1.

1 THE NEXT GENERATION OF MONEY AND PAYMENTS

There are various innovative money payment systems in the market today, many of which are built
on platforms like the mobile phone, the Internet, and the digital storage card. These alternative
payment systems have seen encouraging or even continued growth, from the likes of PayPal,
Apple Pay, Google Wallet, Alipay, Tenpay, Venmo, M-Pesa, BitPay, Moven, BitPesa, PayLah!,
Dash, FAST, Transferwise, and others.

Beyond payment systems that are based on fiat currency, the growing use of digital currency
allows for faster, more flexible, and more innovative payments and ways in financing goods and
services. One digital currency, however, stands out among the rest. Bitcoin is one of the most
well-known digital currencies today. To be specific, Bitcoin is a cryptocurrency, which is a subset
of what is generally known as a digital currency. Bitcoin is a unique cryptocurrency that is widely
considered to be the first of its kind. Like many created after it, Bitcoin uses the power of the
Internet to process its transactions. This chapter introduces the characteristics and features of
Bitcoin.

1.3.5 The rise of Bitcoin

An example of a cryptocurrency is bitcoins. Satoshi Nakamoto published a paper on the

Web in 2008 for a peer-to-peer electronic cash system. Despite many efforts, the identity

of Satoshi remains unknown to the public and it is not known whether Satoshi is a group

open-source software. It can be downloaded by anyone, and the system runs on a decen- tralized
peer-to-peer network. It is not only decentralized but also supposedly fully

1Satoshi in Japanese means “wise” and someone has suggested that the name might be a
portmanteau of four technology companies: SAmsung, TOSHIba, NAKAmichi, and MOTOrola.
Others have noted that it could be a team from the National Security Agency (NSA) or an e-
commerce firm (Wallace, 2011). Other suggestions are David Chaum, the late Hal Finney, Nick
Szabo, Wei Dai, Gavin Andresen, and the Japanese living in the neighborhood of Finney by the
same surname Dorian Nakamoto. There are other suggestions such as Vili Lehdonvirta, Michael
Clear, Neal King, Vladimir Oksman, Charles Bry, Shinichi Mochizuki, Jed McCaleb, and Dustin
Trammell, but most have publicly denied that they are Satoshi.

or a person.

The cryptocurrency invented by Satoshi Nakamoto, called bitcoins, is run using

12 Handbook of Digital Currency

distributed. That means that every node or computer terminal is connected to each other. Every
node can leave and rejoin the network at will and will later accept the longest proof of work known
as the blockchain as the authoritative record.

This longest blockchain is proof of what has happened while these nodes were gone.
Cryptocurrency is mysterious and misunderstood for a few reasons.

First, no one knows who is really behind some of these cryptocurrency systems. It was designed
so that third-party trust is not needed and sometimes there is no legal entity behind it but open-
source software.

Second, many have jokingly remarked that Bitcoin sounded more like “big con” especially after
the collapse of Mt. Gox. But it is important to note that Mt. Gox was merely a financial
intermediary, being just one of many unregulated exchanges that trade in Bitcoins. Mt. Gox was
not part the Bitcoin system itself. It is a complex currency sys- tem to the men in the street and
therein lies the confusion.

Third, cryptocurrency involves mining or proof of work. There are rewards for mining and the
reward is given to the first who can solve a cryptography problem. The degree of difficulty of the
problem will ensure that the timing to solve the prob- lem is approximately 10 min for Bitcoin.
Cryptocurrency cleverly solves the double- spending problem so that every cryptocurrency can
be spent only once. It is a financial technology and it involves financial regulation but therein lies
the difficulty in execu- tion and understanding even for the professionals. That is why it is an area
of great interest to researchers, regulators, investors, and merchants and it is hitting the head-
lines regularly.

The general arguments for a successful distributed cryptocurrency are as follows:

1. Open-source software: A core and trusted group of developers is essential to verify the

code and possible changes for adoption by the network.

2. Decentralized:Evenifitisnotfullydistributed,itisessentialthatitisnotcontrolledby

a single group of person or entity.

3. Peer-to-peer:Whiletheideaisnottohaveintermediaries,thereisapossibilityofpools

of subnetworks forming.

4. Global: The currency is global and this is a very positive point and workable for

financial integration with or without smart contracts among the parties.

