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CIS Issue Brief on regulating Crypto-asset advertising in India
https://cis-india.org/internet-governance/blog/cis-issue-brief-on-regulating-crypto-asset-advertising-in-india
<b></b>
<p>Over the past decade, crypto-assets have established themselves within the digital global
zeitgeist. Crypto-asset (alternatively referred to as cryptocurrency) trading and investments
continue to skyrocket, with centralised crypto exchanges seeing upwards of USD 14 trillion (or
around INR 1086 trillion) in trading volume. </p>
<p>One of the key elements behind this exponential growth and embedding of crypto-assets into
the global cultural consciousness has been the marketing and advertising efforts of crypto-asset
providers and crypto-asset-related service providers.In India alone, crypto-exchange
advertisements have permeated into all forms of media and seem to be increasing as the
market continues to mature. At the same time, however, financial regulators such as the RBI
have consistently pointed out concerns associated with crypto-assets, even going so far as to
warn consumers and investors of the dangers that may arise from investing in crypto-assets
through a multitude of circulars. </p>
<p>In light of this, we analyse the regulations governing crypto-assets in India by examining the
potential and actual limitations posed by them. We then compare them with the regulations
governing the advertising of another financial instrument, mutual funds. Finally, we perform a
comparative analysis of crypto-asset advertising regulations in four jurisdictions - The EU,
Singapore, Spain and the United Kingdom- and identify clear and actionable recommendations
that policymakers can implement to ensure the safety and fairness of crypto-asset advertising in
India.</p>
<p>The full issue brief can be accessed <a href="http://www.cis-india.org/internet-governance/blog/issue-brief_regulating-crypto-asset-advertising-in-india">Here</a></p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/cis-issue-brief-on-regulating-crypto-asset-advertising-in-india'>https://cis-india.org/internet-governance/blog/cis-issue-brief-on-regulating-crypto-asset-advertising-in-india</a>
</p>
No publisherAman Nair and Vipul KharbandaCryptocurrenciesBlockchainBitcoinAdvertisement2022-05-25T07:46:02ZBlog EntryWhat does the 2022 Finance Bill mean for crypto-assets in India?
https://cis-india.org/internet-governance/blog/what-does-the-2022-finance-bill-mean-for-crypto-assets-in-india
<b></b>
<p style="text-align: justify;" dir="ltr"> </p>
<p style="text-align: justify;" dir="ltr">The recent budget speech saw the Finance Minister propose a slew of measures that seek to clarify the taxation regime with regards to crypto-assets in India. The speech, and the proposed measures, have led to significant discussion and debate within the domestic crypto-ecosystem as questions continue to be raised about the ambiguous legality of crypto-assets in the absence of any dedicated crypto legislation. In the face of this uncertainty, this blog post looks to contextualise the proposals put forth by the Finance Minister in her speech and clarify what they mean for crypto-asset regulation and use in India. </p>
<h3 style="text-align: justify;">Crypto-assets defined as a virtual digital asset and taxed at 30% </h3>
<p style="text-align: justify;" dir="ltr">The <a href="https://www.indiabudget.gov.in/doc/Finance_Bill.pdf">2022 Finance Bill</a>, introduces the definition of a ‘virtual digital asset’ as an amendment to the 1961 Income Tax Act. The government defines a virtual digital asset as: </p>
<ol><li style="list-style-type: lower-alpha;" dir="ltr">
<p style="text-align: justify;" dir="ltr">Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; </p>
</li><li style="list-style-type: lower-alpha;" dir="ltr">
<p style="text-align: justify;" dir="ltr">A non-fungible token or any other token of similar nature, by whatever name called;</p>
</li><li style="list-style-type: lower-alpha;" dir="ltr">
<p style="text-align: justify;" dir="ltr">Any other digital asset, as the Central Government may, by notification in the Official Gazette specify</p>
</li></ol>
<p style="text-align: justify;" dir="ltr">Furthermore, the bill also introduces section 115BBH to the Income Tax Act, according to which income or profits generated from the transfer of ‘virtual digital assets’ would be taxed at the rate of 30%. The Finance Minister further clarified that any expenses incurred in carrying out such trades cannot be set-off or deducted from the profits generated, except the amount spent on buying the crypto-asset in the first place. Further in case of losses incurred from crypto-asset trading, such losses cannot be carried over to subsequent financial years.</p>
<p style="text-align: justify;" dir="ltr">While this clarification of the provisions relating to crypto-assets under the Income Tax Act, 1961 drew much attention for their potential impact, it is important to note that this measure is far from a departure from the government’s pre-existing stance. In responses to parliamentary questions on <a href="https://pqars.nic.in/annex/255/AS30.pdf">30th November 2021</a> and <a href="https://pqars.nic.in/annex/253/AU3105.pdf">23rd March 2021</a>, the Minister of Finance has repeatedly stressed the liability to pay taxes on any profits arising out of crypto trading under Indian tax law. </p>
<p style="text-align: justify;" dir="ltr">The budget speech merely clarified the provisions under which profits from crypto trading shall be taxed. Prior to this, there had been a fair amount of debate as to whether profits from crypto trading would be included as part of the regular income, income from other sources, or if they would be taxed as capital gains. This distinction and categorisation was critical as it determined the rate of tax applicable to crypto profits. However with the proposed section 115BBH, the government has made the taxation regime clearer on how these profits are to be taxed. </p>
<h3 style="text-align: justify;">Introduction of TDS onto crypto-asset transactions and transfers </h3>
<p style="text-align: justify;" dir="ltr">Another provision that this budget has proposed is the introduction of a 1% TDS (Tax Deducted at Source) on any transfer of a crypto-asset, provided that other conditions in relation to aggregate sales specified in the proposed section 194-S are satisfied. It must be noted that this TDS shall be payable not only on cash transfers, but even on trades where one cryptocurrency has been traded for another cryptocurrency. Thus trades where Bitcoin is bought using Tether would also be liable to such TDS deduction. Interestingly, the way the provision is currently drafted, if any person accepts payment for any goods or services in cryptocurrency, then such a person would be liable to pay TDS at 1%. This is because the Income Tax Act treats the cryptocurrency as the asset being bought or sold and treats the good or service being provided by the “seller” as the consideration. Thus instead of it being looked at as a transaction where one person is paying for something by using cryptocurrency, it is looked at as a transaction where the other person is buying the cryptocurrency and paying for it in kind (through the goods or services of the “seller”).</p>
<h3 style="text-align: justify;">Questions of enforcement still remain</h3>
<p> <span style="text-align: justify;">While these measures do bring a certain level of clarity and stability in the taxation regime with regard to crypto-assets, one still needs to grapple with the issue of their implementation. News reports suggest that about 15-20 percent of the investors in crypto assets are in the </span><a style="text-align: justify;" href="https://economictimes.indiatimes.com/tech/technology/students-hop-on-to-the-cryptocurrency-bandwagon/articleshow/86980964.cms">18-20 year age group</a><span style="text-align: justify;">. A number of such investors do not file tax returns since they are mainly students investing their extra savings or “pocket money” to make a quick profit. Ensuring that this demographic actually follows the letter of the law may be a challenge for the revenue authorities and it would be interesting to see how they overcome it.</span></p>
<div> </div>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/what-does-the-2022-finance-bill-mean-for-crypto-assets-in-india'>https://cis-india.org/internet-governance/blog/what-does-the-2022-finance-bill-mean-for-crypto-assets-in-india</a>
</p>
No publisherVipul Kharbanda, Aman NairFinancial TechnologyCrypto PartyBitcoinCryptocurrencies2022-02-03T06:31:54ZBlog EntryReport on Regulation of Private Crypto-assets in India
https://cis-india.org/internet-governance/blog/report-on-regulating-private-crypto-assets-in-india-public-consultation
<b></b>
<div> </div>
<div>CIS is excited to release its flagship report on regulating private crypto-assets in India. </div>
<div> </div>
<div>Link to the report: <a href="https://cis-india.org/internet-governance/cis-report-on-regulation-of-private-crypto-assets-in-india">CIS report on regulation of private crypto-assets in India</a></div>
<p>Link to Annex 1: <a href="https://cis-india.org/internet-governance/annex-1-excerpts-from-comments-submitted-by-ripple">Excerpts from the public consultation comments received from Ripple</a> </p>
<div> </div>
<h2>EXECUTIVE SUMMARY</h2>
<div> </div>
<div><span id="docs-internal-guid-3834383b-7fff-beda-e219-52248f1c887b">
<p dir="ltr">As of May 2021, the crypto-asset market in India stood at USD 6.6 billion. With no signs of slowing down, crypto-assets have become an undeniable part of both Indian and global financial markets. In the face of this rapid growth, policymakers are faced with the critical task of developing a regulatory framework to govern private crypto-assets. </p>
