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Why Cryptocurrency can't be adopted in Banking Sector of India?

Before coming on the topic of Bitcoin or Cryptocurrency, it is important to know the existence of money and how it is trusted by people as an exchange of value. Money represents value. It is given in exchange for something and it passes on in exchange for things to other people. But to believe in these transactions, there should be trust in people that it has some value. Like govt told its people that it will be liable for the value paper currency which is basically a Govt promise and people trusted this Fiat money.

It is a legal tender as it is given by the central authority. It is regulated by the Central Authority and they can print as much say want. In the present scenario, digital money came into the picture which makes the use of physical money lesser. Bank keeps the ledger of all the account to solve the double-spending problem. There are attempts to make digital currency viable but the double-spending problem cannot be solved without central authority as whenever entity gets the right to regulate money, it leads to corruption, mismanagement and control on your own money will be lost. [1]In October 2008, Satoshi Nakamoto created a digital cryptocurrency called Bitcoin.

It is a kind of distributed ledger which can be seen by anyone and it has the property that once a data is saved in it then it becomes difficult to change it. In this customer can digitally exchange the value without the interruption of 3rd party which was present earlier. It operates on the premise of solving encryption algorithms to create unique hashes that are finite in number. It is combined with a network of computers and verifies the transactions; users are able to exchange hashes as if exchanging physical currency. There are a fixed number of Bitcoin that is generated and more no. will not be generated to prevent the overabundance and to ensure its uniqueness.[2]

Features of Cryptocurrency

Bitcoin is a kind of Computer-generated code which can be used by its owner who has a unique password which makes the user spend or trade-in exchange of goods or any other currency or even a coin with another person. To obtain a Bitcoin, there can be two methods, first, by mining it or getting it in exchange for other currency from Bitcoin holders.

These transactions are continuously checked and recorded in the blockchain which confirms and check that the coins which are traded belonged to its rightful owner and it is tradable the way it is submitted. This process of mining will stop when it reaches 21 million which will further make the process more complex and at each try, less Bitcoin will be given. To ensure the security, a person who wants to deal in the Bitcoin must-have digital wallet which provides a unique two-part address.

On the first part, it holds the address of the person and keeps it private and on the second part, it is made public holding the information that the dealing happened which can be viewed by anyone. There are two main advantages in this; first, it cannot be traded twice at the same time as the two transactions are not feasible. And second, it keeps the record of the old transaction while keeping the identity of a person who is dealing in it secret.[3]

How it will affect the economy?

It is already used as an exchange of goods and services and even it became the de facto currency of many countries as it reduces the cost of business and it stabilizes the prices and provides ease in trading internationally. It has a major loophole which is associated with the upper cap of 21 million, it is possible countries which has an abundance in oil will have more Bitcoin inflow than the rest of the world. Fiat currency prevents this from happening as the Governments have a control on this, unlike Cryptocurrency. It does not have a capability to work in the real market as the market works on the demand and supply and that is how inflation or deflation happens.[4]

There is a need for the financial regulator to supervise the Bitcoin as it can lead deep deflation in the economy because of the upper cap. It can be characterized as a medium of exchange or store of value and it is possible that in the case of inflation, the value of this can be less than its store of value because of the lack of the trust in the people. Cryptocurrency holds the power to shift the power from the State to its citizen who can take away the control from the State and it can remove the corruption done by the Government.

The privacy rules in Bitcoin like the user's identity cannot be revealed can lead to criminal activity and even hackers can take benefits from its distributed ledgers. In 2010, by exploiting the loophole in code, the bunch of hackers got 184 billion Bitcoin and it stimulated the security breach. However, it was reversed in a few hours and codes were also modifies so that it cannot happen in future.[5]

There is a famous case on Bitcoin fraud in 2014. A leading Bitcoin exchange and intermediary named Mt. Gox which was situated in Shibuya, Tokyo, Japan was holding 70% Bitcoin transaction which was happening all over the world. Through this theft from the hot wallet of the company (Mt. Gox) which was started from the beginning of the year 2011, the company filed for bankruptcy protection in Feb 2014 and it started with liquidation in April. The main reason for this can be a lack of security.[6]

Efforts taken by the Countries to regulate the Cryptocurrency

While many countries like China, Russia and Columbia prohibit the dealing in Cryptocurrency due to the shift of power from Government to the people and decentralized economy[7], Countries like the US, Germany, UK and Brazil tried to regulate these virtual currencies.