5. Fast:Thespeedoftransactioncanbefasterandconfirmationtimecanbeshortened.

6. Reliability: The advantage is that there is no settlement risk and it is nonrepudiable.

The savings in cost of a large settlement team for financial activities can be

potentially huge.

7. Secure:Privacyarchitecturecanbebetterdesignedincorporatingproofofidentitywith

encryption. If that is done, the issues surrounding Know Your Customer/Client

(KYC) and anti-money laundering and terrorist financing (AML/TF) will be resolved.

8. Sophisticated and flexible: The system will be able to cater to and support all types of

assets, financial instruments, and markets.

9. Automated: Algorithm execution for payments and contracts can be easily incorporated.

10. Scalable: The system can be used by millions of users.

11. Platform for integration: It can be designed to integrate digital finance and digital law

with an ecosystem to support smart contracts with financial transactions. Custom- ized
agreements can be between multiple parties, containing user-defined scripted clauses, hooks,
and variables.

The possible applications will be wide-ranging and include global payment and remit- tance
systems, decentralized exchanges, merchant solutions, online gaming, and digital contracting
systems. Each cryptocurrency is a great and an interesting experiment. No one knows where
these cryptocurrency experiments are heading but the experiments are interesting because of the
technology that is developed along with them.

The technology disrupts the payment system as we know it because it costs almost nothing to
transfer payments. Cryptocurrency technology will allow us to reach out to the unbanked and
underbanked. It presents the opportunity to function as a conduit for payments and funds. It will
transform the way business is being done by diminishing the role of the middleman, whether it is
smart accounting or smart contract.

It will also change the way financial world operates especially in fund raising and lend- ing.
Basically, it is possible to do an Initial Crowd Offering or crowd lending, all in the peer-to-peer
framework, eliminating the middleman.

However, there are downsides or potential risks for cryptocurrency too. Cryptocur- rency like
Bitcoin depends on mining, and once the incentives for mining disappear, no one knows if the
cryptocurrency in question will continue to have consensus on the dig- ital register. They are over
400 cryptocurrencies and the number is increasing on a daily basis. But many of them are in the
graveyard.

So, as they say, “let the buyer beware,” because what you own may just be worthless once there
are doubts about the blockchain. It seems that if the cryptocurrency exhausts most of their coin
supply too fast and too early, the probability of the coins dying is higher. For some coins, it is
difficult to know who is behind them and whether there could be a backdoor that allows someone
to control the system. Cryptocurrency with unknown developers has a higher probability of being
buried in the graveyard.

The blockchain may come under attack as well. The blockchain serves as a proof of the sequence
of events as well as proof that it came from the largest pool of computing power. As soon as the
computing power is controlled by nodes that are cooperating to attack the network, they may
produce the longest chain of their choice creating doubts about the validity of the blockchain.
This can easily happen once the interest on a par- ticular currency wanes and the number of
miners shrinks, which opens up the possibility of having a few blockchains in concurrent
existence. Once there is any doubt of the accu- racy of the blockchain, even if it was
subsequently corrected, the coin will be heading for the graveyard.

Introduction to Bitcoin 13

14 Handbook of Digital Currency

When there are no new coins to reward the miners, the system is unlikely to continue. Once no
new coins are issued as the mining reward, then the miners are expected to be rewarded purely
by transaction fees. This can be a problem. On the other hand, if the fees are increased too
quickly or to an unreasonable level, interest on the coins will wane as well. With higher mining
cost due to expensive equipment, mining pools will be formed. This is because miners prefer
higher probability of success in cracking the code. However, this will lead to an undesirable
outcome of mining pools exceeding 30% or even 50% of the net- work, thus exposing the
cryptocurrency to attack. This was indeed the case for Bitcoin when the mining pool accounted
for over 50% in the middle of 2014. This is one serious problem that needs to be solved sooner
rather than later and consensus ledger or digital register without mining may be one solution.

