Bitcoin’s India Travails – Attempting Big Change Through Small Change

Fortune 500 CEOs will tell you that India doesn’t exactly embrace change at a fast pace. Global investment gurus will tell you that there are two Indias around – one capitalist and the other socialist – and both are rarely in sync. Bottom line, India can be a frustrating place to do business, despite a market of 1.2 billion people.

The upstart virtual currency Bitcoin, which has made a fortune out of disrupting conventional financial norms, probably thought it could sneak in guerrilla style into India and game the system. Instead, it just got tamed by the Reserve Bank of India, the central bank of the country.

Bitcoin basics
If you are one of those for whom the penny doesn’t drop at the mention of Bitcoin, here’s a short primer.

Bitcoin is a virtual currency, which is exchanged on a peer-to-peer basis. Unlike regular currencies, it has no nationality and therefore, no central bank. You can use Bitcoin not only to buy virtual goods but also real items, as long as the seller agrees to trade in the currency.

More arcane details surround Bitcoin, but let’s concentrate on the money-making part. Bitcoins can be ‘mined’ by downloading software, which is a slow and dirty job. Otherwise, you can exchange real cash on Bitcoin exchanges to buy the virtual currency.

This second method is proving to be really profitable. Compared to major currencies, Bitcoin’s exchange rate has gone up an average tenfold since it emerged in 2009. For people interested in cashless, anonymous, non-taxable transactions, Bitcoins are worth every nickel and dime. They are also invaluable in buying goods from the ‘underground’ market.

Little wonder then that governments across the world have been watching the rise of the Bitcoin with increased wariness.

Banking on India
India may have been a Johnny-come-lately to the whole Bitcoin gig, but alternative monetary systems and currency transactions are an integral part of the country’s economic structure, rarely for the better and mostly for the worse.

Unaccounted, undeclared income, better known in India as ‘black money,’ is the country’s best kept open secret. Politicians fight elections with it; business people pay bribes with it and middle-class Indians buy homes and gold with it.

If anything, it should be a surprise that Bitcoin adoption in India only exploded in 2013 when 70% of the 35,000-odd Bitcoin downloads in the country took place. Experts believe this growth has been spurred by an increasingly IT-savvy populace and remittances by Indians based abroad.

The largest Indian Bitcoin exchange, the cleverly named BuySellBitco.in, had been expanding rapidly – rumoured to be transacting around Rs 120 million a month. It had tied up with major Indian private banks to facilitate online purchase and also offered regional language support to customers from southern India. What it didn’t plan out was being on the radar of the Indian authorities. That can never be a good thing, as the exchange soon found out.

RBI reservations
In India, the rule of law is often a flexible concept, but there are still some institutions not worth antagonising. One such entity is the country’s central bank, the Reserve Bank of India, the fiercely independent guardian of India’s monetary system, whose policies and pronouncements can, at times, even send the government into a tizzy. Bit-part virtual currency players are small fry in comparison.

As it turned out, the RBI didn’t even have to declare a ban on Bitcoin. An innocuous-sounding Press release was enough to short-circuit Bitcoin’s plans in India, at least for the short term. By advising traders in Bitcoin that they were essentially operating in a regulatory ‘Wild West’ where they could not expect the RBI to come play Sheriff in case things went south, the central bank covered all bases including its behind.

The real deal
Painting Bitcoin black, however, will not do justice to the complex real-world scenarios that virtual currencies pose for modern financial markets and commerce. The RBI, by playing it safe, has failed to address the needs of the savvy Internet consumer who wants to use virtual currency to experience a wealth of virtual and actual options.

Instead, the Indian central bank should look at the progressive view German authorities have taken about Bitcoin and virtual currencies in general. Ironically, Germans have figured out a way to tax such transactions. If there is one thing governments should never be shy of, it is to find new ways of generating tax revenues.

Unfortunately, the US Federal Reserve, too, has adopted an ambiguous policy towards the Bitcoin. The US has the largest population of Bitcoin users in the world and while the Fed has approved the use of the currency, the IRS has not issued any tax guidelines.

For better or worse, it’s time to face up to both sides of the same coin.