There is so much being written about people who have turned billionaires by investing in Bitcoins that those who missed the boat fall into four categories—the ones clambering on to the crypto-currency bandwagon in the hope of making big bucks on the lesser known currencies; and those who are telling themselves that it is another version of the tulip mania. There is a third group of lawyers and consultants who are minting money lobbying for these currencies to gain legitimacy, or explaining them to people at fee-based seminars, while a fourth group wants answers and reassurance from someone else that their dabbling in Bitcoins will not clean out their savings or attract income-tax notices.
The block-chain technology behind crypto-currencies had gained worldwide acceptance; but crypto-currencies as a legal tender is a different ball game. Let’s try and understand what is happening in India and abroad. In March 2017, the finance ministry set up a nine-member inter-disciplinary committee that included Niti Aayog to study the global situation and suggest measures for dealing with such currencies. The finance minister announced in November 2017, ‘The government’s position is clear, we don’t recognise this as legal currency as of now.’
Then, on 29th December, the finance ministry issued a formal press release warning people about ‘virtual currencies’ (VCs). It said, “VCs are not backed by government fiat” and they are also not legal tender or even currencies, in the real sense, although they are called ‘coins’. VCs don’t have “any intrinsic value and are not backed by any kind of assets,” their prices are “entirely a matter of mere speculation” and that there is a “real and heightened risk of investment bubble of the type seen in ponzi schemes," says the release. Equating crypto-currency to Ponzi schemes, the ministry warned people to avoid getting trapped by them and to note that digital currencies are often used to carry out subversive activities such as drug and terror funding. It was also emphatic in stating that “VCs do not have any regulatory permission or protection in India” and people should deal with them at their own risk. This warning was issued after seeking public views on future of Bitcoins (in May 2017) on its portal MyGov. Given that the cost of one Bitcoin had soared to a peak of as much as Rs19 lakh, we are talking about big stakes here.
Greed and risk-taking behaviour go hand-in-hand; so, despite this emphatic warning, and at least three previous warnings by the Reserve Bank of India (RBI) (once in 2013 and twice in 2017), there are thousands of people queuing up every day to register with crypto exchanges. We have listed only five such exchanges operating in India (in Delhi, Mumbai, Pune, Bengaluru and Hyderabad); these include Zebpay, Unocoin, GlobalDCX, CoinSecure and BtcxIndia. In fact, the business press gives credibility to these exchanges by writing about the waiting lists for registration to trade.
Those in queue would do well to learn from the collapse of the National Spot Exchange of India Ltd (NSEL). A crackdown by the government and the tax department led to a forced shutdown which caused a loss of over Rs5,000 crore. NSEL was shut, even though it had operated with the full knowledge of the commodity regulator and the Securities and Exchange Board of India (SEBI); it also had a permission of sorts from the ministry of consumer affairs. People wanting to invest must remember that virtual currency exchanges do not even have that fig leaf.
I asked SEBI chairman, Ajay Tyagi, about crypto-currency exchanges operating like regulated entities and what happens if they collapse? There was no answer. Media reports, however, say that SEBI is examining a legal framework for crypto-currencies and Mr Tyagi was quoted by the press as saying that it does not pose a systemic risk, so far. This is in contrast to the rather strident stand taken by the finance ministry shortly after Mr Tyagi’s statement.
If any of the crypto exchanges collapses, the regulators and the government may quietly wash their hands off. Why not ban the currencies then? Rajeev Chandrasekhar, a Rajya Sabha MP, asked as much in parliament. His question was whether the government plans to block all bank accounts and credit cards that are being used for Bitcoin/crypto-currency transactions.The finance minister Arun Jaitley refused to answer and said he would await the report of the inter-disciplinary committee. In other words, crypto-currency is not legal in India declares the government, but it is not illegal either. While government inaction in peer-to-peer acceptance and valuation of crypto-currencies may be fine, allowing crypto-currency exchanges to operate without regulation is clearly irresponsible.
Worse, the tax department is legitimising them by formally visiting these exchanges, as reported by the business press, to explore the possibility of levying GST on them. One thing seems certain. If crypto-currency exchanges do fail, then investors would have no one to blame but themselves.
Another issue that is strangely lending credibility to crypto-currency exchanges are the tax notices to individual investors by the income–tax (I-T) department. A tax notice, with 28 detailed questions, has gone viral on social media. The department has reportedly sent out 500,000 notices sending the recipients scurrying to find out their tax liability, probably for the first time.
As far as tax implications for the individual are concerned, well-known chartered accountant, Ameet Patel, is emphatic that there is no ambiguity. The I-T department, he says, is unconcerned with the legality or otherwise of income—whether from drug running or crypto-currencies. It is only concerned with income. If you have earned income that puts you in the tax bracket, then you definitely pay tax.
Future Trends
Having said this, there is no way of knowing whether crypto-currencies will remain illegal forever. Some of the biggest exchanges in the world do not want to lose out on the craze and have launched futures contracts in crypto-currencies. While the CBOE Global markets (Chicago Board of Exchange) was the first to launch Bitcoin futures on 10 December 2017, the CME (Chicago Mercantile Exchange) introduced these contracts on 18 December 2017.
Top businesses and investors are divided on the issue. The legendary Warren Buffett is critical and thinks they will have a ‘bad ending’. Jamie Dimon, CEO of JP Morgan Chase, has called it a ‘fraud’. Nobel Prize winning economist, Robert Shiller, thinks it is a bubble, as do Ray Dalio, who heads Bridgewater Associates, the world’s largest hedge fund, and Jim Rogers. Most, however, are positive about the
block-chain technology that underpins crypto-currencies. Meanwhile, software giants, such as Microsoft, Dell, Reddit as well as Expedia, Subway and a growing number of others, are accepting payments in Bitcoins.
Many developed nations have also taken a benign view to the use of Bitcoins for peer-to-peer transactions (or barter deals) or given it a semblance of legality, even while worrying about its use for illegal transactions and money laundering. They include the United States, Canada, Germany and Australia. Most nations have issued warnings or cautioned people about crypto-currencies and do not allow them as legal tender, but have not declared them illegal either; nor do they legally permit these as a means of payment. Countries like Finland and Sweden treat VCs as a commodity. The countries that have explicitly banned crypto-currencies include Kyrgystan, Bolivia, Vietnam, Ecuador, Algeria, Morocco, Bangladesh, Nepal, etc. A large number of countries are sitting on the fence and watching developments.
Like in India, there are powerful lobbies of consulting and legal firms that are pushing hard for legalising crypto-currency. But it is too early to say if crypto-currencies will end up as a famous bubble like the Dutch Tulip mania or survive and gain legitimacy eventually.
Casinos provides coins in lieu of
cash. One earns more coins on
others losses. And earn more too.
Few earn fortunes on others misery.
Exchanges are big casinos with only trading with no real business asset base.
Untill some truly good reason come up for Coins... Till then it's just herds and luck.