Challenges for Lakshmi in India

As per the recent reports, the Reserve Bank of India has formed a panel for discussing the viability of a virtual currency for the Indian Economy. Though the name for the same hasn’t been finalized, there are speculations to name it Lakshmi, after the Indian Goddess for Wealth.[1] The aim of the panel is to analyze the requirements for a fiat cryptocurrency. The step has been taken following the popularity in transferring through cryptocurrencies such as Bitcoin, Ethereum, Ripple, etc. However, given their non-fiat nature[2], the Central Bank is not keen on entertaining these visual currencies and do not favor their presence in the economy.

 

With the recent fall in the price of Bitcoin, followed by the theft of Bitcoins worth more than Rs. 20 Crore from an Indian Cryptocurrency Exchange[3], the popularity of the same might see a downfall. It is pertinent to note that these exchanges are not regulated the way SEBI approved exchanges are controlled. In the USA, cryptocurrencies are regulated as both commodities as well as securities.[4]They are not treated as currencies as the name suggests and rather they have emerged as investor’s darlings because of the curious techno-cum (nature).[5] This is because investors can transfer money without it being tracked back to its source. This gives them autonomy.

 

Presently, Indian regulations and provisions do not provide for any type of control over such visual currencies with the Finance Ministry declaring them to be non-legal tender in the Budget of 2018. The main reason for doing so could be to curb the tax evasion and money laundering practices that can be easily carried out with cryptocurrencies.[6] The RBI has, time and again, warned about the financial and legal risks involved with the use of these tenders. It issued notices three times in December 2013, February 2017 and December 2017. The latest notice comes with the RBI ordering Indian banks to terminate all business relationship with cryptocurrency exchanges.[7] It has not explicitly banned the use of the same but has discouraged it widely. The pace at which transactions are growing, if the Indian economy does adopt a visual currency, transfer would be much faster because of the technology involved.

 

Now, to deal with problems related to cryptocurrencies. Bitcoin has come under global scrutiny as it is regarded unsafe. There are no dispute resolution methods and the transactions cannot be traced to any person. In order to secure such transactions, ledger-like blockchain technology is required which records transactions. RBI will have to develop its own blockchain so as to protect investor interest and prevent thefts.[8] The law on cryptocurrency will require disclosure of the source of income along with classification of cryptocurrency – whether it is an asset, a security or a commodity (as in the case of USA). If it is a security, then Securities and Exchange Board of India will have to be involved for regulating the limit on transactions, listing requirements, procedures to be followed for transfer, penalties for fraud and misrepresentations, disclosure in financial statements, procedure in case of theft, etc. If it as an asset, then investment limitations on the same will be required, whether banking companies can fund them or not on behalf of their clients. If it is to be considered as a commodity, the only statute governing the scenario is the Indian Essential Commodities Act, 1955. Several amendments to the same will be required. As there is no explanatory definition to the word “commodities” in the Act, the parameters required for a cryptocurrency to be considered one might be difficult to construe.

 

The Banking Regulation Act, 1949 controls the business of the banks. Under section 5(b), Banking means acceptance of deposits of money from public for the purpose of lending or investing with the option of repayment on demand. The same will be required to be amended if banks are to be allowed to deal in visual currencies, the word “money” will have to be strung with the words “and visual currency”. Banks also perform agency functions for their customers by paying on their behalf. Therefore, acceptance of deposits in visual currency will be a primary function thereafter. Presently, banks allow electronic transfer of money, but with the possibility of India having its own legal visual currency, the requirement for scrutiny will grow tenfold as frauds and money laundering opportunities will also grow.

 

As far as cybercrime is concerned, the current provisions of sections 43 and 66 of the Information Technology Act, 2000 deal with theft of any data from any computer system providing for punishment of the same – If any person, dishonestly or fraudulently, does any act referred to in section 43, he shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to five lakh rupees or with both. What the provisions lack are exclusive terms to deal with theft of money in digital form. In a case where India introduces its own cryptocurrency, the legislation will have to be amended to include scenarios where money is laundered through cyber technology. Cryptocurrencies will be used to transfer large amount of funds, therefore penalty as per the amount involved in the transaction will have to be decided upon. The Executive will have to come up with a proper procedure for complaints arising out of theft of money, procedure for dispute resolution mechanism, etc.

 

Suggestively, to ensure that there is easy introduction of the system in the country, the RBI can set a limit on banks having a particular amount of turnover that will be allowed to perform transactions through cryptocurrencies.[9]All such transactions shall require prior RBI approval with proper disclosure and authenticity. Additionally, banks can have mandatory IT representatives on the board to help ensure that the data protection policy of the Bank is up to the satisfaction of the RBI. For this purpose, section 10A(2)(a) of the Banking Regulation Act, 1949 will be required to be amended as it does not explicitly provide for appointment of an IT expert to the Board.

 

One facet is the insurance policy of banks. An important aspect is whether a certain limit of the transaction would be insured by the banks as against theft of cryptocurrency, or the banks will have full accountability for transactions that take place? Whether the banks will have individual cyber protection or will the protection provided by RBI be enough? Customer and investor protection are the main goals of RBI which it adheres to fulfil. Banks are the intermediaries through which transactions take place. With the recent PNB fraud, investor faith in banks has been shaken. To ensure their satisfaction, banks’ policy could provide for fair insurance of money being transferred through the medium of cryptocurrencies. Keeping in mind the Financial Resolution and Deposit Insurance Bill, 2017 will the deposits in form of cryptocurrencies (which will be a huge amount) be insured in case the bank goes bankrupt and initiates insolvency proceedings?

