1. NATIONAL LAW UNIVERSITY,
JODHPUR
LL.M DISSERTATION PRESENTATION
REGULATION OF BITCOINS UNDER EXTANT
REGULATORY
FRAMEWORK OF INDIA – A CRITICAL ANALYSIS
SUPERVISED BY: PRESENTED
BY:
DR.MANOJ KUMAR SINGH NISHTHA
ASST. PROFESSOR ROLL NO. 512
FACULTY OF LAW LL.M 1 YEAR
(CORPORATE LAWS)

2. PRESENTATION OVERVIEW
 SIGNIFICANCE OF RESEARCH.
 RESEARCH OBJECTIVES
 RESEARCH QUESTIONS
 HYPOTHESIS
 BITCOINS – THE MECHANISM,
ADVANTAGES AND DISADVANTAGES
 NEED FOR REGULATING BITCOINS
 HOW OTHER JURISDICTION HAVE
TREATED BITCOINS
 EFFECTIVE MECHANISM OF BITCOINS
IN INDIA
 CONCLUSION AND SUGGESTIONS

3. SIGNIFICANCE OF THE RESEARCH
 Reserve Bank of India has cautioned the
Users, Holders And Traders of the Virtual
Currencies Of the following potential Risks
vide a Press Release dated 24.12.2013:
 FINANCIAL
 OPERATIONAL
 LEGAL
 CUSTOMER PROTECTION
 SECURITY RELATED
 Apprehensions raised by RBI has
accelerated the curiosity to understand
and regulate bitcoins in India
 Therefore the main aim is to :
 Analyze the acceptability of bitcoins
as a tradable currency in India ;
 Analyze the risk associated and
identified by RBI to bitcoins ;
 Examine the regulation of bitcoins
under various acts and legislations in
India

4. RESEARCH OBJECTIVES
 To examine the scope of the term “Virtual Currency”;
 To define “Bitcoins” and “bitcoins”;
 To identify the mechanism behind bitcoins ;
 To examine the level of anonymity that can be maintained while dealing in bitcoins
;
 To analyze whether the concept of bitcoins can be replicated under Indian
Economic Model;
 To critically analyze the potential impact of bitcoins on Indian Rupee ;
 To Find out whether the usage of bitcoins has been authenticated by any
regulatory bodies;
 To find out the applicable laws and regulations under which bitcoins may or can be

5. RESEARCH QUESTIONS
 What are the implications that bitcoins may have on Indian Rupee ?
 Will a currency with no governing body be accepted in India ?
 Does the level of anonymity involved in the encrypted transaction of bitcoins pose a
national threat to the security of the country in terms of its assumed illegal usage ?
 Whether the trading, holding and usage of bitcoins illegal in India ?
 If the trading, holding and usage of bitcoins is not illegal, can it be regulated by a
regulatory authority ?
 How can it be regulated under the extant regulatory frameworks in India ?
 What is the legal status of the exchanges facilitating the bitcoins trading in India ?
 What all statutory acts and provisions can be invoked to regulate bitcoins in India
?

6. IF BITCOINS ARE AN OPEN SOURCE CRYPTOGRAPHIC PROTOCOL
MANAGED IN A DECENTRALISED MANNER, THEN REGULATING IT
UNDER EXISTENT REGULATORY FRAMEWORK OR CREATING NEW
FRAMEWORK WILL RESULT IN LOSS OF ITS DECENTRALISED
HYPOTHESIS

7. WHAT ARE BITCOINS ?
Bitcoins is a digital or virtual currency
based on a peer to peer payment
system that facilitates instant payment
between two parties.
* * In a peer-to-peer network, tasks are
shared amongst multiple
interconnected peers who each make a
portion of their resources directly
available to other network participants,
without the need for centralized
coordination by servers
 A community is defined by the
cooperation of its participants, and
efficient cooperation requires a medium
of exchange (money) to enforce
contracts which is traditionally provided
by the government to legal entities.
 Opposing which Wei Dai, a Cypherpunk
described a protocol by which these
services can be provided to and by
untraceable entities.
 Basing on the findings of Wei dai,
Satoshi Nakamoto, in 2009 came up
with the concept of Bitcoins.

