Ban on cryptocurrencies: Understanding the proposed legislation

Policy

Ban on cryptocurrencies: Understanding the proposed legislation

Anurag Vaishnav - September 5, 2019 Comments

In July, a Committee set up by the Ministry of Finance to study issues related to virtual currencies, submitted its report. The Committee recommended that all private cryptocurrencies should be banned in India. Correspondingly, the Committee proposed a draft Bill banning cryptocurrency in the country. In this blog, we explain cryptocurrencies and how they are used, recommendations of the Committee with respect to cryptocurrencies and the regulatory framework for cryptocurrencies in India and other countries.

What are virtual currencies and what is their use?

Virtual currency is a digitally tradable form of value, which can be used as a medium of exchange, or a stored value which can be utilised later. It does not have the status of a legal tender. A legal tender is guaranteed by the central government and all parties are legally bound to accept it as a mode of payment.

Cryptocurrency is a specific type of virtual currency, which is decentralised and protected by cryptographic encryption techniques. Bitcoin, Ethereum, Ripple are a few notable examples of cryptocurrencies. Decentralisation implies that there is no central authority where records of transactions are maintained. Instead, anyone can create a transaction. This transaction data is recorded and shared across multiple distributor networks, through independent computers as shown in Figure 1. This technology is known as Distributed Ledger Technology.

Figure 1: Distributed Ledger Technology

The Committee noted that there are two principal ways in which cryptocurrencies are raising money. First, through Initial Coin Offerings, where digital tokens are issued in exchange for other currencies. Second, through using it as a means of exchange or a payment system. As of February 2019, there were more than 2,000 cryptocurrencies across the world, with a market capitalisation of approximately USD 120 billion.

Why has the Committee recommended banning of cryptocurrencies?

The Committee noted various regulatory concerns around virtual currencies, and cryptocurrencies in particular. These include:

Fluctuation in prices: Cryptocurrencies are subjected to market fluctuations and the lack of a centralised authority makes it difficult to regulate them. For instance, in December 2017, the value of Bitcoin cryptocurrency was around USD 20,000 per coin, which reduced to USD 3,800 per coin by November 2018. The Ministry of Finance, in a press statement, noted that the price of virtual currencies is a matter of mere speculation resulting in spurt and volatility in their prices.

Risk to consumers: The Committee also noted that there are several vulnerabilities in the design of cryptocurrencies which leave consumers open to risk of fraud. These include phishing cyber-attacks and ponzi schemes. For instance, a Rs 2,000 crore ponzi scheme was unveiled in April 2018. Further, cryptocurrency transactions are irreversible, which means once a transaction is done, there is no way to remedy it.

Impact on power consumption: The Committee also observed that cryptocurrencies can have unfavourable consequences on India’s energy demand. Validating transactions in a distributed network involves high electricity consumption and requires high computation power. The Committee noted a study which estimated that 19 households in USA can be powered for one day by the electricity consumed in a single transaction of bitcoin cryptocurrency.

Potential use for criminal activity: The Financial Action Task Force, an intergovernmental organisation to combat money laundering, in its report (2014) observed that virtual currencies provide greater anonymity than traditional payment methods. This makes them more vulnerable to money-laundering and illicit funding for terror financing. The Committee noted that the decentralised nature and the anonymity which cryptocurrencies provide makes it difficult for law enforcement authorities to track down people involved in illicit activities.

Is there any country which has permitted use of cryptocurrencies?

Different countries have adopted different regulatory frameworks with respect to cryptocurrencies. Some countries have permitted the use of cryptocurrencies as a payment system while there is a complete ban on cryptocurrencies in some others. Note that no country has allowed use of any virtual currency as legal tender.

Table 1: Regulatory framework for cryptocurrencies in different countries

Country	Regulatory Framework
Canada	Permitted as a payment system and as a form of investment, income from it is taxed
Switzerland	Permitted as a payment system (including consumer to government transactions) and as a form of investment
Japan	Permitted and regulated as a payment system
China	Use of cryptocurrency is banned for all purposes

What are the present regulations in India with respect to cryptocurrencies?

In the last few years, the Reserve Bank of India (RBI) has notified the potential financial, operational, legal and security risks related to cryptocurrencies on multiple occasions (December 2013, February 2017 and December 2017). In December 2017, the Ministry of Finance issued a statement which clarified that virtual currencies are not legal tender and do not have any regulatory permission or protection in India. Further, the investors and participants dealing with them are doing so entirely at their risk and should best avoid participating. In the 2018-19 budget speech, the Finance Minister announced that the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate their use in financing illegitimate activities or as a part of payment system. In April 2018, RBI notified that entities regulated by it should not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies.

How does the draft Bill proposed by the Committee change these regulations?