Mining to create new bitcoins and process transactions

Bitcoin is designed with a hard limit of 21 million bitcoins, which are expected to be created by
2040 (Figure 1.3). For now, these bitcoins are generated through mining, dur- ing which miners,
who are Bitcoin users running software on specialized hardware, pro- cess transactions and are
rewarded with new bitcoins for contributing their computer power to maintain the network. Mining
is important not only for new bitcoins to be issued but also because it is a necessary process for
transactions to be added onto the blockchain and be subsequently confirmed. The verification
process is a computationally intensive process that ensures that only legitimate transactions are
verified and recorded onto the blockchain. It is the network that provides the computing power for
the trans- actions to take place and for the transactions to be recorded.

What happens during mining is actually a mathematical process. A real-life analogy to bitcoin
mining would be the search for prime numbers: while it was easy to find the small ones, it became
increasingly more difficult to find the larger numbers, leading researchers to use special high-
performance computers to find them (Tindell, 2013).

21.00 18.38 15.75 13.13 10.50

7.88 5.25 2.63

2009 2013 2017

Figure 1.3 Bitcoin supply.

2021 2025 2029 2033

Total bitcoins in circulation over time (millions)

Introduction to Bitcoin 19

20 Handbook of Digital Currency

Mining is a computationally intensive task that requires miners to find the solution to a
predetermined mathematical problem in order to create a new block. This is the mathe- matical
proof of work. Mining is difficult because besides ensuring that the transactions are valid, miners
have to fit the data in a particular manner in order to add it to the blockchain. Miners have to
guess and search for a sequence of data that produces a required pattern.

The difficulty of the problem is automatically adjusted so that a new block can only be created
every 10 min on average. The Bitcoin protocol is designed to generate new bit- coins
progressively, at a predictable but decreasing rate. To ensure a progressive growth in new
bitcoins, the reward for solving a block is halved automatically every 4 years, and the difficulty of
solving increases over time. These two effects work together to pro- duce an effect that over time,
the rate at which bitcoins are produced will be similar to the production rate of a commodity like
gold (see Figure 1.3). There will be a point in the future when the hard limit of bitcoins will be
reached and the incentive for miners will instead be transaction fees. The arbitrary number chosen
to be the limit in number of bit- coins is 21 million. Once the very last bitcoin, or to be specific, the
very last satoshi— 0.00000001 of a bitcoin—is produced through mining, miners who continue to
contribute their computing power to verify transactions will instead be rewarded with transaction
fees. This may be a less desirable situation for people and businesses relying on bitcoin
payments, which will have to pay a transaction fee, but it ensures that miners will still have an
incentive to keep the network up and running even after the last bitcoin is mined.

Every new block that is successfully added onto the blockchain references the previous block,
making it exponentially difficult to reverse previous transactions in previous blocks. Because
changing a block on the blockchain will require recalculation of the proofs of work of all
subsequent blocks (Bitcoin Project), it becomes more and more infeasible for an adversary to
manipulate a block after more blocks have been added after it, and the Bitcoin protocol is
accordingly designed to prefer longer chains. Miners therefore perform a vital task as they verify
transactions and ensure that the blockchain cannot be tampered with.

While bitcoin transfers are broadcast instantaneously over the network, there is, in practice, a 10
min delay for a transaction to be confirmed. This is the result of the 10 min delay for a block to be
created and added onto the blockchain. Having a confir- mation ensures that the network (of
miners) has verified that the bitcoins are valid and have not been already spent. Typically, most
users wait for six confirmations, that is, an hour, before considering a transaction to be
“confirmed,” but each user has the freedom to decide how long they wish to wait before they
consider their transaction confirmed.

How Bitcoin Works

As the world’s first and most popular cryptocurrency, Bitcoin eclipses all others when it comes to
public usage and recognition, market capitalization, and trading volume. The payment aspect of
Bitcoin has continued to grow at a brisk pace since its 2009 inception, as both individuals and
institutions have increasingly come to view the cryptocurrency as an accepted method for
executing payment transactions.

BITCOIN PIONEERED THE CRYPTOCURRENCY SPACE, AND FOR NOW REMAINS THE
STANDARD BY WHICH OTHERS ARE MEASURED.

As a decentralized currency that is entirely digital and disconnected from any government or
central bank, Bitcoin has several key characteristics:

Bitcoin utilizes a worldwide network of encrypted peer-to-peer transactions that are verified
and securely recorded in a “blockchain,” which is a digital public transaction ledger devoid of any
central authority. All confirmed and verified Bitcoin transactions are included in this blockchain.

