What is bitcoin?
Before we begin to understand this, a more basic question we need to ask is: “what is money?”. Money, ultimately, is simply the tool that we use to exchange value. Throughout history we’ve used lots of things as money, from seashells, to precious metals, to salt… The most popular money, historically, has been gold. There’s good reason for this: gold works really well as money. It’s rare – so it’s not worthless, and it’s tangible so if you’re holding it in your hand it’s probably yours. And this worked for thousands of years, no matter what social institutions exist around you, no matter who the king or government is at that particular time.
Then came along a new invention: paper money. Paper money has some advantages and disadvantages. The biggest disadvantage is that paper is easy to counterfeit, something that’s practically impossible with gold.
Next came Digital Money as we all know. In fact, the vast majority of money these days are actually just numbers in computers. Banks use today is a “centralized” solution – they keep a ledger on their computer which keeps track of who owns what. Everyone has an account and this ledger keeps a tally for each account.
Bitcoin: Established in 2009 after the financial crash, Bitcoin is a worldwide cryptocurrency and digital payment system. It is called as the first decentralized digital currency. The system works without a central repository or single administrator. The word bitcoin first occurred and was defined in the whitepaper that was published on 31 October 2008. It is a compound of the words ‘bit’ and ‘coin’. The whitepaper frequently uses the shorter coin. It was invented by an unknown person or group of people under the name Satoshi Nakamoto. Satoshi Nakamoto claimed to be a man living in Japan, born on 5 April 1975. As of 24 May 2017, Nakamoto is believed to own up to roughly one million bitcoins, with a value estimated at approximately $9 billion USD as of November 2017. He also owns an estimated one million Bitcoin Cash coins as on 1 August 2017. The identity of Nakamoto remains unknown.
Bitcoins was released as an open source software. The transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain.
Bitcoin was creation as a reward for the process called as Mining. (Mining is a record-keeping service done through the use of computer processing power). Bitcoins are exchanged for other products and services globally. Bitcoins can also be used as investments.
In Bitcoin, the coins (or rather the transactions) are all recorded in a ledger. So far, nothing new. The big deal with Bitcoin is that this ledger is public and shared. Not only, it’s also maintained by the public. Thousands of people have a copy of this ledger around the world, and anyone can download and verify this ledger. In Bitcoin, instead of accounts, money is moved between addresses like email.
On 6 August 2010, a major vulnerability in the bitcoin protocol was spotted. Transactions were not properly verified before they were included in the blockchain, which let users bypass bitcoin’s economic restrictions and create an indefinite number of bitcoins
Commercial Use: Who accepts Bitcoin? Of course, businesses have started accepting it all around the world, some big names include Microsoft and TigerDirect and a whole bunch of airlines. There are websites to help you find Bitcoin-accepting businesses
Why Bitcoins?: Bitcoins can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that they’ll go up in value.
Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money. Unlike bank accounts, bitcoin wallets are not insured.
User Anonymity: Bitcoin purchases are discrete. Unless a user voluntarily publishes his Bitcoin transactions, his purchases are never associated with his personal identity, much like cash-only purchases, and cannot be traced back to him. In fact, the anonymous Bitcoin address that is generated for user purchases changes with each transaction. Transactions are made with no middle men – meaning, no banks! There are no transaction fees and no need to give your real name. More merchants are beginning to accept them:
No Third-party Interruptions: One of the most widely publicized benefits of Bitcoin is that governments, banks and other financial intermediaries have no way to interrupt user transactions or place freezes on Bitcoin accounts. The system is purely peer-to-peer; users experience a greater degree of freedom than with national currencies.
Purchases Are Not Taxed: Since there is no way for third parties to identify, track or intercept transactions that are denominated in Bitcoins, one of the major advantages of Bitcoin is that sales taxes are not added onto any purchases.
Very Low Transaction Fees: Bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are kept very low. This can be a major advantage for travellers. Additionally, any transfer in Bitcoins happens very quickly, eliminating the inconvenience of typical authorization requirements and waiting periods. Bitcoin users can pay for their coins anywhere they have Internet access. This means that purchasers never have to travel to a bank or a store to buy a product.
No Paperwork: Anyone, from any country, of any age can accept Bitcoins within minutes. There is no ID card, passport or proof of address that all conventional banks required to open an account. All you need to do to start sending and receiving Bitcoins is to download a Bitcoin Wallet program and generate a Bitcoin Address.
Irreversible Transactions: Bitcoin is the only payment method that is 100% irreversible and cannot be charged back.
Quick and Cheap Transactions: When making a Bitcoin transfer the fees are extremely low compared to conventional methods of moving money. Accepting credit cards will generally cost 3-5% of the transfer amount, which again is much more expensive than a Bitcoin transaction.
Payment service providers: Merchants accepting bitcoin ordinarily use the services of bitcoin payment service providers such as BitPay or Coinbase. When a customer pays in bitcoin, the payment service provider accepts the bitcoin on behalf of the merchant, converts it to the local currency, and sends the obtained amount to merchant’s bank account, charging a fee for the service.
