Header image alt text

Naavi.org

Building a Responsible Cyber Society…Since 1998

Year 2013 in retrospect

Posted by Vijayashankar Na on December 31, 2013
Posted in bitcoinCyber CrimeCyber LawITA 2008  | No Comments yet, please leave one

The year 2013 ended with an intense debate on Bitcoins the virtual currency system that caused lot of ripples in the market. over the last one month, Naavi.org has been full of discussions on Bitcoin to the extent that discussions on other aspects of Cyber Law actually receded to the background.

However if we try to trace the developments on Cyber Law in India during the last year, the following points emerge.

1. Debate on Section 66A:

The controversy on Sec 66A continued during the year ending with a direction from the ministry of communications and information technology that no arrests should be made without the permission of higher officials in the department. Though the reference in the Supreme Court on the constitutional validity of Section 66A is still pending, there has not been any adverse news about the misuse of Section 66A.

2. Karnataka as Cyber Crime Haven

Another issue that on which lot of activity took place but remained unresolved through out the year was the status of Cyber Judiciary in Karnataka. After the December 27, 2011 when the then adjudicator gave out a judicial verdict holding that a “Company” can either be the complainant or an accused under Section 43 of ITA 2000/8, the undersigned has been fighting to get the order reversed. Though the next IT Secretary briefly reopened the case, Axis Bank managed to silence him with a vacation judge’s order of the Karnataka High Court. The Cyber Appellate Tribunal has registered the appeal but has no chair person to conduct proceedings since our Ministry in the center is not interested in appointing anybody but a chosen person who is not acceptable to the Chief justice of India. The Chief Ministers of the State are not concerned that the net effect of this development is that a cyber criminal cannot be prosecuted in Karnataka for most of the violations. Recently a writ has been filed by an advocate in Karnataka High Court to resolve the issue. Probably we may find a solution one way or the other for this imbroglio  in 2014.

In comparison, the Maharashtra adjudicator Mr Rajesh Agarwal was very active through out the year and decided on scores of cases.

3. Frauds on Exporters and  Importers

During the year the Exporters and Importers in India were specifically targetted with an e-mail based attack where the money due to be paid out to a designated business contact abroad or receivable from such a business contact was diverted to fraudster’s accounts. The amounts involved were huge and in most cases the losses have not been recovered since the fraudster is abroad.

4. E Banking Safety

Naavi continued his efforts on campaigning for better safety of E Banking and conducted workshops at RBI as well as some Banks.  During the year RBI also announced the possibility of new Banking licenses to be announced and Naavi has been bringing to the attention of RBI that the technology dependence of Banks is on the increase and it is time to make Cyber Crime Insurance mandatory at least for the new banking licencees.

During the year RBI also tried to issue new regulations which would Dis-Incentivize” the use of cheques and force public to resort to E Banking. Naavi conducted an intense campaign against the proposal which subsequently did not see the light of the day during the year. Hopefully the proposal has been dropped.

5. Bitcoins

Finally during the end of the year the Global Bitcoin conference that was held in Bangalore on December 15 2013 focussed the attention of the entire country on the phenomenon of Cryptocoins. However the publicity attracted adverse attention of the regulators and Enforcement Directorate and Income Tax authorities raided a number of Bitcoin operators in Ahmedabad and Tumkur and launched some enquiries. The full impact of this development will pay out in the next year and may have a huge impact on the Netizens.

The above is just a glimpse of some of the developments and I invite those who are interested to know the details to explore the site further.

In the meantime Naavi.org wishes all its readers a Happy and prosperous New Year.

Naavi

Addressing the concerns of RBI on Bitcoins

Posted by Vijayashankar Na on December 31, 2013
Posted in bitcoin  | No Comments yet, please leave one

The RBI advisory of 24th December 2013 has set an agenda for the Bitcoin community as to the future of Bitcoin industry in India.

The advisory was fine as far as the public was concerned since it was the duty of RBI to warn the  individual investors about the FEMA risk and the volatility risk involved in buying or selling Bitcoins.

The advisory was completely silent on the “Miners”.

The advisory was some what negative on the business entities since it hinted at a possible review of the guidelines in future.

When the advisory was followed by the ED action on two of the Ahmedabad based traders, the Advisory assumed a more threatening meaning.

The statement of the Dy.Governor of RBI, Mr K.C.Chakravarthy in Coimbatore in which he has assured that RBI is not having intentions of regulating the Bitcoins at present has eased the situation to some extent.