Currently, only the entities regulated by the central bank are prohibited from dealing in, or providing services for dealing in virtual currencies. The draft Bill prohibits any form of mining (creating cryptocurrency), issuing, buying, holding, selling or dealing in cryptocurrency in the country. Further, it provides that cryptocurrency should not be used as legal tender or currency in India. The Bill allows for the use of technology or processes underlying cryptocurrency for the purpose of experiment, research or teaching.

The Bill also provides for offences and punishments for the contravention of its provisions. For instance, it states that mining, holding, selling, issuing or using cryptocurrency is punishable with a fine, or imprisonment up to 10 years, or both. For individuals who might be in possession of cryptocurrencies, the Bill provides for a transition period of 90 days from the commencement of the Act, during which a person may dispose of any cryptocurrency in their possession, as per the notified rules.

Are there any areas where the Committee recommended use of cryptocurrencies?

According to the Committee, while cryptocurrencies or virtual currencies do not offer any advantages, the underlying technology behind them (Distributed Ledger Technology, DLT) has many potential applications, both in finance and non-finance sectors. Some of these are listed in Table 2. The Committee observed that DLT makes it easier to identify duplicate transactions, and therefore can be utilised for fraud-detection, processing KYC requirements, and claim management for insurance. Further, it can be helpful for removing errors and frauds in land markets, if used for maintaining land records. The Committee was also of the view that the idea of an official digital currency in India can be explored further, and that the government may setup a group to examine and develop an appropriate model of digital currency in India.

Table 2: Applications of Distributed Ledger Technology

Sector	Possible uses of DLT
Payments	Faster and cheaper cross-border payments Reduced transaction cost for micro-payments
Identification	Storing personal records such as birth, marriage or death certificates Removing duplicates in identification platforms such as KYC
Insurance	Fraud detection and risk prevention Claims prevention and management
Ownership registries	Removing errors and frauds in land markets Administrative ease of maintaining land records
Trade Financing	Reduced operational complexity and transaction costs

Understanding recent amendments to the Arms Act, 1959

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Rohin Gerg - December 5, 2019 Comments

The Arms (Amendment) Bill, 2019 was introduced in Lok Sabha recently and is scheduled to be passed in this Winter Session. The Bill amends the Arms Act, 1959 which deals with the regulation of arms in India. The Act defines arms to include firearms, swords, and anti-aircraft missiles. The Statement of Objects and Reasons of the Bill noted that law enforcement agencies have indicated a growing connection between the possession of illegal firearms and criminal activities. In this context, the Bill seeks to reduce the number of firearms allowed per person, and increases punishments for certain offences under the Act. The Bill also introduces new categories of offences. In this post, we explain key provisions of the Bill.

How many firearms are allowed per person?

The Arms Act, 1959 allows a person to have three licenced firearms. The Bill proposes to reduce this to one firearm per person. This would also include any firearms that may have been given as inheritance or as an heirloom. Excess firearms must be deposited at the nearest police station or licensed arms dealer within one year of the passing of the Bill. The Bill also extends the duration of a licence from three years to five years.

Note that in 2017, 63,219 firearms were seized from across India under the Arms Act, 1959. Out of these, only 3,525 (5.5%) were licenced firearms. Further, 36,292 cases involving firearms were registered under the Act in 2017, of which only 419 (1.1%) cases involved licenced firearms. [1] This trend persisted even at the level of specific crimes, where only 8.5% of the murders committed using firearms involved licenced firearms. [2]

What changes are being made to existing offences?

Presently, the Act bans manufacture, sale, use, transfer, conversion, testing or proofing of firearms without license. The Bill additionally prohibits obtaining or procuring un-licensed firearms, and the conversion of one category of firearms to another without a license. The latter includes any modifications done to enhance the performance of a firearm.

The Bill also proposes increased punishments for several existing offences. For example, the Act specifies the punishment for: (i) dealing in un-licensed firearms, including their manufacture, procurement, sale, transfer, conversion, (ii) the shortening or conversion of a firearm without a licence, and (iii) import or export of banned firearms. The punishment for these offences currently is between three years and seven years, along with a fine. The Bill increases the minimum punishment to seven years and the maximum to life imprisonment.

The Act also punishes dealing in prohibited firearms (such as automatic and semi-automatic assault rifles) without a license, with imprisonment between seven years and life imprisonment, along with fine. The Bill increases the minimum punishment from seven years to 10 years. Additionally, the punishment for cases in which the usage of prohibited arms results in the death of a person has been revised. The punishment has been updated from the existing punishment of death penalty to allow for death penalty or life imprisonment, along with a fine.

Are there any new offences being introduced?

