CHAPTER 1 – INTRODUCTION
1.1 AIM & SCOPE
The aim is to understand the control of Cryptocurrencies in Indian market and what the legal status is as well as in future what it will holds. This study also focuses on the pros and cons of Bitcoin and how does Bitcoin actually works.
1.2 STATEMENT OF PROBLEM
In recent years Bitcoin which have become the important topic relating to payment and its special features which is popular for having a cryptographic key used for making payments, that can be safe and also without having any authority in such online platform. Even though digital currencies have become well recognized and which is accepted as a medium of payments, the use of such currencies cannot be without problems. There are still issues relating to ban on Bitcoin transactions in India even though Supreme Court lifted the ban on March 2020. The concern relating to the regulation of Bitcoin and also the various challenges as well as the risk involved needs to be known.
In the era of information and communication technologies has brought various benefits in financial and corporate sector. There is various kinds of trading, dealings and currencies which is arising out of which Cryptocurrency is monetary methods which is given importance in recent years. Cryptocurrency denotes currencies which are cannot be seen and valuable and which can only be by electronic modes in various ways which are social networking, peer to peer networks, in virtual transactions and such other manner in which these type of currency is accepted. It means as a medium of buying and selling, which is apart from physical real money which is used in various dealing whether it be online or physical transactions. From the period of barter to commodity money, metal and coins, gold and silver, from modern monetary system and now with latest which is globally currency growths, Cryptocurrency which is called Bitcoin.
Bitcoin which was launched in 2009 is a medium which is used globally independently without any government regulations or any central bank. It can be exchanged easily for goods and services. It provides depositors to execute transactions by their own without any assistance of financial segments because it is considered as a digital currency which is a substitute for currency market. In India the use of Cryptocurrency is still in progress stage where Supreme Court lifted the ban of cryptocurrencies in the year March 2020. This research paper will cover the rise of Bitcoin in India and what is the advantages and disadvantages, also what the legal status is and how does Bitcoin works in detail. The research will thereby conclude by certain suggestions as per required.
1.4 RESEARCH QUESTIONS/ HYPOTHESIS
Whether Cryptocurrency will be the new secure payment option in India?
1.5 RESEARCH METHODOLOGY
This research is a doctrinal study relating to Bitcoin in India. This paper will be based on various readings, observations from different authors, journal as well as research articles. The Library-based research method will be followed for deriving the answer for the research problem. The search will be conducted on the basis of primary sources such as statutes and secondary sources such as books, online articles. The paper is based on pure theoretical research.
1.6 REVIEW OF LITERATURE
The Author explains the concept of Cryptocurrency and what is the effect of Cryptocurrency in India. The Author also provides with various limitations which can be faced. The Author also explains about the legal status of Cryptocurrency along with reasons. The Author also sheds light about what is the present and future of Cryptocurrency in India and also described in detail about the various benefits or issues it is facing.
The Author gives us a brief about the Cryptocurrency, its types, features and also about how Bitcoin was made introduced in the year 2008. The Author explains how the does Bitcoins works and also the statutory status in India. The Author provides the various advantages and disadvantages of Bitcoins as well as the opportunities and challenges it has in Indian economy.
CHAPTER 2 – INTRODUCTION TO BITCOIN AND HOW DOES IT WORK
The most popular Cryptocurrency which is Bitcoin which is known by all is developed by group of people or an unknown person named Satoshi Nakamoto in the year 2008. It is a form of electronic cash which can be sent from one user to another on the peer to peer network without any intermediaries. The transactions which are done are contained in a block where the information is there about the previous block which forms a block chain. This information which is available in Bitcoin network is for the users to validate that the Bitcoin which is transacted previously is spent or not. Thousands of users who are transacting through this network act as intermediaries and each user owns private or public key. Bitcoin is now the most recognized digital currency globally. In other electronic payment system which are banks or any electronic unit where every transactions are been verified, these Bitcoin are instead on verifying or to transmit transactions wholly rely on the large number of miners to verify. The transactions fees charged in Bitcoin transactions is very less compared to the other online methods available. No need for any bank to store any money. The database of a person which is stored either in computer or phones or somewhere in the cloud is called as wallet. These Bitcoin are transferred from one wallet of person to other wallet. Cryptocurrency are of various types such as Bitcoin (BTC). Litecoin (LTC), Ethereum (ETH), Ripple (XRP).
