The Steering Committee Report by the Ministry of Finance was released on 2nd Sept 2019, and to one’s surprise interprets Cryptocurrencies and Blockchain Technology in much better light than its predecessor draft bill, released to the public domain on 22nd July 2019, which aimed at cryptocurrency ban.
Upon going through the reports, the conclusions were contradictory and unplanned as described below.
The top executives from the Ministry of Electronics & Information Technology (MEITY) and officers from RBI, were the panel members for both, draft bill and steering committee report. It may be noted that the report was made mainly by the students of the National Institute of Public Finance and Policy (NIPFP).
The few points which CREBACO observed on the steering committee report are mentioned below:
Initially, the report talks about a broader fintech landscape, which mentions technologies such as mobile payments, investment advisory, insurance aggregators, peer-to-peer lending and cryptography. This can be inferred as the report, recognizing the existence of cryptocurrency in the global financial landscape, due to bitcoin’s global popularity and raising awareness and adoption.
The report then moves to encryption and cryptography, and signifies the importance of them in security. It brings confidentiality, privacy, non-repudiation and integrity. It also describes the use of cryptography in Blockchain technology which helps it to secure information and protect identities. The report talks about how Society for Worldwide Interbank Financial Telecommunication (SWIFT) has entered into Blockchain technology to speed up the payment settlements.
The report mentions about Blockchain and distributed ledgers, however from the comment on the fundamentals about them, it is vague and not being formulated properly. Even though the report talks about Blockchain that makes the transactions in virtual currencies like Bitcoin possible but at the same time it also talks about potential applications of Blockchain beyond the scope of cryptocurrencies. Report does not talk about centralized and decentralized feature of Blockchains in detail as the application may vary. For instance, one has a Blockchain with all servers under one organization’s control, then it’s a centralized Blockchain, as that organization owns the control over it.
The report also talks about major fintech applications where Blockchain is being deployed including cross border payments and talks again about SWIFT and the settlement processes and not Bitcoin. It may be noted that even if Blockchain comes into payment settlement, there will still be Nostro and Vostro accounts where banks will further process the payment to the account holders. Blockchain will just eliminate the third party in interbank settlement. Looking at the size of transactions in today’s financial ecosystem, we don’t think that the transactions can be settled on the very same day.
Implementing Blockchain in payment settlement does not make transactions peer-to-peer which must be understood. There should be a global interbank Blockchain, only then the feature may be applicable. The report does not comment on consensus-based validation of transactions which will allow any updation of transaction. The banks will not make the Blockchain open source and if they do, they will have to create reward tokens, otherwise nobody would mine it.
The report then talks about digital currencies and tokens and how the ICO market performed in the past few years. It also talks about the top five cryptocurrencies by market capitalisation which included Bitcoin, Ethereum, Ripple, Bitcoin-Cash, etc as on 25th September, 2018. Report accepts that Initial Coin Offering (ICO) evolution is rising in the Global fintech landscape and is an innovative way of capital raising by fintech business.
The issue of virtual coins has emerged as an alternative to traditional forms of startup financing. The report says that the regulation of the coins/tokens depends on the characteristics, purpose and objective for which they are being issued, which can be grouped into two categories which are ‘utility’ and ‘security’ tokens. It however, did not explain the terminology of usage. The report also talks about consumer protection framework, which points out the scandals which took place in the fintech industry including the payment protection scandal in the UK and the Sharda chit fund scam in India. It also mentioned the Gain Bitcoin scam in India.
The report suggested that there is a need for legal framework to redress grievances of consumers in the financial sector. This legal framework will be made, specifically addressing the needs in the digital environment. This will ensure consumers of digital financial services, that have meaningful choice and control over their personal data. But, it does not talk about requirement of legal framework for cryptocurrency industry which has potential valuation of 12.9 Billion Dollars in India and 20,000+ Jobs based on the research data of CREBACO Global Inc
Analysis and Comments on the draft bill for banning Virtual Currencies
(By Sidharth Sogani & Jagdish Pandya)
The Subhash Chandra Garg committee issued a draft bill to propose specific actions to be taken in relation to virtual currencies. On 22nd July 2019, when we looked at the report we found the draft bill has been made by students of the National Institute of Public Finance and Policy (NIPFP). Also, much to our avail, no industry experts were referred, their comments and suggestions were not considered while framing the draft bill. Some of the points which we would like to highlight from the draft bill are as follows.