The Bill adds certain news offences. For example, forcefully taking a firearm from police or armed forces has been made a crime under the Bill. The punishment for doing so is imprisonment between 10 years and life imprisonment, along with a fine. Additionally, the Bill punishes the negligent use of firearms, such as celebratory gunfire during weddings or religious ceremonies which endanger human life or personal safety of others. The proposed punishment in this case is imprisonment of up to two years, or a fine of up to one lakh rupees, or both.

The Bill also adds a definition of ‘illicit trafficking’. It is defined to include the trade, acquisition, sale of firearms or ammunitions into or out of India where the firearms are either not marked as per the Act or violate the provisions of the Act. The Bill makes illicit trafficking punishable with imprisonment between 10 years and life, along with a fine.

Does the Bill address issues of organised crime?

The Bill also introduces a definition of ‘organised crime’. ‘Organised crime’ has been defined as continued unlawful activity by a person, either as a member of a syndicate or on its behalf, by using unlawful means, such as violence or coercion, to gain economic or other benefits. An organised crime syndicate refers to two or more persons committing organised crime.

The Bill introduces harsher punishments for members of an organised crime syndicate. For example, for the possession of an unlicensed firearm, the minimum term for an individual would be seven years, extendable to life imprisonment and liable to a fine. However, the possession of unlicensed firearms by a member of a syndicate will be punishable with imprisonment between 10 years and life, along with a fine. This increased punishment also applies to non-members contravening provisions of the Act on behalf of a syndicate.

[1] Crime in India 2017, National Crime Records Bureau, October 21, 2019, http://ncrb.gov.in/StatPublications/CII/CII2017/pdfs/CII2017-Full.pdf.

[2] Crime in India 2016, National Crime Records Bureau, October 10, 2017, http://ncrb.gov.in/StatPublications/CII/CII2016/pdfs/NEWPDFs/Crime%20in%20India%20-%202016%20Complete%20PDF%20291117.pdf.

Tenure and salaries of CIC and ICs under the Right to Information Rules, 2019

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Anya Bharat Ram - October 29, 2019 Comments

The Right to Information (Amendment) Act, 2019 amended the Right to Information Act, 2005. The RTI Act, 2005 specified the tenure, terms of service and salaries of the Chief Information Commissioner (CIC) and Information Commissioners (ICs) at the central and state levels, in the parent law. The RTI (Amendment) Act, 2019 removed these provisions and stated that the central government will notify the term and quantum of salary through rules.[1]^,[2]

The Right to Information Rules, 2019 were notified on October 24, 2019.[3] These rules set out the tenure, terms of service and salaries of the CIC and ICs at the state and central levels. Table 1 compares the provisions related to the tenure and salary of the CIC and ICs under the Right to Information Act, 2005 and the Right to Information Rules, 2019

Table 1: Comparison of the provisions of the Right to Information Act, 2005 and the Right to Information Rules, 2019

Provision

RTI Act, 2005

RTI Rules, 2019

Term

The CIC and ICs (at the central and state level) will hold office for a term of five years.

The CIC and ICs (at the central and state level) will hold office for a term of three years.

Salary

The salary of the CIC and ICs (at the central level) will be equivalent to the salary paid to the Chief Election Commissioner and Election Commissioners (Rs 2,50,000 per month)

Similarly, the salary of the CIC and ICs (at the state level) will be equivalent to the salary paid to the Election Commissioners (Rs 2,50,000 per month) and the Chief Secretary to the state government (Rs 2,25,000 per month), respectively.

The CIC and ICs (at the central level) shall receive a pay of Rs. 2,50,000 and Rs. 2,25,000 per month, respectively.

CICs and ICs (at the state level) shall receive a pay of Rs. 2,25,000 per month.

Source: The Right to Information (Term of Office, Salaries, Allowances and Other Terms and Conditions of Service of Chief Information Commissioner, Information Commissioners in the Central Information Commission, State Chief Information Commissioner and State Information Commissioners in the State Information Commission) Rules, 2019; The High Court and the Supreme Court Judges (Salaries and Conditions of Service) Amendment Act, 2017; Indian Administrative Services (Pay) Rules, 2016; PRS.

[1] Right to Information Act, 2005, https://rti.gov.in/rti-act.pdf.

[2] Right to Information (Amendment Act), 2019, file:///C:/Users/Dell/Downloads/The%20Right%20to%20Information%20(Amendment)%20Bill,%202019%20Text.pdf.

[3] The Right to Information (Term of Office, Salaries, Allowances and Other Terms and Conditions of Service of Chief Information Commissioner, Information Commissioners in the Central Information Commission, State Chief Information Commissioner and State Information Commissioners in the State Information Commission) Rules, 2019, http://egazette.nic.in/WriteReadData/2019/213438.pdf.

Ban on cryptocurrencies: Understanding the proposed legislation

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