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.