Criticism: Bitcoin has been criticized for the vast amounts of electricity consumed by mining. It has been estimated that annual consumption (as of 2017) was 23 terawatt hours, approximately the same as the country of Ecuador. Bitcoin is also criticised because it has never shown has a source of stable value and its price has been highly volatile and it hasn’t yet established itself as a widely accepted transactions medium. It is also criticised for the lack of transaction reversals because there are pros and cons to the irreversible nature of bitcoin, but it should be pointed out that the possibility for refunds can be built on top of the base protocol. If someone wishes to pay an extra escrow fee to make sure that they can reverse a transaction after it has been sent, there is nothing stopping that platform from being built tomorrow.
Bitcoins are Ponzi Scheme because it is a dishonest top-down approach where founders promise investors that they’ll profit. The success of an investor in a Ponzi scheme comes at the expense of those who invest after them. In a Ponzi scheme early adopters rule the roost and it’s a zero-sum game for the majority who proceed them. Also, bitcoins can be hacked.
Scandals: Bitstamp hacked. The world’s third largest bitcoin exchange amounting to 6% of all bitcoin transactions had to suspend its operations on January 5, 2015 after less than 19,000 bitcoins were stolen from operational bitcoin wallets were compromised resulting in a $5 million loss. The Slovenia based company reopened operations a week later with extra security processes in place. Similar incident was followed in February 2016 where there was a collapse of Mt Gox bitcoin exchange in Japan. The exchange folded after hackers allegedly breached its systems stealing about $450 million worth of bitcoins. The company filed for bankruptcy protection leading to investigators in both Japan and US to probe the incident.
Indian Ponzi Scandal: The case is centered around a new private startup called Webwork Trade Links, that launched in September last year, with the paid-up (cash for stock) capital of a relatively measly ₹1 lakh. Four months later, the company’s revenue had grown to ₹260 crores, entirely from investors’ money. The money came in after the founders of Webwork launched Addsbook.com in October. Investors were promised rich rewards for clicking on advertisements posted on the website. More pointedly, the founders of the website had collected ₹500 crore from 200,000 ‘investors’ over the same period. The accused founders reportedly purchased luxury automobiles, an Audi and a Mercedes Benz, for ₹2 crores. According to the Times of India, the company bought bitcoin worth ₹13 crores, for payments to those who saw their returns cut off.
Silk Route Founder Ross Ulbricht convicted: 31 year old Ross Ulbricht known by his online alias “Dread Pirate Roberts” and the man behind the now shut website Silk Road was convicted for his role in orchestrating a scheme that enabled around $200 million of anonymous online drug sales using bitcoins on the website. He was found guilty of charges including conspiracies to commit money laundering, computer hacking and drug trafficking. His appeal for a new trial was rejected by a federal judge in Manhattan this April.
Bitcoin Start-up Neo & Bee disappears: A promising new bitcoin start-up based in Cyprus which came up with the idea of serving as a kind bitcoin bank mysteriously went under in March last year, a month after its conception and highly publicised launch. Its 28-year-old British born CEO Danny Brewster was served an arrest warrant for suspicion of fraud and is allegedly on the run.
Hong Kong’s Mycoin shuts shop: Hong Kong police arrested six people in connection with an alleged scheme by Mycoin investment company to defraud investors of at least HK$169 million ($21.8 million) after the bitcoin trading platform suddenly collapsed in February this year. According to a report by the South China Morning Post, the arrests followed after more than 50 clients claimed they were unable to withdraw funds from investment accounts. Another report said that under the alleged ponzi scheme, the victims were told that for every 90 bitcoins they bought through MyCoin, they would receive 219 a year later – more than double their return.
Current Status of Bitcoin: No one knows what will become of bitcoin. It is mostly unregulated, but that could change. Governments are concerned about taxation and their lack of control over the currency. The capital market regulator Securities and Exchange Board of India (SEBI) is planning to bring Initial Coin Offerings (ICO) under its existing legal framework. In recent times, popularity of crypto currencies has increased rapidly and number of entities looking at raising funds through ICO. Crypto currencies like bitcoin, ethereum and such offerings have been under government radar for long time. Even discussions were held between various regulatory bodies, including SEBI and Reserve Bank of India (RBI) to regulate crypto currencies. The RBI is of the view that these instruments are securities and so SEBI should be the regulating body. But these crypto-currencies are neither ‘commodities derivatives’ nor ‘securities’ under Securities contract.
The Union government has constituted a time-bound inter-disciplinary committee to come up with an action plan for dealing with virtual currencies so as to fix the regulatory gaps in the existing framework governing virtual currencies. Reserve Bank of India (RBI) has also cautioned the users, holders and traders of Virtual currencies about the potential financial, operational, legal and customer protection and security related risks through press releases in December 2013 and February 2017. The current value of Bitcoin is 6,17,390.58 Rupees for 1 Bitcoin
-Nitin Basavaraj,
Daksha Legal 