Bitcoins are created through a process called “mining,” which uses computer processing capacity
to form units of the cryptocurrency. In order to add new Bitcoins into the global network, miners
must follow strict cryptographic rules specified by the system.

Digital “wallets” are used to store Bitcoin credentials for each user and enable users to store,
transfer, and spend their currency, at

which point these transactions are recorded in the blockchain. Bitcoin wallets use secured
“private keys,” which are used to sign and provide proof of transactions.

3) Disadvantages

Lack of Awareness & Understanding.

It undermines the authority of banks and financial institutions on the financial system.

Bitcoin prevents any government and financial institution from acting as a trusted third party to

facilitate transactions.

There is still no legal framework protecting the rights of users of these technologies or
overseeing

the institutions that use them.

Bitcoin has volatility mainly due to limited amount of coins and the demand for them increases
day

by day.

Bitcoins have been banned in several countries on grounds that these currencies could be
used for

money laundering, terror funding and drug trafficking.

It’s very much still an experimental currency and is a high-risk environment for consumers and

investors at the moment.

Problems such as losses arising out of hacking, no sources of customer recourse and the
general

financial volatility surrounding Bitcoins.

Only a miniscule number of goods and service providers accept payment in Bitcoins
currently. Therefore, a person cannot expect to buy his daily necessities like vegetables, milk, or
pay his mobile bill, etc. in Bitcoins.

It is virtually impossible for illiterate people to recognize a bitcoin.

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Banking ban

Finance minister Arun Jaitley, in his budget

speech on 1 February 2018, stated that the
government will do everything to discontinue the
 Ind use of bitcoin and other virtual currencies in India
ia for criminal uses. He reiterated that India does not
recognise them as legal tender and will instead
encourage blockchain technology in payment
systems.
"The government does not recognise
cryptocurrency as legal tender or coin and will
take all measures to eliminate the use of these
cryptoassets in financing illegitimate activities or
as part of the payments system," Jaitley said.[63]
In early 2018 India's central bank, the Reserve
Bank of India (RBI) announced a ban on the sale or
purchase of cryptocurrency for entities regulated
by RBI.[64]
In 2019, a petition has been filed[by whom?] with the
Supreme Court of India challenging the legality of
cryptocurrencies and seeking a direction or order
restraining their transaction.[65]
Are bitcoins currency or asset?
Income generated through regular trading in bitcoins would be
considered “business income”

