly.
However, the present situation is such where bitcoin doesn’t fall in any of the above
definitions. So, it does not cleanly fall into the category of foreign currency as per FEMA as
it does not qualify to be currency as per the same Act—the RBI would have to explicitly
notify it to be such in the first place.

Online transactions in bitcoin and FEMA

If one transacts into export/import transactions in bitcoin, the provisions of FEMA will get
attracted. Transactions in FEMA are categorized as ‘Current account transaction’ and ‘Capital
account transaction’. First we analyze current account transactions defined under FEMA
(Section 2(j)). A “current account transaction” means “a transaction other than a capital
account transaction and without prejudice to the generality of the foregoing such transaction
includes,—
(i) payments due in connection with foreign trade, other current business, services, and short-
term banking and credit facilities in the ordinary course of business,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents, spouse
and children;”
Highlighting ‘a transaction other than a capital account transaction’ from the above definition,
capital account transaction (Section 2(e)) means “a transaction which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or assets

39 | P a g e
or liabilities in India of persons resident outside India, and includes transactions referred to in
sub-section (3) of section 6; Section 6(3) of FEMA lists out the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or agency in
India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name
called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between
a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease exceeding five years, by a
person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding
five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred
—
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.”
Whether foreign trade in bitcoins will be treated as a current account transaction or a capital
account transaction depends on assessment of whether bitcoin is a ‘good’ or an ‘asset’.
As already discussed, we prefer not to call bitcoins a good. If it is not a good, then foreign
transactions in bitcoin shall be treated as capital account transactions. Thus, such transactions
are not allowed unless there is explicit nod from the RBI.
Receipts and Payments in Bitcoins:
Considering the fact that bitcoins are not legal tender in India, receipts and payments in this
virtual currency in a domestic transaction as well as in imports/exports is a separate
As far as receipts and payments in bitcoins are concerned, following are the possible
questions that need to be answered:
Is it possible to buy goods or services in India and make payment in bitcoins? Certain
companies in India are accepting bitcoins as payment against purchase of goods or services.
Even if as per the Reserve Bank of India Act, 1934 (“the Act”), payment made in legal tender
is a valid discharge of an obligation or debt one has towards a payee, the Act however does

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not specifically exclude any other form of consideration. Meaning thereby that any form of
payment other than legal tender in India is allowed since it is not prohibited specifically,
subject to the condition that there is consensus between the parties involved.
• Is it possible to export and receive payment in bitcoins? Any international transaction which
involves payment or receipt shall attract the provisions of FEMA and rules made there under.
If one was to export outside the Indian territory and receive payment in bitcoin, one shall first
examine what bitcoins shall be treated as, for that matter. Foreign Exchange Management
(Manner of Receipt and Payment) Regulations, 2016 clearly specify the modes of payment in
different cases.
Regulation 3(2) of these Regulations state the following:
“(a) In respect of an export from India, receipt shall be made in a currency appropriate to the
place of final destination as mentioned in the declaration form irrespective of the country of
residence of the buyer.
(b) Any other mode of receipt of export proceeds for an export from India in accordance with
the directions issued by the Reserve Bank of India to authorized dealers from time to time.”
Bitcoins are not legal tender in India, by virtue of which, they are not recognized as real
currency. Also, RBI hasn’t directed anything pertaining to receipt of bitcoins for such
transactions.
Clearly, this leads one to the conclusion that anyone cannot receive bitcoins as a manner of
receipt for any exports made outside India.
• Is it possible to import and remit payment in bitcoins? Regulation 6(1) states that:
“(1) Notwithstanding anything contained in Regulation 5, a person resident in India may
make payment for import of goods in foreign exchange through an international card held by
him/ in rupees from international credit card/ debit card through the credit/ debit card
servicing bank in India against the charge slip signed by the importer/ as prescribed by
Reserve Bank from time to time.”
What is “foreign exchange”? Section 2(n) of FEMA defines foreign exchange as, “foreign
exchange” means foreign currency and includes,— (i) deposits, credits and balances payable
in any foreign currency, (ii) drafts, travellers ,cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts,
travelers, cheques, letters of credit or bills of exchange drawn by banks, institutions or
persons outside India, but payable in Indian currency; ”
Examining the above, it’s conclusive that bitcoin does not conform to the above definition
and thus it is certainly not foreign exchange.

