Bitcoin: Why Its Binary Worldview Is The Most Appropriate

S Murlidharan

Feb 25, 2021, 03:04 PM | Updated 03:04 PM IST

Bitcoin representation. (via Twitter) 
Bitcoin representation. (via Twitter) 
  • Its binary worldview — kosher as a new asset class but not kosher as legal tender — is the best nuanced stand possible.
  • The crypto currency, Bitcoin, has been having a roller-coaster ride in the market, but a few days ago it breached the $50,000 mark. As it happens with most of the events, views are polarised on the worthiness or worthlessness of this rather inscrutable cryptic (pun intended) currency.

    While it has been championed and hailed by Elon Musk, the founder of Tesla, the electric car giant, it has been contemptuously rubbished by Rakesh Jhunjhunwala, the big bull who stomps the Indian bourses often with considerable success.

    Jhunjhunwala quipped recently, on hearing Bitcoin has surged past $50,000, that he won’t even pay $5 for it.

    Whereas Musk has staked his company’s substantial war chest in it — Tesla recently invested $1.5 billion out of its cash reserves of $19 billion in Bitcoin that in fact helped it rally to dizzying heights.

    What has raised eyebrows in discerning and knowledgeable quarters is Musk’s and Tesla’s decision to accept payment in Bitcoin for its premium and much-in-demand electric cars. That elevates Bitcoin to legal tender status.

    Can Tesla do so? To be sure, in SEC filings, it has inserted a caveat saying ‘subject to applicable laws’ thereby allowing itself the elbow room to reject Bitcoin payments should the Federal Reserve crack the whip against payment in Bitcoin.

    There could be accounting problems as well for Tesla. Suppose its fancy car is priced at $100,000, will it accept just two Bitcoins as the price and deliver the car?

    Will the auditors accept the payment as kosher in the absence of legal tender status for it?

    Will the Federal tax department insist on Tesla stating the Bitcoin car sales into uniform dollar sales and tax it accordingly?

    Indeed, there are many imponderables which Musk and Tesla seem to have glossed over. Be that as it may.

    The Indian Supreme Court seems to have taken a nuanced view — crypto currencies should not be banned even while they not passing muster as legal tender. The Indian central bank had in 2018 effectively banned crypto transactions after a string of frauds in the months following Prime Minister Narendra Modi’s sudden decision to ban 80 per cent of the nation’s currencies consisting in 500 and 1,000 rupee notes.

    The Reserve Bank of India had asked all regulated entities, such as banks, to stop any dealings related to private crypto currencies as part of that order. This brought crypto currency trading in India to a halt. Crypto currency exchanges responded with a lawsuit in the Supreme Court in September and won respite in March 2020. The Supreme Court set aside the Reserve Bank of India’s 2018 circular.

    What the Apex Court effectively did was to say “hey it is your funeral if you burn your fingers dabbling in crypto currencies of the world” while at the same time respecting the RBI stand not to accord legal tender status to it. Be that as it may.

    The Crypto Currency and Regulation of Official Digital Currency Bill, 2021 before Parliament could well disturb the truce brought in or via media ushered in, by the apex court.

    The purpose of the law has been described as to create a facilitative framework for an official digital currency issued by the RBI to “prohibit all private crypto currencies in India”.

    But, certain exceptions will be permitted “to promote the underlying technology of crypto currency and its uses,” the Lok Sabha bulletin said.

    There are disturbing straws in the wind. What will the official crypto currency achieve beyond being a me-too in the world of sovereign crypto-currencies that have been a pale shadow of the glamorous Bitcoin? And the exception in favour of countenancing non-official crypto currencies led by Bitcoin is delightfully vague — “to promote the underlying technology of crypto currency and its uses”.

    Bitcoin mining is well nigh impossible except in the hands of mathematics whiz kids endowed with infinite patience and plenty of resources to splurge on electricity. So the only practical way to join the bandwagon is to buy it in the market.

    Like with any other commodity including gold, it is its scarcity value that drives up its prices. But why should the Indian government lose sleep over it so long as banks in India do not recognise it as legal tender?

    Its binary worldview — kosher as a new asset class but not kosher as legal tender — is the best nuanced stand possible.

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