In the last quarter of 2017, the price of a Bitcoin has more than tripled. This has led to a sudden surge in the awareness of the word Bitcoin across the globe and especially in India. It is a textbook example of the diffusion of innovation theory in action. We have certainly breached the Innovators to Early Adopters, and probably, even Early Majority stage in terms of awareness of the word. In terms of understanding of the concept and participation in the ecosystem of Bitcoins (or Blockchain) we are, quite likely, still in the Innovators stage.
So, what is Bitcoin? With the name incorporating the word “coin”, of course, it connotes a currency and with the word “Bit” it connotes something digital. We could say it is a Digital Currency. The use of a currency is as a medium of exchange of value between participants in an economy. In that sense, if Bitcoins are accepted as a form of payment between different participants then it is being used as a currency.
In India, a digital currency can be used as a medium of exchange by mutual consent. Legally this can be considered a barter exchange. But for it to gain economy-wide acceptability like cheques, credit cards or digital wallets, it will need some sort of a regulation or a “killer app”, such as a widespread goods or service provider accepting it as a payment system. This could be the government itself—highly unlikely anytime soon—accepting payments in Bitcoins (or other digital currencies) or platforms like Flipkart or Amazon. It is unlikely that Bitcoins or other related currencies would become acceptable on a large scale within India in 2018.
In 2018, it is possible that exporters or importers might start using Bitcoins for specific types of transactions if they become acceptable in the target countries they do business with. Of course, compliance with FEMA will have to be kept in mind, but it is possible to structure transactions in a compliant manner.
Suggestions could come in to the RBI and the Government of India to come out with some kind of a notification or clarification on the legal status of cryptocurrencies or digital currencies like Bitcoins. Some might also suggest that an official RBI or government-backed cryptocurrency like RupCoin be floated. Of course, this seems to conflict with the original idea behind Bitcoin where a distributed ledger not controlled by any central authority issues the currency.
This brings us back to small explanation of what is Bitcoin. In January 2009, an as-yet-unidentified individual, or group of individuals, named Satoshi Nakamoto (similar to the pseudonym Nicholas Bourbaki) released the source code and first set of digital currency called Bitcoins. He claimed in a white paper that he had solved the “double spend” problem of digital currencies. Typically, a central authority is required to authenticate a transaction and maintain a ledger of who owns how much and transfer money between the participants while maintaining the total amount of currency constant or trackable.
The problem with a central authority is that it is prone to intentional manipulation by those in authority or to hacking by those not in authority but being able to target the efforts towards the central ledger. Bitcoins are based on the Blockchain technology. Blockchain technology maintains a “distributed ledger”, i.e. it is a non-centralized ledger with potentially millions or billions of copies. The whole peer-to-peer network would have independent copies of the Blockchain ledger which is authenticated by the whole network itself. So there is no centralized authenticating authority or ledger and hence hack attacks or authority manipulation is not possible.
Bitcoin is a specific use of Blockchain technology to issue a currency. However, Blockchain can be used to replace all transactions or interactions which required a central authority to authenticate. Now all of that can be done, in principle, using distributed ledgers on Blockchain.
Coming back to use of digital currency in India, it is unlikely that it will be accepted freely in the economy, but if the Government of India adopts a RupCoin under the aegis of the RBI or UIDAI or some similar central agency, and accepts it for payment of taxes, it could suddenly gain widespread adoption. But this is likely to happen over the next three-to-five years rather than within 2018.
Within 2018, it is likely to become more and more widespread as an instrument for speculation. With easy money seemingly being made, more and more people would explore ways of owning and trading Bitcoins or other new cryptocurrencies. It is likely that the mania can spread further and SEBI will probably have to step in to regulate it or at least clarify its stance on how to allow people to lose their money through trading in a safe way; i.e. allow people to lose money via trading mistakes and stupidity but not to outright fraud. Clarity on taxation is also not there, but until it is defined clearly as a security by SEBI, or currency (whether domestic or foreign) by RBI, it is likely to be treated as an asset on which capital gains will have to be paid. On Bitcoin or other non-Indian cryptocurrencies, FEMA is likely to apply. But, again clarity would be expected from government authorities. Can Indian companies or individuals start a new cryptocurrency?
Legality will depend on clarifications from the RBI. In the meanwhile, the Indians are likely to do this in some foreign jurisdiction, thus India will lose the innovations to those locations. Applicability of GST to Bitcoins or other such digital tokens will also require clarity.
In short, expect a slew of notifications or clarifications or clarity emerging from actual action of the authorities and application of law.
The idea that Bitcoins can be used for illegal activities like money laundering, terrorist financing, corruption payments, tax evasion, etc. is valid but banning Bitcoins in India will hardly solve that problem. So, there is no option for the government but to allow it under an acceptable regulatory regime. SEBI will have to proactively consider allowing trading of Bitcoins on existing or regulated exchanges under existing or new laws.
So far, we have only addressed the visible and widespread uses of Blockchain as currency and speculative instrument. The most important and beneficially disruptive use of Blockchain is for transactions. It is likely that smart contract platforms will emerge within private ecosystems, probably backed by some large financial institutions, which will allow the participants to transact with each other.
Uses of smart contracts in government processes and in smart city implementations will likely be proposed by large global and Indian IT and consulting firms to the central and state governments. This is likely to be adopted in pilot projects for very specific, limited-use cases on trial basis within 2018.
Bitcoin awareness is likely to increase to the Late Majority within 2018. But widespread usage by citizens (B2C) for day-to-day transaction is unlikely. Most likely, Blockchain will enter the Early Adopters stage in 2018 in government and private enterprises (B2B). Speculative mania will likely be tamed due to various regulatory actions by relevant authorities.