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It is hereby inferred that in exchange of any imports made by any person in India, it is
manifestly impossible to remit payment in bitcoins in the ambit of law.
SEBI
Classification as ‘commodity derivative’
Bitcoin is treated as ‘commodity ’ in few foreign jurisdictions. However, to understand the
intricacies revolving bitcoins as ‘commodity derivative’ in India, one shall have to refer the
Securities Contracts Regulation Act, 1956
Section 2 clause (bc) of the Act defines the expression as:
"commodity derivative" means a contract —
(i) for the delivery of such goods, as may be notified by the Central Government in the
Official Gazette, and which is not a ready delivery contract; or
(ii) for differences, which derives its value from prices or indices of prices of such underlying
goods or activities, services, rights, interests and events, as may be notified by the Central
Government, in consultation with the Board, but does not include securities as referred to in
sub-clauses (A) and (B) of clause (ac);
To be able to be covered by the above definition, the essential element is a contract. While the
definition of contract is dealt by the Indian Contract Act, 1872, either of the above two
purposes is a pre-requisite for a contract to be a commodity derivative contract.
Essentially, bitcoin is not goods as already explained in the preceding sections, additionally it
is also not something that has its value derived from an underlying good or something else. In
fact value of bitcoins fluctuate on demand-supply phenomenon rather than anything
persistent.
Conclusively, bitcoins cannot be treated as commodity; also it cannot be treated as
commodity derivative. Therefore, SEBI cannot be seen as the authority overseeing bitcoin
exchanges
Collective Investment Scheme (‘CIS’)
Collective Investment Scheme has been defined under Section 11AA (1) of the Securities and
Exchange Board of India Act, 1992 (‘SEBI Act’). Accordingly, sub-section 2 or 2A has to be
referred to, which specifies a list of conditions that have to fulfilled in order to fall under the
definition of CIS. Interestingly, Sections cited above focus on words or expressions such as
‘collective’, ‘pooling of interest’, ‘contribution’. Looking at the concept of bitcoin, it cannot
be held that at any time the investor is collecting funds and then investing the money. Till
date, there is no trace of any such activity in the market where a service such as pooling of
funds of investors and then investing in bitcoins was done. Thus, trading in bitcoins for
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investment purposes has not grown enough to be regarded as CIS. If at all there is a
prospective change resulting in inclusion of bitcoin trading services under the regulation of
SEBI by virtue of being treated a CIS, consequential norms shall be applicable parri passu to
such platform or providers of service if any.
Requirement under Section 12 of SEBI Act, 1992
Section 12 mandates obtaining registration certificate for persons specified such as brokers,
sub-brokers, share transfer agents, etc. An inclusion in the provision is that of ‘such other
intermediary who may be associated with securities market’. The words draw one’s attention
to two words, namely ‘intermediary’ and ‘securities’. To extend the above provisions to
bitcoin or bitcoin exchanges, the service provider shall have to be an intermediary under
SEBI and the dealing item shall be a ‘security’. Since none of the criteria will be fulfilled by
bitcoins, obtaining aforementioned registration cannot be extended to bitcoin exchanges.
Nodal Account Directions
RBI has issued Directions for opening and operation of Accounts and settlement of payments
for electronic payment transactions involving intermediaries dated 24th November, 2009 in
line with the following preamble:
“The use of Electronic/Online Payment modes for payments to merchants for goods and
services like bill payments, online shopping etc. has been gaining popularity in the country.
With a view to safeguard the interests of the customers and to ensure that the payments made
by them using Electronic/Online Payment modes are duly accounted for by the intermediaries
receiving such payments and remitted to the accounts of the merchants who have supplied the
goods and services without undue delay, it is considered necessary to frame suitable
directions for the safe and orderly conduct of these transactions. “
The directions have been issued to intermediaries as defined under the directions.
‘Intermediaries’ would include all entities that collect monies received from customers for
payment to merchants using any electronic/online payment mode, for goods and services
availed by them and subsequently facilitate the transfer of these monies to the merchants in
final settlement of the obligations of the paying customers.
Explanation: For the purpose of these directions, all intermediaries who facilitate delivery of
goods/services immediately/simultaneously (e.g. Travel tickets/movie tickets etc) on the
completion of payment by the customer shall not fall within the definition of the expression
“intermediaries”. These transactions which are akin to a Delivery versus Payment (DVP)
arrangement will continue to be facilitated as per the contracts between the merchants and the
intermediaries as hitherto and banks shall satisfy themselves that such intermediaries do not

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fall within the definition of the “intermediaries” when they open accounts other than internal
accounts.
The Prevention of Money-laundering Act, 2002
Schedule IV of the Prevention of Money-laundering Act, 2002 (‘PMLA’), lists out a
comprehensive text on obligations of banking companies, financial institutions and
intermediaries which inter alia includes reporting requirements by such entities. If bitcoin
exchange platforms are specifically included as intermediaries, the requirements as above
shall be applicable on such platforms as well. Further, it is advised that such entities may as a
self-regulatory measure adopt to fair practices ensuring that it does not get involved in illegal
or illicit activities which may attract gross consequences under laws such as PMLA. A KYC
policy in place is also suggested to further the adherence to best practices.

Taxation
Coming to the matter of taxation in bitcoin transaction, particularly in a case where we import
bitcoin, following may apply:
Customs Duty: As per Central Excise and Customs Act, 194416, customs duty is levied on
import of software subject to the condition that the software imported in a physical form.
Therefore, software imported online is not chargeable to Customs duty. Similarly, if bitcoin is
treated as software, no duty shall apply.
VAT: VAT has now been subsumed into the Goods and Services Tax with effect from 1st July
2017. GST is discussed in later sections .