However, if any businessman wants to invest a couple of lakhs or more on setting up a high end mining facility or for developing a trading platform or for a VC to consider financing such ventures, the current vagueness in the RBI’s policy is not acceptable. They would like to have a more categorical statement from RBI that they consider Bitcoins as outside the laws applicable to the currencies in India either under the RBI act or Indian coinage act or Payment and Settlement act. Similarly SEBI needs to clarify that trading of Bitcoins and other crypto coins is outside its regulatory area.

At this point of time if a clarification is sought, it is unlikely that either RBI or SEBI will commit on either the acceptability or non acceptability of the cryptocoin system or its exchange platforms.

Also the industry need to always keep a watch on “Retrospective Legislation” and other players like the Income Tax authorities suddenly springing a surprise and pushing a business to the brink of a collapse.

The industry should therefore pursue its efforts to extract a clear mandatory guideline from RBI, SEBI and Income Tax authorities on how they would deal with Cryptocoins in the future.

If the guideline is considered unfair it would be necessary for the industry to approach the appropriate courts in India to seek a clarification on

a) whether the guidelines are within the powers of RBI,

b)Whether they are not an infringement of the Constitutional rights of Indians and

c) Whether they infringe on the Human Rights in general.

Such a judicial clarification is essential for the industry to raise necessary finance and  would also be good for RBI and other institutions to resolve the issue without executive responsibility.

Even while the process of getting such clarification is on, the industry can move proactively to cause the setting up of  a “Regulatory Body” and start addressing the issues raised by RBI in its advisory. This will pave the way for a favourable response from RBI when it considers responding to any query on clarifications.

If we analyse the RBI advisory then the following action points may be required.

1. Security Concerns: The web platforms that provide services for wallets and trading etc need to ensue that they adopt the best information security practices on the lines adopted by Banks and other organizations. This will require policies and procedures to be established for the purpose. It will have to meet the laws such as ITA 2000/8. It will be on the lines of the  Total Information Assurance program suggested by Naavi in the past for Banks.

2. Grievance Redressal Mechanism: Being a peer to peer system the grievances also have to be resolved by the same system. It is possible to device a means by which an “Ombudsman” can be appointed for the purpose of interacting with the public and resolving the conflicts. He can be supported by an appropriate back end support system to ensure that disputes will be resolved within the provisions available int he protocol.

3.Financial Risk due to volatility: This is the inherent nature of the commodity and will get resolved over a time. What needs to be ensured now is only following of ethical practices by operators so that public donot get mislead by tall claims. This is a public education issue and can be effectively met by an appropriate overreach program.

4. Legal Jurisdiction Issue of foreign trading platforms: At present users in India may tend to trade on foreign exchanges like MtGox or BTCChina etc because there are no such exchanges in India. Once a sophisticated exchange based in India becomes operational, the issue would be resolved. Until then just as we deal with foreign E-Commerce sites such as Amazon or E Bay, we need to manage the situation under the existing laws. By linking the approved grievance redressal mechanism to such services it is possible to address the issue.

5. AML and FEMA Issues: It is necessary to ensure compliance of available laws on AML or FEMA by the traders through appropriate policies and procedures. This is part of the Total Information Assurance program. A suitable customized techno legal information security framework for Bitcoin community (On the lines of Indian Information Security Framework- IISF proposed by Naavi earlier) can address this issue.

Thus every one of the concerns expressed by the RBI can be addressed if there is a willingness of the Bitcoin community.

Naavi’s proposition is to create a private  voluntary society to which all the Bitcoin members will get themselves accredited under a commitment of a common ethical commitment and to seek the support of RBI/SEBI/IT authorities to recognize such a body as a trustworthy ally of the regulators.

If such a program has to succeed, the body has to be insulated from vested business interests.

The business interests can however be represented by a separate agency of the business entities while the regulatory issues can be handled by the independent voluntary society.

The model is similar tot he Indian Banking system where RBI is the regulator but IBA is the industry representative. IBA takes up business interests with RBI and problems are resolved by mutual discussion.

Similarly the current business groups associated with Bitcon can be the industry representative body while the voluntary society can be formed now to take care of the regulatory concerns.

However the industry players have to whole heartedly support and participate in such a voluntary endeavour as if it is a “Self Regulating Body” of the industry. If this bottoms up approach is not initiated, there may be a possibility of a similar regulatory body being hoisted by the regulators on the industry.

