GUJARAT NATIONAL LAW UNIVERSITY

MONEY,BANKING & PUBLIC FINANCE ASSIGNMENT

PAPER ON THE TOPIC-
“Cryptocurrency And Law”

Submitted to- Mr.Hitesh Thakkar

Assistant Professor of Economics

Submitted by-
Divya Shikhar Srivastava (17A048)
B.A.LLB.(HONS)- THIRD SEMESTER
(Mail- divyashikharsrivastava@gmail.com
M.No.7607245865)

Harshvardhan Singh Jodha (17A053)

B.A.LLB.(HONS)- THIRD SEMESTER
(Mail- hsjodha3@gmail.com
M.No.9828398960)
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 INDEX

1. ABSTRACT 3
2. Introduction-What is Money? 4
3. Bit coin, crypto currencies - how do they work? 6
4. Why do banks like block chain better than Bitcoin? 7
5. Block chain will Change the Financial Services Industry 8
6. Funding and investment 9
7. Bubble Fears related to Cryptocurrency 10
8. How Bitcoin can and will Disrupt the Financial System? 11
9. Legal risk of owning crypto currency in different countries including India 12
10. Legal Position of Bitcoins in India 13
11. India to Ban Cryptocurrencies 15
12. SEBI on cryptocurrency 16
13. Legality of bitcoins in India 17
14. Conclusion 19

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 ABSTRACT

Cryptocurrency is an encrypted and peer-to-peer network for conducting digital barter, which
was developed eight years ago. Bitcoin, the first and most popular cryptocurrency, is
transforming rapidly the long standing and unchanged financial payment systems that have been
unchanged for many decades. Whether cryptocurrencies may replace traditional fiat currency or
not is a question that remains unanswered, they could change the way Internet-connected global
markets interact with each other, clearing away barriers present around national currencies and
exchange rates. Cryptocurrencies may revolutionize digital trade markets by creating a free
flowing trading system without fees. But such rapid changes in the basics of a society call for
regulations to streamline such a change to move towards a goal that is beneficial for the masses.
Through this paper the author seeks to analyse the conditions prevailing in the legal field as to
how the authorities act to the major changes in the currency system and how the laws will be
shaped.

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1. Introduction-What is Money?

Since societies transitioned from a barter economy to using money as a medium of exchange,
individuals have tried to devise systems that allow for rational ways to exchange value. In order
to help make goods and services commensurable the Greek philosopher Aristotle came up with
four criteria that help to dictate what is considered to be ‘good money’:

1. It must be durable

2. It must be portable

3. It must be divisible

4. It must have intrinsic value

Originally the preferred medium of exchange was gold as it was able to fulfill all four of these
criteria. As economies grew and the demand for a medium of exchange increased, governments
were forced to create a more accessible medium of exchange that they could control and
regulate. This was the birth of fiat currency. This particular medium of exchange has been
adopted worldwide; however it has come with its own set of issues. In order to help fix some of
these issues, cryptocurrencies began to emerge in 2009, leveraging a disruptive technology called
blockchain. A cryptocurrency is a digital currency that uses cryptography for security
(Investopedia, 2016). Blockchain specifically deals with the way in which data is structured and
allows for the existence of decentralized digital ledgers where single organizations are not able to
effect transactions (Hackett, 2016). Currently the two most widely adopted cryptocurrencies are
Bitcoin and Ether, the currency that is used to power the Ethereum blockchain.