GST on bitcoins
Currency under FEMA vis-à-vis ‘money’ under GST
Currency has been defined under FEMA:
Section 2(h) “currency” includes all currency notes, postal notes, postal orders, money orders,
cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes,
credit cards or such other similar instruments, as may be notified by the Reserve Bank;
On perusal of the above definition, it is explicit that bitcoins does not fit in any of the
mentioned types. It is in fact not been notified by the Reserve Bank as a currency. So
apparently, bitcoin is not currency.
On lines similar to the definition above, lawmakers have framed the definition of ‘money’
under GST which as same as the one under Section 65B (33) of Schedule V of the Finance

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Act, 1994 pertaining to Service Tax. Section 2(75) of CGST Act defines: “money” means the
Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter
of credit, draft, pay order, traveller,cheque, money order, postal or electronic remittance or
any other instrument recognized by the Reserve Bank of India when used as a consideration
to settle an obligation or exchange with Indian legal tender … of another denomination but
shall not include any currency that is held for its numismatic value;…
Money
‘Money’, as defined, has been kept out of the purview of GST.

Goods
‘Goods’ has been defined under GST. Section 2(52) “goods” means every kind of movable
property other than money and securities but includes actionable claim, growing crops, grass
and things attached to or forming part of the land which are agreed to be severed before
supply or under a contract of supply;
Bitcoin doesn’t have any intrinsic value in itself; hence it would be technically incorrect to
refer it as goods.
Where bitcoin is not being used as anything except as a ‘means of payment’, it needs to come
under the arena of currency. Otherwise, GST implications with respect to supply of
goods/services will arise.
Until specifically declared by RBI, bitcoin shall not be ‘money’. Several countries have
declared bitcoin as ‘money’ thereby making it exempt from GST. For example, a European
Court of Justice Ruling has exempted bitcoin from VAT. Australian Federal Government has
also proposed to exempt bitcoins from tax in its budget 2017.
Computer Programme
The system on which bitcoin works, is nothing but software, a set of codes which may be
considered a ‘computer programme’. Indian Copyright Act, 1957 defines the word ‘computer
programme’:
Section 2(ffc): "computer programme" means a set of instructions expressed in words, codes,
schemes or in any other form, including a machine readable medium, capable of causing a
computer to perform a particular task or achieve a particular result. Under GST, if classified
as software/computer programme a rate of 18% shall apply.
Section 2(24) of the Income Tax Act, 1961 defines ‘income’. Accordingly tax is applicable
subject to the basic exemption limit on any profit made on dealing with bitcoins.

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On sale of bitcoins and any resultant profit is subject to capital gains tax under as applicable
as per the Income Tax Act, 1961.
In Tata Consultancy Services v. State of Andhra Pradesh (Order dated 5th November, 2004),
the Court held that a software whether customized or non-customised will be goods if it
satisfies a set of three attributes, namely:
1. Utility;

2. Capable of being bought and sold;

3. Capable of being transmitted, transferred, delivered, stored and possessed

Goods might be tangible or intangible. Bitcoin does satisfy the above last two points,
however, it doesn’t seem to have the same utility as of other goods. There is no absolute
usefulness that might be associated with bitcoin. A bitcoin is definitely bought and sold for
purposes such as investment or trading; however, these facts do not necessarily make an item
‘goods’. Since bitcoin has utility which is specific to itself and not general, and further to add,
having no intrinsic value, it cannot be termed as ‘goods’.
Foreign Ruling on Bitcoins
The GST implications of transactions involving bitcoin - GSTR 2014/3 – A Goods and
Services Tax Ruling, Australian Taxation Office, Australian Government19, (original ruling
dated 17th December, 2014)
The Ruling summarises following significant points with respect to application of GST on
bitcoins and related implications:
1. The ruling as specified has considered the classification of bitcoin as ‘money’ or a
‘financial supply’ under the GST Act.

2. As pointed out, there must be a ‘supply for consideration’ for there to be a taxable supply.

3. A transfer of bitcoin from one entity to another is a ‘supply’ for GST purposes. The
exclusion from the definition of supply for supplies of money does not apply to bitcoin
because bitcoin is not ‘money’ for the purposes of the GST Act.

4. The supply of bitcoin is not a ‘financial supply’. Further, it is not an input taxed supply.

5. A supply of bitcoin is a taxable supply and the supply of bitcoin is not GST-free (for
example, a supply to a non-resident for use outside of Australia).

6. A supply of bitcoin in exchange for goods or services will be treated as a barter transaction.

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Bitcoin is not goods and cannot be the subject of a taxable importation. However, an offshore
supply of bitcoin can be a taxable supply under the ‘reverse charge’ rules.
The above ruling significantly points out that bitcoin is neither money nor its supply a
financial supply; moreover, it is also not goods. Interestingly, Australian Government has
proposed to exempt bitcoins from tax.
Status of bitcoins under Indirect Taxation
in different jurisdictions Country/Region Status
Singapore Profit on trading in bitcoins in ordinary course
is taxable20
Australia Propose to exempt bitcoins from taxation by
treating it as money
European Union Any exchange of bitcoins for another currency
does not attract VAT or GST, as the case may be
USA Treated as property as per Internal Revenue
Service, USA21
Norway As proposed in 2017, no VAT shall be levied on
trading in bitcoins22
Japan In 2017, officially recognised bitcoins as a
means of payment
Risks Associated with Bitcoins

RBI through its press release dated 24th December, 2013 has warned the public about the
negative attributes of bitcoins and its usage. It specifically pointed out, that since they are
stored digitally, they are exposed to risks such as hacking, attacks, compromises etc.

