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|Cryptocurrency Bill 2021 PDF|
|No. Of Pages: 8|
|PDF Size: 171 KB|
|Source: Ministry: Finance|
Highlights of the Bill
- The draft Bill seeks to prohibit mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. Cryptocurrency is defined as any information, code, 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.
- Under the draft Bill, mining, holding, selling, issuing, transferring or use of cryptocurrency is punishable with a fine or imprisonment of up to 10 years, or both.
- A person must declare and dispose of any cryptocurrency in his possession, within 90 days from the commencement of the Act.
- The draft Bill permits the use of processes or technology underlying any cryptocurrency for experiment, research, or teaching.
- The central government, in consultation with the RBI, may issue digital rupee as legal tender. The RBI may also notify a digital currency recognised as legal tender in a foreign jurisdiction, as a foreign currency.
Key Issues and Analysis
- The draft Bill bans all cryptocurrencies based on the risks associated with them such as potential use for money-laundering, risks to consumers and threat to the country’s financial stability. However, cryptocurrencies also have potential benefits such as better record keeping and more efficient cross border payments. Several countries are trying to mitigate some of these risks through regulations.
- The Bill defines cryptocurrency to include information, code or token which has a digital representation of value and is generated through cryptographic means, or otherwise. This definition may be too broad and include various forms of digital tokens which have not been generated through cryptography. Such tokens may not pose the risks associated with cryptocurrencies.
- The penalties prescribed for certain offences under the Bill may be disproportionately higher compared to other similar economic offences in the country.
PART A: HIGHLIGHTS OF THE BILL
Cryptocurrency arose as a person-to-person electronic cash system that enables internet payments to be transmitted directly from one party to another without the need of a banking institution.  A central authority issues money that all parties are legally obligated to accept as a means of payment in conventional currencies. As a result, the issued money becomes legal tender. Because the majority of cryptocurrencies are not backed by a governmental guarantee, they are not regarded legal cash. Transaction data for a legal currency is often kept centrally by financial organisations such as banks. Cryptocurrency transactions, on the other hand, are recorded and shared with all network members. If the recipient is ready to accept it, cryptocurrency may be used as payment. They are also exchanged because their values vary in comparison to other currencies such as the US dollar. They are also utilised as utility tokens, granting holders access to a company’s products and services. As of October 2019, the globe has over 3,000 cryptocurrencies, with a daily worldwide trading volume of over USD 50 billion. 
Several hazards associated with cryptocurrencies have developed over the years, including the potential use for unlawful activities and a lack of consumer protection. Countries have devised a variety of frameworks to govern cryptocurrency. Several nations (including Japan, Canada, and Switzerland) regulate cryptocurrencies under anti-money laundering laws. ( Certain cryptocurrencies have been accepted as legal payment methods in several countries, including Japan. Other nations (including China and Saudi Arabia) have outlawed their usage as a currency. 3
Between 2013 and 2017, the Reserve Bank of India (RBI) and the Ministry of Finance issued a number of warnings about the possible financial, consumer protection, and security dangers associated with cryptocurrencies. The RBI barred firms regulated by it from dealing in, or providing services for trading in, virtual currencies in April 2018. The Ministry of Finance established an Inter-Ministerial Committee (IMC) to investigate virtual currency concerns. It emphasised various concerns connected with cryptocurrencies, including excessive price volatility, susceptibility to money laundering, and financial stability threats.  Taking these factors into account, it was proposed that all cryptocurrencies, save those issued by the government, be prohibited in India. It also suggested a draught bill to prohibit the use of cryptocurrencies in the nation and to establish an official digital currency.
- Cryptocurrency: The draft Bill defines cryptocurrency as any information, code, number or token, generated through cryptographic means or otherwise, 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.
Regulation of cryptocurrency
- Ban on cryptocurrencies: The draft Bill bans the use of cryptocurrency as legal tender or currency. It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency. Mining is an activity aimed at creating a cryptocurrency and/or validating cryptocurrency transactions between a buyer and seller.
- In particular, the use of cryptocurrency is prohibited 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.
- Exemptions: The central government may exempt certain activities, if necessary in public interest. The use of technology or processes underlying cryptocurrency for experiment, research or teaching is permitted.
- Digital Rupee: The central government may, in consultation with the central board of the RBI, approve digital rupee to be legal tender. The RBI may also notify a foreign digital currency as a foreign currency. Foreign digital currency means a digital currency recognised as legal tender in a foreign jurisdiction.
