BITCOINS AND THE RISK INVOLVED

 What is bitcoin?

Bitcoin is basically an open source, peer to peer digital currency. Amidst many other things, what makes bitcoin exceptional and distinctive is the fact that it is the world’s first completely decentralised digital payments system that is to say that it is under no centralized authority. Santoshi Nakamoto in the original whitepaper that he published on bitcoin in 2009 had said that trade and commerce on internet is solely dependent upon financial institutions filling in as trusted third parties in order to process electronic payment. For instance, if X wants to send 1000 INR to Y over internet, he would have had to depend upon a trusted third party like Paypal or Google Wallet. These parties keep a record or ledger of their account holder’s balances and when this third party would send money to Y they would deduct 1000 INR from X’s account balance and would add it to Y’s account. Although this system functions well enough but it has certain limitations like marginal costs to keep up the infrastructure etcetera which Nakamoto wanted to remove through the system of crypto-currencies. 

What are the risks involved in use of bitcoins?

Due to the danger posed by bitcoins, Citigroup CEO Michael Corbat expects that state-sponsored crypto-currency would emerge in the foreseeable future. Cryptocurrencies are a "real enough threat" to the financial system, according to Corbat, and governments will not take the disruption of their records, tax collection, money laundering, and know-your-customer (KYC) capabilities "lightly."

One of the major risks involved in bitcoin trading is the criminal uses which makes the policy makers a bit apprehensive. For instance, ‘silk road’ a famous deep web site is notorious for online trading is drugs and other illicit wares. Even the Federal Bureau of Investigation i.e. the FBI in their unclassified documents has described bitcoins as “A decentralized, peer-to-peer (P2P) network-based virtual currency – provides a venue for individuals to generate, transfer, launder, and steal illicit funds with some anonymity”. It is feared that bitcoin can easily be used for money laundering to help finance terrorism and also in illegal trafficking of goods. The bitcoins provides one with an alternative identity which makes it almost similar to traditionally using cash for such illicit activities. 

Another shortcoming of bitcoins is that the transaction is irreversible. Thus once a person has sent money to someone accidentally or by mistake then also the transaction would not be reversed as is possible in cases of PayPal or even when one uses credit cards. Thus one accidental click holds the power to cause great suffering to an individual.

The other major concern for many is that currently bitcoin does not fit into any existing statutory regulations and policies making it hard for us to know which law applies to it and how. As a result, bitcoin could pose a significant threat to national sovereignty because it is likely to escape the reach of many government policies. In this regard it could be said that taxation is one of the relevant issues here. Given that bitcoin is decentralised and unaffected by third-party financial institutions, it's fair to assume that keeping track of how it's being used is nearly impossible. The anonymity attached to this currency makes it a tax haven for many. Furthermore, while the overall market capitalisation of a state-regulated currency is determined by the central bank in charge of issuing the currency, this is not the case for bitcoins or other crypto-currencies, as the amount of money available on the market is only determined in advance. Thus, the central bank or any other authority would not be able to intervene and to manage the inflation rate, as the value of bitcoin would solely depend upon market demand. Lastly, an overall interest rate cannot be charged for of the crypto-currencies. The states fear that if such currency is widely embraced the nation states may in due course lose their ability to regulate the economy through traditional means of monetary policies.