8. PECULIARITIES OF BITCOINS
 It is a Virtual Currency supported by
high end computer algorithms ;
 It is not regulated or controlled by
any Centralized Bank ;
 They are limited to a figure of 21
millions (total bitcoins in circulation
as on 25.04.2014 is 12,68,3425 );
 The buyer and seller interacts directly
with no third party intermediary in
between ;
 Promotes non reversible payments –
cannot be spent more than once;
 Identity of Bitcoin users are
Pseudonymous and not anonymous;
 All the record of the transactions in
bitcoins are recorded in a transaction
log called “Blockchain”
 There is no fixed value to bitcoins as
its value fluctuates through supply
and demand chain;
 Hence they are volatile with the value
seeing its extreme highs and lows;

9. BITCOINS – FLUX Of SUPPLY AND DEMAND
The following graph
shows the fluctuation
in value of bitcoins
going as high as 1150
to as low as 69
explaining its volatile
102
307
780
122 130
434
1151
69
203
560
491
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Months (May ‘13 – Apr ’14)
Value of
bitcoins
in USD

10. BITCOIN TRANSACTION CHAIN
All the
transaction
are
facilitated
through an
e-wallet
generated
specially to
store
bitcoins
 There are two parts to a bitcoin address –
 the public key and
 the private key
 the public key can be freely given but the private key is to be
retained with oneself.
 When someone makes a transaction to send bitcoins to an
address, a message is broadcast from the owner of the sending
address to the network that X amount of coins from that address
now belong to the new address.
 This operation is authorized by the sender’s private key which is
used to sign transactions, providing a mathematical proof that
they have come from the owner of the wallet.
 The signature also prevents the transaction from being altered
by anybody once it has been issued.

11. BITCOIN TRANSACTION CHAIN
All transactions are broadcast between
users and usually begin to be confirmed by
the network in the following 10 minutes,
through a process called mining.
Bitcoins can be obtained through :
-Bitcoin exchanges in exchange of
conventional money ;
- merchants in exchange for the sale of
goods or services ;
- user can generate it through mining

12. BENEFITS OF USING BITCOINS
 LOWER TRANSACTION COST FOR ELECTRONIC ECONOMIC EXCHANGES
- Absence of third party intermediary such as paypal completely eliminates third party
intermediary fee
 INCREASED PSEUDONOMOUS PRIVACY
-Less risk of identity theft as no material information regarding the identity is transferred
between the parties. However a permanent and complete full record of
 NO EROSION OF PURCHASING POWER BY INFLATION
- Due to the fixed amount of bitcoins in circulation i.e. 21million

13. NEED FOR REGULATING BITCOINS
 Its absolute Laissez faire nature – renders bitcoins unregulated ;
 Bitcoins are currency created on a peer to peer network supported by algorithms –
which makes it prone to anti cyberspace activities such as hacking : MT GOX COLLAPS
 The Bitcoin platform and its pseudonymous character provides
safe haven to the illegal activities concealing the identity of the
transactor : USA v. Ross William Ulbricht, 14 CRIM68
 It can be used for money- laundering activities and running
Fraud ponzi scheme – SEC v Trendon Shavers, 4:13-CV-416,
Florida criminal case involving Pascal Reid and Michell Espinoza

14. MT GOX COLLAPSE
- Mt GOX: the biggest bitcoin exchange in Japan responsible for 70% of the total bitcoins
in
Circulation suspended its operation in February 2014 ;
- The CEO Mark Karpeles cited reasons of Slowing down of the server due to heavy
transaction
On the exchange
-Few days later an anonymous document was floted namely _ Crisis Strategy Draft,
which
Claimed that approx. 7,44,408 bitcoins were stolen from the exchange (6% of the total
bitcoin
In circulation amounting to $480 million ;
-The above information was finally confirmed by the CEO resulting in MT. GOX filing its
Bankruptcy papers.

15. SPECULATION OF TREATMENT TO BITCOINS
 CAN BITCOINS BE TREATED AS :
 CURRENCY under section 2(h) of Foreign Exchange Management Act, 1999 ;
 SECURITIES under section 2(h) of Securities Contract Regulation Act, 1955;
 DERIVATIVES under section 2(ac) of Securities Contract Regulation Act, 1955 and section
17(6A) of Reserve Bank of India Act, 1934;
 NEGOTIABLE INSTRUMENT under Negotiable Instruments Act, 1881;
 GOODS under section 2(d) of The Forward Contracts (Regulation) Act, 1952;

16. WHO CAN REGULATE BITCOINS IN INDIA
 Reserve Bank Of India
- “ one of the values of currency is stability
and the extent a currency is the target of
speculation as opposed to primary means
of exchange does create some concerns
for the user” – Raghuram Rajan
 Income Tax department
- Conducted raids at the Bengaluru Bitcoin
exchange – Coinmonk and Unocoin which
ended up as an inquisitive meeting
showing its intention of taxing the mining
activity of bitcoins.
 Enforcement Directorate
- Conducted raids at Ahmedabad office of
BuySellBitCo.in for the violation of FEMA
provisions as RBI does not authenticat
such transactions.
 All three institutions are filled
with dilemma and
speculations and have
expressed concerns over the
regulation of digital currency
and resorted to preventive
measures to understand the
bitcoin phenomena