<p dir="ltr">This report is an introductory resource for those who are looking to engage with the development of such a framework. It first provides an overview of the technical underpinnings of crypto-assets, their history, and their proposed use cases. It then examines how they fit within India’s current legislative and regulatory framework before the introduction of a dedicated crypto-asset law and how the government and its institutions have viewed crypto-assets so far. We present arguments for and against the adoption of private crypto-assets and compare the experiences of 11 other countries and jurisdictions. Finally, we offer specific and actionable recommendations to help policymakers develop a cohesive regulatory framework. </p>
<h3>What are crypto-assets? </h3>
<p dir="ltr">At their core, cryptocurrencies (CCs) or virtual currencies (VCs) are virtual monetary systems consisting of intangible ‘coins’ that use blockchain technology and serve a multitude of functions. While the word ‘cryptocurrency’ is often used as an umbrella term to describe various assets within the crypto-market, we note that these assets do not all share the same characteristics and often serve different functions. Therefore, for the purposes of this report, we use the term ‘crypto-assets’ rather than ‘cryptocurrencies’ when discussing the broad range of technologies within the crypto-marketplace.</p>
<p dir="ltr">Crypto-assets utilize a distributed ledger technology (DLT) known as blockchain technology. A blockchain is a complete ledger of all recorded transactions, which is created by combining individual blocks, each of which stores some information and is secured by a hash. Blockchain, by the very nature of its architecture, can be used to ensure decentralisation, authenticity, persistence, anonymity, and auditability. </p>
<h3>History and proposed uses of crypto-assets </h3>
<p dir="ltr">While other forms of crypto-assets have been proposed in the past, the modern conception of one can be traced to a research paper published under the pseudonym, Satoshi Nakamoto, which first proposed the idea of bitcoin. Bitcoin, as it was presented, seemingly solved the ‘double spending’ problem by utilising a form of DLT known as blockchain. Bitcoin, which was first operationalised on 3 January 2009, has since become the dominant crypto-asset globally – trading at over USD 57,000 per bitcoin. </p>
<p dir="ltr">Following the popularity of bitcoin, several alternatives (known as alt coins) were launched, the most popular of which is ethereum. According to CoinMarketCap, as of April 2021, there are over 9,500 traded cryptocurrencies in existence, with a total market capitalisation of over USD 2 trillion. The rise of bitcoin and other crypto-assets also led to the emergence of crypto-exchanges such as Binance. These exchanges act as platforms for users to buy, sell, and trade crypto-assets. </p>
<p dir="ltr">Many potential use cases for crypto-assets have been identified, including: </p>
<ol><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">A method of payment </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">A tradeable asset </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Initial coin offerings </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Crypto-asset funds and derivatives</p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Crypto-asset-related services</p>
</li></ol>
<h3>Legal frameworks and private crypto-assets in India</h3>
<p dir="ltr">While crypto-assets are also referred to as virtual currencies and cryptocurrencies, they do not currently satisfy the legal requirements to be considered as currency under Indian law. Although they have not yet been classified as a financial instrument, it is possible, through executive action, to include them within the definition of any of the following instruments: currency, foreign currency, derivative, collective investment scheme, or payment system. Such a move would give the government a legal basis to regulate the hitherto unregulated crypto-asset market, thereby bringing about much-needed stability and minimising the risk of fraudulent practices.</p>
<h3>Understanding the case for private crypto-assets </h3>
<p dir="ltr">This report examines both the benefits and limitations of crypto-assets across a number of their use cases. </p>
<ol><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Benefits of crypto-assets as a currency and asset: </p>
</li></ol>
<ul><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Decentralised and verifiable transactions </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Reduced transaction costs </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Confidentiality </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Security </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Easier cross-border transactions </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">A potential tool for financial inclusion </p>
</li></ul>
<ul><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">As a tool for verifying asset ownership </p>
</li></ul>
<ol start="2"><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Limitations of crypto-assets as a currency and asset: </p>
</li></ol>
<ul><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">High environmental costs </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Replaces traditional transaction costs with new costs </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">A few actors dominate mining </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Cannot replace traditional money </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Introduces challenges in implementing monetary policies </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Lack of network externalities </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">The limited actual impact on financial inclusion </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Use for illegal activities </p>
</li><li style="list-style-type: disc;" dir="ltr">
<p dir="ltr">Prone to schemes and scams </p>
</li></ul>
<h3>International Perspectives </h3>
<p dir="ltr">In order to draw inferences and lessons from a multitude of perspectives, we examined the regulatory frameworks governing private crypto-assets in the following jurisdictions: </p>
<br />
<ol><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">European Union </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">El Salvador </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">United States </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">United Kingdom </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Japan </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Venezuela </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">South Africa </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Singapore</p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Indonesia </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Switzerland </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">China </p>
</li></ol>
<h3>Recommendations</h3>
<p dir="ltr">Keeping in mind the benefits and limitations, as well as the experiences of countries around the world, we recommend the following measures to develop an appropriate regulatory framework in India. We have divided our recommendations into 2 types: immediate or short term measures and longer term measures.</p>
<ol><li style="list-style-type: upper-alpha;" dir="ltr">
<h3 dir="ltr">Immediate/ Short Term Measures </h3>
</li></ol>
<ol><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Steering clear of bans private crypto-assets</h4>
</li></ol>
<p dir="ltr">Earlier, regulatory bodies made calls to ban private crypto-assets, but this resulted in crypto-assets being assimilated into the unregulated black market, thereby stifling potential innovation. To that end we recommend avoiding a ban, and adopting a regulatory approach instead. </p>
<ol start="2"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Recommend that regulatory bodies use their ad-hoc power to exercise interim oversight </h4>
</li></ol>
<p dir="ltr">During the interim period, prior to the adoption of a dedicated crypto-asset legislation, crypto-assets could be included under one of the existing financial instrument categories. The regulations governing them would apply to both cryptocurrency exchanges as well as vendors who accept payments in cryptocurrencies.</p>
<ol start="2"><li style="list-style-type: upper-alpha;" dir="ltr">
<h3 dir="ltr">Long Term Measures </h3>
</li></ol>
<ol><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Specific Regulatory Framework</h4>
</li></ol>
<p style="text-align: justify;" dir="ltr">There needs to be an independent regulatory framework specific to crypto-assets since the unique features of crypto-assets make them unsuitable to be regulated through the existing regulatory frameworks.</p>
<ol start="2"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Identify clear definitions</h4>
</li></ol>
<p dir="ltr">Policymakers should adopt a definition of crypto-assets that includes entities that have emerged within the crypto space but which cannot be classified as ‘currencies’. They must also categorise and define these various entities as well as crypto-asset service providers. </p>
<ol start="3"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Limit the scope of regulations to crypto-assets rather than their underlying technologies</h4>
</li></ol>
<p dir="ltr">Any proposed regulation must differentiate between the assets themselves and the technology underlying them. This would ensure that crypto-assets are not defined by the technology they currently use (i.e., DLT and blockchain) but by the purpose they serve. </p>
<ol start="4"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Introduce a licensing and registration system</h4>
</li></ol>
<p dir="ltr">A licensing system, similar to those adopted in other jurisdictions such as the EU or New York, can be adopted to ensure that the state is able to effectively monitor crypto-related activities. </p>
<ol start="5"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Make provisions for handling environmental concerns </h4>
</li></ol>