In the US, regulatory measures mostly cover agency level, which comprises of the Department of Treasury, Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN). Each of the department has a different definition and a different viewpoint on the application of regulation on Cryptocurrency. [8]It is done to protect the interest of the consumer and financial market which will be affected by the Bitcoin. The Constitution of the US prevents the State for Coining money and not the private person unless it is similar to US dollars which are a legal tender.

We can see the case of Bernard von Nothaus who was convicted for creating Liberty Dollar and which is also in the form of paper currency. He was convicted to form a currency which is similar to the US dollar and his plan was to make it in circulation.[9]

In the US case, Securities and Exchange Commission vs. Trendon T. Shavers and Bitcoin Savings and Trust, Judge Mazzant gave the landmark judgement that Bitcoin will be treated as currency and it will be treated as currency transaction and the US Court has jurisdiction to hear all the disputes related to the Cryptocurrency and the dealings in it. Now Securities and Exchange Commission has the authority to decide any matter of fraud related to the Cryptocurrency.[10]

In Germany, Cryptocurrency is treated as a financial instrument. The Federal Ministry of Finance had brief talk related to the tax treatment but still, there is no fixed regulation passed related to the same. [11]In UK also, Bank of England have not passed any circular or regulated related to the stand of Bitcoin but it considered as 'single purpose vouchers' and this classification will levy 10-20%of Vat on the sale and it was opposed by the people as it will hamper the growth of this business in the UK.[12]

Scenario of India on the Regulation of Cryptocurrency

The central government had not laid down any laws and regulation related to this virtual currency. After demonetisation, Indians faced a challenge in trusting the government on their money and they got attracted to this new form of currency but due to the prohibition on cross border supply of Bitcoin and slow process of mining because of lack of infrastructure in India, people are facing problem in dealing with the Bitcoin.

We can know the stand of India through its landmark judgement on Cryptocurrency.

Internet and Mobile Association of India vs. Reserve Bank of India[13]

In this case:
Statement on Developmental and Regulatory Policies was issued by Reserve Bank of India. According to Section 10(2) r/w Section 18 of the Payment and Settlement System Act, 2007. Through this RBI commanded the entities which it regulates that they cannot deal with the virtual currencies like cryptocurrency nor they can facilitate the same to any person or institution in doing transaction related to this and they have to end the relationship with that person or company who is already dealing with virtual currency. Supreme Court held that the Circular is unreasonable and it should be subjected to proper rule and regulation instead of a complete ban. Therefore the Supreme Court revoked the said Circular.[14]

Petitioner contended that RBI regulates currency and any payment system but Cryptocurrencies does not come in this purview, therefore, it has no jurisdiction to pass such circular. This virtual currency can be similar to money but it cannot change the element of legality in this cryptocurrency.

They are more like tradable goods rather than a type of currency, therefore RBI will not come into the picture while dealing with it. The Petitioner further contended that occupation or business until the legislature puts any ban on this and announce this kind of business a, res extra commercium which means 'a thing outside commerce'. It was also contended that RBI believes that it is impractical to govern or regulate these virtual currencies by putting such complete ban on this but this is very unreasonable and inappropriate on the part of RBI for taking such decision on the basis of their wrong understanding on Cryptocurrencies.[15]

RBI argues that these virtual currencies can be used for unlawful cause because of blockchain technology. It will sabotage the credit system of India and will also hamper fiscal stability. It is a proper authority for the control of banking activities in India. Supreme Court respected the authority of RBI regarding its decisions related to the economic policy of India.[16]
Supreme Court held that it is not legal tender but it functions like a store of value or unit of account or a medium of exchange or a combination.