When American online retailer Overstock.com opened its

virtual gates to bitcoins on 11 January, it made around
$130,000 in sales in one day, primarily from new customers,
and left chief executive officer Patrick Byrne “#stunned”. His
prophecy that other online retail giants would follow suit was
soon realized when reports that Ebay UK was contemplating a
“virtual currency” category hit the news. These are arguably
the surest signs that virtual currencies, and bitcoins in
particular, are slowly but surely going mainstream.
The success of the bitcoin lies in the fact that it attempts to
emulate the directness, transparency and security of peer-to-
peer networks like BitTorrent in the monetary context. Money
has traditionally been centrally regulated, and the sudden
surge in bitcoins has invited mixed reactions from regulators
across the globe. As Indian entrepreneurs have been jumping
on the bitcoin bandwagon as well, all eyes are on the Reserve
Bank of India (RBI), which is yet to come out with a definitive
verdict. Pending this, it is also time to think about the tax
treatment of bitcoins since transactions in the virtual currency
Are increasingly in India.
While Indian tax authorities and laws are yet to respond to the
bitcoin phenomenon, we may learn from the experience of
other countries that have begun to think about the issues at
play. There are two possibilities here that could impact the
direct and indirect taxes payable, i.e., the characterization of
bitcoin as either a “currency” or an “asset”.
If bitcoins are treated as “currency” in India, income arising
from the exchange of bitcoins for regulated currencies due to
currency fluctuations should ordinarily be considered “income
from other sources”. However, income generated through
regular trading in bitcoins would be considered “business
income”. Moreover, payments received in bitcoins would be
considered “income” for each transaction involving goods and
services. However, in India, “currency” has been understood
restrictively to include coins, currency notes, bank notes, etc.,
and other such instruments issued by a governmental
authority.
Most other jurisdictions regulating bitcoins have rejected their
characterization as currency since they would not want to
confer “money” status to peer-to-peer units. Consequently,
several nations such as Singapore, Norway and Canada, have
characterized bitcoins as “assets”.
To understand the basis for this, we need to first stop and ask
—what is a bitcoin? It is essentially a string of data created (or
mined) by the computation of blocks in the system using
appropriate software. The digitized nature of the bitcoin makes
a stronger case for its characterization as an intangible asset.
In India, such treatment would mean that virtual currencies,
whether sold for cash or in exchange for goods or services,
should attract capital gains.
However, this may not be the most elegant of approaches
since several issues may arise. The transfer of bitcoins mined
by the sender may be treated in the same manner as self-
acquired intangible assets and may not be subject to capital
gains tax. Exceptions have been carved out in case of certain
transactions involving sale of self-generated assets, but virtual
currencies are not included in that list.
Further issues may arise for financial institutions or traders
since income from regular trade in bitcoins may be
characterized as “business income”. Another question that
may arise is whether trading in bitcoins can be considered
“speculative” business.
It may also be noted that sums such as payments to
contractors and sub-contractors, the whole of which may not
be characterized as income or profits in the hands of the
recipient, may not be subject to withholding obligations where
bitcoins are characterized as assets.
On the indirect tax front, one begins to wonder if payments
made in bitcoins for goods and services should be considered
barter transactions or payments in cash. If bitcoins are
considered “currency”, indirect tax implications should not
arise. However, where bitcoins are considered assets, parties
holding them may be compelled to convert to regulated
currencies and indirect tax implications may arise.
When American online retailer Overstock.com opened its
virtual gates to bitcoins on 11 January, it made around
$130,000 in sales in one day, primarily from new customers,
and left chief executive officer Patrick Byrne “#stunned”. His
prophecy that other online retail giants would follow suit was
soon realized when reports that Ebay UK was contemplating a
“virtual currency” category hit the news. These are arguably
the surest signs that virtual currencies, and bitcoins in
particular, are slowly but surely going mainstream.
The success of the bitcoin lies in the fact that it attempts to
emulate the directness, transparency and security of peer-to-
peer networks like BitTorrent in the monetary context. Money
has traditionally been centrally regulated, and the sudden
surge in bitcoins has invited mixed reactions from regulators
across the globe. As Indian entrepreneurs have been jumping
on the bitcoin bandwagon as well, all eyes are on the Reserve
Bank of India (RBI), which is yet to come out with a definitive
verdict. Pending this, it is also time to think about the tax
treatment of bitcoins since transactions in the virtual currency
are increasing in India.

In such a situation, while value-added tax (VAT) implications

may arise on exchange of bitcoins for cash, VAT may not be
applicable to purchase of goods using bitcoins since Indian
VAT legislations contemplate only sale of assets for cash
consideration and not on barter transactions.
Countries such as Germany and UK have, however, attempted
to extend their VAT laws to bitcoin transactions and India may
yet include barter transactions in goods within the newly
proposed Goods and Services Tax regime. From a service tax
perspective, since the legislation already envisages barter
transactions, service tax should be payable on exchange of
bitcoins for taxable services.
As of today, it may be safe to conclude that the present
framework for taxation in India is sufficient for dealing with
bitcoins and there are rational ways of applying tax laws to
transactions in all cases depending on characterization.
Although entities in the industry would prefer for bitcoins to be
characterized as currency for tax purposes owing to the lighter
tax burden, such characterization seems difficult in the present
scenario. Thus, unless RBI proactively takes steps to
recognize bitcoins as currency in an attempt to regulate them,
it may be advisable for merchants accepting bitcoins as
payment to treat them as assets for tax purposes.