Bitcoins are not backed and/or regulated by a centralized agency till date, making them less
reliable.

There is no forum, where a user can possibly reach out for any help or grievance, as a result
of which Indian consumers are being exposed to transactional and informative risks.

Another issue pertains to awareness. Lot of consumers has little or no information regarding
risks associated with bitcoins lending them into unwanted trouble under regulations such as
anti-money laundering.

One of the very important attributes of bitcoins is its volatility. Steep changes every second
are expected, making investors prone to zero-worth risks.

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 CHAPTER-3
REVIEW
OF
LITERATURE

1. Sindri Leó Árnason(2015) This is a bachelor’s of science essay that counts for 6
ECT credits in the School of Social Sciences, Faculty of Business Administration, at
the University of Iceland. I chose this topic because I had become interested in

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Bitcoin and cryptocurrencies in 2013-2014 when their media coverage boomed. I had
already done some research on this topic beforehand and as I am studying finance at
the University of Iceland I wanted to research what Bitcoin’s future impact on the
business world could possibly be. I would like to thank Guðrún Johnsen who is a
lecturer at the School of Social Sciences, who helped guide me through writing this
essay and my father, Árni Leósson, who helped read over my essay, fixing spelling
and grammar mistakes as well as helping me develop essential arguments.

2. Steven Goldfeder (2016) The path to Bitcoin is littered with the corpses of failed
attempts. I’ve compiled a list of about a hundred cryptographic payment systems, both
e-cash and credit card based technologies, that are notable in some way. Some are
academic proposals that have been well cited while others are actual systems that
were deployed and tested. Of all the names on this list, there’s probably only one that
you recognize — PayPal. And PayPal survived only because it quickly pivoted away
from its original idea of cryptographic payments on hand-held devices! There’s a lot
to learn from this history. Where do the ideas in Bitcoin come from? Why do some
technologies survive while many others die? What does it take for complex technical
innovations to be successfully commercialized? If nothing else, this story will give
you an appreciation of how remarkable it is that we finally have a real, working
payment mechanism that’s native to the Internet.

3. Jonathan Chiu(2017) A general equilibrium monetary model is developed to study

the optimal design of a cryptocurrency system based on a blockchain. The model is
then calibrated to Bitcoin transaction data to perform a quantitative assessment of the
scheme. We formalize the critical elements of a cryptocurrency: the blockchain to
keep a history of transactions, the distributed updating of information and consensus
through competition for such updating. We show that, unlike cash, a cryptocurrency
system does not support an immediate, final settlement. In addition, the current
Bitcoin scheme generates a welfare loss of 1.4% of consumption. Such loss can be
lowered substantially to 0.08% by adopting the optimal policy which reduces mining
and relies on money growth rather than transaction fees to finance mining rewards.
The efficiency can potentially be improved further by adopting an alternative
consensus protocols such as the proof-of-stake. A key economic feature of a
cryptocurrency system is that mining is a public good, while double spending to
defraud the cryptocurrency depends on individual incentives to reverse a particular

49 | P a g e
transaction. As a result, a cryptocurrency works best when the volume of transactions
is large relative to the individual transaction size.

4.Nicola Dimitri (2017) Since its 2008 appearance as a cornerstone of the

cryptocurrency bitcoin, the blockchain technology gained widespread attention as a
modality to securily validate and store information without a trusted third party.
Indeed trust is replaced by cryptographic security, epitomised by hash functions, a
unique fingerprint of any information file. The paper is a quick overview of the main
concepts and applications of the blockchain, taken from an economic perspective.

5.Pasquale Giungato( 2017) Bitcoin is a digital currency based on a peer-to-peer

payment system managed by an open source software and characterized by lower
transaction costs, greater security and scalability than fiat money and no need of a
central bank. Despite criticisms about illegal uses and social consequences, it is
attracting the interest of the scientific community. The purpose of this work is to
define and evaluate the current trends of the literature concerned with the
sustainability of bitcoin, considering the environmental impacts, social issues and
economic aspects. From the analysis it emerges that the transition of the whole
monetary system in the new cryptocurrency will result in an unacceptable amount of
energy consumed to mine new bitcoins and to maintain the entire virtual monetary
system, and probably bitcoin will remain a niche currency. Blockchain, which is the
base for a distributed and democratically-sustained public ledger of the transactions,
could foster new and challenging opportunities. Sharing the framework of medical
data, energy generation and distribution in micro-grids at the citizen level, block-stack
and new state-driven cryptocurrencies, may benefit from the wide spread of
blockchain-based transactions. Under the perspective of its being a driver of social
change, bitcoins and related blockchain technologies may overcome the issues
highlighted by numerous detractors.
6.Satoshi Nakamoto( 2017) A purely peer-to-peer version of electronic cash would
allow online payments to be sent directly from one party to another without going
through a financial institution. Digital signatures provide part of the solution, but the
main benefits are lost if a trusted third party is still required to prevent double-
spending. We propose a solution to the double-spending problem using a peer-to-peer
network. The network timestamps transactions by hashing them into an ongoing chain
of hash-based proof-of-work, forming a record that cannot be changed without