Major Regulation / Deregulation Bitcoin has benefited from largely permissive regulation in
western countries, but has been subject to much more restrictions in Asia. The ban of Bitcoin in
China led to a significant depression in Bitcoin prices worldwide, indicating the importance of
global acceptance to blockchain in order to drive value .Conversely, it has been inferred by
numerous sources that in order to achieve widespread adoption among financial institutions,
regulation must be in place to ensure safe and secure transactions. Global deregulation would
impact both Bitcoin and Ether, to varying degrees. Bitcoin, being treated as a currency, would
see significant value growth as a result of deregulation, allowing access into numerous market

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and ease of transactions across borders. While Ether would likely see greater value as a result of
widespread adoption and reduction of limitations with the smart contract application. The
intrinsic value of a unit of Ether would not necessarily grow, but the widespread adoption of the
Ethereum Network would likely grow, leading to greater demand for smart contracts and
Ethereum.1 Bitcoin, which is regarded as one of the most populous cryptocurrency, was created
in 2009 as the first decentralized cryptocurrency.2 The underlying technical system upon which
decentralized cryptocurrencies are based was created by the group or individual known as
Satoshi Nakamoto.3

1
The Future of Cryptocurrency Alexander D’Alfonso, Peter Langer, Zintis Vandelis
2
What is Bitcoin? http://bitguru.co.uk/bitcoininfo/ biGuru News retrieved 24 October 2017
3
Economist Staff (31 October 2015). “Blockchains: The great chain of being sure about things”. The Economist.
Retrieved 18 June 2016.

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2. Bit coin, crypto currencies - how do they work?

A lot of attention has been given to Cryptocurrencies in the recent days. All this has happened
after the value of bitcoin skyrocketed and hit record highs in the market. The value have gone so
high that Venezuela has planned to create its own digital currency called “petro”.
Cryptocurrencies are basically nothing less than a cutting-edge digital technology. They promote
themselves this way. Cryptocurrencies aim to change or reshape the fundamental ways of how
this global financial world operates. Digital currencies like Bitcoin promise the market that they
would circumvent the financial structure. Their appeal lies in this promise only. The way these
digital currencies handle this promise is by relying on clever mathematics. They take the ledge-
keeping function away from financial institutions and assign this work to a network of
autonomous companies.

Bitcoin and the block chain convention have accomplished a framework that empowers the
trading of significant worth between two gatherings obscure to each other in a quick and
successful path, without the requirement for delegates. In spite of its adolescence and the
numerous difficulties it includes, the money related industry has set its sights on this innovation
that can offer an awesome open door for producing new managing an account benefits that are
more dexterous, more affordable and more ideal for its clients. Most cryptocurrencies are
designed to gradually decrease production of currency, placing an ultimate cap on the total
amount of currency that will be in circulation mimicking previous metals (Andy, 2011).
Compared with ordinary currencies held by financial institutions or kept as cash on hand,
cryptocurrencies can be more difficult for seizure by law enforcement (Andy, 2011). This
difficulty is derived from leveraging cryptographic technologies. A primary example of this new
challenge of law enforcement comes from the Silk Road case, where Ulbricht’s bitcoin stash
“was held separately and encrypted”8. Cryptocurrencies such as bitcoin are pseudonymous,
though additions such as Zerocoin have been suggested, which would allow for true anonymity4

4
Matthew Green (26 May 2013). “Zerocoin: Anonymous Distributed ECash from Bitcoin”. John Hopkins
University.

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3. Why do banks like block chain better than Bitcoin?

The reason for Bitcoin was to alter the trading of significant worth between clients without the
requirement for utilizing monetary middle people or pubic establishments to confirm the
legitimacy of the exchange and without using lawful delicate. This is the means by which bitcoin
is utilized, as a unit of trade. Also, with a specific end goal to have the capacity to send bitcoins,
first you need bitcoins or trade legitimate delicate for bit coins. This clarifies the development of
particular organizations spend significant time in encouraging money trade, which by and large
are similar ones that give you the wallet to store them.