<p dir="ltr">A dedicated taxation programme and strict limitations on mining can minimise the environmental costs associated with crypto-assets. </p>
<ol start="6"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Consumer protection measures </h4>
</li></ol>
<p dir="ltr">Any potential licensing system must include mandatory obligations for crypto-asset service providers that ensure that consumer rights are protected.</p>
<ol start="7"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Taking measures to limit the impact of crypto-asset volatility on the wider financial market </h4>
</li></ol>
<p dir="ltr">Governments must take measures to ensure that the volatility of crypto-markets does not have a significant knock-on effect on the wider financial market. Such steps can include limiting financial institution holdings and dealings in crypto-assets. </p>
<ol start="8"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Extending Anti Money Laundering/ Counter Financing of Terrorism norms and exchange control regulations</h4>
</li></ol>
<p dir="ltr">Given the anonymous nature of crypto-assets and their potential for use in illegal activities, we recommend ensuring that crypto-specific anti-money laundering, prohibition of terror financing and foreign exchange management rules are introduced.</p>
<ol start="9"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Create an oversight body </h4>
</li></ol>
<p dir="ltr">Subject to the availability of resources, the government might consider establishing a dedicated body to oversee and research changes in the crypto-marketplace and make appropriate suggestions to the concerned regulatory authorities. </p>
<ol start="10"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Taxation</h4>
</li></ol>
<p dir="ltr">The existing uncertainty with regard to the correct tax provisions to be applied for various transactions when dealing with crypto-assets needs to be clarified with specific amendments to the tax provisions. </p>
<ol start="11"><li style="list-style-type: decimal;" dir="ltr">
<h4 style="text-align: justify;" dir="ltr">Stablecoin Specific Regulation</h4>
</li></ol>
<p dir="ltr">Given the specific position occupied by stablecoins, and the unique role that they perform in the crypto-ecosystem, any legislation that seeks to regulate private crypto-assets must focus heavily on them. To that end, policymakers should pay special attention to identifying the various entities associated with stablecoins, applying greater regulatory scrutiny onto those entities and taking steps to limit the risk that stablecoins pose to the wider financial system. </p>
<p dir="ltr"> </p>
<h3>Note</h3>
<div><em> A previous version of this post contained a link to a public consultation version of the crypto report. This version has since been taken down and the current version of the document is the final version. </em></div>
</span></div>
<p> </p>
<div> </div>
<div> </div>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/report-on-regulating-private-crypto-assets-in-india-public-consultation'>https://cis-india.org/internet-governance/blog/report-on-regulating-private-crypto-assets-in-india-public-consultation</a>
</p>
No publisherAman Nair, Vipul Kharbanda, Aryan GuptaCrypto PartyBitcoinCryptocurrencies2022-01-27T09:16:08ZBlog EntryAt the Heart of Crypto Investing, There is Tether. But Will its Promise Pan Out?
https://cis-india.org/internet-governance/blog/the-wire-aman-nair-june-30-2021-cryptocurrency-tether-stablecoin-dollar
<b>The $18.5 million fine levied by the New York attorney general’s office earlier this year to settle a legal dispute, raises more questions than answers.</b>
<p style="text-align: justify; ">The article was <a class="external-link" href="https://thewire.in/tech/cryptocurrency-tether-stablecoin-dollar">published in the Wire</a> on June 30, 2021.</p>
<hr />
<p style="text-align: justify; ">Cryptocurrencies have become the centerpiece of the global digital zeitgeist in 2021. Anyone remotely familiar with them would probably be able to name a few of the famous ones like Bitcoin and Ethereum.</p>
<p style="text-align: justify; ">However, there exists a lesser known cryptocurrency at the heart of this $ 3 trillion market, Tether. Issued by the company Tether.ltd, Tether forms the foundation for modern day crypto trading and could potentially be one of the biggest schemes in financial history.</p>
<p style="text-align: justify; ">Tether is a special type of cryptocurrency known as a stablecoin. Unlike coins such as Bitcoin and Ethereum, Tether’s monetary value is not a function of the forces of the crypto market but is rather pegged to the US Dollar. What this means is that 1 Tether will always be worth exactly 1 USD. This fixed value has allowed it to occupy a unique position within the crypto ecosphere, with it becoming the de facto standard of liquidity within these markets by acting as a widely accepted substitute to the US dollar.</p>
<p style="text-align: justify; ">At present, buying cryptocurrency using traditional fiat money (like dollars or rupees) comes with certain challenges. Purchasing with traditional currencies requires the use of banking services that come with a host of fees and time delays. At the same time, purchasing one type of crypto coin like Bitcoin with another coin like Ethereum can prove difficult due to the constantly shifting values of both coins. This is where Tether comes in. Acting as a bridge between the traditional financial world and the crypto market, it has become a sort of digital dollar — one that makes cryptocurrency trading significantly easier.</p>
<h3 style="text-align: justify; ">The problem with tether</h3>
<p style="text-align: justify; ">On the surface, Tether seems like a perfectly reasonable innovation that looks to fill in the gaps that exist within the market. Dig a little deeper than the surface and the discrepancies start to appear.</p>
<p style="text-align: justify; ">The premise of Tether’s appeal comes from its value being pegged to the US dollar. The company<a href="https://web.archive.org/web/20180202054322/https://tether.to/"> initially claimed</a> to have achieved this by ensuring that their currency was “fully backed” by cash reserves.</p>
<p style="text-align: justify; ">The process looked something like this: You gave the company 1 US dollar and they gave you 1 Tether that you could use to make other crypto purchases. If you returned your Tether, you would get your dollar back and the Tether you returned would be ‘burned’ (removed from circulation). This meant that for every Tether that existed the company would have 1 corresponding dollar in reserve in the bank, ensuring that the currency was backed.</p>
<p><img src="https://cis-india.org/home-images/copy2_of_CryptoCurrrency.png/@@images/054a9af7-7949-4765-b4be-bf50e8094a41.png" alt="Crypto Currency" class="image-inline" title="Crypto Currency" /></p>
<p><span class="discreet">An illustrated image shows US dollars, cryptocurrency and NFT written on a phone. Photo: Marco Verch/Flickr CC BY 2.0</span></p>
<p style="text-align: justify; ">However, there was an enormous flaw in this system. Since Tether.ltd was the sole creator of the coin, it could create as many of them as it wanted while falsely claiming that these new Tethers were also backed fully by cash reserves. And this is exactly what is alleged to have happened in a <a href="https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal">case brought forward</a> against Tether.ltd by the New York Attorney General’s office. The filings made by the attorney general noted that in their investigation they found that not only did the company have inadequate reserves to back the number of Tethers in circulation, but that there were significant periods of time wherein the company did not have any bank accounts or any access to banking at all — thereby exposing Tethers claims of being backed as being demonstrably false.</p>
<p style="text-align: justify; ">The scam was alleged to have worked as follows. First, the company would issue new coins that were not actually backed by any corresponding dollars. These new Tethers were then transferred to Bitfinex – a cryptocurrency exchange that was <a href="https://news.bitcoin.com/paradise-papers-reveal-bitfinexs-devasini-and-potter-established-tether-already-back-in-2014/">owned by Tether.ltd</a>. These unbacked Tethers would then be used to buy bitcoin, with the momentum from this increased demand causing the price of bitcoin to rise. They would then exchange their newly appreciated bitcoins for actual US dollars — thereby essentially creating real money where none had previously existed. While there is no conclusive evidence for this being true, <a href="https://www.researchgate.net/publication/342185292_Is_Bitcoin_Really_Untethered">research</a> has pointed to increased tether supply causing a boom in bitcoin prices in 2017.</p>
<p style="text-align: justify; ">The company has since altered its claim from being backed by cash reserves, to now being backed by a number of assets (which it refers to as its ‘reserves’) – of which <a href="https://tether.to/wp-content/uploads/2021/05/tether-march-31-2021-reserves-breakdown.pdf">cash only formed a small subset</a>. It maintains that the cumulative value of their assets does equal the number of Tethers in circulation, though it is worth noting that the veracity of these claims has been consistently <a href="https://davidgerard.co.uk/blockchain/2021/05/13/tether-publishes-two-pie-charts-of-its-reserves/">challenged</a>.</p>
<h3>How does this affect the rest of the crypto market?</h3>
<p>Tether’s problems are unfortunately not limited to itself, but rather affect the entire crypto marketplace. If the New York Attorney General’s filings are true, then it would mean that a significant amount of the demand in the crypto market could potentially not be backed by any actual purchasing power and that the price of cryptocurrencies like bitcoin have been artificially inflated.</p>
