India’s bitcoin operators shut shop following RBI warning

F P :Dec 26, 2013

New Delhi: A number of bitcoin operators in India have begun suspending their business following RBI's warning against use of such virtual currencies due to potential money laundering and cyber security risks.

While RBI is yet to come out with a clear regulatory framework for bitcoins, which have been gaining currency across the world over the past few months, it has issued an advisory cautioning general public against use of bitcoins and other virtual currencies.

Within days of this advisory issued on December 24, a number of entities offering bitcoin services have suspended their operations, temporarily or indefinitely, while websites of a few others have gone down.

However, some other entities continue to run their operations of offering bitcoin exchange services for rupee and other currencies.

Bitcoin is a virtual currency that can be generated through complex computer software systems with solutions shared on a network, although the process is complex and such 'mining' can be done only on very powerful servers.

Hardly three years into existence, bitcoin has already become the world's most expensive currency and its per unit value soared past USD 1,000 level or about Rs 63,000 recently, although the prices have now slipped below Rs 50,000 level.

There was a phenomenal surge in the exchange rate for bitcoin from little over USD 200 to well past USD 1,000 during November, but there has been an extreme volatility since then and the RBI's warning has further added to its woes in India.

One of the bitcoin operators in India, buysellbitco.in, has posted its website, "Post the RBI circular, we are suspending buy and sell operations until we can outline a clearer framework with which to work.

"This is being done to protect the interest of our customers and in no way is a reflection of Bitcoin's true potential or price," it said.

Another entity, INRBTC also said that "in light of RBI's notice, services of INRBTC.com are being suspended indefinitely".

Explaining its decision, INRBTC said that RBI has stated that users of virtual currencies are exposed to both legal and financial risks.

"Further it (RBI) states that absence of information of counterparties could subject the users to unintentional breaches of Anti-Money laundering and combating the financing of terrorism (AML/CFT) laws," it added.

"The only option left now is suspend the services until further arrangements can be made," INRBTC said, while adding that all trades which have been executed till December 26, 2013 will be processed completely.

"All pending orders will be cancelled and the deposits on those orders will be refunded 100 percent to the users," it said.

Many other websites offering bitcoin services in India have gone down, although a few continue to operate as of now despite increasing regulatory glare on bitcoins globally.

While authorities and experts are becoming worried about its potential money laundering risks, concerns have also been raised about this new phenomenon snowballing into an 'e-ponzi' or an electronic version of investor fraud, given the growing promotion of bitcoin as investments without any enabling regulations for them.

According to a senior official said, pressure has increased on regulatory and enforcement agencies in India after latest moves by China and France on this front.

"The fact remains that regulators are scrambling for ways to regulate this entire gamut of digital currency, as it is a totally new concept in India and even the jurisdiction is not clear as yet on who should regulate them," he said.

While the US has declared that all prevailing money laundering laws would apply to bitcoins, China has asked its banks and other financial institutions not to deal in bitcoins and the public has been asked to do so at their own risk.

Besides, France last week warned its banks about risks related to bitcoins.

At the same time, the experts are also raising concerns about cyber security issues, given the huge scope of money laundering and other illegal activities through use of an unregulated digital currency concept.

Bitcoin came into existence in 2009 and the current number of bitcoin units generated so far stands at about 12 million. However, only a small number of bitcoins are being used for real commercial and retail purposes and a majority of transactions are happening for speculative investments.

Adding to the challenges before the regulators, this e-currency is already being accepted by some online retailers in countries like the US, China and a few others, for various purposes including pizza delivery.

Those looking at this new phenomenon include almost all financial sector regulators as also agencies mandated to handle economic crimes, such as RBI, Sebi and various agencies under the Finance Ministry, a senior official said.

While regulators are tight-lipped about their plan of action, a senior official said that one possible way forward can be following the US, where authorities have decided to subject bitcoins to money laundering rules applicable to all other financial transactions in the country.

Regulators are also looking into claims being made by some entities of being registered bitcoin exchange providers, although they might have merely registered as a company with the Registrar of Companies for generic business purposes.

To make things worse, this virtual currency has become new tool for fraudsters who are promoting bitcoins as the next big investment products with unlimited returns.

A few complaints have already poured in about bitcoins being used by some operators in certain new-age and e-versions of multi-level marketing or ponzi schemes.

Regulators fear that this new phenomenon can give rise to a new kind of illegal investment schemes that could be very difficult to track and clamp down. There is almost zero physical activity when dealing in bitcoins and nearly all transactions take place in the electronic format.