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4. Block chain will Change the Financial Services Industry

The blockchain is the fundamental innovation behind bitcoin, the prevalent cryptographic money
that is reforming the way we direct exchanges. The blockchain is, basically, an immense,
dispersed record equipped for recording anything of significant worth. It can record deeds, rental
assentions, values, contracts, cash, titles and, practically, any sort of benefit. These records can
be put away and moved secretly between two gatherings free of any money related delegate. It is
basically a shared exchange instrument that does not depend on a delegate for confirmation or ID
of the included gatherings. The first decentralized cryptocurrency, bitcoin, was created in 2009
by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function,
as its proof-of-work scheme5In April 2011, Namecoin was created as an attempt at forming a
decentralized Domain Name Servers (DNS), which would make internet censorship very
difficult. Soon after, in October 2011, Litecoin was released. It was the first successful
cryptocurrency to use script as its hash function instead of SHA-256. Another notable
cryptocurrency, Peercoin was the first to use a proof-ofwork/proof-of-stake hybrid.6 IOTA
(Distributed Ledger Technology) was the first cryptocurrency not based on a blockchain, and
instead uses the Tangle.7 Many other cryptocurrencies have been created though few have been
successful, as they have brought little in the way of technical innovation.8 On 6 August 2014, the
UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what
role, if any, they can play in the UK economy. The study was also to report on whether
regulation should be considered.9

The blockchain is open source, which implies that anybody can change its hidden code. The
innovation depends on best in class cryptography to record and verify exchanges. The blockchain
is likewise decentralized as there is no single vault where the data is put away. On the off chance
that one gathering to a blockchain endeavors to alter the record, different gatherings are promptly
told so fitting move can be made.

5
Jerry Brito and Andrea Castillo (2013). “Bitcoin: A Primer for Policymakers”. Mercatus Center. George Mason
University. Retrieved 22 October 2013.
6
Wary of Bitcoin? A guide to some other cryptocurrencies, ars tecnica, 26-05-2013
7
Sonstebo, David (2016). “IOTA First Chapter Synopsis
8
Are Any Altcoins Currently Useful? No, Says Monero developer Riccardo Spagni”. Bitcoin Magazines. Retrieved
31 May 2016.
9
UK Launches initiative to explore potential of virtual currencies”. The UK News. Retrieved 8 August 2014.

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5. Funding and investment

Our present financing and speculation models depend on middle people to lead exchanges at
each phase of the procedure. Attorneys, speculation investors, and financial speculators
accompany high joined expenses, yet the rise of shared loaning plans and value crowd funding
plans have crashed this market for over 10 years. It enables business people to meet with
speculators without experiencing an exorbitant outsider and the blockchain is equipped for
bettering these capacities. It can computerize most capacities and guarantee that the chronicle of
speculations is smooth, secure, and straightforward. Brilliant contracts will guarantee that this
scene is on a very basic level modified.

The blockchain enables business people to meet with financial specialists without experiencing
an expensive outsider, and it is fit for bettering these capacities. It can mechanize most capacities
and guarantee that the account of speculations is smooth, secure and straightforward. Savvy
contracts will guarantee that this scene is in a general sense modified.

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6. Bubble Fears related to Cryptocurrency

Bitcoin likewise has a tendency to pull in a ton of negative scope in the press, as a cash that
purportedly encourages evil exercises like tax evasion or fear based oppression financing.
Additionally, couple of organizations, on the web or something else, acknowledges it for
payment. While the estimation of bitcoins can swing strongly, it has seen a sharp spike so far this
year. From a valuation of about $700 (€589) per bitcoin toward the beginning of 2017, it has
taken off to record levels to cross the $12,000 hindrance out of the blue Wednesday, December
6. Bitcoin is presently the biggest cryptographic money, with aggregate market esteem at present
evaluated at over $100 billion, making it worth more than numerous US organizations.

Experts trust the most recent bounce in the estimation of bitcoin is being driven by developing
enthusiasm about the computerized money among financial specialists and different
stakeholders.US controllers a week ago made room for bitcoin prospects to exchange on
significant trades, including the world's greatest fates focus the Chicago Commercial Trade
(CME)."The certainty that CME, the greatest child on the square, is moving right on time into
cryptographic money, will constrain other real trades to take action accordingly in the dread of
not passing up a great opportunity," Shane Chanel, from Sydney-based ASR Riches Guides, was
cited by AFP news office as saying in a note this week.

