So you all must have heard or seen the news bulletin that Indian Government is deciding to ban cryptocurrency but none of them shows why and how? Moreover what would be the meaning of such a ban? Will this mean you will be fined for using cryptocurrencies? or you would be jailed for using Cryptocurrency? Here is the synopsis of how Indian Government is trying to ban Cryptocurrencies:
It started in 2017 when the Department of Economic Affairs made a recommendation committee headed by Shri Subhash Chandra Garg, Secretary, DEA which would study the aspects of cryptocurrencies and suggest government some legal measures related to it. So the committee finally submitted it's report in February 2019. It's on the basis of this report that Indian government is deciding to ban Cryptocurrencies.
Before reading keep it in your mind that these were merely the recommendations given by the committee and it's not necessary that the original law would come and would match the aspects of report. This is basically a summary of what was written the report.
Report on Virtual Currencies
Characteristics of Virtual Currencies which make it necessary to regulate them:
i. They don't have any intrinsic value and therefore are subject to huge fluctuations.
ii. They are decentralized networks regulated by no central authority.
iii. The transactions in cryptocurrencies are irreversible therefore scams and frauds cannot be reversed.
iv. They carry a degree of pseudonymity, although can't be said to be completely anonymous for participants.
Key Concerns
1. Protecting the consumers from fraud: There have been various frauds in cryptocurrencies. Moreover forking is also done where network protocol is changed for personal benefit of earning money.
2. Protecting financial system and economy: RBI wouldn't be able to regulate the supply of money in the Economy.
3. Need to Prevent Criminal Activity: As law enforcement and seizure of asset becomes difficult in decentralized blockchains
How to make Ban possible?
Here they have taken inspiration from our very good Friend (Sarcasm Intended) China. Example was cited that post ban in China the use of RMB in global transactions fell from 90% to less than 1%. Just like China India would also use a big firewall to ban such sites. Most probably just like the way they banned Porn
. Moreover no place will be allowed to host cryptocurrency related events. They also have agreed that use of VPN could be possible in such cases but would still be traceable as to who is using the website.
Key Recommendations in the Report
1. The Committee notes with serious concern mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these cryptocurrencies. All these cryptocurrencies have been created by non sovereigns and are in this sense entirely private enterprises.
2. There is no underlying intrinsic value of these private cryptocurrencies. These private cryptocurrencies lack all the attributes of a currency.There is no fixed nominal value of these private cryptocurrencies i.e. neither act as any store of value nor they are a medium of exchange. Since their inceptions, cryptocurrencies have demonstrated extreme fluctuations in their prices. Therefore, the Committee is of clear view that the private crytocurrencies should not be allowed. These crytocurrencies cannot serve the purpose of a currency. The private cryptocurrencies are inconsistent with the essential functions of money/currency,hence private cryptocurrencies cannot replace fiat currencies.
3. A review of global best practices also shows that private cryptocurrencies have not been recognized as a LEGAL tender in any jurisdiction.
4. The Committee recommends that all private cryptocurrencies, except any cryptocurrency issued by the State, be banned in India.
5. The Committee endorses the stand taken by the RBI to eliminate the interface of institutions regulated by the RBI from cryptocurrencies. The Committee
also recommends that all exchanges, people, traders and other financial system participants should be prohibited from dealing with cryptocurrencies.
6. Accordingly,the Committee has recommended a law banning the cryptocurrencies in India and criminalizing carrying on of any activities connected with
cryptocurrencies in India.
It's pretty evident from the text that Government is a sketchy regarding a lot of cryptocurrencies have arrived in the marketplace where everyone is creating their own currency. Thing is that they call themselves are currencies yet they have no underlying intrinsic value. Moreover as per traditional economics Money must have 4 necessary attributes:
1. Store of Value
2. Medium of Exchange
3. Fixed Nominal Value
4. Divisibility
Now as per the committee Bitcoin cannot have a store of value because it's price is merely a bubble of demand and nothing else. But I don't know why they said it can't be medium of exchange. But then I found the reason they were giving was the high transaction times involved in transferring hinders it's ability to act as medium of exchange here is the quote
"Since these cryptocurrencies are backed by trust and consensus-based algorithms, processing transactions is time-consuming due to validation procedures and network
latency. The large gap in transaction processing speed between cryptocurrencies (especially Bitcoin), and other electronic payment methods, hinders their ability to
be used as medium of exchange"
Thirdly they said it doesn't has a fixed nominal value which is true it is subject to extreme volatility. This is why they are recommending ban of cryptocurrencies altogether.
