Bitcoin

CSAT, RBI Grade

1.Evolution of Money
B IBPS, SBI
2.Functions of Money
3.Bitcoin system: features
[GS3] Money
4.Pros and Cons
laundering
5.Money laundering, Crime
6.Mt.Gox bankruptcy?
Interview Stage
7.Laxmicoin, RBI stand
MCA/EC

Barter system: Benefits

Simplest
Foreign Exchange regimeX
Concentration of wealth.X

Barter system: Problems

Double coincidence of wants

Division of laborX
Perishable

Saving => Capital..NO

Barter system: Problems

Circular flow of incomeX

Divisibility, Fungibility.X

Fungibility: Mutual substitution

Functions of money?

Primary functions
1. Medium of
Exchange
2. Measure of Value
Why?
3. Readily
acceptable.
4. Durability,
Portable,
Recognizable

Functions of money?

Derivative Functions

1. Store of Value (Savings =>

Investment)
2. Transfer of Value (Kashmir 2
Kanyakumari)
3. Deferred Payment (Time value of
Money)

Functions of money?

Other benefits:
1. Distribution of
National income

Social empowerment
Factors of
Production
Land (lease)
Labor
Capital
Entrepreneurship

Reward $$
Rent
Wages
Interest
Dividend
Profit

NOT the root of evil

So far
1.Barter system: pros cons
2.Functions of money

Evolution of Money

Commodity Money

Commodity to measure value

USA: tobacco, Corn, iron nails, Bear
pelts
Aztec: cocoa beans
India, Pacific: Cowries
Fiji: Whale teeth
WW2 PoW: cigarettes

Commodity Money: pros & cons

Good
Intrinsic value

Commodity Money: pros & cons

Bad
Face Value not same
throughout region
Face value not same
for outsiders (Cocoa)
Perishable- HyperInflation
Bulky to Carry
Division of labour..X

Evolution of Money

Metallic Money

Started as commodity money

Traders & Kings: uniformity, precision
Gold: high value
Silver: moderate
Copper/ Bronze: day to day purchases

Metallic Money: Good

1.
2.
3.
4.

Intrinsic value
Non-perishable
Divisible, Fungible, Melt-combine
Even foreign trade possible. (without
exchange rate)
5. Production low, Prices stable
6. HyperinflationX

Metallic Money: problems?

1. Gold coin (Muhr)
2. Silver (Rupaiyaa)
3. Copper (Dam,
Paisa)

Mansabdari Payment
- Gold 50
- Silver 25
- Copper 25

Copper Dam: Debasement

1.
2.
3.

20 gm

Barter system
Tax collection
East India

13 gm

Metallic Money: Bad

Bulky to carry
Ship sinks, Wealth lost
Smuggling for intrinsic value =>
Debasement
bad money drives out good.
(Grishams law)

Evolution of Money

What is Fiat Money?

Fiat = legally binding command.

Fiat Money= by the command of the
government.
US dollar, Indian Rupee, Euro, Yen,
Yuan
Legally recognized to settle all debts
& payments within territorial
jurisdiction.

What is not Fiat Money?

1.
2.
3.
4.

Legal backing.X
Kirana walla plastic coins & coupons
Fake currency with film star photos
Shares, Bonds, Debentures, G-Sec, Tbill
5. DD, Cheques, Credit Card, ATM card
6. Bitcoin & other Digital currency

Fiat Money types

1.
2.
3.
4.
5.

1 US $= 22 grains Gold
1 British Pound =113
1 Pound =113/22 =4.8 US$
During warcollapse
Post WW2: IMF-Gold
standardcollapse

Fiat
Gold
Standard

1. Central Bank free to print

currency without gold
backing.
2. Exchange Rates:
1. Fixed Exchange rate
2. Floating
3. Managed

Fiat
Paper
Standard

India: paper standard

RBI
Notes from Rs.2 to
1000. (earlier
10,000)
RBI Act 1934

Government
Rs.1 note
All coins.
Rs 1 and 2 notes
discontinued. (existing
circulated)
Coinage Act 2011: Rs1
note. Fin.Secretary Rajiv
Mehrishi, bilingual

Fiat Money: Problems?

1. Debasement: Over printing, Hyper

inflation
2. Still Bulky to carry
3. Theft, fire, counterfeit
4. Change problem
5. Rounding off: (40p x 1 L=40k)

Evolution of Money

1. Cheques, bank drafts

2. Credit card, debit cards,
3. Visacard, Master card, Rupay
card
4. ATM card, NEFT, RTGS,

Examples
Bank
Money?

Bank Money?

1. Easy to transfer over long

distance
2. Exact amount can be
transferred (change
problem..X)
3. Hard to counterfeit
4. Can freeze if stolen [KYC]
5. Legally recognized for high
value payment.