Be that as it may, France's national bank a week ago issued a solid cautioning against promotes
theory on Bitcoin, with the Bank of France senator Francois Villeroy de Galhau naming it as a
"theoretical resource" whose esteem and instability have "no monetary premise."

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7. How Bitcoin can and will Disrupt the Financial System?

The standard reception of bitcoin has begun to snowball and numerous money related
establishments have observed. Truth be told, the impact of bitcoin is strong to the point that a
senior National Bank of Ireland official has gone on record to express that, "virtual and advanced
monetary forms can challenge the sway of states." Similarly as amazing, a month ago Google
and Hurray added the cost of Bitcoin to their fund systems. All things considered, what we have
seen up to this point is likely simply a glimpse of a larger problem. Numerous VCs, including
Marc Andreessen, trust the eventual fate of the blockchain and cryptographic money to be
amazingly brilliant. Bitcoin and altcoins are engaging clients by dispensing with, or limiting,
numerous monetary delegates. This can possibly be an enormous disturbance and opportunity.

Around the world, bitcoin is presently acknowledged by more than 100,000 vendors with
exchanges averaging what might as well be called $78 million every day. While that is just a
small amount of charge card exchange volume, some would state that is the reason it still such an
awesome open door for hypothesis.

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8. Legal risk of owning crypto currency in different countries including India

Numerous individuals in India have begun purchasing and offering cryptographic forms of
money, an advanced cash where encryption strategies are utilized to manage the age of units and
check exchange of assets. These work autonomously of a national bank. India has more than one
million Bitcoin clients; the nation represents right around 10 for each penny exchanging volume
terms. As indicated by an ongoing report by PHDCCI, consolidated exchanging volumes in India
could be in the scope of Rs 200-250 crore for every month.

Exchanging crypto or virtual, monetary forms has surged because of uncommon returns. For
instance, Bitcoin, the most established and the most prominent virtual money, has given 30 times
returns in the course of recent years. The estimation of the money surged from $100 in June 2013
to $3,025 in June 2017. Likewise, Swell, a digital currency in light of between bank settlements,
has given 200 for each penny returns in the course of recent months finished July 31.

The other explanation behind such an expansion in volumes is the low returns given by other
resource classes, for example, land, settled stores and gold. While mindfulness about Bitcoin and
altcoins (virtual monetary forms other than Bitcoin) has been ascending, for speculators, there
are a few worries that they ought to know about. For instance, Bitcoins are not upheld by any
unmistakable resource but rather sheer request. Not at all like different ventures, there is no
hidden resource; its esteem is estimated by simply request and supply. Also, there is a great deal
of haziness behind their activities. For example, nobody knows who is behind the making of
Bitcoin. Most vital, the digital money showcase isn't controlled in India. In the event that you
lose cash in a bank, you can grumble to the Hold Bank of India (RBI). Be that as it may, for
Bitcoin, there is no controller you can swing to.

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9. Legal Position of Bitcoins in India