Offences and Penalties
- Under the Bill, mining, holding, selling, issuing, transferring or using cryptocurrency is punishable with a fine or imprisonment of up to 10 years, or both.
- Issuing any advertisement, soliciting, assisting or inducing participation in use of cryptocurrency is punishable with a fine or imprisonment of up to seven years, or both. Acquiring, storing or disposing of cryptocurrency with the intent of using it for non-commercial purposes will be punishable with a fine.
- 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 government.
PART B: KEY ISSUES AND ANALYSIS
Rationale for the draft Bill
Working of cryptocurrencies
Money has three functions: it serves as a unit of account, a means of exchange, and a store of value. In most nations, money is issued by a government-supported body (such as the RBI in India) and is backed by the government. A government agency licences entities that are authorised to retain money and facilitate payments (such as banks, credit cards, and payment wallets). This implies that there is a centralised, government-regulated system for authenticating transactions and tracking money movement.
In various ways, cryptocurrencies deviate from this structure. For starters, they are only available in digital form. Second, there is no centralised body in charge of validating and guaranteeing transactions. Instead, the transactions are confirmed by other users and then securely kept. The procedure is outlined below.
A digital object, unlike a tangible cash note, is simple to duplicate. As a result, a digital currency has the intrinsic difficulty of preventing duplicate payments with the same money. Cryptocurrencies use “blockchains” to overcome this issue. Every user in the system has access to every other user’s account balance (code-names may be used to protect privacy). When a series of payments occurs, they are grouped together into a “block.” Other users validate the block by determining if the individual making the payment has enough funds. If a majority of users approve all transactions in a block, it is deemed legitimate. At this point, the block is cryptographically linked to the preceding block and published to the system. A blockchain is a series of such transaction blocks. This ledger is a kind of Distributed Ledger Technology since it is accessible to all users and verified by them (DLT). The encryption mechanism employed makes changing the transactions in a verified block very difficult. Furthermore, changing a block necessitates changing all succeeding blocks, which is a near-impossible operation. Furthermore, since many copies of the ledgers are maintained, it would be very difficult to tamper with all of them at the same time. These characteristics contribute to the system’s trustworthiness.
Benefits and risks associated with cryptocurrencies
The Inter-Ministerial Committee (2019) said that the technology behind cryptocurrencies, namely distributed ledger technology (DLT), has the potential to enhance the efficiency and inclusivity of the financial system.
6. It has the potential to reduce the cost of personal identification for KYC while also improving credit availability. Global authorities (such as the IMF) have also emphasised the advantages of cryptocurrency. These new currencies might make transactions cheaper, quicker, and more efficient. , ,  They may, for example, be used for low-value cross-border transfers when the cost of sending remittances remains high owing to several middlemen. Cryptocurrencies also enable a more secure payment system (since records cannot be changed by a single person), increased transaction transparency, and greater auditability. 8
However, cryptocurrencies have been linked to a number of hazards. For starters, they endanger customers. Cryptocurrencies lack a governmental guarantee and hence are not legal currency. Because they are speculative, they are also very volatile. For example, Bitcoin’s value decreased from USD 20,000 in December 2017 to USD 3,800 in November 2018. If a user loses their private key, they lose access to their cryptocurrency (unlike traditional digital banking accounts, this password cannot be reset). These private keys are sometimes maintained by technical service providers (cryptocurrency exchanges or wallets), which are vulnerable to viruses or attack.
Second, cryptocurrencies make it easier for criminals and money launderers to use them. Because the public keys involved in a transaction cannot be directly connected to a person, they enable better anonymity than traditional payment systems. Third, central banks are unable to control the supply of cryptocurrencies in the economy. If they become widely used, this might jeopardise the country’s financial stability. Fourth, since authenticating transactions requires a significant amount of energy, it may have a negative impact on the country’s energy security (the total electricity use of bitcoin mining in 2018 was equivalent to that of mid-sized economies such as Switzerland). 7
Cryptocurrency regulation in other jurisdictions
Countries are regulating cryptocurrencies in different ways, taking into account the advantages and hazards. In Canada, cryptocurrencies are governed by anti-money laundering and anti-terrorist funding legislation.  Trading of digital currencies on open exchanges is authorised, and cryptocurrency earnings are subject to income tax. They may also be used to purchase or sell products and services. In Japan, cryptocurrency may be used as a payment mechanism.  The Financial Services Authority of Japan registers and regulates cryptocurrency exchanges. The use of bitcoin as a payment method is legal in New York, subject to licencing regulations.  Every licensee must follow anti-fraud, anti-money laundering, cyber security, and information security requirements.