India
The government of India stated in early 2018 that cryptocurrencies such as bitcoin are not
legal tender in India.[594] While the government has not yet enacted a regulatory
framework for cryptocurrencies,[595] the Reserve Bank of India (RBI) has advised
caution on their use and has issued three notifications[596] that “cautioned users,
holders and traders on the risk of these currencies and clarified that it has not given any
licence or authorisation to any entity or company to operate such schemes or
deals.”[597]
Most recently, on April 6, 2018, the RBI issued a notification prohibiting banks, lenders and
other regulated financial institutions from “dealing with virtual currencies,” which stipulated
that “[i]n view of the associated risks, it has been decided that, with immediate effect,
entities regulated by the Reserve Bank shall not deal in VCs or provide services for
facilitating any person or entity in dealing with or settling VCs. Such services include
maintaining accounts, registering, trading, settling, clearing, giving loans against virtual
tokens, accepting them as collateral, opening accounts of exchanges dealing with them
and transfer / receipt of money in accounts relating to purchase/ sale of VCs.”[598]
Moreover, the RBI stated that “[r]egulated entities which already provide such services
shall exit the relationship within three months from the date of this circular.”[599]
However, Deputy Governor B.P. Kanungo, in a policy press conference, did “recognize that
the blockchain technology or the distributed ledger technology that lies beneath the virtual
currencies has potential benefits for financial inclusion and enhancing the efficiency of the
financial system” and stated that the RBI has “constituted an inter-departmental committee
in Reserve Bank of India who will produce a report and they will explore the feasibility and
desirability of issuing a digital currency by the central bank.”[600]
Reports in early 2018 indicated that the government is in the process of drafting a law to
regulate trade of cryptocurrencies in India and “has formed a committee to fast track the
process,” according to the Hindustani Times.[601] The government has expressed
two main concerns that the law will address: “the source of money being used to trade in
[cryptocurrencies]; and regulation of exchanges of VC [virtual currency] to protect the
common man,” one government official was quoted as saying.[602]
An interdisciplinary committee, chaired by the Special Secretary (Economic Affairs), was
established in April 2017 “to examine the existing framework with regard to Virtual
Currencies.”[603] The committee has nine members including representatives from the
Department of Economic Affairs, Department of Financial Services, Department of
Revenue (CBDT), Ministry of Home Affairs, Ministry of Electronics and Information
Technology, Reserve Bank of India, National Institution for Transforming India (NITI
Aayog), and State Bank of India. The role of the committee is to
(i) take stock of the present status of Virtual Currencies both in India
and globally; (ii) examine the existing global regulatory and legal
structures governing Virtual Currencies; (iii) suggest measures for
dealing with such Virtual Currencies including issues relating to
consumer protection, money laundering, etc.; and (iv) examine any
other matter related to Virtual Currencies which may be relevant.
[604]
On August 7, 2017, Business Line reported that the committee had submitted its
report, but details of the report had not been made available to the public.[605]
On December 29, 2017, India’s Ministry of Finance released a press statement that
cautioned investors about the “real and heightened” risks of trading in cryptocurrencies
such as bitcoin, saying virtual currency investments are similar to “Ponzi schemes.”[606]
According to a February 1, 2018, news report, the Minister of Finance told lawmakers in
Parliament that “[t]he government does not consider cryptocurrencies legal tender or coin
and will take all measures to eliminate use of these crypto-assets in financing illegitimate
activities or as part of the payment system,” but “[t]he government will explore use of
blockchain technology proactively for ushering in [the] digital economy.”[607]
On November 13, 2017, the Supreme Court of India admitted under article 32 of the
Constitution a Public Interest Litigation writ petition against the Union of India and issued a
notice[608] to the Ministry of Finance, Minister of Law and Justice, Ministry of Electronics
and Information Technology, Securities and Exchange Board of India, and Reserve Bank
of India. The petition seeks “a regulatory framework to be laid down on Crypto Currency
and wanted that the virtual currency be made accountable to the exchequer.”[609]
The Supreme Court previously heard a petition in July 2017 that sought “a similar kind of
regulatory framework”:
A Public Interest Litigation [PIL] was filed (Writ Petition (Civil) no.
406 of 2017) under Article 32 of the Constitution against Union of
India, Ministry of Finance and the Reserve Bank of India over the
use and business of Bitcoins, Litecoins, Ethereum etc. The
Supreme Court on July 14, 2017, directed the RBI and the other
concerned ministries to clarify their stance and enact a bill on the
same before disposing off the PIL.[610]