The main problem with determining the legal status of how bitcoins should be handled is
whether they are a currency, security, commodity, or something completely different. While
bitcoins are commonly referred to as a "currency" as they have many common characteristics of
one, the legal definition requires a currency to be issued, used and accepted by a country, which
is not the case with bitcoin. Another problem with bitcoins is that not all the countries have
legalized its use. For consumers, some countries like Australia, Canada, Finland and Germany
have legalized its use and have made it clear to apply normal earned income rules on Bitcoin,
while many countries have yet not made a clear statement with the legalization and use of
bitcoin. On the hand Thailand has made the use of bitcoins illegal. The non-uniformity in the
legalization of bitcoin in different countries is a major issue (“Effect of Bitcoin”, 2017). In
March, RBI Deputy Governor R Gandhi warned against crypto-currencies such as Bitcoin.
"They pose potential financial, legal, customer protection and security-related risks," Gandhi
said. "Payments by such currencies are on a peer-to-peer basis and there is no established
framework for recourse to customer problems, disputes, etc. Legal status is definitely not there,"
he added. As mentioned above, bitcoins are not authorized as yet but there is scope for them to
be legalized under different legislations. As per the Foreign Exchange Management Act, 1999,
currency is defined as "all currency notes, postal notes, postal orders, money orders, cheques,
drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or
such other similar instruments, as may be notified by the Reserve Bank." According to the
definition, RBI has the power to include bitcoins within the definition of currency. Currency
other than "Indian currency" is termed as "foreign currency", and regulated by foreign exchange
laws. Most likely bitcoins can be governed by foreign exchange laws. Further, Bitcoins can also
be included within the definition of "security" which states that "such other instruments as may
be declared by the Central Government to be securities". Further, the Indian Copyright Act,
1957, defines the term "computer programme" as "a set of instructions expressed in words,
codes, schemes or in any other form, including a machine readable medium, capable of causing a
computer to perform a particular task or achieve a particular result". Having gone through the
various definitions, it can be concluded that there is enough scope for legalizing bitcoins. One
has to wait and watch as to which approach the Indian government takes (Jhala, 2014). In the
Union Budget 2018, Finance Minister Arun Jaitley reiterated that the cryptocurrencies are not

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recognised as legal tender. During his budget speech, the Finance Minister said, “The
Government does not consider crypto-currencies legal tender or coin and will take all measures
to eliminate use of these crypto-assets in financing illegitimate activities or as part of the
payment system. However, Jaitley also added that the government would try and explore the
blockchain technology, which drives bitcoin and other crypto-currencies. The recognition of
blockchain technology for future use in the digital economy has received positive reactions from
the industry. Though the budget does not specifically talk about how blockchain will be
explored, it should be noted that in digital economy the major use for this has been around
crypto-currencies like Bitcoins (“Budget 2018”, 2018). 10

10
https://indianexpress.com/article/technology/budget-2018-bitcoins-other-crypto-currencies-illegal-but-govt-to-
explore-blockchain-5047639/.

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10. India to Ban Cryptocurrencies

The Interdisciplinary board of trustees investigate digital money, submitted three months back,
has looked for a total prohibition on cryptographic money, reports ET refering to obscure
government sources.

In August, while Inc42 had effectively revealed over the boycott hypotheses, it had likewise
recorded different RTIs looking for government's present understanding as Bitcoins drove
cryptographic forms of money's market entrance has been expanding exponentially in India. In
its reaction, the administration had kept up its existing conditions which are in a state of harmony
with RBI's announcement dated December 24, 2013. RBI had forewarned the clients, holders
and merchants of virtual monetary forms including Bitcoins, about the potential budgetary,
operational, and legitimate, client assurance and security related dangers that they are presenting
themselves to.

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11. SEBI on cryptocurrency

Without any administrative administration in India, unlawful money related plans looking for
open interests consequently of appealing returns are mushrooming in different parts of the
nation. Market guard dog SEBI has intended to descend vigorously on illegal 'starting coin
offers.' In any case, SEBI isn't quick to go up against the mantle of a controller for such
'exchanging' — as of now being offered on various alleged trades in spite of there being no
guidelines in such manner — as the fundamental item, which is Bitcoin or any such digital
currency, isn't an affirmed item by RBI or some other office. In the meantime, SEBI can't enable
artless financial specialists to be shown a good time with unlawful guarantees by these trades and
those asserting to 'mint' digital currencies, PTI announced citing an unidentified source. Various
them are suspected to enjoy deceitful exercises without really stamping any such virtual
monetary standards that require extremely complex calculations. Various 'coin contributions'
being made in India are only deceitful Ponzi or fraudulent business models, including some
offering optional exchanging Bitcoins or other set up virtual monetary forms, while numerous
others are plain fakes with no such cash really being in play, they included.

The administration has likewise constituted a board of trustees to propose a system for managing
these virtual monetary forms and to comprehend their present structure and legitimate
ramifications. Till that point, it's for all intents and purposes somewhat of a murkiness.

