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Note

Regulating Crypto Currency

Raman Swamy

There is something irresistible about Bitcoin. Governments hate it but financial players find it very attractive. The RBI has issued no less than three warnings that Bitcoin trading is dangerous. The Finance Minister in his Budget speech categorically stated that crypto-currencies are not legal tender and that the government would not recognise them. Despite this, the lure of Bitcoins draws traders like a magnet.

There is a good reason why the authorities are against the digital currency—because it bypasses the entire controlled financial system. Bitcoins enable citizens to buy goods and services and exchange money without involving banks, credit card issuers or other third parties.

This is obviously anathema to the central bank and to the finance ministry. Banks and credit card companies are also appalled at the thought that economic transactions can take place without any role for them.

But the irony is that both the government and the RBI are toying with the idea of floating a crypto-currency of their own. They have even thought of a name for it—Lakshmicoin. It will be the official digital currency. It will be regulated. All other Virtual Currencies, including the ever-popular Bitcoin, will be banned.

Strangely, however, no step has been taken so far to actually impose a ban. It would have been easy for the government to pass a new law through Parliament declaring Bitcoin and all other forms of crypto-currencies to be illegal and punishable as a criminal activity as serious as printing and circulating counterfeit currency.

But till now, this has not been done. Finance Minister Jaitley has only said Bitcoin is not legal tender; he has not declared it to be illegal.

The Reserve Bank too has only issued advisories and cautionary notifications, from time to time. In fact, more than four such press releases and advisories have been issued in the last few years—in which users, holders and traders of virtual currencies, including Bitcoins, have been "cautioned" about the "potential financial, operational, legal, customer protection and security related risks".

The RBI has also issued "clarifications"—to the effect that the creation, trading or usage of VCs including Bitcoins, as a medium for payment "are not authorised by any central bank or monetary authority".

It has come out with even more clarifications—to the effect that "no regulatory approvals, registration or authorisation have been applied for or obtained for carrying on such activities".

Despite such warnings—and in spite of the volatile ups and downs in the online Bitcoin market in recent months—the evidence is that more and more Indians are taking to the crypto-currency in a big way. No authentic estimate is available for the obvious reason that Bitcoin trading is outside the scrutiny of all format agencies—however it appears that lakhs of Indians are investing in the digital money and also indulging in buying and selling activities on an increasing basis.

Again ironically, the Modi government and the RBI—which are on mission mode to promote cashless economy and e-transactions—have begun harping on the "dangers of dealing in digital modes of investment purchase and sales through crypto-currencies".

According to a recent sternly worded note VCs (virtual currencies) are not advisable for the following frightening reasons'?

1.   VCs are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc.
2.   There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation.
3.   VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear.
4.   Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.

Such scare-mongering by the authorities is somewhat amusing when viewed in the perspective of the harsh implantation of the government's draconian "Digital India" mission. The critics of the "go-digital" policies  are citing the very same risks regarding hacking, compromise of access credentials, commercial exploitation, invasion of privacy, personal data misuse and password theft.

The government prefers not to acknowledge this clear dichotomy in its stance towards Bitcoins. Instead it has stepped up the anti-VC campaign. Especially in the wake of a significant spurt in the valuation of many VCs and the rapid growth in Initial Coin Offerings (ICOs) and keeping in view the evidence of soaring rise in the trading of VCs including Bitcoin, the RBI has issued even more notifications and advisories.

In December 2017 for instance RBI said it had not given any license or sanction to any entity or company to operate such ICO schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, traders, etc dealing with Virtual Currencies will be doing so at their own risk, it added with a frown.

The matter has come up before the courts too. In November 2017, a PIL was filed before the Supreme Court seeking issuance of directions to regulate the flow of Bitcoins. The petitioners said no regulator be it, SEBI, authorities under FEMA or money laundering Act or even the income tax officials have got any power to track, monitor and regulate crypto money account transfers. Further, Bitcoin neither falls under the definition of money or currency nor share of debenture or commodity. It is an entity with financial value and hence liable to be made subject to statutory regulation of some kind.

The Hon'ble Judges merely paused and passed the buck. Notices were issued to the ministries of Finance, Law and Justice. Information Technology, market regulator SEBI and the RBI seeking their response to the matters raised in the PIL. There the matter stands.

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Frontier
Vol. 50, No.40, Apr 8 - 14, 2018