RBI can notify particular instruments as currencies but it had not done this in the case of Cryptocurrencies because it believed that it will not come in the purview of 'currency' definition which is given in the statute. The Apex Court observed that the way in which this virtual currency is used in India as consideration for the transaction of any goods and services or like a facilitator between the parties in their dealings, it can be said that it will fall under the purview of RBI and it has the power to regulate.

SC also rejected the contention that RBI has no idea while passing the circular, though the Apex Court concluded that it was an inappropriate regulatory action taken by the RBI bypassing such circular. The SC held that RBI does not satisfy the court related to damage which is caused by the usage of Cryptocurrency and also it does not recognise the unfavourable impact of it on banking and financial sector. By putting such regulation on the institution that is dealing in these Cryptocurrencies which does not harm them, RBI acted in a very inappropriate way bypassing such circular. Therefore, the Supreme Court ordered to set aside the same.[17]

Analysis
The judgment is an essential growth in the field of Cryptocurrency as after this bank is no more a regulator for the entities which are dealing in these virtual currencies and this makes business in this workable in India. There is a need for classification in this sector which is already done by another country but in Indian law, it still needs to be explained. The way the laws are framed by the RBI and the legislature plays a vital role in determining whether Crypto currency can be treated as money in future and will it come under the purview of RBI.

There is a need for a regulatory procedure for the implementation of blockchain technology and in the dealing of cryptocurrencies and regarding this many petitions was also filed. Seeing the draft of the Cryptocurrency & Regulating of Official Digital Currency Bill, 2019 (Bill) which ban the mining, holding, selling, trade issuance, disposal or use of cryptocurrency also makes it punishable with fine and imprisonment of up to 10 yrs or both, we can say that India is not ready to adopt this method.[18]

As there is a possible risk involved in this like money laundering, customers in danger and there is a threat to fiscal stability.[19] But there are advantages associated with this technology like in record-keeping and efficiency in a cross-border transaction.

Blockchain Technology in Banking System

Blockchain has a very good computing system. Through Blockchain technology, the data of the person get saved in the central ledger and every minute change in the token which is generated from the transaction will create a new entry as it will not make changes in a past entry, therefore there will be two entries. It will solve the problem of hacking as the person will get to know about the fraud as he will get to know that he had done only one entry but the system is showing two entries.

If it is implemented in the Banking sector, there are many benefits attached to it like that people will not be able to do backdate entry which is a major cause of corruption as people will get to know that there two entries.

The problem is in Blockchain key which holds all the information, if somebody sends the value, the bank will have the code to open the key to read the token that the person has generated and to know, whom they need to transfer that money. But it will be done by the computerised system, not by any bank employee.

But to crack the value, it needs a high computing power which means that the bank will need the proper server rooms which are not possible as Bitcoin coin mining require hours to do it which needs a high level of infrastructure which lacks in India and to establish it also it requires a lot of expense.

In India, the oldest product named Finacle is still used by many banks, therefore we can say it will be difficult for Indian Banking sector to adopt this new technology and the main reason can be lack of infrastructure and technological advancement in the banking sector.

India has a very strict policy regarding exchange control which include for every overseas transfer. A person has to do paperwork and it will go through proper banking procedure and with the strict supervision of RBI. But the main aim of Cryptocurrency is decentralization which will the RBI outside the picture and it may lead to funding illegal activity or may get hacked or misused by an unknown factor.[20]

Suggestions
  • Power to make rules can be given to self-regulatory association as they can expertise in this technology but RBI should have the ultimate control.
     
  • There should be compulsion on the dealer to register them and comply themselves with the rules. It will help in the transparency issue and Government will be able to supervise the transaction and will be able to take action in illegal activities.
     
  • The government needs to do the classification of Cryptocurrency so that they can levy taxes on them which can actually help the economy to grow.
     