PTI

Everything you need to know about Bitcoins

Bitcoin is a decentralised peer-to-peer digital currency and payment network. (AP)

 I E Muhammad Zulqarnain Zulfi : New Delhi, Thu Dec 05 2013, 10:32 hrs

Digital currency Bitcoins were in the news recently after James Howell, an IT worker from Newport, Wales, discovered that he had accidentally thrown out a hard drive containing 7,500 bitcoins -- now worth almost $8 million.

 

Howell obtained the bitcoins in 2009 for almost nothing. When he discarded his hard drive last July -- now buried in a Newport landfill the size of a soccer field -- the bitcoins were worth nearly $9,00,000. Today, the value of one Bitcoin has soared to over $1,000.  

"Bicoins are wonderful idea of alternate money. Bitcoin is a digital money so no middlemen, no bankers make it more safer and convenient. All we have to do is solve complex mathematical problems,"explains Callmus Jones, one of the early miners of this crypto-currency. 

What is Bitcoin? 

Bitcoin is a decentralised peer-to-peer digital currency and payment network. But unlike traditional currencies, this one doesn't have a reserve. Instead, Bitcoin relies on a sort of honour system, and is traded on the web. According to the Bitcoin website, Bitcoin is free from the highs and lows of inflation, interest rates and market fluctuations, and its value is determined by the number of bitcoins in circulation -- that number is capped at 21 million. 

How does it work?

According to the Bitcoin website, "Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them." 

Bitcoins are typically bought through an exchange. The process involves setting up an account, then transferring funds into the account in order to start buying bitcoins. Bitcoins can also be exchanged in physical form through the Casascius coin, each of which is one digital Bitcoin.

Individuals can acquire bitcoins through: 

Payment for goods and services 

Purchasing them at a Bitcoin exchange 

Exchanging Bitcoins with other individuals 

Earning Bitcoins through competitive mining (a process whereby users create money through computing: users donate their computer power to Bitcoin so it can be used to solve complex mathematical problems required to validate transactions. When a problem is solved, bitcoins are issued). 

The world's first Bitcoin ATM went live in a downtown Vancouver shop in October this year, allowing people to exchange cash for the digital currency. Approximately 20 businesses in Vancouver now accept Bitcoin. 

In November, British billionaire Sir Richard Branson's commercial flight company Virgin Galactic announced it started accepting the digital currency for its Virgin Galactic flights to space. And on November 28, University of Nicosia, Cyprus' largest private university said it will start accepting Bitcoin for tuition fees -- the first university to do so. 

Advantages?

Efficiency: Money can be sent and received instantly anywhere in the world, at any time, without a bank or middleman. 

Low fees: Payments are processed with either no fees or very small fees. 

Privacy: Transactions do not contain users' personal information, offering stronger protection against identity theft. 

Control: Users are in full control of their transactions. 

Transparency: All information on transactions is available in the database. 

Risks?

Because Bitcoin isn't backed by a mint, transactions are not subject to the same regulations as other currencies. While every single transaction made using Bitcoin is posted publicly, the identity of the user remains anonymous -- making it hard to track perpetrators in the case of theft. 

The now-defunct online drug market Silk Road was an early driver in Bitcoin's growth, taking advantage of the currency's ability to provide anonymity to users. 

But according to the Bitcoin website, the most common vulnerability is user error. Similarly to physical cash stored in a digital form, Bitcoin wallets that store private keys can be accidentally deleted, lost or stolen.

Live: Bitcoin exchange rate 

Bitcoins..... Virtual currency...What it is ?

 B T :Pritam P. Hans       Edition: May 12, 2013

Paying in a different coin

Demand in India for Bitcoins, a virtual currency maintained by peer networks, is largely from speculators - as it is worldwide.

Mahin Gupta, a 30-year-old software developer in Ahmedabad, joined the alternative economy in 2011, when an Australian company contacted his firm to create a platform based on the digital currency known as Bitcoins.

 He accepted part of the payment in Bitcoins, and then continued to collect them even when their value fell briefly to around $2.

"The value of Bitcoins suffered due to scams and trades as it wasn't very mature then," says Gupta. On April 11 this year, one Bitcoin was worth around $170 (over Rs 9,200). The appreciation reflects the popularity of this highly volatile virtual currency (it was at a record $260 on April 10) in the real-world economy.

No wonder, then, that Bitcoin enthusiasts like Gupta are a growing tribe. They seek to free currency transactions from the clutches of government and financial institutions, and give full control to owners. What drives them is the belief that governments do not always manage money wisely.

For example, in March this year, Cyprus demonstrated the perils of the trust-based financial model. Deep in an economic crisis, the Mediterranean island country's government decided to take depositors' money in some bank accounts with deposits over i100,000. Many who trusted Cyprus's banks will have no access to much of their money for an uncertain period, and may lose it all.

Had these depositors used Bitcoins, they would not have been at the mercy of the government. 