In such an endeavour there will be issues that we normally see in any organization such as jockeying for power, fighting for resources, individual egos etc. If the Bitcoin community in India can effectively address all these issues and come together, then regulators would be happy to come up with an industry friendly policies at the national level.

Let’s start a debate on this idea. Suggestions from interested persons are  welcome.

Naavi

Dy Governor of RBI Clarifies on Bitcoins

Posted by Vijayashankar Na on December 30, 2013
Posted in bitcoin  | No Comments yet, please leave one

Dr K.C.Chakaravarthy, Dy Governor of RBI has always been pragmatic when it comes to security issues in the Bank. He has also been always pro-customer minded when dealing with Banking issues.

True to his reputation, he has come up with an honest admission that at this point of time RBI has no plans to come up with a regulatory framework for Bitcoins. He says that RBI is neither supporting the system or coming up with any adverse regulation. He is candid to admit ..”Whether it is legal or illegal, we don’t know”.

See details here

We hope the ED shows the same pragmatism in dealing with the raids they have already conducted.

Naavi

Related Report in domainb.com

The Impact of RBI Advisory on Bitcoins in India

Posted by Vijayashankar Na on December 30, 2013
Posted in bitcoin  | No Comments yet, please leave one

On the 24th of December 2013, RBI gave an advisory  on Bitcoins.

Copy of the advisory can be found here.

The caution was meant for the users, holders and traders of Virtual Coins (VCs) including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.

The advisory refers to the virtual currencies as “Electronic records claimed to be decentralized digital currency or virtual currency”.

The advisory goes on to state that “trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority.

It adds “No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities”.

It is in the light of the above that the Advisory states that they may pose several risks to the users.

The advisory recognizes the following risks:

1.Loss of VCs may arise due to hacking, loss of password, compromise of access credentials, malware etc.

2.There is no established framework for redressal of customer problems, disputes, charge backs etc.

3.Losses may arise on account of volatility of value.

4.Trading of VCs on platforms on websites operating in different jurisdictions poses legal and financial risks.

5.Absence of information on counter parties could subject users to unintentional breaches of anti- money laundering laws.

The advisory also states that RBI is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

It is clear from the above that RBI has been extremely careful in releasing the advisory. It has not provided any mandate but has done its duty to the public by highlighting the risks inherent in the use of VCs. These risks are known to an informed VC user but were required from the point of view of the ordinary man on the street.

Hence the Bitcoin community need not be unduly worried about the advisory.

However RBI has indicated that it is still examining the issue. This could mean that at some point of time in future RBI may come out with a more detailed mandatory guideline if it deems fit.

This possibility will hang on the heads of all Bitcoin operators as the proverbial Sword of Damocles.

If Bitcoin operators need to commit on any investments on Bitcoin, then there is need for better clarity since business cannot thrive on a future full of uncertainty.

The problem is complicated by the fact that the RBI advisory has already been mis-interpreted by most people including some of the Bitcoin operators themselves. All the major news papers highlighted the fact that “Bitcoins operators shut shop after RBI advisory”. This automatically implied that RBI’s advise was to “Shut shop”. It is ironic that the panic actually spread because some of the Bitcoin operators stated that they are “Suspending” their operations following the RBI’s advisory. This was interpreted by the public as “Admission that there was some thing wrong”.

During the last Bitcoin Conference on December 15th at Bangalore, I had clearly made out that RBI advisory was expected and the advisory was on the lines then indicated. From 15th December to 24th December there was ample time for the operators to take stock of their operations. In fact if there was  a need to temporarily shut shop, it was immediately after the conference.

As one can see, RBI advisory did not warrant closure of business. At best it warranted the operators to review their business policies to make their operations compliant with the expectations.

When the Bitcoin operators revealed a nervousness and responded with their own knee jerk reaction to the RBI advisory, it was natural for the Enforcement Directorate to presume that there must be some thing wrong and they need to move in before it is too late. In a way the hasty closures actually must have prompted the ED to act immediately.

Anyway the bygones are bygones and the clock cannot be turned back. It is now time to look to the future and both RBI and ED on one side and the Bitcoin operators on the other side should sit and discuss how Bitcoin (and all other VCs) as a system need to be looked at. If  the risks of money laundering in Bitcoins is not different from the use of printed notes, RBI need to consider if at all there is a need to throttle what is essentially freedom of the citizen to create and use his own system of payment settlement.

If  a citizen decides to give his friend Idlies and Dosas so that he purchases a film ticket for him, why should the regulator be concerned about this barter system?  Bitcoin after all is a community arrangement to use a “Specified Electronic Record” as the basis for settlement of payment.

If Bitcoin is being perceived as a “Currency” , then Government should think … What is  there in Bitcoin which is not there in Indian Rupees or US Dollars?

If the public are voluntarily giving it a status of a “Peer to Peer Currency”, then

Is it right for the regulator to infringe on his freedom of choice of a payment system?

.. It is time to ponder

Naavi

Bitcoin is a Human Rights Issue

Posted by Vijayashankar Na on December 30, 2013
Posted in bitcoin  | 1 Comment

Bitcoin is a unique concept of an instrument that can be used for settlement of consideration between persons who form part of a digital community. It was developed as a peer to peer payment settlement system in the Internet world. The community of Netizens who participate in the Bitcoin transactions decide on who gets how much of Bitcoins and which transaction is to be added to the approved chain of transactions.The community itself determines the value of the Bitcoin by simply a process of demand and supply.

The Government or the Central Bank of any country have no role either in the production of Bitcoins or in the maintainance of the system.

Hence Bitcoin is a system that belongs to the community which is part of the digital world. The Government authorities which have a role in managing the society of Citizens have no real role to play in regulating the Bitcoins which operate only in the Netizen world.

There are some transactions where the Bitcoin is being exchanged for the currencies of the physical world. This inter society transactions are the transactions that create problems of jurisdiction. The physical society Governments need to restrict their regulatory concern only in managing the inter society conversion of Bitcoins to fiat currencies and no more.

It is to be noted that Bitcoin system is governed by the “Protocol”. This is the “Master Governance System”.  It is an open source document that the constitution of the Bitcoin governance is known to all. Any changes or refinements to the protocol are done by the users themselves as defined by the protocol itself.

All decisions on Bitcoins are taken democratically by the community participants.

Being a system developed only by Netizens for the Netizens by a community of the Netizens, Bitcoin is actually a matter of right of these Netizens. The restrictions that some regulatory authorities are trying to impose on the community is therefore to be treated as a curb on the democratic rights of Netizens.

If some of the Non Netizens are also adopting the use of Bitcons for settlement of payments in the physical world, they are doing so at their own financial risk. They are aware that if the value of Bitcoins fall down, they cannot go to any regulatory authority to compensate them for the loss. Despite this lack of assurance if people adopt Bitcoins as a currency of their choice, it is necessary for the regulators to respect this choice of the people.

If necessary the Government can consider regulations to ensure that the citizens of the physical world are not adversely affected by the use of Bitcoins.

However, in any democratic set up it is essential for the Government to respect the right of Bitcoin community to mine, use and trade in Bitcoins as an essential human right.

Naavi

According to wikipedia, the total black money of Indians in the Swiss Banks is around US $ 1.2 Trillion.

Seen in this context, the Enforcement Directorate accusing the Bitcoin system as a tool of hawala appears a joke.

At present the total Bitcoin stock ever mined is valued at around US $ 10 billion. The stock of bitcoins in India is a fraction of a fraction of a fraction of the total bitcoin population.

The ED recently unearthed a hawala network in Punjab worth over Rs 1000 crores involving bogus invoicing of exports. The amount of black money used in Indian elections is of the order of thousands of crores. The amount of bribes that our politicians take each year is of the order of several lakh crores.

If US $ 1400 billion (Rs 70 lakh crores) has gone out of India and reached Swiss Banks, it indicates that the ED has failed miserably in controlling the illegal movement of funds from India to foreign countries whether in the form of cash or otherwise. According to one estimate, the amount of cash moving out each year is itself of the order of Rs 4 lakh crores.

Hence the possibility of bitcoins being used as a major tool of hawala transactions requiring the ED to conduct raids on two bitcoin operators in Ahmedabad is not a credible argument.

In the light of such information, the enforcement Directorate needs to answer the Bitcoin community about why the department considers Bitcoin a threat more than the other known forms of hawala.

Probably the ED was excited about the prospect of  identifing some Bitcoin trading to Narendra Modi or Amit Shah so that they can raise another hue and cry against the BJP’s prime ministerial candidate.

Naavi