  • The legislature needs to make laws for the regulation and penalising the person who gets involved in the illicit activity through Cryptocurrency.[21]

Conclusion

There is a need for regulatory framework work for the regulation of Cryptocurrency as huge fraud can be committed by the hackers, the right of the consumer can be violated and even it has a power destabilise the financial market and in absence of regulatory authority.

To adopt this technology by the underdeveloped nation or developing nation like India, there will be a need for good infrastructure and internet facility and also a strong legal framework. One of the reasons for not adopting this technology by many Governments can be the decentralization of the economy and their power will be shifted to the people.

And the second reason can be this technology needs people who have expertise in this as single loophole can lead to major frauds. There can be a problem related to the classification of these virtual currencies and regulating it. And these regulations may defeat the sole purpose of introducing such virtual currency.

End-Notes:
  1. James Surowiecki, A brief History of Money( Apr 24, 2020, 4:15) ,https://spectrum.ieee.org/at-work/innovation/a-brief-history-of-money.
  2. Peter D. DeVries, An Analysis of Cryptocurrency, Bitcoin and the Future, Vol1 No.2, Sept 2016.
  3. Deepanshu Poddar and Advik Rijul Jha, Cryptocurrencies, in Need of Regulation: A Primer to Bitcoins Regulation in India,4RSRR 50 (2018) ,http://www.scconline.com
  4. Id.
  5. Id.
  6. Jake Frankenfield, Mt. Gox ( Mar 23, 2020, 11:30 PM), https://www.investopedia.com/terms/m/mt-gox.asp.
  7. Shelagh Dolan, How the laws & regulations affecting blockchain technology and cryptocurrencies, like Bitcoin, can impact its adoption( Apr 5,2020, 4:05 PM), https://www.businessinsider.in/finance/news/how-the-laws-regulations-affecting-blockchain-technology-and-cryptocurrencies-like-bitcoin-can-impact-its-adoption/articleshow/74464680.cms.
  8. Global Legal Insights, Blockchain & Cryptocurrency Regulation 2020(Apr 5, 2020, 3:25 PM), https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa.
  9. Coin week, Bernard von NotHaus Sentenced to Probation for Liberty Dollar Conviction( Apr 7,2020 , 11:28 PM),https://coinweek.com/coins/news/bernard-von-nothaus-sentenced-probation-liberty-dollar-conviction/.
  10. Securities and Exchange Commission vs. Trendon T. Shavers and Bitcoin Savings and Trust, Civil Action no. 4: 13-CV-416.
  11. Winheller Attorneys at Law & Tax advisors, Bitcoin Taxation in Germany(Apr 10, 2020, 7:54 PM),https://www.winheller.com/en/banking-finance-and-insurance-law/bitcoin-trading/bitcoin-and-tax.html.
  12. Comply Advantage, Cryptocurrencies Regulation in the UK(Apr 10, 2020, 8:10 PM), https://complyadvantage.com/knowledgebase/crypto-regulations/cryptocurrency-regulations-uk-united-kingdom/.
  13. Internet and Mobile Association of India vs. Reserve Bank of India, Writ (Civil) Petition no. 528 0f 2018.
  14. Id.
  15. Vaibhav Goyal, The SC struck down a circular by RBI which directed banks not to deal in transactions involving cryptocurrency (Internet Mobile Association of India v. Reserve Bank of India) (Apr 20, 21,2020, 11:44 PM), http://lawtimesjournal.in/the-sc-struck-down-a-circular-by-rbi-which-directed-banks-not-to-deal-in-transactions-involving-cryptocurrency-internet-mobile-association-of-india-v-reserve-bank-of-india/
  16. Id.
  17. Supra 10.
  18. Ministry: Finance, Draft Banning of Cryptocurrency &Regulation of Official Digital Currency Bill, 2019(Apr 25, 2020, 7:56 PM),https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-currency-bill-2019.
  19. Id.
  20. Supra3.
  21. Amit K. Kashyap and Akansha Goyal, India's Discomfort with Blockchain-Based Currency: A Vacuum on The legality of Bitcoins,(2019)6 GNLU L. Rev.216.

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