Committee Report Summary
Virtual Currencies in India
A high-level Inter-Ministerial Committee was constituted in November 2017 to study the issues related to virtual currencies and propose actions to be taken. The Committee submitted its report on February 28, 2019 and the report was released in public domain on July 22, 2019. The mandate of the Committee included examining the policy and legal framework for regulation of virtual currencies. Key observations and recommendations of the Committee include:
- Virtual currencies: Virtual currency is a digitally tradable form of value, which can be used as a medium of exchange or acts as a store of value or a unit of account. 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. Decentralisation implies that there is no central authority where records of transactions are maintained. Instead, transaction data is recorded and shared across multiple distributor networks, through independent computers. This technology is known as Distributed Ledger Technology.
- Issues related to virtual currencies: The Committee observed that cryptocurrencies cannot replace traditional currencies due to several issues associated with them. These include: (i) cryptocurrencies are subjected to market fluctuations. For instance, the value of Bitcoin cryptocurrency reduced from around USD 20,000 (December’17) to USD 3,800 (November’18) in less than a year; (ii) cryptocurrencies are decentralised, which makes them difficult to regulate; (iii) cryptocurrency design have several vulnerabilities which leave consumers open to risk of phishing cyber-attacks and ponzi schemes. Further, transactions are irreversible, meaning there is no way to redress wrong transactions; (iv) cryptocurrencies require large amount of storage and processing power, which can have unfavourable consequences on country’s energy resources; and (v) cryptocurrencies provide greater anonymity making them more vulnerable to money-laundering and terrorist funding activities.
- Regulatory framework around the world: The Committee observed that different regulatory frameworks are followed in different countries with respect to cryptocurrencies. Countries such as Japan, Switzerland and Thailand allow use of cryptocurrencies as a mode of payment. In Russia, they can be used as a mode of exchange (barter exchange), but not for payments. On the other hand, China has a complete ban on virtual currencies. The Committee observed that no country has allowed use of any virtual currency as legal tender.
- The Committee recommended that all private cryptocurrencies, except any cryptocurrency issued by the State, be banned in India and any activity connected with cryptocurrencies be criminalised through a law. Further, it recommended that the government may establish a Standing Committee to take into account the global and local technological developments in the field and revisit the issues related to virtual currencies, as and when required.
- Official Digital Currency: The Committee observed that an official digital currency can have several advantages over the existing payment mechanisms. These include availability of all records of transactions, cheaper alternate for cross-border payments and ease and safety of distribution. The Committee noted that there are several risks and issues associated with its implementation as well. Significant infrastructure investment would be required to issue a digital currency. Validating transactions in a distributed network would involve high electricity consumption and require high computation power. Further, there could be infrastructural challenges on account of electricity outages and internet connectivity.
- The Committee recommended that an open mind needs to be kept regarding introduction of an official digital currency in India. It recommended that, if required, a Committee may be setup by the Ministry of Finance with representatives from RBI and the Ministry of Electronics and Information Technology (MEITY), to examine and develop an appropriate model of digital currency in India.
- Applications of Distributed Ledger Technology (DLT): The Committee observed that while cryptocurrencies do not offer any advantage as a currency, the underlying technology (DLT) has several potential applications. 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, frauds in land markets, if used for maintaining land records.
- The Committee recommended that the Department of Economic Affairs should identify uses of DLT and take measures to facilitate its usage. Similarly, financial sector regulators should examine the utility of the technology in their respective fields.
Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019
The Inter-Ministerial Committee has proposed a draft Bill which bans cryptocurrencies, criminalises activities associated with cryptocurrencies in India, and provides for regulation of official digital currency. Key features of the Bill include:
- Cryptocurrency and its mining: The Bill defines cryptocurrency as any information, code, number or token which has a digital representation of value and has utility in a business activity, or acts as a store of value or a unit of account. The Bill defines mining as an activity aimed at creating a cryptocurrency and/or validating a cryptocurrency transaction between a buyer and seller.
- Prohibited activities: The Bill provides that cryptocurrency should not be used as legal tender or currency in India. It prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency in the country. In particular, the Bill prohibits the use of cryptocurrency for: (i) use as a medium of exchange, store of value or unit of account, (ii) use as a payment system, (iii) providing services such as registering, trading, selling or clearing of cryptocurrency to individuals, (iv) trading it with other currencies, (v) issuing financial products related to it, (vi) using it as a basis of credit, (vii) issuing it as a means of raising funds and (viii) issuing it as a means for investment.
- The Bill allows for use of technology or processes underlying cryptocurrency for the purpose of experiment, research or teaching.
- Offences and Penalties: The Bill provides for the following offences and penalties:
Table 1: Offences under the Bill
Mining, holding, selling, issuing or using cryptocurrency
Fine or imprisonment up to 10 years, or both
Issuing any advertisement, soliciting, assisting or inducing participation in use
Fine or imprisonment up to seven years, or both
Acquiring, storing or disposing of cryptocurrency with intent to use
Sources: Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019; PRS.
- The Bill provides that any subsequent conviction for any offence under the Bill would be punishable with a fine and imprisonment of 5-10 years. Further, attempting to commit an offence will be punishable with 50% of the maximum term of imprisonment for the offence or the applicable fine, or both. All offences punishable with fine may be compounded. Offences related to use of cryptocurrency for issuing related financial products or issuing it as a means of raising fund or investment, would be cognisable and non-bailable. All other offences would be non-cognisable and bailable.
- The Bill provides that the maximum amount of fine levied will be the higher of: (a) three times the loss caused and (b) three times the gain made by the person. If the loss caused or the gain made by the person cannot be determined, the maximum amount of fine for acquiring, storing or disposing of cryptocurrency will be up to one lakh rupees. For all other offences, the maximum fine will be up to Rs 25 lakh. The Bill amends the Prevention of Money Laundering Act, 2002 to give effect to the offences.
- Regulation of digital rupee and foreign digital currency: The Bill provides that the central government may, in consultation with the central board of RBI, approve a digital form of currency to be legal tender. Further, it provides that the RBI may notify a foreign digital currency as a foreign currency in India to be governed by the Foreign Exchange Management Act, 1999. Foreign digital currency means a digital currency recognised as legal tender in a foreign jurisdiction.
- Investigating Authority and punishment: Only officers of the rank of Deputy Superintendent of Police or above may investigate offences under the Bill. The court will consider few factors while determining the quantum of punishment for the offences. These include the gains made by the individual and the harm caused to the financial system, among others.
- Immunity and exemptions: The Bill empowers the central government to grant immunity to any person from prosecution under the Act, if such person makes full disclosure of the violation. Further, the central government may exempt certain activities from the list of prohibited activities under the Act, if it considers it necessary in public interest.
- Transition period: 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 rules notified by the central government.
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