<p style="text-align: justify; ">If Tether was ever found (either by a regulatory body or through leaks) to have been creating unbacked units of its currency then it would result in a significant amount of buying pressure disappearing from the crypto market. And since Tether isn’t just any other cryptocurrency but rather is a medium for exchange in the crypto world, its downfall would have severe knock on effects that could cause a serious crash in the entire crypto market.</p>
<p style="text-align: justify; ">Quantifying such knock-on effects would be extremely difficult, however as previously mentioned, research has clearly outlined a significant causal relationship between tether’s supply and increased bitcoin prices. This leads to the conclusion that the reverse would likely be true; that a rapid decrease in tethers would cause a significant decrease in the price of bitcoin and other cryptocurrencies.</p>
<p style="text-align: justify; ">Ultimately, no one knows for sure whether Tether is a scheme or not. However, mounting evidence from a number of independent sources have all pointed to discrepancies in the company’s functioning. What is clear is that, if the allegations are in fact true, then Tether poses a serious risk to the entire crypto marketplace and investors.</p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/the-wire-aman-nair-june-30-2021-cryptocurrency-tether-stablecoin-dollar'>https://cis-india.org/internet-governance/blog/the-wire-aman-nair-june-30-2021-cryptocurrency-tether-stablecoin-dollar</a>
</p>
No publisheramanInternet GovernanceBitcoinCryptocurrencies2021-07-01T14:46:46ZBlog EntryCIS Comments on the National Strategy on Blockchain
https://cis-india.org/internet-governance/blog/cis-comments-on-the-national-strategy-on-blockchain
<b></b>
<p dir="ltr"> </p>
<p dir="ltr">This submission is a response by the researchers at CIS to the report “National Strategy on Blockchain” prepared by Ministry of Electronics and Information Technology (MEITY) under the Government of India. </p>
<p>We have put forward the following comments based on our analysis of the report.</p>
<p><strong><br /></strong></p>
<ol><li style="list-style-type: upper-roman;" dir="ltr">
<h3>General Comments on the National Strategy</h3>
</li></ol>
<ol><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">There are currently a number of reports and policies on blockchain use across departments, ministries and even states. The absence of a harmonised blockchain policy across all departments and institutions of government must be fixed. </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">There are inherent dangers with viewing blockchain as a silver bullet solution. </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr">Informational concerns with blockchain are existent and policies must be designed to reflect these concerns and minimise their occurrences. </p>
</li></ol>
<p><strong><br /></strong></p>
<ol start="2"><li style="list-style-type: upper-roman;" dir="ltr">
<h3>Section Specific Comments </h3>
</li></ol>
<ol><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr"><strong>Section 6.1</strong> - There is a need for greater decentralisation and a shift away from a solely government operated blockchain </p>
</li><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr"><strong>Section 6.2: </strong></p>
</li></ol>
<ul><li style="list-style-type: lower-alpha;" dir="ltr">
<p dir="ltr">The legality of blockchain also faces the hurdle of smart contracts </p>
</li><li style="list-style-type: lower-alpha;" dir="ltr">
<p dir="ltr">The RBI decision to halt the use of cryptocurrencies was struck down by the Supreme Court </p>
</li><li style="list-style-type: lower-alpha;" dir="ltr">
<p dir="ltr">The right to be forgotten exists as an extension of the right to privacy as well </p>
</li></ul>
<ol start="3"><li style="list-style-type: decimal;" dir="ltr">
<p dir="ltr"><strong>Section 7</strong> - There is a need for greater detail and granularity in the report’s analysis and in the suggestions and recommendations that it makes. </p>
</li></ol>
<div> </div>
<div>The full submission to MEITY can be found at: <a href="https://cis-india.org/internet-governance/national-strategy-on-blockchain">https://cis-india.org/internet-governance/national-strategy-on-blockchain</a></div>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/cis-comments-on-the-national-strategy-on-blockchain'>https://cis-india.org/internet-governance/blog/cis-comments-on-the-national-strategy-on-blockchain</a>
</p>
No publisherVipul Kharbanda & Aman NairBlockchainBitcoinCryptocurrenciesData GovernanceSubmissionsE-Governance2021-03-22T05:34:41ZBlog EntryRBI Ban on Cryptocurrencies not backed by any data or statistics
https://cis-india.org/internet-governance/blog/rbi-ban-on-cryptocurrencies-not-backed-by-any-data-or-statistics
<b>In March 2020, the Supreme Court of India quashed the RBI order passed in 2018 that banned financial services firms from trading in virtual currency or cryptocurrency.
Keeping this policy window in mind, the Centre for Internet & Society will be releasing a series of blog posts and policy briefs on cryptocurrency regulation in India
</b>
<p id="docs-internal-guid-9ddef591-7fff-b8f5-3c20-c4a78d53d066" style="text-align: justify;" dir="ltr"> </p>
<p style="text-align: justify;" dir="ltr">On April 6, 2018 <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0">the RBI issued a circular</a> preventing all Commercial and Co-operative Banks, Payments Banks, Small Finance Banks, NBFCs, and Payment System Providers not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies. The RBI had issued a Press Release cautioning the public against dealing in virtual currencies including Bitcoin in 2013. However, the growing popularity of cryptocurrencies and its adoption by large numbers of Indian users, may have been the reason which forced the RBI to issue another Press Release in February 2017 reiterating its earlier concerns regarding cryptocurrencies raised in its earlier circular of 2013. In December 2017 both the RBI as well as the Ministry of Finance issued Press Releases cautioning the general public about the dangers and risks associated with cryptocurrencies, finally culminating in the circular dated April 6, 2018 banning financial institutions from dealing with cryptocurrency traders. As a result of this circular the operations of cryptocurrency exchanges took a severe hit and the number of transactions on these exchanges reduced substantially. The cryptocurrency market in India all but disappeared with only a few extremely determined enthusiasts still dealing in cryptocurrencies, at the risk of potentially depriving themselves of banking services altogether.</p>
<p style="text-align: justify;" dir="ltr">The RBI circular was challenged in the Supreme Court by the Internet and Mobile Association of India; final arguments in the case were concluded only in the last week of January, 2020 with the judgment of the Supreme Court being awaited. Generally speaking, whenever such policy decisions of the executive branch are challenged in the courts, a well accepted defense for the executive authorities, specifically in highly complicated fields such as finance, etc. is that the decision was taken by an expert body using its expertise in the field. The basic rationale underlying this argument is that the authority has relied on verifiable data and used its expertise to analyse the same in order to arrive at its decision.</p>
<p style="text-align: justify;" dir="ltr">However, it appears from the response by the RBI to an RTI query by Centre for Internet and Society, that requested the RBI for a copy of all reports, papers, opinions and advice that was relied upon for issuing the April 6, 2018 circular, that the RBI has not relied upon any such data to come to a conclusion that banking services should be denied to all those entities dealing in cryptocurrencies. It appears from the response to the RTI query that it was the RBI’s own previous circulars and press releases which formed the basis for the April 6, 2018 circular. This response completely undermines the argument that the decision by the RBI was taken after an analysis of all the facts and statistics concerned with cryptocurrency trading.</p>
<p style="text-align: justify;" dir="ltr">Not only does the RTI response weaken the commonly accepted defense of an expert body making a well-reasoned decision, but it also strengthens another legal ground for challenging the decision of the RBI, viz. arbitrariness. One of the grounds on which executive decisions can be challenged is that the decision was made without taking into account relevant material and without the application of mind. The admission by the RBI in its RTI response that there is no material relied upon by the RBI, except its own previous Press Releases, only strengthens the argument that the decision was made in an arbitrary manner.</p>
<p style="text-align: justify;" dir="ltr">Such an admission by the RBI regarding the process followed before issuing the April 6, 2018 circular reduces the credibility of the decision itself. However it remains to be seen whether the Supreme Court of India agrees with the arguments of the petitioners challenging the April 6, 2018 circular, even though the petitioners may not have been able to produce this RTI response from the RBI to further bolster their case.</p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/rbi-ban-on-cryptocurrencies-not-backed-by-any-data-or-statistics'>https://cis-india.org/internet-governance/blog/rbi-ban-on-cryptocurrencies-not-backed-by-any-data-or-statistics</a>
</p>
No publishervipulCybersecurityinternet governanceBitcoinInternet GovernanceCryptocurrenciesCyber Security2020-03-05T18:35:48ZBlog EntryCryptocurrency Regulation in India – A brief history
https://cis-india.org/internet-governance/blog/cryptocurrency-regulation-in-india-2013-a-brief-history
<b>In March 2020, the Supreme Court of India quashed the RBI order passed in 2018 that banned financial services firms from trading in virtual currency or cryptocurrency.