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redoing the proof-of-work. The longest chain not only serves as proof of the sequence
of events witnessed, but proof that it came from the largest pool of CPU power. As
long as a majority of CPU power is controlled by nodes that are not cooperating to
attack the network, they'll generate the longest chain and outpace attackers. The
network itself requires minimal structure. Messages are broadcast on a best effort
basis, and nodes can leave and rejoin the network at will, accepting the longest proof-
of-work chain as proof of what happened while they were gone.

7. Kiran Ganesh(2017) Cryptocurrencies have soared in popularity since 2008, with

more than 1,000 in existence today and an aggregate value greater than the market
capitalization of IBM. But we are highly doubtful whether they will ever become
mainstream currencies. The need for companies and individuals to pay tax receipts in
government-issued currency, and the potentially unlimited crypto-money supply, pose
significant barriers to widespread adoption. We think the sharp rise in cryptocurrency
valuations in recent months is a speculative bubble. • But while we are doubtful
cryptocurrencies will ever become a mainstream means of exchange, the underlying
technology, blockchain, is likely to have a significant impact in industries ranging
from finance to manufacturing, healthcare, and utilities. We estimate that blockchain
could add as much as USD 300-400bn of annual economic value globally by 2027. •
Investing in the blockchain wave is akin to investing in the internet in the mid-
nineties. Blockchain could lead to significant disruptive technologies in the coming
decade. But for the time being, technological shortcomings still need to be resolved, it
remains unclear which specific applications will prove most useful/profitable, and
actual revenue and profitability associated with the industry is currently limited.
Despite these challenges, investors seeking long-term opportunities from blockchain
technology can start to position in two broad groups: technology enablers – in
software, semiconductors, and platforms; and early & successful adopters – in
finance, manufacturing, healthcare, utilities, and the sharing economy.

8 Jonathan Chiu(2017)A general equilibrium monetary model is developed to study

the optimal design of a cryptocurrency system based on a blockchain. The model is
then calibrated to Bitcoin transaction data to perform a quantitative assessment of the
scheme. We formalize the critical elements of a cryptocurrency: the blockchain to
keep a history of transactions, the distributed updating of information and consensus
through competition for such updating. We show that, unlike cash, a cryptocurrency

51 | P a g e
system does not support an immediate, final settlement. In addition, the current
Bitcoin scheme generates a welfare loss of 1.4% of consumption. Such loss can be
lowered substantially to 0.08% by adopting the optimal policy which reduces mining
and relies on money growth rather than transaction fees to finance mining rewards.
The efficiency can potentially be improved further by adopting an alternative
consensus protocols such as the proof-of-stake. A key economic feature of a
cryptocurrency system is that mining is a public good, while double spending to
defraud the cryptocurrency depends on individual incentives to reverse a particular
transaction. As a result, a cryptocurrency works best when the volume of transactions
is large relative to the individual transaction size (e.g., as in a retail payment system).

9. LuYu( 2017)Cryptocurrencies have emerged as important financial software

systems. They rely on a secure distributed ledger data structure; mining is an integral
part of such systems. Mining adds records of past transactions to the distributed ledger
known as Blockchain, allowing users to reach secure, robust consensus for each
transaction. Mining also introduces wealth in the form of new units of currency.
Cryptocurrencies lack a central authority to mediate transactions because they were
designed as peer-to-peer systems. They rely on miners to validate transactions.
Cryptocurrencies require strong, secure mining algorithms. In this paper we survey
and compare and contrast current mining techniques as used by major
Cryptocurrencies. We evaluate the strengths, weaknesses, and possible threats to each
mining strategy. Overall, a perspective on how Cryptocurrencies mine, where they
have comparable performance and assurance, and where they have unique threats and
strengths are outlined.
10.Fabian Schär(2018) In this article, we give a short introduction to
cryptocurrencies and blockchain technology. The focus of the introduction is on
Bitcoin, but many elements are shared by other blockchain implementations and
alternative cryptoassets. The article covers the original idea and motivation, the mode
of operation and possible applications of cryptocurrencies, and blockchain
technology. We conclude that Bitcoin has a wide range of interesting applications and
that cryptoassets are well suited to become an important asset class.
11.Brian Lucey(2018) We are delighted to invite you to submit your research papers
to be considered for presentation at the first Cryptocurrency Conference of its kind
that will take place on 24 May 2018 at Anglia Ruskin University, Cambridge, UK.
This event will bring together an international group of academics conducting

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research in finance and related disciplines, as well as practitioners and policy makers
to discuss the issues associated with the rapid growth of cryptocurrency markets. This
conference provides a forum for presenting new research findings, and discussing the
future direction of cryptocurrency research. We welcome both theoretical and
empirical papers assessing the opportunities and challenges of cryptocurrency
markets. There will be a prize for the best paper from a PhD student. The main theme
of the conference is ‘Investigating the Macro-financial aspects of Cryptocurrencies’.
12.William Lunn(2018) In this indepth report, we analyse the market implications of
blockchain technology in light of the bitcoin boom since our initial cross-sector and
cross-border publication, Blockchain: The Trust Disrupter, roughly a year ago. While
we make no comment on the valuation of particular cryptocurrencies, we believe the
rise of bitcoin and Initial Coin Offerings highlights how transformative the
underpinning blockchain technology will be across sectors, with financial services
and capital markets at the front of the queue.