The committee had held 3 inter-ministerial meetings on 27th November 2017, 22nd February, 2018 and 9th January, 2019. We must understand that the technology evolves every second and having such long gaps to take a stance related to technology can be fatal.
The figures mentioned related to the number of cryptocurrencies and market capitalization were outdated and were wrongly mentioned.
The reports states that China has a complete ban on cryptocurrency whereas it is similar to Indian ban which is a blanket banking ban. The report has not understood the borderless nature of cryptocurrency which does not require any geographical or legislative jurisdiction, instead only requires internet.
The report tries to emphasize on the short note, which Mr. Arun Jaitley, made in the budget speech of 2018 where he just mentioned that cryptocurrency is not a legal tender which we all own and that they will take all measures to eliminate the use of crypto assets in financing illegitimate activities which is fair. But the report seems to be interpreting something else.
The report does not say anything about the comments provided by RBI, NASSCOM, MCA, Income Tax Dept. etc. They must provide the comments given by these associations in order to make the understanding more clear. The tax treatment if any is not clarified.
The report has also described the ripple network in a wrong manner. It says that ripple system uses xrp tokens to facilitate transfer between different currencies which is only applicable to a program of Ripple network which is called X rapid. The Xcurrent and other programs are similar to SWIFT and many banks are already using it. If the bank convert their fiat into XRP and send XRP tokens in cross-border then they may be indirectly violating money laundering policies which the report has not understood.
It mentions that JP Morgan Chase has launched an open-source enterprise-ready distributed ledger and smart contract platform called Kyurem but it does not mention that they have also come out with their own private cryptocurrency for easier payments called the JPM coin.
It talks about the scalability challenge of Bitcoin. It has nowhere mentioned about the lightning network which has increased the transfer speed amongst Bitcoin transactions. Also, it talks about the validation path but does not talk about the real-time viewability of the transaction on the Blockchain which happens in less than a minute. They failed to compare the transaction speed with cross border payment solutions such as Western Union or SWIFT which takes up to 3 working days. It may be noted that the Bitcoin Network has decentralized 100,000+ nodes and Swift Network has only roughly 11,000 centralized nodes.
It has misunderstood the attack on the Ethereum Blockchain (DAO Attack) and talks about the 51% attack on the Bitcoin Blockchain which happened many years ago (2014) when the Bitcoin network was really small. The control was only for a few seconds and the possibility of change in the ledger was not possible. Now the number of nodes and users have grown at such an extent that another attack is impossible.
It talks about the lack of maturity and comments that DLT are at an early stage of development but in such a case why there is an option to ban it and not let the technology evolve and develop to become better?
Further the report mentions only about Russia, China, Switzerland, Thailand, Japan, New York (USA) and Canada with respect to regulations. All the countries have regulations in place except China which is reluctant in regulating Crypto due to its economic conditions. Should India look at Chinese laws to adapt in India or should we look at UK, USA, Canada, Japan, Switzerland and Russia to adopt a legal framework for regulations for Crypto?
The bill does not define cryptocurrencies in the right manner. It fails to understand the fundamental Idea behind Bitcoin.
The bill by the Ministry of Finance confirms that there were around 50,00,000 traders in India and 24 exchanges with a trading volume ranging from 1500 Bitcoins a day or 1 billion Indian rupees. This is where we would like to point out that it is very difficult for something so decentralized and borderless to be banned when there are 50 lakh active traders or users already.
The government is ignoring the GST for the taxes which can be earned from 50 lakh traders and 1 billion rupees volume due to lack of regulation. It’s a major revenue loss for the Nation.
The bill criticizes scam projects but we must point out that Bitcoin is not a project but a network with nobody behind it. Satoshi Nakamoto is an imaginary person who doesn’t exist. The bill fails to understand the difference between Bitcoin and other ICOs in detail.
The bill talks about forking and says that the miners of a currency can earn more revenue by forking a currency by changing the programming protocol to benefit themselves. In the tech world, forking is a community-driven scenario. And even if the miner forks a coin, what is wrong? If one doesn’t support the fork, just don’t switch and stick to the old chain. The revenue will be visible and can be taxed.
The report talks about protecting the financial system and economy. It states that Bitcoin is not energy efficient but if you see more than 70% of energy used in Bitcoin mining is renewable and it ignores the fact that printing of currency notes, cheque books and documents also require paper which is not environment friendly at all. We must see that cross-border transaction is much more energy efficient and environmentally friendly when compared between Fiat and a Bitcoin transfer.