Keeping this policy window in mind, the Centre for Internet & Society will be releasing a series of blog posts and policy briefs on cryptocurrency regulation in India
</b>
<p id="docs-internal-guid-18286fb9-7fff-c656-6a5b-a01a2e2b3682" style="text-align: justify;" dir="ltr"> </p>
<p style="text-align: justify;" dir="ltr">The story of cryptocurrencies
started in 2008 when a paper titled “Bitcoin: A Peer to Peer Electronic
Cash System” was published by a single or group of pseudonymous
developer(s) by the name of Satoshi Nakamoto. The actual network took
some time to start with the first transactions taking place only in
January 2009. The first actual sale of an item using Bitcoin took place a
year later with a user swapping 10,000 Bitcoin for two pizzas in 2010,
which attached a cash value to the cryptocurrency for the first time. By
2011 other cryptocurrencies began to emerge, with Litecoin, Namecoin
and Swiftcoin all making their debut. Meanwhile, Bitcoin the
cryptocurrency that started it all started getting criticised after
claims emerged that it was being used on the so-called “dark web”,
particularly on sites such as Silk Road as a means of payment for
illegal transactions. Over the next five years cryptocurrencies steadily
gained traction with increased number of transactions and the price of
Bitcoin, the most popular cryptocurrency shot up from around 5 Dollars
in the beginning of 2012 to almost 1000 Dollars at the end of 2017.</p>
<p style="text-align: justify;" dir="ltr">Riding on the back of this
wave of popularity, a number of cryptocurrency exchanges started
operating in India between 2012 and 2017 providing much needed depth and
volume to the Indian cryptocurrency market. These included popular
exchanges such as Zebpay, Coinsecure, Unocoin, Koinex, Pocket Bits and
Bitxoxo. With the price of cryptocurrencies shooting up and because of
its increased popularity and adoption by users outside of its
traditional cult following, regulators worldwide began to take notice of
this new technology; in India the RBI issued a Press Release cautioning
the public against dealing in virtual currencies including Bitcoin way
back in 2013. However, the transaction volumes and adoption of
cryptocurrencies in India really picked up in earnest only after the
demonetisation of high value currency notes in November of 2016, with
the government’s emphasis on digital payments leading to alternatives to
traditional online banking such as cryptocurrencies forcing their way
into the public consciousness. Indian cryptocurrency exchanges started
acquiring users at a much higher pace which drove up volume for
cryptocurrency transactions on all Indian exchanges. The growing
popularity of cryptocurrencies and its adoption by large numbers of
Indian users forced the RBI to issue another Press Release in February
2017 reiterating its concerns regarding cryptocurrencies raised in its
earlier Press Release of 2013. </p>
<p style="text-align: justify;" dir="ltr">In October and November, 2017
two Public Interest Petitions were filed in the Supreme Court of India,
one by Siddharth Dalmia and another by Dwaipayan Bhowmick, the former
asking the Supreme Court to restrict the sale and purchase of
cryptocurrencies in India, and the latter asking for cryptocurrencies in
India to be regulated. Both the petitions are currently pending in the
Supreme Court.</p>
<p style="text-align: justify;" dir="ltr">In November, 2017 the
Government of India constituted a high level Inter-ministerial Committee
under the chairmanship of Shri Subhash Chandra Garg, Secretary,
Department of Economic Affairs, Ministry of Finance and comprising of
Shri Ajay Prakash Sawhney (Secretary, Ministry of Electronics and
Information Technology), Shri Ajay Tyagi (Chairman, Securities and
Exchange Board of India) and Shri B.P. Kanungo (Deputy Governor, Reserve
Bank of India). The mandate of the Committee was to study various
issues pertaining to Virtual Currencies and to propose specific actions
that may be taken in relation thereto. This Committee submitted its
report in July of 2019 recommending a ban on private cryptocurrencies in
India.</p>
<p style="text-align: justify;" dir="ltr">In December 2017 both the RBI
as well as the Ministry of Finance issued Press releases cautioning the
general public about the dangers and risks associated with
cryptocurrencies, with the Ministry of Finance Press Release saying that
cryptocurrencies are like ponzi schemes and also declaring that they
are not currencies or coins. It should be mentioned here that till the
end of March 2018, the RBI and the Finance Ministry had issued various
Press Releases on cryptocurrencies cautioning people against their
risks, however none of them ever took any legal action or gave any
enforceable directions against cryptocurrencies. All of this changed
with the RBI circular dated April 6, 2018 whereby the RBI prevented
Commercial and Co-operative Banks, Payments Banks, Small Finance Banks,
NBFCs, and Payment System Providers not only from dealing in virtual
currencies themselves but also directing them to stop providing services
to all entities which deal with virtual currencies.</p>
<p style="text-align: justify;" dir="ltr">The effect of the circular was
that cryptocurrency exchanges, which relied on normal banking channels
for sending and receiving money to and from their users, could not
access any banking services within India. This essentially crippled
their business operations since converting cash to cryptocurrencies and
vice versa was an essential part of their operations. Even pure
cryptocurrency exchanges which did not deal in fiat currency, were
unable to carry out their regular operations such as paying for office
space, staff salaries, server space, vendor payments, etc. without
access to banking services. </p>
<p>As a the operations of cryptocurrency exchanges took a severe hit and
the number of transactions on these exchanges reduced substantially.
People who had bought cryptocurrencies on these exchanges as an
investment were forced to sell their crypto assets and cash out before
they lost access to banking facilities. The cryptocurrency exchanges
themselves found it hard to sustain operations in the face of the dual
hit of reduced transaction volumes and loss of access banking services.