17. REGULATION OF BITCOINS UNDER OTHER
JURISDICTIONS
 UNITED STATES
-Internal revenue Services, has issued guidelines to tax bitcoins as a “property” and not a
currency ;
- a tax payer who receives virtual currency as a payment for goods or services must in
computing gross income , include the fair market value of the virtual currency ;
- the fair market value would be in terms of U.S. Dollars as on the date of receipt.
 CANADA
-Bitcoins are not “legal tenders” as reported by the Department of Finance, Canada ;
-Factsheet issued by Canada revenue Agency dated 05.11.2012 on virtual currencies states
that transactions involving bitcoins are of the nature of barter transaction and hence are to be
treated as “commodity” for the purpose of levying tax.
- federal Budget was unveiled on 11.02.2014 which included a brief mention of Canadian Govt.
plans to introduce anti- money laundering and anti -terrorist financing regulations for virtual
currencies such as bitcoins.

18. REGULATION OF BITCOINS UNDER OTHER
JURISDICTIONS
 CHINA
-Central bank of China and four other government ministries issued a notice on 03.12.2013
stating bitcoins are virtual commodity and not a currency ;
-Bans and payment institution are prohibited from dealing in bitcoins.
 EUROPEAN UNION
- No specific legislations or tax treatment has been accorded to bitcoins ;
- European banking Authority just like RBI in India has issued a warning on the dangers
associated with transactions involving virtual currency viz. bitcoins ;
- The EBA pointed out that since bitcoins are not regulated , consumers are exposed to the risk
of losing their money.

19. REGULATION OF BITCOINS UNDER OTHER
JURISDICTIONS
 RUSSIA
- Ranks comes second China in banning of bitcoins and radically clarifying that no other
currency be it virtual can foster other than Ruble.
- The use of bitcoins and other cryptocurrencies carries the risk of violating citizens’ property
rights and cannot be used in Russia, the country’s Prosecutor General's Office concluded
after meeting with the Central Bank, FSB, and Interior Ministry.
- The monitoring of the use of virtual currencies shows an increasing interest in them,
including for the purpose of money laundering, profit obtained through illegal means
- Russia’s official currency is the ruble. The introduction of other types of currencies and the
issue of money surrogates are banned under Article 27 of the federal law ‘On the Central
Bank of the Russian Federation.’

20. CONCLUSION
- Although still in its nascent stages, Bitcoin and other digital currencies like it are
projected to become important players in the future of e-commerce.
- Satoshi writes in his white paper—“as long as there are more honest nodes than
dishonest nodes, the dishonest ones are suppressed and Bitcoin remains whole”, but the
fact of the matter remains that in reality the entire mechanism of bitcoins is supported by
algorithms and computer programming and given the current graph of technical
innovations in the areas coding and decoding computer algorithm and programmes,
bitcoins is almost all the time exposed to the anti-cyber vulnerabilities.
- How, when, and to what extent bitcoins will grow remains to be seen. But the potential
consequences of widespread adoption of it are already palpable.

21. CONCLUSION
- The peer-to-peer, decentralized, and largely unregulated system of Bitcoin contains the
potential to threaten the global economic stability. The threat posed by Bitcoin is no more
theoretical, as the system has already fallen in wrong hands.
- The lack of an underlying legal framework posits additional problems. Because digital
currencies like Bitcoin lack regulation or public oversight, they are subject to credit, liquidity, and
operational risks, as well as risk of fraud.
- Sooner or later these problems would have to be addressed as leaving the issue unaddressed
would create much hue and cry. India should seek to create an instrument at place in order to
deal with the upcoming break through’s of the bitcoins – be it positive or negative. It is the
demand of the principle of Caveat Emptor that India must make available guidelines for informing
the buyers and the users of bitcoins to be aware of pros, cons, consequences and legality of
their act.

22. SUGGESTIONS
The entire globe is at a standstill and is in aghast with the entire peer to peer mechanism on
which the bitcoins operate.
Therefore it is suggested that Bitcoin is a cosmopolitan currency that has not only affected
India but worldwide. Almost all the countries are facing similar doubts as to under which head
can they categorize bitcoins and likewise regulate – do they accept it as an alternate virtual
currency, or as a commodity and subject it to the consumption tax unlike Japan.
That the global skepticism of regulation of bitcoins must be addressed at an international
platform and international agreements under the Comity of Nations almost parallel to the
scheme of World Trade Organization and International Monetary Fund.

23. SUGGESTIONS
Such international platform will provide for addressing the issues relating to bitcoins and also
range of deliberations considering the participation of all the Developed and Developing Nations
.
Attaining and implementing such a model is time taking and requires the extremes of
cooperation among the participating nations however it must be noted that the results shall be
far reaching as such an approach will not only provide an uniform solution to the regulation of
Bitcoins but would also help in creating an international obligation on the member nations and
giving to the world a global jurisdiction to govern bitcoins and virtual currencies.

24. THANK YOU