Bank
Money
Benefits

Evolution of Money

Money

1. Subprime crisis=> US QE =>

Why
Increased dollar supply
Virtual
2. Dollars Purchasing power
Currency?
3. Banks charge fees on online
transfer, credit card, ATM
4. Anarchist groups: Fiat
currency.X

Bitcoin: Beginning
2008 Paper by
Satoshi Nakomoto
Real identity
unknown
2009 started

Total Reward
21 Mill.BTC
2031

Data
Block
Total
21
Million
50 BTC

25 BTC

12.5

6.25

Reward declines over time

With each 2.1 lakh Datablocks

Total Reward
21 Mill.BTC;

1BTC
=10(^8) Satoshi

Mining software

Solving speed
Hashrate/sec
Laptop: 30 kh/s =>
.003 BTC (24 hrs.)
MINUS lightbill = 3$

Mining Pool

Reward distribution
As per Hashrate
1 BTC= 10(^8) Satoshi
1 Satoshi= 0.00000001
BTC

Bitcoin
rigs
Mining
GPU
hashrate
Higher than
CPU

Bitcoin
Mining rigs
5 GPU in 1
PC
Over 4
dozen PCs

Mining Pool

Reward distribution
As per Hashrate
1 BTC= 10(^8) Satoshi
1 Satoshi= 0.00000001
BTC

Evolution of money
Bitcoin concept
Bitcoin mining

Bitcoin Transfer?
Digital Wallet / E-Wallet software

Public address (email address)

Private key (password)
No names, No IP, No phone numbers

Double spending?
Email client
(outlook)

Bitcoin (digital
wallet)

Double
One mail forwarded
spending?...No
to many

Block Chain

Public ledger
Validity of Each transaction
10 minutes

Bitcoin vs.
NEFT & RTGS
Positive
Negative

Bitcoin vs SBI Netbanking

RTGS: Real Time
Gross Settlement

Retail: 2-5
Corporate: >5
Processing
fees
25-55 RS.
(SERVICE TAX)
Instant

NEFT: National
Electronic Fund

Bitcoin

Transfer

50k at a
time

No ceiling

2.50-25

None

1 hour
cycles.

upto 10
minutes

Bitcoin vs Netbanking
RTGS

NEFT

Weekdays: 8 AM 6.30PM
Saturday: 8 to 1.30
Sunday: Holiday
Central monitoring RBI
Can recover password

Bitcoin

24/7

None
gone

Bitcoin vs Netbanking
RTGS

NEFT

1.Bank account number

2.Branch IFSC code
Both need bank account,
fulfill KYC norms

Bitcoin

Only public
address of
wallet
even robot / AI
can.

Money laundering,
Terrorism, Gambling
illegal activities
In Bitcoin system?

Mining
Selling
goods &
services
Speculators:
Oct.13: $200
Dec 13: $1200
Feb 15: $230

Block Chain

Only Public & private key

No names, phone numbers, addresses
No Central authority to record IP.

TA
X

Co
nv
er
t

HA
VE
N

to

$$

Online shopping using Bitcoins

1.
2.
3.
4.

Silkroad: cocaine
2013: FBI shut down
Legit Online shopping sites
Some Pizza parlors, fashion
stores
5. IT professionals (not FIAT)

Bitcoins
Buy goods
services

Why: Bitcoin exchange?

Speculators:
Dec.13: $1200
Feb.15: $230

a
2013: Bitcoin Exchange (Mt.Gox)
n
i
h
1 BTC = $____ .

$1,400
$1,200
$1,000
$800
$600
$400
$200
$190
$-

$1,200

C
f
o
k
n
a
B
s

le
p
o
e
P
$580

I
B
R

$490

1. Decentralised Digital
Currency or Virtual
Currency
2. 3 ways to aquire
1. Mining
2. Trading goods-services
3. Exchange with Fiat
currency

Bitcoin
RBI stand
Dec 2013

Bitcoin

1. No central bank has

authorized Bitcoins
RBI stand
2. Not Traded through BSE, NSE, Dec 2013
Commodity exchange (SEBI,
FMC)
3. No Forex dealers under
FEMA: Converting $
$=Rs=Bitcoin illegals

1. Bitcoin Exchange website =

legal status unclear
2. Danger: hacking, phishing,
malware, password lost
3. Consumer courts cannot help

Bitcoin
RBI stand
Dec 2013

1. Mere digital code, no intrinsic

value, not backed by Gold,
silver or crude oil.
2. Speculation, volatility
(1200=>200)

Bitcoin
RBI stand
Dec 2013

1. Media reports on illegal drug,

money laundering, terrorfinancing.
2. unintentionally breach antimoney laundering / Antiterror laws
3. Same with litecoins,
bbqcoins, dogecoins etc.

Bitcoin
RBI stand
Dec 2013

Abad Raid (December 2013)

Buysellbitco.in
First Bitcoin exchange in India
Mahim Gupta, Bopal
ED, FEMA (Authorized dealers)
Prevention of Money laundering Act
2002 (3-7 years | 5 lakh)

Screenshot (2015, Feb)

Buy: ~14,800
Sell: ~14,400

Laxmicoin.com
Mitts Daki (US) and
Raj Dangi (Banglore)
=> 30% NGO, poor
No RBI reply (since
2013)
RBI stand:
Examining the
issues in Digital
currency

Mt.Gox scam
Mt. Gox Bankruptcy?

Software bug
Bitcoin =>resend back
8,50,000 Bitcoin stolen [offline?]
$ 500 million lost
Filed Bankruptcy in Japan Court
April 2014: liquidation

IRS USA (March 2014)

Bitcoin Taxable Property / commodity

Capital Gains tax (23%)
Withholding norms.

Interview Questions

1. How does Bitcoin system work?

2. Benefits and limitations?
3. Should it be given legal recognition
in India?
4. Measures to curb money laundering,
terror-financing, drug rackets?