Faced with such an existential threat, a number of exchanges who were
members of the Internet and Mobile Association of India (IMAI), filed a
writ petition in the Supreme Court on May 15, 2018 titled Internet and
Mobile Association of India v. Reserve Bank of India, the final
arguments in which were heard by the Supreme Court of India in January,
2020 and the judgment is awaited. If the Supreme Court agrees with the
arguments of the petitioners, then cryptocurrency exchanges would be
able to restart operations in India; as a result the cryptocurrency
ecosystem in India may be revived and cryptocurrencies may become a
viable investment alternative again.</p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/cryptocurrency-regulation-in-india-2013-a-brief-history'>https://cis-india.org/internet-governance/blog/cryptocurrency-regulation-in-india-2013-a-brief-history</a>
</p>
No publishervipulCybersecurityinternet governanceBitcoinInternet GovernanceCryptocurrenciesCyber Security2020-03-05T18:36:09ZBlog EntryRegulating Bitcoin in India
https://cis-india.org/internet-governance/blog/regulating-bitcoin-in-india
<b>The article discusses the possible contours of future bitcoin regulation in India. Bitcoin, often considered a ‘notorious’ virtual currency limited only to techies or speculators, is currently fighting a battle to become a bona fide mainstream means of exchange.</b>
<p style="text-align: justify; ">While most currencies in the real world have the backing of a central authority of some kind (such as a sovereign or a Central Bank) infusing them with an air of legitimacy, Bitcoin has no such central authority which issues or controls it. Additionally, the distributed and decentralised nature of the Bitcoin network makes regulation a tricky issue. This article seeks to touch upon the issue of Bitcoin regulation and makes certain broad suggestions for the future. It is a follow-up to a previous article by this author discussing the legal treatment of Bitcoin under Indian law, available at <a href="http://cis-india.org/internet-governance/bitcoin-legal-regulation-india">http://cis-india.org/internet-governance/bitcoin-legal-regulation-india</a>.</p>
<p style="text-align: justify; ">The Reserve Bank of India (<b>RBI</b>) has not exactly been shy in recognising and even regulating technological advances in the financial sector as is evident from their detailed guidelines on Internet Banking,<a href="#_ftn1" name="_ftnref1">[1]</a> Prepaid Payment Instruments<a href="#_ftn2" name="_ftnref2">[2]</a> Account Aggregator Regulations,<a href="#_ftn3" name="_ftnref3">[3]</a> and the consultation paper on proposed regulations for P2P lending platforms,<a href="#_ftn4" name="_ftnref4">[4]</a> etc. However, though the RBI has acknowledged the existence of Bitcoin (it issued a note cautioning the public against dealing in virtual currencies including Bitcoin way back in 2013<a href="#_ftn5" name="_ftnref5">[5]</a> and again in 2017<a href="#_ftn6" name="_ftnref6">[6]</a>), there have been no clear guidelines regarding the same. Nevertheless, Bitcoin has come a long way since its inception and a consensus is emerging amongst the more technically inclined individuals that Bitcoin is infact here to stay.</p>
<p style="text-align: justify; ">Even if a sceptical view is taken that Bitcoin may not last for a long time, that does not mean that regulation is useless as there is already a large amount of money invested in Bitcoin entities in India and Bitcoin exchanges seem to be betting big on this sector really taking off - especially in the backdrop of the government’s recent push towards a more digital and less cash dependent economy.</p>
<p style="text-align: justify; ">While the Indian government is trying to hard sell the idea of digital payments, primarily using existing banking channels as well as the relatively new National Payments Corporation of India (<b>NPCI</b>) and the various applications that are cropping up around the NPCI’s UPI platform, one must note that going digital could involve high administrative costs. These costs are typically charged by banks and intermediary merchants, and may not be palatable to all stakeholders, as was evident in the recent fracas between petrol pump owners and banks over proposed transactional charges on card payments.<a href="#_ftn7" name="_ftnref7">[7]</a></p>
<p style="text-align: justify; ">It is this vacuum that alternatives such as prepaid payment instruments and virtual currencies can fill while addressing the concern of high administrative charges, which is likely to be a major hurdle in going digital. Administrative charges for most of these instruments are significantly lower than what existing payment channels charge for digital transactions.<a href="#_ftn8" name="_ftnref8">[8]</a></p>
<p style="text-align: justify; "><b>Legality of Bitcoin and the need for Regulation</b></p>
<p style="text-align: justify; ">Bitcoin technology is being widely embraced all over the world, including neighbouring China which has become one of the biggest markets for the uniquely decentralised currency. However the biggest hurdle that Bitcoin enthusiasts see in mainstreaming this technology is the fact that most countries are treading too cautiously around Bitcoin and therefore do not have regulation governing them.</p>
<p style="text-align: justify; ">The creation and transfer of Bitcoin is based on an open source cryptographic protocol and is not managed by any central authority.<a href="#_ftn9" name="_ftnref9">[9]</a> It is the decentralized nature of this virtual currency that makes regulation a major challenge. This does not mean that regulators are not capable of regulating Bitcoin, in fact attempts have been made in several jurisdictions but these are mostly in the discussion stage, for eg. the Washington Department of Financial Institutions (“DFI”) introduced a bill in December, 2016 which proposes amendments to certain portions of the Washington Uniform Money Services Act and includes provisions specific to digital currencies;<a href="#_ftn10" name="_ftnref10">[10]</a> the U.S. District Court for the Southern District of New York has in a decision in September, 2016 taken the view that Bitcoin is money under the plain meaning of Section 1960, the federal money transmission statute.<a href="#_ftn11" name="_ftnref11">[11]</a></p>
<p style="text-align: justify; ">This article does not intend to undertake a discussion on how Bitcoin is dealt with in various jurisdictions, but instead is aimed at suggesting a possible way forward for Indian regulators to regulate Bitcoin in a manner that satisfies the regulatory zeal towards security as well as ensures that the technology does not get stifled through overregulation. It is important that the regulators create a balanced regulation because an impractical ecosystem for Bitcoin exchanges and their users, may lead to traders seeking alternative methods of purchasing Bitcoin such as P2P trading, over-the-counter (OTC) markets and underground trading platforms, which are significantly more difficult to regulate.<a href="#_ftn12" name="_ftnref12">[12]</a></p>
<p style="text-align: justify; "><b>Suggestions for Regulation</b></p>
<p style="text-align: justify; ">Since Bitcoin is a decentralised cryptocurrency, it is impossible to regulate it through one single centralised point for all transactions. Neither is it feasible to regulate each and every Bitcoin user. A pragmatic compromise between these two extremes could be to regulate the points at which fiat currency or valuable goods enter the Bitcoin system, i.e. the Bitcoin exchanges where people may buy and sell Bitcoin for actual real world money, or websites which offer Bitcoin as a means of payment. Such an approach would reduce the number of points of supervision and lead to effective enforcement of the regulations. The regulations may require any entity providing services such as buying and selling of Bitcoin for actual money, trading in Bitcoin (such as non-cash exchanges) or providing other Bitcoin related services (such as Bitcoin wallets, merchant gateways, remittance facilities, etc.) to be registered with a central government agency, preferably the Reserve Bank of India.</p>
<p style="text-align: justify; ">One legal issue regarding the regulation of companies transacting in Bitcoin is whether the RBI has the authority or jurisdiction to regulate Bitcoin in the first place. Without getting into the arguments regarding whether it is a dangerous trend or not, an easy way in which the RBI could ensure it has the authority to regulate Bitcoin would be to follow the path that the RBI adopted while regulating Account Aggregators under the Non-Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016 wherein the RBI declared Account Aggregators as Non Banking Finance Companies under section 45-I(f)(iii) thereby getting the authority to regulate and supervise them under section 45JA of the Reserve Bank of India Act, 1934.</p>
<p style="text-align: justify; ">The Regulations, once issued by the Reserve Bank of India, can prescribe mandatory registration, capital adequacy provisions, corporate governance conditions, minimum security protocols, Know Your Customer (KYC) requirements and most importantly provide for regular and ongoing reporting requirements as well as supervision of the Reserve Bank of India over the activities of Bitcoin companies.</p>
<p style="text-align: justify; ">Any proposed Bitcoin regulatory framework would seek to address certain issues; for the purposes of this article, we will assume that the following three issues are the ones that must necessarily be addressed by a regulatory framework:</p>
