Ayush Varma, Alumni of IIT Madras, Batch of 2013; Manager, Operations & Analytics at Delhivery Private Limited
“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e-cash.” –Professor Milton Friedman, Nobel Prize winner in Economic, 1999.
First ever mention of virtual currency; talked about nine years before the first digital currency came into being.
Bit Coins is the most popular and valuable crypto-currency. Introduced in 2008, it is a digital currency that is essentially a piece of information regarding the transaction between two entities or individuals. This information is analogous to a mail communication where both the sender and the recipient have the knowledge as well as an evidence of communication.
The other crucial part of this virtual currency is the cryptic infrastructure built around it that supports and provides hack-proof, transparent and unbiased technology platform to enable a transaction between two parties.
Virtual Currency is sometimes considered as the future alternative to the banking system. The banking system is based on centralized ledger system where the bank is the entity that maintains the universe of transactions happening worldwide. In the case of bitcoin, the ledger is de-centralized and can be accessed by any member of the bitcoin community. Another aspect is the magnanimous cost of banking infrastructure including buildings, bank employees, technology and maintenance. In case of virtual currency, only costs involved are the cost of building the cryptic platform for enabling of bitcoin transaction and storage cost.
Bitcoins work on basis of full anonymity, validation of each and every transaction and absence of any kind of provision in the system to create a bias. Validation of every transaction is driven by incentive where a certain amount of bitcoins or % of the transaction is added into the system as well as in the personal account of the first validator. This is how new currency is created in the system. The incentive – based validation forms the basis for removing the invalid transactions in the system and decentralization of ledger creates transparency allowing the system to be hack-resistant.
Currently, there are nearly 800 virtual currencies with a total market capitalization of 27.5 $ billion. Governments and central banks are considering financial and legal implications of the currency. As compared to the currency which is monitored and regulated by central bank around the world, many are yet to come up with decisive guidelines in order to keep a check on the inadvertent implications of the virtual currency. The flip side of transparency and the asset-light system is the underlying objective of the transactions between two anonymous entities/individuals. It is rumoured that virtual currency such as bitcoin is also being used for illegal activities including weapon purchase, drug smuggling, money laundering etc.
While there are countries that gave a positive response to Bitcoins, there are some which have made the currency illegal. Most of these countries are indecisive on the legality of the virtual currency. Takes of different countries on bitcoins is mentioned below –
Australia: 600 virtual currencies including Bitcoins are accepted by the government and Reserve Bank of Australia (RBA) as competing currencies. Bitcoins are looked upon as barter transaction between two individuals or parties. Both GST and Capital Gain taxes are applicable to any transaction involving digital currency.
The United States: The US Treasury recognizes bitcoins as a convertible decentralized virtual currency. In 2014, the government auctioned nearly 40,000 bitcoins that were confiscated following the closure of Silk Road. The Internal Revenue Service (IRS) requires bitcoins to become under federal tax as well as recognizes bitcoin mining as business or trade and requires the same to be taxed under self-employment. Prominent businesses including e-commerce websites, Dish Network, etc accept payments in bitcoins.
Canada: In Canada, unlike The United States, most significant and important actions come under the ambit of the federal government and not provincial. Canada Revenue Agency (CRA) recognizes bitcoins of dual nature – used as currency to make a purchase or trade it as a commodity for speculative purposes. Besides getting taxes under Income Tax Act, the currency is also liable to be regulated under the Money Laundering and Terror Financing Act. Currently, bitcoins and businesses around bitcoins, such as mining, exchange etc, are not regulated but are accepted in principal.
Estonia: Tax & Customs Board of Estonia follows the stand of European Central Bank (ECB) recognizing bitcoin as a decentralized digital currency. Bitcoin is viewed as an alternative means of payment, not as any form of security or e-currency. Hence, all individual and legal entity needs to be registered as “providers of business services”. Since the bitcoin is not viewed as a financial instrument, it is also subject to Estonian Value Added Tax (VAT). VAT was eventually exempted from bitcoin transactions by the European Court of Justice (ECJ). The currency fell into bit of a trouble because of a criminal suit against a Bitcoin brokerage in early 2014, investigation pertaining to which led to the Estonian Supreme Court ruled in favour of restrictions on bitcoin trading activity in the country.
Denmark: Danish Assessment Board doesn’t recognize bitcoins as official currency for tax or VAT purposes, allowing for non-regulation from the state’s side. Also, the fluctuations in the value of the digital currency are not subject to any capital gain or loss, keeping it out of the purview of Capital Gain taxes. At present, it is not being regulated under the money laundering regulations. Denmark is also the innovation centre of crypto-currency with multiple bitcoin start-ups and exchanges.
Sweden: Swedish Financial Supervisory Authority has publically declared the digital currency as a legal means of payment. Bitcoin or other virtual currency exchanges need to have a license in order to function and need to comply with requirements of KYC and other customer related norms. Similar to Denmark, many bitcoin start-ups have flourished under the pro-digital currency liberal regime such as Safello Bitcoin Exchange, KnCMiner etc. Weekly transacted bitcoin volume have surpassed 2.4 mn Kr (Swedish Krona)
More countries that need to be in the same bucket as above include South Korea, Netherlands, and Finland etc. There are several countries that have insinuated, through their part-legislations or policy guidelines, that even though the digital currency will go through a plethora of regulatory changes over a period of time but have been in principle accepted the usage of the bitcoins and several other crypto-currencies.
China: According to People’s Bank of China (PBOC), bitcoin is not considered as currency but as virtual goods. The bank does not authorize the bitcoin exchanges and companies revolving around virtual currency implying that it can do so at its own risk. Toward the end of 2013, PBOC released notification prohibiting the entire financial corporation’s from bitcoin trading. In the beginning of 2014, the PBOC prohibited all financial organizations as well as 3rd party payment service providers, form bitcoin trading making it legal only for an individual. China is home to 98% of bitcoin trading and more than 66% of mining.
Russia: The Russian Central Bank (CBR) have declared all virtual currencies including bitcoins illegal under Article 27 of the Federal Law. So, no policy around taxation and regulation exists till the country recognizes bitcoins.
India: India has no decisive position on the legality of bitcoins. As of now, bitcoin buying, selling, trading or mining is not illegal by any law in India. In absence of government acknowledgment, the crypto currency industry has established its own self-regulatory body and watchdog – Digital Asset and Block chain Foundation of India (DABFI). Recently, RBI advised that it hasn’t recognized/authorized any operation regarding virtual currency and operators, miners, exchanges are on their own. As per the RBI, virtual currency stored in e-wallets is hack-prone and valuation of any currency not backed by any asset is exposed to legal and financial risk.
Due to drop in storage cost and growth in the area of blockchain technology and cryptography, once, hypothesized as a theoretical idea is now brazenly real and has trapped the governments and central banks in a virtual limbo. Virtual currency or Money 2.0 has gained traction throughout the world and is said to pose a difficult challenge in the face of existing centralized banking system.