The bill also mentions about personal data protection bill of 2018 which states the data which should be stored in India. Cryptocurrencies have cryptographically encrypted database which is pseudonymous and does not have any personal information which is shared on the network. This crucial point is not clarified at all and is completely ignored.
Further, it states that non official virtual currencies could affect the ability of Central banks to carry out their mandates. Central banks cannot control the money supply in the economy if virtual currencies are widely used, as their decentralized nature restricts their ability to stabilize the economy. we would highlight the methods used by the government stabilize an economy. It’s mainly by printing notes as per will, changes in interest rates and creating artificial inflation and deflation.
It says that virtual currencies are used for criminal activities. It ignores the fact that the US dollar is the currency which is used for maximum illicit activities globally and money laundering is completely untraceable when we use Fiat currency, like US dollars or Indian rupees. But in Bitcoin, the blockchain and its merkle tree is open and is completely traceable to the very genesis block. If the government regulates the exchanges with KYC and strict practices any conversion from Bitcoin to fiat currency, the transactions can be tapped and traced in few minutes. The bill fails to understand the traceability feature of Bitcoin.
Each technology has its pros and cons. The pros of Bitcoin can be exceptional when it comes to fund transfer at low cost, the cons of course includes illicit activities which is also there in the traditional Fiat currencies since decades, but the governments have still not found a solution to it. When an international bank does money laundering there is nobody to stop them for years and all they do is pay a fine and walk away when caught for the sake of it.
It talks about suitability of ban on cryptocurrencies with a comparison of China. China is not a democratic country which must be noted by the Indian legislators and lawmakers. Adopting any regulation from China is not suitable for an open-minded and emerging global country like India, especially when there is a digital movement by the PM, Mr.Narendra Modi. If ban was a solution United States, Germany, Japan and the developed nations would have banned it already but instead they have chosen to regulate it because banning it cannot be an option for a borderless cryptocurrency like Bitcoin.
The committee suggests that Cryptocurrency has no store value and can’t serve as a medium of exchange, which is not true at all.
The committee did not even consider possibilities of regulating it and was biased towards outright ban. It goes to an extent of Criminalizing the activities related to it which was a shock as even China did not take such a step. It ignores the fact it stated earlier in the report that there are more than 50 lakh traders involved already in India. How the ban will be implemented is still a question.
The report further talks about CBDCs and to our surprise, it managed to find disadvantages in that as well.
For the legal framework, the draft refers to definitions from Coinage act 1906 and RBI Act 1934, which is outdated for a digital technology like Blockchain. Even though there were several upgradations to the act, but still the definitions still remain the same.
Later the bill talks about advantages and use cases of Blockchains and Digital Ledger technologies which was mostly taken from online encyclopedias and other web sources.
The bill suggests complete banning of Digital currencies in India, that considers direct and indirect uses as offence. India’s Population is 1.3 Billion out of Global population of 7.7 Billion. That means almost 20% of the global population will be banned from usage. This is not practically applicable and will have several implementation issues.
It may be noted that that the draft bill refers regulations of only a handful of countries. It ignores United Kingdom (Indian laws are derived from British legal frameworks) and while drafting regulations, British laws must be considered seriously. Along with the UK, it also completely neglects European Union which includes G7 Countries like Germany, France etc.
It must be noted that all G7 Countries have regulations for Cryptocurrencies and none have such strict penalties for the same. None of the G7 Countries consider dealing in cryptocurrencies as a criminal offence if all compliances and AML laws are followed and it is declared in one’s tax returns.
In fact when we look at the G20 Countries, most of them have regulations. Only China has a blanket ban. Argentina and few others along with India have no regulations yet. Looking at the facts, most countries have regulations in place and no one has considered it to be a serious criminal offence. Bitcoin and cryptocurrency have just begun and have evolved to become a movement of change in the global financial system and the way we deal and understand money.
CREBACO is a research and intelligence firm focused on Blockchain technology and cryptocurrency related projects with professionals such as Lawyers, CAs, Tech Auditors and Industry experts on board. CREBACO has a database of over 2000 Projects in the industry and shares the research mainly with governments, intelligence and investors. CREBACO also provides Credit Ratings for Digital Asset Exchanges, Blockchains and Coin Offerings based on the legal, tech, financial and team’s due diligence which helps to reduce the scams and make the blockchain and crypto industry a better space.
Draft Bill by Ministry of Finance: https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf
Steering Committee Report by Ministry of Finance: