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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 |
Yesterday, the Election Commission announced the dates for the 2019 Lok Sabha elections. The voting will take place in seven phases between April 11, 2019 to May 19, 2019. With this announcement, the Model Code of Conduct (MCC) has comes into force. In this blog, we outline the key features of the MCC.
What is the Model Code of Conduct and who does it apply to?
The MCC is a set of guidelines issued by the Election Commission to regulate political parties and candidates prior to elections, to ensure free and fair elections. This is in keeping with Article 324 of the Constitution, which gives the Election Commission the power to supervise elections to the Parliament and state legislatures. The MCC is operational from the date that the election schedule is announced till the date that results are announced. Thus, for the general elections this year, the MCC came into force on March 10, 2019, when the election schedule was announced, and will operate till May 23, 2019, when the final results will be announced.
How has the Model Code of Conduct evolved over time?
According to a Press Information Bureau release, a form of the MCC was first introduced in the state assembly elections in Kerala in 1960. It was a set of instructions to political parties regarding election meetings, speeches, slogans, etc. In the 1962 general elections to the Lok Sabha, the MCC was circulated to recognised parties, and state governments sought feedback from the parties. The MCC was largely followed by all parties in the 1962 elections and continued to be followed in subsequent general elections. In 1979, the Election Commission added a section to regulate the ‘party in power’ and prevent it from gaining an unfair advantage at the time of elections. In 2013, the Supreme Court directed the Election Commission to include guidelines regarding election manifestos, which it had included in the MCC for the 2014 general elections.
What are the key provisions of the Model Code of Conduct?
The MCC contains eight provisions dealing with general conduct, meetings, processions, polling day, polling booths, observers, party in power, and election manifestos. Major provisions of the MCC are outlined below.
What changes have been recommended in relation to the MCC since the last general elections?
In 2015, the Law Commission in its report on Electoral Reforms, noted that the MCC prohibits the issue of advertisement at the cost of public exchequer in newspapers/media during the election period. However, it observed that since the MCC comes into operation only from the date on which the Commission announces elections, the government can release advertisements prior to the announcement of elections. It noted that this gives an advantage to the ruling party to issue government sponsored advertisements that highlights its achievements, which gives it an undue advantage over other parties and candidates. Therefore, the Commission recommended that a restriction should be imposed on government-sponsored advertisements for up to six months prior to the date of expiry of the House/Assembly. However, it stated that an exception may be carved out for advertisements highlighting the government's poverty alleviation programmes or any health related schemes.
Is the Model Code of Conduct legally binding?
The MCC is not enforceable by law. However, certain provisions of the MCC may be enforced through invoking corresponding provisions in other statutes such as the Indian Penal Code, 1860, Code of Criminal Procedure, 1973, and Representation of the People Act, 1951. The Election Commission has argued against making the MCC legally binding; stating that elections must be completed within a relatively short time (close to 45 days), and judicial proceedings typically take longer, therefore it is not feasible to make it enforceable by law. On the other hand, in 2013, the Standing Committee on Personnel, Public Grievances, Law and Justice, recommended making the MCC legally binding. In a report on electoral reforms, the Standing Committee observed that most provisions of the MCC are already enforceable through corresponding provisions in other statutes, mentioned above. It recommended that the MCC be made a part of the Representation of the People Act, 1951.
Note that this is an updated version of a previous blog published in 201
