Author: Ashish Chandra, Senior Attorney, Media, Broadcasting, Internet, Tech, Telecom & Sports
That digital, virtual currency (or commodity) not issued by any government, bank or central organization - commonly known as a Bitcoin - is best known for illegal use. Yet, it's more popular than ever! Is it here to stay? If it appears in your contracting world, what must you know now?
Author Ashish Chandra put the stethoscope on the Bitcoin and its effect on the global community – and found it alive and finding its feet! He discovered some interesting implications commercial and contract managers need to know about if and when it becomes a contracting issue.
IMPLICATIONS FOR CONTRACTING
The Bitcoin payment option would pose several head scratchers for contract professionals. You will need to consider several things, including…
Bitcoin - more viable than volatile
The real culprit is misuse, not the currency itself. True, Bitcoins have generated unprecedented volatility in exchange rates; precipitated the collapse of big Bitcoin exchanges; caused a few promoters to get arrested for several illegal Bitcoin exchanges and spawned other harmful developments. Notwithstanding, the Bitcoin is proving to be a viable substitute for the fiat currency exchanged for trading goods and services in the virtual world.
Few developed countries have fully legitimized Bitcoins. Nevertheless, as Bitcoins gain user acceptability and exchange rates stabilize, they will increasingly gain recognition from governments worldwide, and slowly become an option for payments under commercial contracts.
BITCOIN BASICS - keeping it simple
For the technically minded, Bitcoins are based on an open source, math-based protocol existing on an online, peer-to-peer computer network that hosts the Blockchain (Public transaction ledger).2
You may access your Bitcoin digital wallet and use it to receive or send Bitcoins through a digital address together with a public key and private key that are part of the Bitcoin Network's cryptographic security mechanism.
How can you get Bitcoins?
Using a “goldrush” metaphor, one way of getting Bitcoin in your digital wallet is by “mining” them through cracking algorithms. It's like a reward to the miner for having solved the math-based algorithm, a game of skill, not chance.
The number of Bitcoins in existence will never exceed 21 million. This controlled supply of 21 million Bitcoins multiplied by its smallest unit can create 21 trillion Bitcoin units…
You can receive Bitcoin in your digital wallet through peer-to-peer transfer or when a seller of goods or services (virtual or actual) receives Bitcoins from the buyer as sale consideration.
You can buy Bitcoin through exchange of a fiat currency. The currency denominations are “BTC” or “XBT”. Currently 1 BTC = ~640 US$. In late 2013, the virtual currency traded for over $1,100 per Bitcoin before dropping precipitously. Bitcoins are easily divisible as the smallest unit of the currency is one-hundred-millionth of a Bitcoin.
The Blockchain reflects usage of Bitcoins within past years to the present. Please click on the links below to view line graphs showing how the Bitcoin has been progressing:
Bitcoins can benefit the economy
Lately, various governments have been attempting to regulate Bitcoins either by…
Items a. and c. are objective and clear however b. is ambiguous and the Bitcoin industry appears to be skeptical about doing business in those countries, because they are not sure what category Bitcoin will fall into and what would be the tax impact (if at all Bitcoins are specifically made legal) or whether their business could be shut and they could face criminal trials.
Because Bitcoins are positioned as currency for the virtual world, Bitcoin enthusiasts and entrepreneurs could use this regulatory arbitrage in their favor and set up shops in regulatory and tax-friendly jurisdictions.
Regular currency and Bitcoin compared
The recent extreme volatility in the exchange rate of Bitcoins has given shivers to financial and securities regulators the world over. The real Bitcoin damage started when The Silk Route used Bitcoins to trade illegal drugs while hiding the identity of the payer and payee. Hacking into the private keys of Bitcoins (stealing Bitcoins from digital wallets) also occurred.
Some believe regular currency or other commodities are not better, supporting their view with examples like the following, all of which exist in the real world with real currency and other commodities:
What is the outlook for Bitcoin?
Fraud will always threaten innocent people. Bitcoin is money, and money has always been used both for legal and illegal purposes. The Bitcoin wasn't really developed to replace fiat currency. It is here to stay in the long run and governments need to frame uniform and flexible regulations to enable the Bitcoin to develop as a payment currency for the virtual world. They need to quickly adopt a balancing approach to cater to the payment system needs of this community. Currency is not the problem: we are - unless we are watchful, aware and operate with integrity.
Next steps – my further thoughts
Disclaimer: The views expressed in this article are my personal views and are neither subscribed to nor endorsed by author's present or previous employers. The author doesn't own or trade in any Bitcoin. Comments welcome at firstname.lastname@example.org.
ABOUT THE AUTHOR
Ashish Chandra is Vice President & Head Legal (Media & Technology) with Reliance Industries Limited (a Fortune 200 and India's largest private sector company). Ashish spends most of his time in advising Reliance for the launch of Reliance Jio 4G network and related services in the areas of entertainment, mobile payments, cloud computing and ecommerce. Prior to joining Reliance, Ashish worked with major US multinationals like News Corporation, eBay / Paypal and NCR Corporation. Ashish is a qualified company secretary, law graduate from University of Delhi and specialized diploma holder in Information Technology laws and IPR laws. Ashish is a regular industry speaker at various legal and industry conferences on Media, Broadcasting, Internet, Technology and Telecom.