 

Another aspect to be dealt with is the tax implication of owning and using a cryptocurrency. Currently, any gains or investments arising out of a visual currency is subject to capital gains tax as in the case of other assets.[10] This would by default classify cryptocurrencies as assets. As mentioned earlier, if the government treats them as securities, then would they be subject to the same provisions as other securities under the Income Tax Act, 1961. Whether there could be any deductions or exemptions as in the likes provided under section 10 of the Act? Whether they will continue to be treated as capital gains as in the case of assets under section 54 or would they fall under the miscellaneous income from other sources as in the case of securities under section 56 (2)?

 

Last challenge for the Indian legislation would be to amend the Reserve Bank of India Act, 1934 to include cryptocurrencies as one of the currency formats of India. Sections 22-29 deal with the power of the RBI to issue currency in the country. Presently, notes authorized by the RBI are circulated throughout the country. In order for a digital currency to evolve, the sections would have to be amended to provide RBI with legislative authority and backing to do so.

 

To conclude, introducing a legally backed up digital currency has a lot of scrutinization and legislative activity involved. The threat of hacking and misappropriation of data is pervasive along with the instantaneous need to curb tax evasion and money laundering practices. Even when there is no legal support to visual currency, the number of people transacting through the same is growing day by day. The introduction of a cryptocurrency could be next best alternative to try and make the Indian economy more investor friendly. All in all, to move towards a digitalized economy, a visual currency is definitely a step forward as it shortens the transaction time involved.

 

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[1]Govt considering its own cryptocurrency, Business Standard (April 14th, 2018, 12:11 pm) http://www.business-standard.com/article/economy-policy/govt-considering-its-own-cryptocurrency-117091600051_1.html

[2]Fiat currencies are those currencies which are declared to be of legal tender and are regulated by an authority.

[3]Bitcoins worth Rs 20 crore stolen from exchange in India’s biggest crypto theft, Economic Times (April 14th, 2018, 1:28 pm) https://economictimes.indiatimes.com/industry/banking/finance/banking/bitcoins-worth-rs-20-crore-stolen-from-exchange-in-indias-biggest-crypto-theft/articleshow/63740771.cms

[4]Cryptocurrencies Are Commodities, Says Federal Judge, Forbes (June 25th, 2018, 10:56 pm) https://www.forbes.com/sites/greatspeculations/2018/03/09/cryptocurrencies-are-commodities-says-federal-judge/#7088ee9b5c09; Breaking: New York Judge Rules Securities Laws Can Apply to Cryptocurrencies, Cointelegraph.com (September 14th, 2018, 21:17 pm) https://cointelegraph.com/news/breaking-new-york-judge-rules-securities-laws-can-apply-to-cryptocurrencies

[5]Cryptocurrency Regulation in India, IndianEconomy.net (April 14th, 2018, 11:02 am) https://www.indianeconomy.net/splclassroom/cryptocurrency-regulation-in-india/

[6] International coalition investigating cryptocurrency tax evasion, money laundering, The Lawyer’s Daily (September 19th, 2018, 10:15 pm) https://www.thelawyersdaily.ca/articles/6986/international-coalition-investigating-cryptocurrency-tax-evasion-money-laundering; Are Cryptocurrencies Super Tax Havens?, Michigan Law Review First Impressions (September 19th, 2018, 10:17 pm) https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1001&context=mlr_fi

[7]Indian Cryptocurrency Exchanges May Move Supreme Court to Challenge RBI’s Order, Crypto-news (April 14th, 2018, 6:25 pm) http://www.crypto-news.in/news/indian-cryptocurrency-exchanges-may-move-supreme-court-challenge-rbis-order/

[8]There have been multiple news reports where cryptocurrency has been easily hacked –Why Bitcoin made a comeback after the South Korean exchange hack, CNBC (September 7th, 2018, 22:49 p.m.)https://www.cnbc.com/2018/06/20/why-bitcoin-made-a-comeback-after-hacking-crypto-traders.html

; BitcoinGold hacked for $18 million, Bitcoin.com (September 7th, 2018, 22:51 p.m.)https://news.bitcoin.com/bitcoin-gold-hacked-for-18-million/

[9]For eg. a company is only allowed to issue an IPO if it has more than a specified amount of turnover for a few years; or a bank has to maintain a minimum amount of cash reserve as per their deposits from time to time under section 18 of the Banking Regulation Act. The suggestion is based on theory that banks having higher cash reserve ratio (CRR) will be subject to closer scrutiny (audits and compliance) by authorities given the threat involved to investors. Banks having smaller CRR might go unnoticed by authorities if they deal in a few large cryptocurrency transactions in a year.

[10]Cryptocurrency Regulation in India, IndianEconomy.net (April 14th, 2018, 11:02 am) https://www.indianeconomy.net/splclassroom/cryptocurrency-regulation-in-india/

Akshita Bohra and Shreya Dixit

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