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 CHAPTER – 4

RESEARCH
METHODOLOGY

RESEARCH DESIGN
Crypto- is short for “cryptography”, and cryptography is computer technology used for
security, hiding information, identities and more. Currency simply means “money currently in
use”. Cryptocurrencies are a digital cash designed to be quicker, cheaper and more reliable
than our regular government issued money. Instead of trusting a government to create your
money and banks to store, send and receive it, users transact directly with each other and
store their money themselves. Because people can send money directly without a middleman,
transactions are usually very affordable and fast.

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A research design is a frame work or blue print for conducting research procedure is
necessary for obtaining information to solve the problem. Research designed to assist the
decision maker in determining, evaluating and selecting the best course of action to take in a
given situation. Descriptive studies are usually the best methods for collecting information
that will demonstrate relationships and describe the world as it exists. Descriptive studies are
designed primarily to describe what is going or what exist.
The research design that will be use is Descriptive Research.
 Involves gathering data that describe events and then organizes, tabulates, depicts,
and describes the data.
 Uses description as a tool to organize data into patterns that emerge during analysis.
 Often uses visual aids such as graphs and charts to aid the reader.

OBJECTIVES OF THE STUDY

1. To study the view of government and general public perspective towards cryptocurrency.
2. Can we replace the indian financial system through cryptocurrency.
3. To check how much cryptocurrency is affecting the indian financial system.

SOURCE OF DATA

PRIMARY DATA
The data which is collected directly from the respondent to the base of knowledge and belief
of such research are called primary data.
SECONDARY DATA
When data are collected and compelled from the published nature or any other's primary data
is called secondary data. We have not collected any information from any sources. So, we
have not used secondary data for our research.

Research Instruments
I have collected the data through QUESTIONNAIRE by personal meeting and table–calling
with people.

Sampling area:-The sampling area to collect the data is common people near about
Bathinda and Kotkapura.

Sample size:-100 respondents

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Sample technique:-Convenient technique

Limitations of the Study

 The responses given by respondents may not be true

 Area of study is limited
 Time of study is also limited

CHAPTER – 5

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 DATA ANALYSIS

&

INTERPRETATION

Cryptocurrency facts takes a simplified look at digital currencies like Bitcoin to help explain
what cryptocurrency is, how it works, and its implications. Cryptocurrency is a digital
currency that uses encryption (cryptography) to generate money and to verify transactions.
Transactions are added to a public ledger – also called a Transaction Block Chain – and new
coins are created through a process known as mining.

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 1. Being a citizen of india, do you support cryptocurrency?

Options No. of Respondents Percentage

Yes 15 15%
No 85 85%

15

85

YES NO

Interpretation: From the survey we comes to know that 85% of the citizen of india do not
supports cryptocurrency and 15% of citizen of india support cryptocurrency.

2 Have you ever heard of Bitcoin, Litecoin or other cryptocurrencies?

Options No. of Respondents Percentage
Yes 40 40%
No 60 60%

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 0.4

0.6

Yes No

Interpretation:From the study we comes to know that,40% people heard about Bitcoin and
60% people never heard about bitcoin, litecoin and cryptocurrencies.

3. Have you ever bought a cryptocurrency?

Options No. of Respondents Percentage
Yes 20 20%
No 80 80%

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 Column1

20

80

Yes No

Interpretation:From the study,we comes to know that 20% People has invested in
cryptocurrency and 80% People has not invested in cryptocurrency.

4. Do you expect Bitcoin to become the leading virtual currency over the next 5 years?

Options No. of Respondents Percentage

Yes 10 10%
No 70 70%
Don’t Know 20 20%

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 percentage
10
20

70

Yes No Don't Know

Interpretation:From the survey, we comes to know that 10% Respondents expect that
Bitcoin to become the leading virtual currency over the next 5 years,70% Respondents expect
that Bitcoin has not becoming the leading virtual currency over the next 5 years and 20%
Respondents do not expect that Bitcoin to become the leading virtual currency over the next 5
years.

5. Is Your current Cryptocurrency portfolio worth more than your initial investment?
Options No. of Respondents Percentage
Yes 9 8.80%
No 91 91.20%

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 8.80%

91.20%
Yes No

Interpretation: From the survey we comes to know that,8.80% people having their current
Cryptocurrency portfolio worth more than your initial investment,91.20% people having their
current Cryptocurrency portfolio worth less than your initial investment.

