IAS Target

Draft banning cryptocurrency regulation official digital currency bill-2019

Virtual Currencies

Virtual currency is a digitally tradable currency. The currency is used as medium of exchange or performs as a store of a value or unit of account. Till now, it doesn’t hold valid/legal tender status. The central government gives the guarantee of a legal tender and all the parties are lawfully bound to take it as a method of payment.

Cryptocurrency

Cryptocurrency is a particular type of virtual currency which is shielded and decentralized by cryptographic encryption methods. Decentralisation means that there is no central power where history of transactions is maintained. Alternatively, transaction data is stored and shared across various distributor networks via independent personal computers. This technology is named as “Distributed Ledger Technology”.
A high level Inter-Ministerial committee was formed in November 2017 to scrutinize the issues regarding virtual currencies and plan actions to be taken. On February 28, 2019 the committee submitted its report and on, July 2019 the report was declared in public domain.

Important recommendations and observations of the Committee include:
  • The Committee stated that there are many issues related to cryptocurrencies and it can’t replace traditional currencies. Issues are:-
    • Cryptocurrencies subjected to market fluctuation, for example, the value of Bitecoin cryptocurrency decreased from USD 20,000 in 2017 to USD 3,800 in 2018, in just a year. Cryptocurrency is decentralized which makes them difficult to control.
    • Cryptocurrency design has several susceptibilities which left consumers open to risk of cyber-attacks and ponzi scheme scams. Moreover, transactions are not reversible means there is no way to redress wrong transactions.
    • cryptocurrencies need large amount of processing power and storage, which may have negative impact on the energy resources of the nation; and
    • cryptocurrencies offer greater security making them more exposure to terrorist funding and money laundering activities. 

  • Regulatory structure around the world:
    The Committee stated that various regulatory structures are followed in various countries with respect to cryptocurrencies. Countries such as Switzerland, Thailand and Japan permit use of cryptocurrencies as a mode of payment. In Russia, cryptocurrencies can be used as a medium of exchange or barter exchange (but not for payments), While china has a total restriction on virtual currencies. 
  • The Committee suggests that all private cryptocurrencies, except cryptocurrency issued by the State, can be restricted in India and any activity regarding cryptocurrencies be forbade through a law. Also, it suggests that the government may setup a Standing Committee to take into account the local and global technological developments in the field and reconsider the issues regarding virtual currencies, as and when needed.

  • Official Digital Currency:
    The Committee noticed that a formal digital currency may have various pros over the existing payment tools. These involve availability of all history of transactions, safety of distribution and cheaper alternate for cross-border payments. The Committee also observed several issues and risks associated with its execution and implementation as well. Significant infrastructure investment would be needed to issue a crypto or digital currency. Authenticating transactions in a distributed network would require high computation power and high electricity consumption. There could be infrastructural challenges on account of internet connectivity and electricity outages. 
    According to a committee, it is necessary the open mind to be kept regarding introduction of a digital currency in India. If needed the committee may be established by Ministry of finance with representatives from ministry of Electronics and Information technology and Reserve bank of India, to develop a proper structure of digital currency in India.

Uses of Distributed Ledger Technology (DLT):

The Committee noted that the cryptocurrencies don’t render any benefit as a currency; the underlying technology (DLT) has various potential applications. DLT makes it easier to recognize duplicate transactions, and therefore can be used for processing KYC requirements, claim management for insurance and fraud-detection. Moreover, it can help to remove frauds in land markets, if utilized for maintaining land history.
The Committee observed that the Department of Economic Affairs should know uses of DLT and take steps to facilitate its usage. Just like this, financial sector regulators should scrutinize the utility of the technology in their own fields.

Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019

The Inter-Ministerial Committee has suggested a draft Bill which criminalises activities connected with cryptocurrencies in India, restricts cryptocurrencies, and provides for regulation of official digital currency.

Key provisions of the Bill involve:

  • Cryptocurrency and its mining:
    The Bill refer cryptocurrency as any code, token, number or information which has a digital representation of value and has uses in a business activity, or acts as a store of value or a unit of account. The Bill states mining as an activity aimed at validating a cryptocurrency transaction or/and creating a cryptocurrency b/w a seller and buyer

  • Prohibited activities:
    The Bill explains that cryptocurrency should not be used as a currency or legal tender in India. It does not allow buying, holding, selling, dealing in, issuance, use or disposal of cryptocurrency in the nation. Precisely, the Bill forbids the use of cryptocurrency for:
    • use as a way of exchange, stocking of value or unit of account,
    • use as a payment system,
    • trading it with other currencies,
    • offering services such as trading, selling, clearing or registering of cryptocurrency to individuals,
    • using it as a basis of credit,
    • issuing financial products related to it,
    • issuing it as a means of raising funds and investment

  • The Bill provides us for use of technology or processes coming under cryptocurrency for the purpose of teaching, research and experiment.

  • Offences and Penalties:
    The Bill provides for the following offences and penalties:
    Offence Punishment
    Mining, selling, issuing, using or holding cryptocurrency Fine or imprisonment up to ten years, or both
    Issuing any advertisement, assisting, soliciting or inducing participation in use Fine or imprisonment up to 7 years, or both
    Buying, storing or disposing of cryptocurrency with intent to use Fine

  • The Bill provides that any following conviction for any offence under the Bill would be punishable with a imprisonment of upto 5-10 years or fine. Also, trying to commit an offence will be punishable with fine or 50% of the maximum term of imprisonment for the applicable offence, or both. Offences regarding use of cryptocurrency for issuing related financial products or issuing it as a way of raising investment or fund would be non-bailable.

  • The Bill facilitates the maximum amount of fine imposed will be the higher of:
    • three times the profit earned by the person.
    • three times the loss caused and
    If the loss caused or the profit earned by the person can’t be determined, the maximum amount of fine for storing, disposing or purchasing of cryptocurrency will be upto 1 lakh rupees. For other offences, the maximum fine will be upto 25 lakh. The bill amends the “Prevention of Money Laundering Act (PMLA), 2002” to give effect to the offences.

  • Regulation of foreign digital currency and digital rupee :
    The Bill points out that the union government may, in discussion with the central board of RBI, issue a digital form of currency to be legal tender. It also points out that the Reserve bank of India may inform a foreign digital currency as a foreign currency in India to be regulated by the Foreign Exchange Management Act (FEMA), 1999.

  • Investigating Authority and punishment:
    Officers of the rank of Deputy superintendent of Police (DSP) or above may only investigate offence as per the bill. The court will examine some factors while determining the quantum of penalty for the offences. These include the profit gain by the person and the harm caused to the financial system.

  • Exemptions and immunity :
    The Bill authorizes the union government to grant immunity to any individual from prosecution under the bill, if such person makes full disclosure of the violation. The union government may void or exempt certain activities from the list of prohibited activities under the Act, if it considers it compulsary in public interest.