<ul style="text-align: justify; ">
<li>Security of the consumer’s property and prevention of fraud on the consumer. In the technology sector this translates into specific emphasis on increased security (against hacking) for accounts that the consumers maintain with the service provider.</li>
<li>India has robust exchange control laws and the inherently decentralised and digital nature of Bitcoin can enable transfer of value from one jurisdiction to another without any oversight by a central agency, potentially violating the exchange control laws of India.</li>
<li>Bitcoin has for long been associated with criminal and nefarious activities, infact many believe that the famous black market website “Silk Road” played a big role in making Bitcoin famous<a href="#_ftn13" name="_ftnref13">[13]</a> and therefore preventing Bitcoin from being used for illegal activities (or creating a mechanism to ensure a digital trail to help investigations post facto) would be a major issue that the regulations would seek to tackle.</li>
</ul>
<p style="text-align: justify; ">Given the above assumptions, let us examine whether the Regulations suggested above can satisfactorily address the concerns of security of consumers, exchange control, and keeping a tab on criminal activities.</p>
<p style="text-align: justify; ">If the regulations provide for minimum capital adequacy requirements as well as registration by the RBI or some other central agency, then the chances of consumers being duped by “fly-by-night” operators would be significantly reduced. The Regulations can also provide for minimum security protocols to be maintained by the companies, which protocols can themselves be developed in concert with Bitcoin experts. Critics may point to the hacking of various Bitcoin exchanges in the recent past, including that of MtGox, in which Bitcoin worth millions of dollars were siphoned off, and argue that the security protocols may not be enough to prevent future instances of hacking. But that is true even for the current security protocols for online banking; and that has not prevented a large number of banks from providing online banking facilities and the RBI regulating the same. The other vital issue that legally mandated security protocols would address (and potentially solve) is the issue of liability in case of hackings. Regulations may provide clarity on this issue and protect innocent customers from negligent companies while at the same time protecting entrepreneurs by defining and limiting the liability for <i>bona fide</i> and vigilant companies.</p>
<p style="text-align: justify; ">The other issue that may be of major concern to the authorities is exchange control. India has extremely specific exchange control laws, and if any person in India wants to transfer any amount to any person overseas, the only legal way to do so is through a bank transfer, which requires filling paperwork giving the reason for the transfer (although the RBI and banks usually don’t ask for any proof for small amounts upto a few lakhs). This means that all transfers outside India are done through proper banking channels and are therefore under the supervision of the RBI. However the decentralised nature of Bitcoin enables individuals to transfer money outside the borders of India without going through any banking channels and hence stay completely outside the purview of the RBI’s supervision. Such a system which lets users transfer money beyond national borders outside legal banking channels could be easily misused by nefarious actors and this is exactly what happened as international drug cartels turned to Bitcoin and other digital currencies to move their ill gotten wealth beyond the borders of various countries.<a href="#_ftn14" name="_ftnref14">[14]</a> Regulating the entities which provide Bitcoin wallets and Bitcoin exchanges will ensure that the RBI can exercise its supervisory jurisdiction over Bitcoin transactions of individual customers even though these transactions do not go through the regular banking channels. The Regulations could impose an obligation on the companies to provide information on any suspicious activities or provide greater information about accounts which see very high volumes, etc. to ensure that Bitcoin is not used to finance organised crime. Thus, the regulations could have provisions that would require the companies providing the Bitcoin wallets or exchanges to flag and monitor customers whose trading accounts or Bitcoin wallets have transactions of an amount greater than a specified limit. This would provide the RBI with the ability to enquire as to the reasons for such high volumes and weed out illegal transactions while at the same time allowing bona fide transactions to continue.</p>
<p style="text-align: justify; ">Very closely linked to the issue of exchange control and supervision of transactions is the issue of checking the furtherance of criminal activities using the apparent anonymity offered by Bitcoin. However if the RBI has regulatory oversight over all the Bitcoin companies that are operating in India, then it would be possible for it to keep an eye on most Bitcoin transactions in India as long as the wallet that originates or terminates the transaction has been provided by a Bitcoin service provider located in India. An argument may be made that a criminal may use the services of Bitcoin wallet services provided by companies outside India and therefore outside the purview of the RBI and its regulations. However this argument may not be as plausible as it may seem at first look; if we assume that for any criminal activity the ultimate goal is to get the money in the form of recognizable legal tender (preferably cash or money in a bank account) then it stands to reason that the Bitcoin in the wallet would be exchanged for currency at some point or the other in the chain, which can only be done through a Bitcoin exchange if the transaction is of a fairly high value (which most criminal transactions are) and these exchanges as well as the accounts maintained by them will be under the purview of the RBI, thus providing the law enforcement agencies with the final link in the chain of transactions. Further, the public nature of the blockchain (the ledger where each Bitcoin trade is registered and verified) also makes it possible for the enforcement agencies to follow the trail of money for each and every Bitcoin or part thereof.</p>
<p style="text-align: justify; "><b>Conclusion</b></p>
<p style="text-align: justify; ">From the discussion above, we see that the major arguments that have been given by sceptics regarding Bitcoin and its attractiveness to criminals due to its decentralised nature are actually not very viable on a closer look. Bitcoin and the blockchain technology are extremely important steps in the direction of better and more efficient financial transactions in the global economy, which is why a number of mainstream banks are also showing a keen interest in the blockchain technology.<a href="#_ftn15" name="_ftnref15">[15]</a> Regulations governing Bitcoin or virtual currencies would clear the air regarding their legal status so that consumers as well as entrepreneurs and investors can invest more money in this technology which could potentially change the way financial transactions are carried out across jurisdictions.</p>
<hr />
<p style="text-align: justify; "><a href="#_ftnref1" name="_ftn1">[1]</a> <a href="https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=414&Mode=0">https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=414&Mode=0</a></p>
<p style="text-align: justify; "><a href="#_ftnref2" name="_ftn2">[2]</a> <a href="https://rbi.org.in/scripts/NotificationUser.aspx?Id=10799&Mode=0">https://rbi.org.in/scripts/NotificationUser.aspx?Id=10799&Mode=0</a></p>
<p style="text-align: justify; "><a href="#_ftnref3" name="_ftn3">[3]</a> <a href="https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10598">https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10598</a></p>
<p style="text-align: justify; "><a href="#_ftnref4" name="_ftn4">[4]</a> <a href="https://rbidocs.rbi.org.in/rdocs/content/pdfs/CPERR280416.pdf">https://rbidocs.rbi.org.in/rdocs/content/pdfs/CPERR280416.pdf</a></p>
<p style="text-align: justify; "><a href="#_ftnref5" name="_ftn5">[5]</a> <a href="https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247">https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247</a></p>
<p style="text-align: justify; "><a href="#_ftnref6" name="_ftn6">[6]</a> <a href="https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435">https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435</a></p>
<p style="text-align: justify; "><a href="#_ftnref7" name="_ftn7">[7]</a> <a href="http://timesofindia.indiatimes.com/business/india-business/petrol-pumps-wont-accept-cards-from-monday-to-protest-banks-transaction-fee/articleshow/56402253.cms">http://timesofindia.indiatimes.com/business/india-business/petrol-pumps-wont-accept-cards-from-monday-to-protest-banks-transaction-fee/articleshow/56402253.cms</a></p>
<p style="text-align: justify; "><a href="#_ftnref8" name="_ftn8">[8]</a> For example, currently the network fee for a person to person Bitcoin transfer is 0.0001 Bitcoin, which comes to roughly Rs. 6 per transaction irrespective of the amount involved.</p>
<p style="text-align: justify; "><a href="#_ftnref9" name="_ftn9">[9]</a> The processing of Bitcoin transactions is secured by servers called Bitcoin “miners”. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology, also known as the “blockchain”. The integrity and chronological order of the blockchain is enforced with cryptography. In addition to archiving transactions, each new ledger update creates some newly-minted Bitcoins.</p>
<p style="text-align: justify; "><a href="#_ftnref10" name="_ftn10">[10]</a> <a href="https://www.virtualcurrencyreport.com/2017/01/washington-department-of-financial-institutions-proposes-virtual-currency-regulation/">https://www.virtualcurrencyreport.com/2017/01/washington-department-of-financial-institutions-proposes-virtual-currency-regulation/</a></p>
<p style="text-align: justify; "><a href="#_ftnref11" name="_ftn11">[11]</a> <a href="https://www.virtualcurrencyreport.com/2016/09/sdny-opinion-re-bitcoin/">https://www.virtualcurrencyreport.com/2016/09/sdny-opinion-re-bitcoin/</a>. For a discussion on how different States and agencies in the United States deal with Bitcoin, please see Misha Tsukerman, “THE BLOCK IS HOT: A SURVEY OF THE STATE OF BITCOIN REGULATION AND SUGGESTIONS FOR THE FUTURE, Berkeley Technology Law Journal, Vol. 30:385, 2015, p. 1127, available at <a href="http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=2084&context=btlj">http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=2084&context=btlj</a> .</p>
<p style="text-align: justify; "><a href="#_ftnref12" name="_ftn12">[12]</a> <a href="http://themerkle.com/why-china-isnt-interested-in-banning-bitcoin-importance-of-regulation/">http://themerkle.com/why-china-isnt-interested-in-banning-bitcoin-importance-of-regulation/</a></p>
<p style="text-align: justify; "><a href="#_ftnref13" name="_ftn13">[13]</a> See generally, Nathaniel Popper, “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money”, Harper Collins, 2015.</p>
<p style="text-align: justify; "><a href="#_ftnref14" name="_ftn14">[14]</a> <a href="https://www.bloomberg.com/view/articles/2013-11-18/are-bitcoins-the-criminal-s-best-friend-">https://www.bloomberg.com/view/articles/2013-11-18/are-bitcoins-the-criminal-s-best-friend-</a></p>
<p style="text-align: justify; "><a href="#_ftnref15" name="_ftn15">[15]</a> <a href="http://www.morganstanley.com/ideas/big-banks-try-to-harness-blockchain">http://www.morganstanley.com/ideas/big-banks-try-to-harness-blockchain</a>.</p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/regulating-bitcoin-in-india'>https://cis-india.org/internet-governance/blog/regulating-bitcoin-in-india</a>
</p>
No publishervipulFinancial TechnologyDigital PaymentBitcoinInternet GovernanceDigital IndiaVirtual Currencies2017-04-20T13:17:37ZBlog Entry50p and Digital Payments Masterclass Learning - CIS
https://cis-india.org/internet-governance/50p-and-digital-payments-masterclass-learning-cis
<b>Sunil Abraham, Saikat Dutta and Udbhav Tiwari from the CIS team attended 50p on the 24 and 25 of January 2017 in Bangalore, India. We had the following learnings from the event, which will shape our work in the digital finance and payments space in the future. </b>
<p style="text-align: justify;" dir="ltr">Sunil Abraham, Saikat Dutta and Udbhav Tiwari from the CIS team attended 50p on the 24 and 25 of January 2017 in Bangalore, India. We had the following learnings from the event, which will shape our work in the digital finance and payments space in the future.</p>
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<p style="text-align: justify;" dir="ltr">Historical Developments of Digital Payments Regulation in India - The historical development of the digital payments ecosystem in India, starting with mobile/SMS banking around 2004, focusing mostly on high-end consumers. The widely varying implementations across banks led to the RBI taking an active regulatory approach, beginning with the introduction of compulsory two factor authentication in the form of mandatory PIN usage for credit and debit cards. This move helped secure “card not present” (CNP) transactions, which in turn allowed the e commerce, online streaming services and other digital services to rapidly gain customers. This serves as an example of how simple, targeted and uniformly imposed regulations can help secure widely used digital payment modes, securing customers while expanding opportunities for businesses. The Watal Committee report has also stressed on how the the industry and consumers alike, in the medium term, will benefit from focused sectoral regulation for the FinTech industry.</p>
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<p style="text-align: justify;" dir="ltr">Expansion in the Modern Digital Payments Industry - The digital payments industry has expanded from having three main stakeholders (banks, card issuing agencies and customers) in mid 2000s to over eight distinct entities who take part in the same payments chain. These include Digital Wallet Providers, Payment Gateways, Payment Processors, Ticketing or Payment Service Providers Billers, all of which are operate with millions of transactions per day. This not only increases the potential attack surface for possible attempts at compromising them but also governance under traditional banking regulations difficult for the regulatory authority. The introduction of BBPS (Bharat Bill Pay System) to integrate the thousands of local utility bill payment system in India, into one centrally administered programme, is just one example of the vast amounts of data being generated (and integrated) by the digital payments industry. Therefore, the need for unique FinTech regulations and standards (maybe even a regulator) to handle the rapidly expanding and critical industry is quite strong in the booming space in India.</p>
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<p style="text-align: justify;" dir="ltr">UPI - The Unified Payments Interface (UPI) is a set of standards that allow for a single application to connect to and control multiple bank accounts (of participating banks), allowing users to use several banking services such as funds transfer (P2P), merchant payments, etc. Initially launched in August, 2016 with support from 16 banks and is gaining rapid acceptance among users, businesses and payment providers alike. While built on the same technological underpinnings as the IMPS system, the UPI standard allows for a wide variety of data, including credit scores, Aadhaar numbers and geographical location to be transmitted. While the standard itself seems reasonably secure, its diverse and closed source implementation allow for the usual closed source development risks of security and unresolved bugs. It is stipulated to become the most widely used digital transaction protocol in India and the backbone of the FinTech industry due to its interoperability and regulatory acceptance. A set of security guidelines and practices that allow for a uniform, secure and auditable implementation of the UPI standard as well as its operational usage will aid in faster and more secure development of the standard while simultaneously protecting consumer interest.</p>
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<p style="text-align: justify;" dir="ltr">Need for Consumer Advocacy - The need for educating consumers about the technical operations of the digital payments industry, best practices to maximise user facing security and strategies for effective dispute redressal were tagged as key focus areas by various groups. The inadequacy of the Consumer Protection Act to deal with the labyrinth of digital payments and the relative lack of liability and breach notification laws (especially in the non-banking finance companies sector) have lead to bargaining power in consumer contracts to fall in the favour of the digital payments industry. While initiatives such as Cashless Consumer are attempting to rectify this, sustained and well planned initiatives implemented in a diverse and multi-lingual manner will be needed to keep up with the rapid pace of expansion in the industry and is burgeoning user base. Incidental benefits of such programmes (an increase in the demand for data protection and privacy aware practices) will also serve to further consumer interest in a manner that will have a positive impact outside the FinTech industry.</p>
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<p style="text-align: justify;" dir="ltr">USSD - The recent push towards USSD based banking, which allows banking transactions to be carried using feature phones, has led to various concerns regarding its security, reliability and implementation. The varying levels of GSM encryption in the providers in India, the lack of open standards (such as HTTPS for Internet Banking) that allow consumers to verify security and the rapid but untested implementation by most banks have led to some players raising doubts about the possibility of exploitation of the particularly vulnerable section of users that will use USSD banking. The need for a detailed investigation into current practices, open and auditable standards unique to USSD banking in India and regulations that mandate a minimum level of compliance was expressed by multiple stakeholders.</p>
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<p>
For more details visit <a href='https://cis-india.org/internet-governance/50p-and-digital-payments-masterclass-learning-cis'>https://cis-india.org/internet-governance/50p-and-digital-payments-masterclass-learning-cis</a>
</p>
No publisherUdbhav TiwariFinancial TechnologyDigital PaymentBankingBitcoinDigital MoneyCyber Security2017-06-15T12:29:52ZBlog Entry