6. According to you, which financial system is more trustable?

Options No. of Respondents Percentage
Cryptocurrency 10 10%
Indain financial system 90 90%

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 percentage
10

90

Cryptocurrency Inda i n financi a l system

Interpretation: From the study we comes to know that,10% people having trust on
cryptocurrency & 90% people having trust on Indian financial system.

7. As the Indian government is not backing up the cryptocurrency, will you still be
interested in purchasing it?
Options No. of Respondents Percentage
Yes 17 17%
No 83 83%

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 percentage

17

83

Yes No

Interpretation :From the survey,we comes to know that as the government is not backing up
the cryptocurrency, as much as 83% people is not interested in purchasing it & 17% people is
interested in purchase it.

8. Cryptocurrency is non-government regulated which offers users more freedom. Would this
increase your interest in using cryptocurrency?

Options No. of Respondents Percentage

Yes 45 45%
No 55 55%

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 45.00%

55.00%

Yes No

Interpretation: From the study we comes to know that,45 % people thought that their
interest is increasing in using cryptocurrency & 55% people thought that their interest is
decreased in using cryptocurrency.

9. Do you expect Governments will take a practical view on Bitcoin and minimise user
registration with identity checks to be limited to original purchase of Bitcoin with fiat
currency?

Options No. of Respondents Percentage

Yes 15 15%
No 70 70%
Don’t Know 15 15%

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 15.00% 15.00%

70.00%

Yes No Don't Know

Interpretation: From the survey, we comes to know that 15% expect Governments will take
a practical view on Bitcoin and minimise user registration with identity checks to be limited
to original purchase of Bitcoin with fiat currency & 15% do not expect Governments will
take a practical view on Bitcoin and minimise user registration with identity checks to be
limited to original purchase of Bitcoin with fiat currency

10. Why Indian government do not support cryptocurrency, main reason behind that:

Options No. of Percentage

Respondents
Untrackable 70 70%
Reducing the power of ministry of 20 20%
finance
Increasing the illegal activities 10 10%

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 Percentage
10

20

70

Untracka bl e Reduci ng the power of mini stry of fina nce

Increa s i ng the i ll ega l activi ties

Interpretation: From the survey,we comes to know that main reason behind that the
government is not supporting the cryptocurrency, as much as 70% of the people thought it is
untrackable,20% of the people thought that it reduces the power of ministry of finance &
10% of people thought that it increases the illegal activities.

11. If cryptocurrency is government regulated but remained intangible, would this

increase your interest in cryptocurrency?
Options No. of Respondents Percentage
Yes 80 80%
No 20 20%

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 20.00%

80.00%

Yes No

Interpretation: From the survey, we come to know that cryptocurrency is government

regulated but remained intangible this factor increasing interest of 80% people in
cryptocurrency is government regulated but remained intangible this factor decreasing the
interest of 20% people in cryctocurrency.

12. Keeping the bird eye view on the world. What approach should indian
government takes towards crypto currency.

Options No. of Respondents Percentage

Positive 20 20%
Negative 80 80%

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 Percentage

20

80
Posi tive Negative

Interpretation: From the survey, we comes to know that 20% of the people thought that
govt approach is positive towards cryptocurrency& 80% of the people thought that govt
approach is negative towards cryptocurrency.

13. If cryptocurrency providers created tangible coins (or notes) for cryptocurrency users
with banks and ATMs readily available but remained non-government regulated,
would this increase your interest in cryptocurrency?

Options No. of Respondents Percentage

Yes 72 73%
No 27 27%

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 27.00%

73.00%

Yes No

Interpretation: From the survey we comes to know that, 73% people increase their interest
in using cryptocurrency and 27% people decrease their interest in using cryptocurrency.

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 CHAPTER – 6

FINDINGS,

CONCLUSION

&

SUGGESTIONS

FINDINGS:

 From the survey we comes to know that 85% of the citizen of india do not supports
cryptocurrency and 15% of citizen of india support cryptocurrency.

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  From the survey we comes to know that, 73% people increase their interest in using
cryptocurrency and 27% people decrease their interest in using cryptocurrency.

 From the survey,we comes to know that main reason behind that the government is
not supporting the cryptocurrency,70% of the people thought it is untrackable,20% of
the people thought that it reduces the power of ministry of finance & 10% of people
thought that it increases the illegal activities.
 From the survey, we comes to know that 20% of the people thought that govt
approach is positive towards cryptocurrency& 80% of the people thought that govt
approach is negative towards cryptocurrency
 From the survey, we comes to know that 50% people interest has been increased in
using cryptocurrency by considering the less fees to operate & 50% people interest
has been decreased in using cryptocurrency by considering the less fees to operate.
 From the study we comes to know that,45 % people thought that their interest is
increasing in using cryptocurrency & 55% people thought that their interest is
decreased in using cryptocurrency.
 From the survey,we comes to know that 35% people thought that cryptocurrency
diminish the value that you perceive about the currency & 65% people thought that
cryptocurrency not diminish the value that you perceive about the currency.
 From the study we comes to know that,30% people is interested in using
cryptocurrency & 70% people is not interested in using cryptocurrency.
 From the study,we comes to know that 60% People has invested in cryptocurrency
and 40% People has not invested in cryptocurrency.

CONCLUSION

The cryptocurrency market, which trades various digital-based coins, can look exciting,
scary, and mysterious all at once to the casual observer. Its pioneer, Bitcoin,
dramatically surged in value and steeply dropped (before picking back up) in recent
months. ICOs (initial coin offerings for new cryptocurrencies), meanwhile, are emerging

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at a head-spinning rate.While some financial advisers remain skeptical, it’s hard to
ignore the massive amount of money invested in the field. We talked to two leading
futurists, who study and predict technology trends, about where they see cryptocurrency
headed—and why you should pay attention.The problem that we can foresee is the pace of
change in regulations; change in regulation usually takes a route of develop, propose and
adopt which generally takes a period. Regulations or regulatory changes typically evolve at a
pace than innovation thereby killing it by declaring it illegitimate. Also as its not been
governed by a central authority Bitcoin tends to fluctuate widely and to be used globally its
volatility needs to settle down.

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SUGGESTIONS

The price of Bitcoin and the price of Ethereum has exploded in 2017. The question is whether
there is sufficient upside potential to consider investing in crypto currencies. Stated
differently, is it (still) worth looking into crypto currencies as an investment or is it too late?
The key consideration is that Bitcoin is not the only crypto currency to invest in. On the other
hand, Bitcoin has made crypto currencies popular and even more secure. Yes, there were
definitely security issues a couple of years ago, but it seems those issues have been resolved.
So Bitcoin has helped mature the crypto currencies space.

Investing Haven believes that a combination of price analysis and fundamental analysis is the
most appropriate way to make a rational investment choice, and to engage in forecasting the
price of crypto currencies. With that in mind, we also look into the altcoins space in this
article in order to find investment opportunities.

Investing Haven’s research team has collected 10 investment tips for investing in crypto
currencies which are useful to investors not very familiar in this space.

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BIBLOGRAPHY

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 https://www.chapman.edu/research/institutes-and-centers/economic-science-
institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf
 https://skemman.is/bitstream/1946/20840/1/BS%20Ritger%C3%B0%20-
%20Cryptocurrency%20-%20Sindri%20Le%C3%B3%20%C3%81rnason
%20Final.pdf

 https://ieeexplore.ieee.org/document/7906988/

 https://files.stlouisfed.org/files/htdocs/publications/review/2018/01/10/a-short-
introduction-to-the-world-of-cryptocurrencies.pdf

 https://brianmlucey.files.wordpress.com/2018/02/call-for-papers-cryptocurrency-
research-conference-2018.pdf

 https://research-doc.credit-suisse.com/docView?
language=ENG&format=PDF&sourceid=csplusresearchcp&document_id=10801099
71&serialid=pTkp8RFIoVyHegdqM8EllLNi1z%2Fk8mInqoBSQ5KDZG4%3D
https://www.ubs.com/content/dam/WealthManagementAmericas/cio-
impact/cryptocurrencies.pdf

 https://lopp.net/pdf/princeton_bitcoin_book.pdf
 https://www.chapman.edu/research/institutes-and-centers/economic-science-
institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf

 https://www.msm.nl/resources/uploads/2017/10/Working-Paper-No.-2017-3.pdf

 file:///C:/Users/Care/Downloads/sustainability-09-02214.pdf

 https://bitcoin.org/bitcoin.pdf

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ANNEXURE

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 QUESTIONARRIE

1.Being a citizen of india, do you support cryptocurrency?

(A)Yes (B)No

2. Have you ever heard of Bitcoin, Litecoin or other cryptocurrencies?

A) Yes B) No

3. Have you ever bought a cryptocurrency?

(A)Yes (B)No

4. Do you expect Bitcoin to become the leading virtual currency over the next 5 years?
(A)Yes (B) No (C) Don’t Know
5. Is Your current Cryptocurrency portfolio worth more than your initial investment?
(A)Yes (B) No (C)Above the same

6. On which financial system is more trustable?

A) Cryptocurrency B)Indain financial system

7.As the Indian government is not backing up the cryptocurrency, will you still be interested
in purchasing it?
A) Yes B) No

8. Cryptocurrency is non-government regulated which offers users more freedom. Would this
increase your interest in using cryptocurrency?
A) Yes B) No

9. Do you expect Governments will take a practical view on Bitcoin and minimise user
registration with identity checks to be limited to original purchase of Bitcoin with fiat
currency?
A) Yes B) No (C)Don’t Know

10. Why Indian government do not support cryptocurrency, main reason behind that:
(A)Untrackable (B)Reducing the power of ministry of finance (C)Increasing
the illegal activities

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11.If cryptocurrency is government regulated but remained intangible, would this increase
your interest in cryptocurrency?

A) Yes 80% B) No 20%

12. Keeping the bird eye view on the world. What approach should indian government takes
towards crypto currency.
A) Positive B) Negative

13. If cryptocurrency providers created tangible coins (or notes) for cryptocurrency users
with banks and ATMs readily available but remained non-government regulated, would this
increase your interest in cryptocurrency?
A) Yes B) No

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