Bitcoin has hit an all time high of $1,200 (approx Rs 80,000) based on talks of the first US Bitcoin exchange-traded fund getting approval from the Securities and Exchange Commission. In India, Bitcoin is selling for over Rs 1,00,000 per bitcoin in Bitcoin trading apps such as Unocoin. Reserve Bank of India Deputy Governor R Gandhi recently pointed out the risks associated with Bitcoin transactions at a FinTech conference.
“We can see that in these types of virtual currencies there is no central bank or monetary authority. They pose potential financial, operational, legal, customer protection and security-related risks,” Gandhi said. “My arguments against virtual currencies stem from two elements — the concept of confidence and anonymity. The currency should be able to sustain these two elements forever. It will impair its exalted status once either of these two elements gets affected.”
Amid the surging prices, a question was raised in the Rajya Sabha on 6 February, on the legal status of virtual currencies such as Bitcoin in India. Arjun Ram Meghwal, Minister of State in the Ministry of Finance, in a written reply to the Rajya Sabha, pointed out that the Reserve Bank of India (RBI) had cautioned Indian citizens against the use of Bitcoin.
Bitcoin transactions in India are legal, the RBI has just cautioned users about the risks of cryptocurrency trading. There are however no official redressal mechanisms, and users transacting with virtual currencies do so at their own risk. The RBI is monitoring the use of Bitcoin in the country, and is in the process of formulating regulations, including foreign exchange laws, and norms for payment systems. The cautionary note is based on a press release by RBI in 2013, when adoption of Bitcoin in the country was a lot less than it is in 2017.
The risks as noted by the RBI include a lack of a central framework for resolving problems, the highly volatile and speculative nature of the cryptocurrency due to a lack of backing by assets, trading across various jurisdictions with unclear legal regulations, and the dangers of being entrapped or associated with financial transactions for illegal and illicit activities. One of the biggest problems for the RBI is in the way the money is stored in digital wallets that are prone to hacks, malware attacks, theft and loss.
Early this year, the People’s Bank of China met with owners of Bitcoin exchanges, and cautioned the people against the use of Bitcoin as a currency. Officially, the bank considers Bitcoin and other cryptocurrencies as “virtual commodities” that do not enjoy the same status as currency. The bank has also cautioned users of Bitcoin, asking them to bear the corresponding risks and responsibilities. Banks and Financial institutions are prohibited from making Bitcoin transactions, and the Bitcoin trading activities are being monitored for violations of foreign exchange norms.
United States of America
In the United States, Bitcoin is treated as property, and Bitcoin transactions are taxed as if they were property transactions. Employers are required to report payment of wages to employees using Bitcoin, and these kinds of payments are subject to payroll taxes. Taxes on gain or loss of value based on transactions depends on whether or not the Bitcoin is held as a capital asset. Although bitcoin is commonly used as a currency, it is not recognised as legal tender in any of the jurisdictions in the United States.
Initially, Bitcoin in the UK was considered a tradeable voucher, which was later reclassified as “private currency“, which reduced the tax liability. Transactions to and from Bitcoin are not taxed. There are taxes for Goods and Services sold for Bitcoin, based on the corresponding value of the legal tender to the cryptocurrency at the time of transaction. Income generated by Bitcoin mining activity is also exempted from tax.
The Bank of Russia, like the RBI, refers to cryptocurrencies as “virtual currency”. The Bank of Russia has issued a warning to Russian citizens, rising the same concerns as the RBI. The speculative nature of the currency, high risk of loss of value, and no entities that can be held legally accountable for settling disputes. The strongly worded warning alerts citizens of possible prosecution over cryptocurrency transactions as the financial activity can be considered as participating in a process that helps terrorists and criminals launder money. The federal Tax Service in Russia has noted in a letter that there are no legal mechanisms prohibiting Bitcoin transactions in Russia.
The Reserve Bank of Australia refers to cryptocurrencies as “digital currencies“, and treats Bitcoin as property, similar to the regulations in the United States. Bitcoin transactions themselves are regulated by the bank, or subject to regulatory oversight. Bitcoin trades are treated as barter trades. As Bitcoin has a steady rate of supply, a limited availability, and cannot respond to seasonal peaks or sudden increases in Demand (say around holiday sales seasons), Australia does not consider any role of cryptocurrencies in the monetary policy.
The European Banking Authority has also issued a warning to European citizens on the hazards of using “virtual currencies.” The risks pointed out in the warning include the potential for loss on electronic trading platforms, there are no legal protections for the money deposited in cryptocurrency exchanges, the virtual currencies can potentially be stolen through electronic means, and the high volatility of the cryptocurrencies. The EBA has gone so far as to recommend that “You should not use ‘real’ money that you cannot afford to lose.” Virtual currencies can be used to make payments without incurring charges, and without a bank acting as an intermediary. Value added tax, and capital gains tax may apply according to the country where the transaction is occurring.
The Central Bank of Brazil has issued a clarification noting that there is no regulation for Bitcoin in Brazil. The notice points out that any regulatory oversight would put pressure on the cryptocurrencies, and that regulations from any authority from any country can potentially affect the prices of the cryptocurrencies, as well as the ability to trade in them. Brazil refers to Bitcoin and similar cryptocurrencies as virtual currencies, noting that they are different from digital currencies. The development of the financial instruments such as Bitcoin is being monitored by the Central Bank of Brazil, and it has said that it is open to legal interventions, if necessary.
Bangladesh is one of the countries with the harshest regulations against cryptocurrencies. As the country has harsh anti money laundering laws, anyone conducting Bitcoin transactions faces a jail term. The use of cryptocurrencies of any kind, including Bitcoin, is banned in Bangladesh. Anyone found being involved with Bitcoin transactions faces up to twelve years in jail.
The process of formulating regulations in India is taking its own sweet time, and RBI seems to be focusing more on formulating regulations for the underlying distributed ledger technology called blockchain, rather than the virtual currencies such as Bitcoin and Litecoin that are based on blockchains. Waiting for too long to introduce regulations is likely to disturb the markets, platforms, apps and systems that emerge before the regulations are in place.
The world over, in times of financial insecurity, Bitcoin is considered as a hedge.
For those who want to get into Bitcoin transactions in India, Unocoin is a convenient platform with a monthly investment plan. BtcxIndia, Zebpay and Coinsecure are other Indian Bitcoin trading platforms. The prices per Bitcoin varies across the platforms. Over 500 merchants in India accept Bitcoin as a payment option.