The Appeal of Bitcoins
Launched in 2009 by an unidentified person or group known as Satoshi Nakamoto, Bitcoins are encrypted sets of digital data representing past transactions. The opensource currency, abbreviated as BTC, is powered by a peer-to-peer network similar to torrent file-sharing networks, and is in the public domain both in terms of issuing and valuation.

Its supply is distributed evenly throughout the network, grows at a rate known to all parties in advance, and can never exceed the predetermined limit. It cannot be manipulated by governments and political bodies, and cannot be inflated or deflated artificially. No central authority issues Bitcoins. All transactions are directly between the two parties involved, with no financial institution as intermediary. So transaction costs, if any, are low.

Nilam Doctor, Ahmedabad-based software professional and Bitcoin investor, has developed a trading platform for the virtual currency Photo: Deepak G . Pawar

Another reason Bitcoins are popular is that payments are irreversible, unlike those made by conventional methods such as debit or credit cards. A credit card payment, for instance, can be later denied to the seller if the cardholder claims there was some fraud. At the start of April 2012, there were some 11 million Bitcoins in existence, with 25 being added every eight minutes as on April 11, 2012.

Around the year 2140, there will be around 21 million, the maximum currently permitted by the system. The currency has seen massive user interest since March 2012, thanks in large part to Cyprus's banking crisis. The Bitcoin was worth around $100 on April 1, 2013, up from $13 at the beginning of the year. With demand rising and supply limited, the digital currency rose steeply before a crash.

"The recent surge is a sort of virtuous cycle of people talking more about Bitcoins and finding it easier to buy them," says Peter Vessenes, Executive Director at the Bitcoin Foundation, which creates standards for Bitcoins and works to promote them. "Demand so far has come from the US and Europe. Asia is less represented currently."

Using Bitcoins
Bitcoins can be broken into small units of up to eight decimal points, and are transferred like e-mail. They are used to pay for goods and services on websites that accept them. Every time they change hands, they are stamped with the transaction details and the identification key of the new owner. All transactions are communicated to the public network and indexed for future verification.

Buyers and sellers remain anonymous, as the identification numbers include no personal details. Early adopters, such as Mahin Gupta in Ahmedabad, have gained hugely. Gupta now runs a trading platform called buysellbitco.in. At the beginning of April this year, Gupta had 20 unfulfilled Bitcoin orders, as none of his contacts - some 60 people in India and the US - were willing to sell the coins.

"There are about 2,000 active Bitcoin users in India. Most of the users are individuals and want to explore the possibilities of an alternative investment opportunity," says Nilam Doctor, an Ahmedabad-based software professional who has invested in Bitcoins and also developed an online trading platform for the currency, rbitco.in.

2,000 Active users of Bitcoins in India

No e-commerce websites in India accept Bitcoins, but many Indian enthusiasts use the payment system for trade of goods and services from overseas websites. Many online stores offer discounts for Bitcoin payments to increase their coin holding for future gains.

The huge demand for Bitcoins in India has largely been from speculators hoping to gain from the rising value of the currency.

How Bitcoins Are Minted
In a traditional economy, a central authority issues currency. But Bitcoins can be created by anyone by mining. It's a bit like digging for gold.

Bitcoins are small blocks of data hidden in a huge amount of irrelevant data. To get Bitcoins, one has to take the entire chunk of data, rearrange it, and process it through a set algorithmic functions - in other words, 'hash' it - until the desired result is found. The first person to find it owns the block - currently 25 Bitcoins. Luck plays an important role in solving the 'puzzle', or rearranging the raw data into the pattern that yields the right result.

You don't need to be a geek to mine. The software, freely available, does everything automatically. What you do need, though, is powerful hardware and money to pay for the power the machines consume. Mining takes time and energy in terms of processing power. As mining activity increases, and as more coins are discovered, the difficulty level of mining rises. Going back to our gold analogy, the more gold we mine, the harder we need to work to extract the remaining gold.

In the early days of Bitcoins, the puzzles were easy enough for even personal computers. Until recently, Bangalore-based Bitcoin enthusiast Benson Samuel mined the currency using a botnet, or a network of computers that run applications. "I used to mine coins using GPUs," he says.

He is referring to graphics processing units, or computers designed to run graphics-heavy applications such as video games. He also used personal computers. "Most of my hashing power used to come from friends' computers. I know a lot of gamers, which helped," says Samuel.

But the rising value of Bitcoins has prompted miners to use powerful computers. The puzzles have become more difficult, too, to control the number of coins that are generated.

So low-powered computers now take longer to win a block, which means higher electricity costs. "We used to get a constant turnover of Bitcoins until the difficulty increased and brought in complete disinterest due to the imbalance of effort versus results," says Samuel.