The various features of Bitcoin are as follows-
2.2 HOW DOES BITCOIN WORKS
Bitcoin can be obtained through three ways i.e. mining, buying from an exchange and accepting from goods and services. Bitcoin is different in two important aspects i.e. it does not need any single governing body and it does not do transaction in currencies of any country whether it be Rupees or Dollars. Through online wallet service Bitcoins can be stored by signing up through which transactions can be proceeded. Transactions are secured by using public key and every user has the whole record of all transactions which is done previously in a form of log. Blockchain is a type of ledger which is displayed publicly all transactions which are made in Bitcoin system. Thus, this blocks records data that builds upon each other which forms a type of blockchain that will shows dates all the way back to the first Bitcoin transactions which was made. It also verifies the person spending and the recipient and also that double spending of Bitcoin is completely impossible. The public key forms a part of user address on Blockchain which is a set of numbers where nobody can know the name of email address etc making Bitcoin user unknown. The main thing is a private key which is one’s identity because through this Bitcoin can be accessed and if someone know about it than all Bitcoins can be stolen from the wallet or account. “Miners” are people who are paid for their work which is auditing. They are the person who does verifications of any Bitcoin transactions. Through this, Bitcoin transactions are done in honestly and miners also prevent in any double spending issues. Mining is various data blocks where Bitcoins needs to be extracted by applying algorithms. For one block 25 Bitcoins is rewarded if Bitcoin could be discovered from that data block and the maximum Bitcoin can be upto 21 million in such system.
2.3 PROS & CONS OF BITCOINS
a. Anonymity – In Bitcoin anyone in the world can transact with each other without any KYC (Know your Customer) process for opening an account. Any person can create number of Bitcoin wallet without any name, address or any other such information.
b. Peer to peer network – In this there are no such master server who controls such operations. In this each client’s stores a number of records of transactions done and also number of Bitcoin which are in each wallet. Transactions are done by a lot of distributed servers. Nor banks or government can control such exchange of money in Bitcoins.
c. No inflations – The maximum limit of Bitcoins is strictly upto 21 million Bitcoins. Since no political forces or any other corporations cannot affect such system there is no chance of inflation.
d. Open Code for Mining Cryptocurrency – Online banking and Bitcoins apply the same algorithm. The only difference is online banking where the information needs to be disclosed about the users where in the Bitcoin system there is no data of the recipient or the sender of the coins.
e. Unlimited number of transactions – Every wallet holder can pay anywhere, anyone any amount and no transactions can be controlled or can be prevented, so it’s easy transfer to another person who have Bitcoin wallet.
f. Low Operating Cost – The commission charged is less which amounts to 0.1% of transaction made, which goes directly to miner’s wallets.
g. Decentralization – Since there is no central authority in this network, each computer which is mining Bitcoins is member of this system.
a. Transactions are irreversible – In Banking payment methods which are any bank draft, credit card charge, or any other are insured and reversible by the banks. In case of Bitcoins, there is no such insurance protection which is there in Bitcoin wallet. If the hard drive data of wallet or even wallet password is lost then the contents are lost forever. In a recent case Stefan Thomas, a German programmer from San Francisco lost his bitcoin password. He was given 7,002 in 2011 which is having a worth now of $ 245 million or almost 1,800 crore.
b. Cannot be Frozen – Nor Bitcoin wallet be seized or audited by any banks. Only the owner of the wallet can decide to manage his wallet.