Now comes the most important Part
Banning of Cryptocurrency and Regulation of Official Digital Currency Bill was suggested by the committee which gave the following law.
Banning of Cryptocurrency and Regulation of Official Digital Currency Bill.
GENERAL PROHIBITION
"(1) No person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency in the territory of India.
(2) Nothing in this Act shall apply to any person using technology or processes underlying any Cryptocurrency for the purpose of experiment or research, including imparting of instructions to pupils provided that no cryptocurrency shall be used for making or receiving payment in such activity.
(3) Nothing in this Act shall apply to the use of Distributed Ledger Technology for creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment."LIST OF OFFENCES
1. Whoever directly or indirectly mines, generates, holds, sells, deals in, transfers, disposes of or issues Cryptocurrency or any combination thereof with an intent to use it for any of the purposes such as raising of money, investment, as payment system, related services, basis of credit etc. shall be punished with fine and imprisonment of not less than 1 year extended upto maximum of 10 years .
2. Whoever directly or indirectly promotes, issues any advertisement, solicits, abets or induces any participation in any activity involving the use of Cryptocurrency for any of the purposes or for purposes generally prohibited above shall be punishable with fine or imprisonment which may extend up to seven years or both.
3. Whoever directly or indirectly acquires, stores or disposes of Cryptocurrency or any combination thereof with an intent to use it for any of the purposes prohibited on a non-commercial basis shall be punishable with a fine.
MAXIMUM AMOUNT OF FINE
For the purposes of Sections 8 and 9 , the maximum amount of fine that may be imposed upon a person for an offence shall be as follows:
(a) the higher of, –
(i) three times the loss or harm caused by the person; or
(ii) three times the gain made by the person.
(b) If the loss caused or the gain made by the person cannot be reasonably determined, the maximum amount of fine that may be imposed on such persons shall be as specified in First Schedule as against each of the offences under Sections 8 and 9.
First Schedule: Offence Maximum Fine Limits
| Under section 8(1)-Buying/selling/mining/dealing/disposing/issuing for Commercial purposes | Upto Rs. 25 crores |
| Under section 8(2)-Using it as crowdfunding/payments sytem | Upto Rs. 25 crores |
| Under section 8(3)- Promoting/ Advertising | Upto Rs. 25 lakhs |
| Under section 8 (4)- Using for Non-Commercial purposes | Upto Rs. 1 lakh |
| Under section 9 (1)- Convicted for the Second time under this act | Upto Rs. 50 crores |
NON-BAILABLE OFFENCES
All the offences under this act are Bailable. Except when Cryptocurrency is mined/used/generated/disposed/held for purposes of raising money / as a means of investment or offering financially related products. This offence is Non-Bailable and Cognizable. Cognizable basically means a serious crime where you can be arrested without an arrest warrant.
Also all this would apply to all the persons including Individuals/HUFs/Firms/BOI/AOP/Body Coroporates/Trust etc.
So this was the basic draft law prepared by the committee and as submitted in it's report to Department of Economic Affairs, Ministry of Finance. Moreover it must be noted that in this very same report the Committee has praised the Distributed Ledger Technology a lot and is saying that Blockchain is the future and will be used in various segments of government. Non of this law would be applicable on usage of blockchain in financial systems or other systems. But creating of virtual currencies using these blockchain systems is not allowed.
PS: It must be noted that this is a draft Bill and a recommendation. Do not get into any FUD on basis of this. This is still to be finalized as a bill and then would be presented in Parliament after approval of which and President it would become a Law this thing could take week, Months or even years. Moreover Chances are that Government might quash these recommendations and might order a new committee on the basis of the Status-Quo. This is merely for Educational purposes and Not a Legal Opinion.
I hope you guys like it. Feel free to ask for any query or thing that you don't understand from the text. Would this ban be sustainable?
Reference Document:
https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf
