Cryptocurrency &
Regulatory Environment
An Introduction

Agenda
• How Crypto-Currencies Work:Bitcoin Example
• Where Crypto-Currencies Fit In The Regulatory Framework
• Crypto-Currency Ecosystem : Key Players and Business
Models
• Opportunities and Trends for Financial Institutions
• Beyond Bitcoin: Decentralised Apps
• Questions/Answers

Virtual Currencies: How
They Work
• 2008 Financial Crisis/Loss of faith in banking
• Fiat Currency Crises in Cyprus, Greece,Argentina,
others
• Chinese currency exportation prohibitions
• Continued irritation with bank payment
inefficiencies and costs
• Technology breakthrough

Why Bitcoin Was Created
• Limitations of Incumbent Payment Systems:
• Limited Access:
• Credit/debit not universally accepted
• 50%of world population has no access to banking systems*
• Credit and savings vehicles not available to unbanked/underbanked
• High Costs:
• Fees:Interchange,Bank Fees,Payment Networks,Processors,ISOs
• Infrastructure and compliance investment(POS,PCI/Security,KYC)
• Chargebacks,reversals,refunds,fraud
• Liquidity “Islands”: moving small amounts of money around the world quickly and cheaply is very difficult
• Privacy: Internet transactions require sharing of personal data with third parties
• Security: inflation, devaluation, asset seizure, currency export controls

What is Bitcoin?
• Above all, Bitcoin is a Platform:
• A Protocol: an open set of standards for
communication
• A Network: self-regulating, self- propagating
• A Currency: universal and independent
• A Payment System: medium for the exchange of
value, and a public ledger

What is Bitcoin? Reality vs.
Myth
• Bitcoin is the:
• First (there are numerous others – Litecoin, XRP, Freicoin, etc.)
• Open-source (non-proprietary code = strength in transparency) – Decentralized (no issuing authority)
• Peer-to-Peer (cash-like electronic transactions, no intermediary) – Digital (built for the Internet)
• Alternative (not a replacement of fiat currencies)
• Cryptographic (based on principles of proven cryptography)
• Currency (medium of exchange, store of value, unit of value?)
• Bitcoin is not:
• Anonymous (but it is pseudonymous)
• Risk-Free (it can be stolen/lost/hacked, just like cash)
• A Substitute for Government/Banks/Payment Networks (complementary - symbiotic)
• Free

How Bitcoin Works

How Bitcoin Works

How Bitcoin Works

How Does It Really Work?

How Does It Really Work?

Bitcoin Pros and Cons

Bitcoin Fluctuation Risks
• Present:
• Immature Market
• Disconnected
exchanges
• Lack of Liquidity
• Uneven regulation,
access
• Future:
• Professional,
connected exchanges
• Derivatives market
• Regulatory clarity

How Crypto-Currencies Fit
in Regulatory Environment
• Laws about Bitcoin are in a gray area today across the world.
• Is Bitcoin Regulated in India?
The RBI regulation on Prepaid Payment Instruments in India defines a lot of areas.
After understanding the documents of RBI’s guidelines and Rules, this is where one
could find the only roadblock based on regulation.
• “3. Eligibility
• 3.2 Only banks which have been permitted to provide Mobile Banking Transactions
by the Reserve Bank of India shall be permitted to launch mobile based prepaid
payment instruments (mobile wallets & mobile accounts).”
• In order to enter into the market; fiat is needed to purchase Bitcoin. Fiat will fade away
as more people adopt Bitcoin. Until that frictionless free flow between consumers and
merchants is made possible, this is a problem area for Bitcoins entry into India.
• If we keep fiat out of the system, then Bitcoin is unregulated in India.

How Crypto-Currencies Fit
in Regulatory Environment
• Feb 1 2017: RBI says it hasn’t authorised use of Bitcoins, flags
risks.RBI warns those investing in virtual currencies like Bitcoins are
exposing themselves to potential financial, legal and security
related risks
• Feb 7 2017: Bitcoin players such as Zebpay, Unocoin, Coinsecure
and Searchtrade have formed the Blockchain and Virtual currency
Association of India and are in the process of formally registering it.
• The main objective of the new association is to create an industry
body to engage with regulators, but the association will also focus
on making Bitcoin trading safe by ensuring members follow strong
KYC measures and by creating awareness among users about
Ponzi schemes and other risks.

Evolution of Regulatory
Landscape
• Early Law Enforcement Focus:
• 2012 FBI Report: concerns over criminal activity (illicit drugs, weapons,
• child pornography)
• Seizure of Mt.Gox assets: Summer 2013: >$5M in U.S. Accounts seized by DHS for
operating an unlicensed MSB
• Silk Road Bust: Fall 2013: DOJ now in possession of ~25K Bitcoins
• To Regulatory Clarity: Are Bitcoins “Money”?
• FEC:Bitcoins are not money(“in-kind contributions”)
• IRS:Bitcoinis Property:taxation guidance
• Congress:Senate hearings held Nov 2013
• State Licensing: Very few Bitcoin companies have successfully obtained

Evolution of Regulatory
Landscape
• Future Issues:
• Consumer Protection:
• Applicability of state and federal laws
• EFTA and Regulation E
• Remittance Rule
• State and federal Securities Laws
• Commodity Trading Rules
• Banking Law: Third Party Service Provider Rules

Crypto-Currency
Ecosystem: Players

Crypto-Currency Ecosystem
-> Miners
• Miners: Some individuals, but increasingly, Groups
or “Pools” using specialized hardware = rewards
split (already commoditizing)

Crypto-Currency Ecosystem
-> Exchanges
• Bitcoin Exchanges:How to Get Bitcoins
• B2C:
• Local Bitcoins
• BitStamp
• Unocoin
• BTC China
• Dozens of others
• B2B: institutional; large funds transfer
• Kraken
• CoinX
• Exchange Software Platforms
• AlphaPoint
• Buttercoin

Crypto-Currency Ecosystem
-> Wallet Providers
• Wallet Providers:
• Coinbase (hosted)
• Circle Internet Financial (Hosted)
• StrongCoin (hosted hybrid)
• BlockChain.info (hosted hybrid)
• Armory (desktop)
• Electrum (desktop)
• Complex
• Bitcoin QT (desktop)

Crypto-Currency Ecosystem
-> Payment Processors
• Accept Bitcoins –
• BitPay
• Coinbase
• Circle
• Square*
• Stripe*
• Many More new players

3. Crypto-Currency
Ecosystem -> Merchants

Paying With Bitcoin
• Bitcoin uses QR Codes to encode payment
information, but merchants can also integrate
directly with wallet providers
• Prices listed in dollars; payment processor
converts to bitcoin

Crypto-Currency Ecosystem:
Bitcoin Investment Vehicles

Crypto-Currency Ecosystem:
Self-Regulation and Advocacy

Opportunities
• Partner with Virtual Currency Companies:
• – Exchanges, Payment Processors need bank accounts
• – Compliance Due Diligence: work with firms that understand compliance
• Explore Issuance of New Financial Products:
• – Debit Cards with Bitcoin Purse
• – Virtual currency-backed GPR Cards
• Bitcoin Wallet = Checking Account?
• Leverage Existing Merchant Relationships
• B2B Funds Settlement: direct challenge to ACH/wires

Beyond Bitcoin: Distributed
Application Plaftorms
• Utilize cryptography and the Bitcoin concept of a distributed public ledger
to enable:
• – Smart contracts
• – Custom currencies
• – identity management
• – Physical and digital property ownership authentication
• – Decentralized currency and stock exchanges
• – Derivatives markets
• – Decentralized autonomous corporations

Raging Issue
• Block size limit controversy:Blocks are limited to 1MB in size. Miners can mine blocks
up to the 1MB fixed limit, but any block larger than 1MB is invalid. This limit cannot be
modified without a hard fork. To prevent Bitcoin from temporarily or permanently
splitting into separate payment networks ("altcoins"), hard forks require adoption by
nearly all economically active full nodes.
• Transaction Backlog: Bitcoin is facing a major problem as the time it takes transactions
to be processed has increased dramatically leading businesses to stop accepting the
cryptocurrency and others to issue warnings that the problems could be terminal.
• Processing Fee: It’s probably due to the size of the transaction. If it has many inputs,
the transaction size will be quite large. The priority of a transaction is based on its size
and fee. By default the minimum fee for a transaction to be considered non free is is
0.00001 btc per kb. Your wallet might be trying to ensure you get into the blockchain
within say... 3 blocks, or less. You could try setting a lower fee and seeing if it goes
through. At the moment the network does not appear to have a significant backlog.

Thank You