c. Not very easy to use – Many people are not confident of using computers so it would be difficult for them for putting public keys, private keys, opening and closing of wallet. When any payment is made to someone than a long number needs to be typed in computer and various procedures to be made.
d. Technical weakness – Bitcoins can be spent twice in rare instances during the confirmation period. Since Bitcoins travels peer to peer it takes several few to transact. During this period a dishonest person can submit same payment of same Bitcoins by fast clicking to any other recipient. Even though the system does not allow double spending and such wrong second transactions but if the second recipient transfers any goods before receiving confirmation of such transactions, than such second recipient loses both the payment as well as the goods transferred.
CHAPTER 3 – BITCOIN IN INDIA
India is growing in a faster rate with respect to use of smart phones and internet availability which helps in various manners. Various start-ups are much interested in using Bitcoins because it can integrate into any software as well as can be monetized. Most of the users are individuals who are possibly looking as an investment opportunity. Any e-commerce websites does not accept Bitcoins as a payment system. Bitcoins are traded for goods and services from other online websites. In Bitcoin economy traders are mainly attracted because of no tax. As per the latest data India ranks sixth in the world. RBI has advised public not to buy or sell any such digital currency. As per RBI it is a type of black money which will spread globally and it cannot be controlled or unacceptable in Indian financial system. The users have suggested setting up its own exchange so that many users can join and use it. Just like other stock exchanges even Bitcoin can be traded with other currencies in the world. There are various websites through which a person can purchase bitcoin such as coinbase.com and coindesk.com which are very popular exchanges. Whereas, in India a person can even purchase from Zebpay exchange which let’s to link bank account for quick transfers. A person can buy Bitcoin by paying in Zebpay’s account and also can be withdrawn to bank account. CEO of Zebpay, Sandeep Goenka told that the number of registered users is increasing heavily day by day and Indian citizens are enquiring about Bitcoins as alternative investment. After Dollar and Yen, Rupee is the third largest that is traded in Cryptocurrency market.
3.2 LEGAL ASPECTS
RBI has warned for buying and selling in any such virtual currency. They possess financial, legal and other security risk. Since payments are on peer to peer basis there is no alternative to any consumer problems, etc. The Central Government has told that a new bill on Cryptocurrencies (The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021) will be brought in the Parliament. Finance Minister Nirmala Sitharaman is even though suggesting for ban on such private Cryptocurrencies in India. Further the inter-ministerial Committee (IMC) suggested introducing an official virtual currency that will be properly regulated by the Reserve Bank of India. Finance Minister Nirmala Sitharaman added that a top level committee will be made under the Economic Affairs to understand the issues relating to digital currencies and advise actions which can be taken in that matter and also all private currencies except if any digital currency which will be issued by state will be prohibited in India. On April 6, 2018 RBI had banned Cryptocurrency in India by issuing a circular and further directed that all those who regulate by it shall not deal with such digital currencies or services for assisting any person. It was challenged in the higher court and on March 4, 2020 Supreme Court struck down the ban on Cryptocurrency trading in India and now it is legal in India. After that it started operating in India again. RBI is also working on virtual form of Rupee and can be estimated soon. The demonetization in 2016 is also the reason where the growth of Cryptocurrency started rapidly amongst a substantial population.
The reason for which government is not supporting Cryptocurrency is because transactions are difficult to be monitored and these can lead to hacking, fraud and also any kind of terrorist activities. The second reason is a rise of Cryptocurrency market could be a good competitor to banking industry. There are few limitations with effect to Cryptocurrenicies in India which are follows –
a. Trustworthiness and Safety – Since Bitcoins system is a type of digital mode for transactions, there is a large amount of chance for terror finance, hacking, money laundering or any other such wrong ways. Due to this, it is less trustworthy and also unsafe.
b. Trouble in tax – It is not yet cleared by Income tax about the taxability from profit on Bitcoins or any other Cryptocurrency. Still the income tax authorities will not leave taxing on such gains. It would be known soon.
c. No Regulatory Body – The transactions made in Bitcoins are not looked after by any Regulatory body which can leads to frauds, No investor protection, no proper monitoring on money in the economy. Reserve Bank of India and other central bank could not track the actions of these Cryptocurrencies.
d. Price Volatility & KYC norms – The pricing in Cryptocurrency depends upon the demand and supply making it a highly volatile market. In India there is no such KYC for Cryptocurrency for now.