As of now, there are no directions on these virtual monetary forms. In this way, by underlining
that they are not lawful, but rather without pronouncing them unlawful, the legislature has placed
them in the hazy area.

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12. Legality of bitcoins in India

Even as economies like Japan and Russia move to legalize the use of Bitcoins, India, despite
being at the cusp of a digital revolution is yet to officially recognize the cryptocurrency.

India's central bank, the Reserve bank of India or the RBI, which regulates Indian rupee, had
earlier cautioned users, holders and traders of Virtual currencies (VCs), including Bitcoins.

"The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not
authorised by any central bank or monetary authority. No regulatory approvals, registration or
authorisation is stated to have been obtained by the entities concerned for carrying on such
activities," the central bank had said.

In March, RBI Deputy Governor R Gandhi warned against crypto-currencies such as Bitcoin.
"They pose potential financial, legal, customer protection and security-related risks," Gandhi
said. "Payments by such currencies are on a peer-to- peer basis and there is no established
framework for recourse to customer problems, disputes, etc. Legal status is definitely not there,"
he added.

However, the central bank hasn't unequivocally banned Bitcoins in the country.11

A news clip by businesstoday journal read as follows-

“The rising craze for bitcoin, a cryptocurrency that has rocketed to shocking highs, has come
under the government's lens. Bitcoin can be an easy way to evade tax or snare unsuspecting
small investors in ponzi schemes. The government has begun a crackdown on illegal uses of this
unregulated virtual currency.

11
How to buy bitcoins in india sell legal in india price, https://www.businesstoday.in/current/economy-politics/how-
to-buy-bitcoins-in-india-sell-legal-in-india-price/story/253734.html,

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 Widening its probe into bitcoin investments and trade, the Income Tax (IT) department is set to
issue notices to 4 to 5 lakh high networth individuals (HNI) across the country who were trading
on the exchanges of this unregulated virtual currency, the PTI reported.

The move comes after the IT department conducted survey operations last week at major bitcoin
exchanges across the country on suspicion of alleged tax evasion. These operations were
undertaken for gathering evidence for establishing the identity of investors and traders, the
transaction undertaken by them, identity of counter-parties and related bank accounts.

Earlier this month, there was a spurt in the value of bitcoin. It rose from under $10,000 at the
start of the year to close to $20,000, before a sharp 20 per cent plunge within hours.

In addition to financial risks—the value of bitcoins has seen huge falls within hours—the
regulators are worried about their use for illicit and illegal activities, subjecting the users to an
unintentional breach of laws against money laundering and terror finance.

Concerns also emanate from some unscrupulous entities indulging in illicit money-pooling
activities—commonly known as ponzi schemes—with the promise of huge returns from
investment in bitcoins and other variants, which they claim are minted through blockchain, a
distributed ledger technology that was created to mint bitcoins and comprises of extremely
complex algorithms with several thousand nodes for each chain.

There is a suspicion that some so-called cryptocurrencies and bitcoin investments may actually
have nothing to do with any blockchain-developed virtual currency and are just new ways
devised by scamsters to ride the wave and what they may be offering could be 'e-ponzi'
schemes”. 12

12
Heres why india has decided to crank up its crackdown against bitcoins,
https://economictimes.indiatimes.com/news/economy/policy/heres-why-india-has-decided-to-crank-up-its-
crackdown-against-bitcoins/articleshow/62131052.cms.

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Conclusion-

The popularity of bitcoin and other cryptocurrencies cannot be ignored at the present time.The
sudden burst in its popularity clearly portrays that this form of currency is the way of the future
and hence eventually the state will have to embrace this change.Although the legal stand of the
government for cryptocurrencies remain unclear especially in south Asian countries, we must not
forget that the right way to incorporate cryptocurrencies in our daily life is to refine it through
Laws. The society needs such laws surrounding cryptocurrencies that stops crime relating to
embezzlement or misuse of funds and the same time maintaining the idea behind cryptocurrency
that is to create an easy to use , fast and secure virtual currency.

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