Several nations, including China, Thailand, Indonesia, and Taiwan, have outlawed the use of Bitcoin.
3 Despite allowing the use of cryprocurrencies, many others have issued warnings about their high risk.For example, the European Securities and Markets Authority, the European Banking Authority, and the European Insurance and Pensions Authority published a joint statement warning that virtual currencies are extremely hazardous and inappropriate as investment, savings, or retirement planning products. 
Definition of cryptocurrency may be too broad
Definition of cryptocurrency may include tokens or value generated through non-cryptographic means
The drawback The bill defines cryptocurrency as “any information, code, number, or token created by cryptography or other methods that has a digital representation of value and has use in a commercial activity, or operates as a store of value, or a unit of account.” It outlaws all cryptocurrencies of this kind. This definition might be considered too broad. It may contain tokens that are not created using cryptographic methods and hence do not pose the hazards associated with cryptocurrencies. For example, online discount coupons, gift cards, and loyalty reward points such as frequent flyer miles may be included since they give a digital representation of value and operate as a store of value. It should be noted that the draught Bill allows the central government to omit some acts from the list of illegal activities if it deems them essential in the public interest.
Definition of cryptocurrency differs from international standards
Other governments define cryptocurrency with more specificity. It is defined by the Financial Action Task Force (an international organisation that combats money laundering) as a math-based decentralised convertible virtual currency safeguarded by encryption. 9. A convertible virtual currency is one that has a real-world counterpart and can be traded for actual money. Virtual money is defined by the state of New York as any digital unit utilised as a means of trade or a kind of digitally stored value. 13. It eliminates digital units that I have no use for outside of the platform and which (ii) are part of incentive schemes.
Penalties for certain offences may be disproportionate
Mining, holding, selling, issuing, transferring, or utilising bitcoin is punishable by up to ten years in jail under the bill. This may seem excessive in comparison to other comparable economic offences. Table 1 compares the penalties imposed by the Bill to those imposed for other offences.
Table 1: Comparison of penalties prescribed under various economic offences
|Mining, holding, selling, issuing, transfer or use of cryptocurrency in the country (draft Bill)||10 years|
|Proceeds of crime involved in money laundering related to offences under the Narcotic Drugs and Psychotropic Substances Act, 1985 (PMLA)||10 years|
|Involvement in activities connected with proceeds of crime including its concealment, possession, acquisition or use or projecting it as untainted property (PMLA)||7 years|
|Holding of foreign exchange of aggregate value exceeding one crore rupees (FEMA)||5 years|
Sources: Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019; Prevention of Money Laundering Act (PMLA), 2002; Foreign Exchange Management Act (FEMA), 1999; PRS.. ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, https://bitcoin.org/bitcoin.pdf.. CoinMarketCap, All cryptocurrencies, as of October 30, 2019, https://coinmarketcap.com/all/views/all/.. ‘Regulation of cryptocurrency around the world’, The Law Library of Congress, June 2018.. ‘RBI cautions users of Virtual Currencies against Risks’, RBI, December 24, 2013; ‘RBI cautions regarding risk of virtual currencies including Bitcoins’, RBI, December 5, 2017; ‘Government Cautions People Against Risks in Investing in Virtual ‘Currencies’’, Press Information Bureau, Ministry of Finance, December 29, 2017.. ‘Prohibition on dealing in Virtual Currencies (VCs)’, Notifications, RBI, April 6, 2018.. ‘Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies’, Department of Economic Affairs, Ministry of Finance, July 22, 2019.. ‘Cryptocurrencies: looking beyond the hype’, Bank for International Settlements Annual Economic Report, 2018.. ‘Virtual Currencies and Beyond: Initial Considerations’, IMF Staff Discussion Note, January 2016.. ‘Virtual Currencies: Key Definitions and Potential AML/CFT Risks’, Financial Action Task Force, June 2014.. Proceeds of Crime (Money Laundering) and Terrorist Financing Act (S.C. 2000, c. 17), Government of Canada.. Digital Currency, Financial Consumer Agency of Canada, Government of Canada.. Payment Services Act, Act No. 59 of 2009, Government of Japan.. Regulations of the Superintendent of Financial Services, Part 200, Department of Financial Services, New York State.. ‘ESMA, EBA and EIOPA Warn Consumers of Risks in Buying Virtual Currencies’, February 12, 2018, https://www.esma.europa.eu/press-news/esma-news/esas-warn-consumers-risks-in-buying-virtual-currencies.
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