3.4 PRESENT & FUTURE OF CRYPTOCURRENCY IN INDIA
There is no such regulatory body for Cryptocurrencies in India. Since there is an absence of such regulation some exchanges such as Unocoin, Zebpay, etc. have started their operation with KYC norms. Even though government is taking careful approach it is of the view that if only blockchain technology is made good which can have centralized system which will give proper authority to a person. There is a chance where government will bring Cryptocurrencies in India in different phases. There is an association known as the Digital Assets and Blockchain Foundation which is made by private company dealing in Cryptocurrencies for educating public on advantages and investment opportunity in Cryptocurrency. In future Cryptocurrency is having good growth in India. With the good technology of Blockchain and good response from investors there can be a chance of virtual banks. There is a good positive sign of Cryptocurrency in future.
CHAPTER 4 – SUGGESTION & CONCLUSION
The reason Bitcoin is now an emerging topic in India is because of its flexibility from physical currency to digital currency and the way the coins are used from one place to another without any regulatory authority. In India the people will get used to such payment method but there needs to be some implementation as rightly been informed by the government regarding its regulatory body. There should be a proper investigation on wallets where huge transactions are done so that there would be less chances of any black money or money laundering. There should be proper KYC process done by regulatory body so that all valid wallets are registered in Bitcoin network. Many entrepreneurs will get the opportunity for transacting in Bitcoins and other Cyptocurrencies within the country. Due to all this major issues if resolved, there would be a good response from the citizens of India and soon India will be in the top position as well as investors can have proper trust while investing. On 10th February, 2021 the prices and volumes of Bitcoins in market increased heavily after Tesla Chief Executive Officer Elon Musk announced for investment in Cryptocurrency as per Indian exchanges. Tesla bought $ 1.5 billion of Cryptocurrency and will accept Bitcoins from buyers. By this announcement the price of Bitcoin crossed from below $ 40,000 to $ 48,000 in two days. The current price of one Bitcoin as per 1st March, 2021 is Rs. 34,04,192.58. Due to this announcement it is very likely to understand the importance and value of Bitcoins in present and also more advanced would be future.
The invention of Cryptocurrency has become a global phenomenon. Even though RBI is warning from using such type of Cryptocurrency due to its various reasons but, as per the latest budget it is looking forward for having its own Cryptocurrencies which will have proper regulatory and can be used as a digital currency. Bitcoins can bring good change in e-business and e-payment sectors. Unless properly controlled, or managed, the users need to take proper precautions while dealing in such virtual money. There should be steps taken for improving and widening the concept of Cryptocurrency. If such improvisation and a secure payment system is made than there will be huge growth in such market. Many vendors are accepting Bitcoins or other types of Cryptocurrencies because many know the opportunity it can give. Therefore at the end it can be stated that Bitcoins have a good and bad things for Indian market and it can be done better with all the steps stated above and it can be secured as well as many people can take this advantage.
 Prof. Blesson James, Prof. Manjari Parashar, “Cryptocurrency: An Overview on its impact on Indian Economy”, International Journal of Creative Research Thoughts (IJCRT), Volume No. 6, Issue 2 (April 2018).
 Dr. Anil Kumar V.V., Swathy. P, “A Study on Opportunities and Challenges of Cryptocurrency in India with Special Reference to Bitcoin”, International Journal of Research and Analytical Reviews (IJRAR), Volume No. 6, Issue 1 (March 2019).