He has now disbanded most of his botnets, and is awaiting delivery of a computer designed to mine Bitcoins. The computer, made by Butterfly Labs, one of the few manufacturers of specialised hardware for Bitcoin mining, uses applicationspecific integrated circuits that hugely increase its processing power and energy efficiency. Samuel says he has invested around Rs 1 lakh in the machine, and is unwilling to disclose its processing power.

"At the current difficulty level and hash rate, you need a very powerful mining hardware of more than 60 GHz (processing speed) to mine Bi tcoins eas i ly," says the Ahmedabad-based Doctor. "I know miners who have switched from Bitcoin to Litecoin and TeraCoin (also digital currencies), where mining is still easy."

On Butterfly Labs' website, a Bitcoin miner with a processing speed of 50 GHz is priced at $2,499. A 1,500 GHz miner, priced at $29,899 just before the crash on April 11, is now labelled "out of stock". Another manufacturer, BitSynCom LLC, was accepting orders for its new 65 GHz Avalon miners at 75 Bitcoins until recently.

The machines are selling like hot cakes. Based on current Bitcoin valuation and puzzle complexity, these machines can pay for themselves in a few weeks. Yes, there is a catch: once these machines start participating in mining activity, the complexity of the hash algorithms will go up.

The Dark Side
Digital cryptographic currencies are new, and there are not enough regulations governing them. Mining, buying and selling Bitcoins is not illegal in India, but it is not recognised by law either, and their taxability is a question mark. "As long as you retain Bitcoins and do not convert them into rupees, it need not be included in your income," says Gupta, who launched his Bitcoin operations after consulting experts.

Benson Samuel, Bangalore-based Bitcoin evangelist, says those who use the digital currency are honest taxpayersPhoto: Deepak G . Pawar

"The Bitcoin economy is currently a traders' paradise in India, as the coins do not attract VAT (valueadded tax) or service tax," he adds. "As a company, you just have to pay corporate tax or income tax."

Government authorities cannot track payments in the Bitcoin system. Should that free people from tax liability on income and from laws that regulate financial transactions? "Bitcoins simply put the decision to pay taxes back in the hands of the citizen," says Samuel. "This cannot be controlled, traced or verified, but several people whom I have spoken with say they would not adopt such a currency without the consideration of 100 per cent honesty in paying taxes."

The anonymity of Bitcoin payments has led to their use for illegal activity. Money-laundering is a threat, as is illegal trade. Silk Road, an online trading website for illegal drugs, uses Bitcoins. "The drug trade from India is vibrant on Silk Road," says Samuel, adding that he has no connect ion
with them.

Since Bitcoin transactions are irreversible, scammers and fraudsters find them useful. "People collect payments and do not deliver," says Samuel. Monetary regulators are waking up to the reality of Bitcoins. In March, the US Financial Crimes Enforcement Network said a money transmitter's licence would be required to sell or exchange Bitcoins, although they can still be freely used to pay for goods and services.

Traditional financial institutions such as banks are yet to enter the Bitcoin arena. Bitcoin Foundation's Vessenes is optimistic that they will accept Bitcoins this year or the next.

"Things are moving here, but it takes time for large enterprises to take action," he says. "Almost every large company we talk to has some internal group that loves Bitcoins and is trying to encourage their use internally. All this advocacy is great, and some of it will flower eventually."

Vulnerabilities
Though Bitcoins have matured substantially, the system is still experimental, and has a few aspects that can be exploited or result in a glitch. If someone could control 51 per cent of the total computing power in the Bitcoin ecosystem, for instance, they could manipulate it to retrieve the money already spent. Thankfully, such a scenario is unlikely, and playing by the rules is rewarding.

Another risk is that Bitcoin apps which serve as the backbone of the system could malfunction. Recently, an incompatibility between two versions of the mining software resulted in a company losing a lot of Bitcoins.

"There was one double-spend (Bitcoins used twice) that left a company out a bit of Bitcoin," says Vessenes. "They resolved it directly with the other party. This sort of thing is not good for the economy. Experts run most important Bitcoin companies, and it's possible that newer ones run by non-experts could face more problems."

The low market capitalisation - around $1.5 billion on April 4, 2012 - lays the system open to manipulation by someone with deep pockets. Governments, on their part, could declare Bitcoins illegal.

Like cash, Bitcoins can be lost or stolen if digital wallets are not secured through encryption and paper or digital back-ups. A lost or deleted Bitcoin cannot be replaced. Despite the criticism and risks, the Bitcoin is gaining popularity.

Just before the crash in prices, some expected their value to reach $1,000 by the end of this year. Whether that happens or not, Bitcoins are making their mark on the economy.