3. 9 Bitcoin is a Threat to the Traditional Transaction System

V
As a digital cryptocurrency, Bitcoin transactions do not involve the
traditional banking system and its pseudonymity strategy can defeat
the whole traditional transaction infrastructure. As a result, this
virtual transaction imposes the users to remove reliance on old
transaction method and also opens the doors to malware and
hackers. In addition, financial institutions may lose their
shareholders and large depositors because of Bitcoin Popularity
(Ali, Clarke & McCorry, 2015, p. 4-9). It is assumed that digital
currencies were generated to compete with traditional financial
industry. For many years after the arrival of Bitcoin, the world
economy had been moving away from hard currency due to
electronic payment systems. As a result, the conventional financial
institutions have reacted toward the competition with the alternative
currencies which is very expensive to
12

build up such infrastructure and implement the system in a proper

way (Raskin & Yermack, 2016, 1-4).
in the developing world where 2.5 billion people do not have access
to a bank account where blockchain technology would be
favourable for random access. Though the system is not enough
transparent and trustworthy as like as traditional transaction
system. But Carrick (2016, p. 11) argues in his research that in
many emerging markets do not have efficient transaction method;
hard government rules and regulations for international
transactions, high operating cost that have made the whole
traditional transaction system difficult for conducting international
commerce. Since Bitcoin has been appreciated substantially more
than other currencies and demonstrated more volatility also.

Impact of Bit Coin on economy and banking and finance;

Power to the Dark Web:
Dark web is the section of the web that is not accessible through
the search engine. What we are given access to is the surface web
which is not even half of the existing internet. Dark web is
accessible only through special software like Tor Browser which
enables anonymous searching of the internet.
Dark web is the place where you can find assassins, weapons and
a lot more illegal stuff. By using crypto currencies like Bitcoins
people can make illegal transactions without giving any information
about them. Cryptocurrencies like Bitcoins are a way to empower
such transactions across the globe which will ultimately result in
increased
Speculations:
As on 14th January 2015, Bitcoin was valued at $170 and as on
24th July 2017, it values at $2772. There have been many ups and
downs in the value of Bitcoins and this scenario is likely to continue.
Due to the extreme highs and lows BitCoins present a massive
possibility for speculation. Just like trading in shares, trading in
Bitcoins is massive and seeing the rise in traction around
cryptocurrencies it is likely to grow further.
Politicization of Money:
Earlier all the monetary transactions were enabled through central
banks (directly or indirectly). Now, with the evolution of Bit coins, the
scenario has changed. The power that was vested in the
governments and central banks is shifting to the masses. This
revolutionary change in transaction handling has the power to
change the economic structure. To bring security and enable
scrutiny, central banks and financial institutions maintain a record of
all the transactions undertaken by the people. Now with digital
currencies, this economic power can be challenged by people. This
has led to the creation of a new autonomous body which can
facilitate transactions. Ultimately if adopted on a large scale,
Bitcoins can lead to the politicization of money.
Apprehension among the Central Banks:
There have been implications that Bitcoins can be used to secretly
launder money outside the country. Central banks across the world
have been wary of Bitcoins as an uncontrollable and unpredictable
form of currency. Cryptocurrencies are leading to loopholes in the
current bank‟s data about the money transactions leading to
inability to track economic activities. Crypto and Cyberspace has
emerged as a power in itself thus bringing a check on the activities
of the so powerful governments.
The Emergence of New Markets:
Cryptocurrencies have led to the emergence of new markets.
Currencies like Bitcoin and Ethereal have opened gates for a new
kind of market which unlike present money market is controlled by
no one. Cyberspace will rise up as the managing body that will
handle and maintain such disruptive markets. The near zero
transaction cost (along with other characteristics) has made these
currencies even superior to the traditional money we are
accustomed to using. What can be surely stated is that it is just the
beginning and the number of Possibilities is endless.

India is a tech-savvy country and the rapid spread of smartphones

and internet access allows for information to spread faster than ever
before. In addition, several techies are investors or owners of
restaurants and pubs across the country. This gives a tremendous
opportunity in the entertainment businesses. One buzzing industry
in India which seems to be super-excited about the usage and
potential appreciation of Bitcoins is that of technology startups. A
number of start-ups now favor dealing in Bitcoins while setting up a
business rather cash. This is because the crypto-currency can be
integrated into almost any software build that can be monetized. It
can act as an alternative to gold for the purpose of investment. This
can lessen the demand for gold, which ultimately can bring down
imports and ameliorate the balance of payments situation.
Furthermore, it is going to have a deep impact on the banking
revolution.
Bitcoins are fast gaining favor in India.

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.

Bitcoins in Circulation
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.