Naavi.org

The Indian National Bar Association is holding a day long event in Bengaluru on October 25, 2018 which is the “4th Annual INBA Privacy Summit”.

The tentative agenda is available here

If you are interested in more information about the event and participation, kindly visit www.privacysummit.in

Naavi

Last week, there was a news report  that a Bitcoin ATM has become operational in Bangalore. It was hailed as “first of its kind” in the country and will have both a “Trading” and “Exchange” platform. The purpose of the ATM is to buy and sell Bitcoins against rupees.

The proposition is,

If you deposit Rs 5,26 463/- (rate prevailing on unocoin.com as of today) and additionally,  a transaction fee  of Rs 3686.90 and service tax Rs 663.64,  one Bitcoin would be credited to the digital account of the person.

On the other hand, if you surrender one Bitcoin from your digital BTC wallet, you would get Rs 4,33,016 in cash after again deducting the transaction fee and service charges.

The difference between the basic buying and selling rate  is Rs 93,447/- per bitcoin which is 21.58% is the jobber’s margin charged by Unocoin which is running the exchange.

The Company Unocoin also separately makes a profit of Rs 7373.80 as transaction fee. When Unocoin sells Bitcoins from its own stock, it makes the additional Rs 93447/- for itself.

If the seller of Bitcoin is a different person, then he sells and realizes Rs 4,33,016. The buyer pays Rs 526 463/-. One wonders where the balance goes. Will there be negotiations between the seller and buyer to arrive at a median price? Or will Unocoin offer to buy and sell simultaneously and pocket the difference?… are questions that need to be answered.

Since in most cases the Unocoin acts as a “jobber”, it will perhaps hold the sell order in it’s control until a “Buy” order emerges and then puts through the transactions crediting the difference to its own jobbing account. It may even use a separate digital wallet which could for all practical purposes be a dummy wallet to route the transaction. It is for this reason that the ATM is called both a trading and an exchange platform. If it is an exchange, then the transaction is between the buyer or seller with a jobber. If it is a trading platform then both the transaction should be between the buyer and seller directly.

The Kiosk also allows transactions in Ethereum crypto which is bought and sold at the rate of rs 21,343 and Rs 15,314 (Spread Rs 6029/- which is 39.36% of the base price).

It is a great business model for the Company and we must appreciate the innovative structuring of the business model to offload the Bitcoins that may be in stock with the Company before the Government really bans all transactions in Bitcoins.

Since RBI does not allow linking of Bitcoin exchanges to Bank accounts, both the buying and selling has to take place in Cash only.  Hence the ATM has to accept and dispense cash only and credit or debit the digital Bitcoin wallet with the Unocoin.

People who are aware of Foreign Exchange transactions and share transactions have heard of a spread of 0.5% to 3% and not 20% plus. But people who are aware of money laundering are aware of and prepared to pay upwards of 25% for converting black money to white money. The brokerage/jobber’s commission charged by this Bitcoin ATM therefore is perfectly acceptable as the fee for conversion of Black money to white money. I am not aware of what is the “Havala” broker’s charges for such transactions. But I suppose it would not be less than 25%. It should be more than the Black money to white money conversion rate since there is an additional service of conversion to foreign exchange is involved.

According to the information available (perhaps through an official press release from the company), the ATM which is also referred to as Kiosk so that the customers and law enforcement agencies can be confused about whether Bitcoin is being traded as a currency or a commodity. The information also quotes the Finance Minister Mr Arun Jaitely as quoting that Crypto currency is “neither legal nor illegal”.  The Minister is projected as if he is recommending “Investment” in Bitcoin. Last year during this time, there was a full page Times of India advertisement urging the investors to “Invest in Bitcoin during this Diwali instead of Gold”. Perhaps this ATM is being set up for the festival season trading of Bitcoins.

The transaction of conversion of Bitcoin to rupee is done on INR basis but the release says that the INR can be converted into foreign currency later. Does it mean that Unocoin also works as an “Authorized Dealer” in foreign exchange? or has roped in willing Authorized Dealers to provide the conversion of INR to foreign exchange and ViceVersa?.. More clarity is required on this aspect.

The point on which the ATM company is arguing the legality of the ATM is that the transactions are allowed only for the customers of the Unocoin and the registration is through a mobile number and an OTP. The members are expected to provide the PAN number, address and phone number. The verification would however be on the mobile and perhaps it would not be possible for Uncoin to find out if the PAN number is actually correct and whether the address and name as registered for PAN would identify with the mobile used for OTP. More clarity is required on this.

In totality, it appears that this ATM is a means of converting unaccounted cash in INR  into bitcoins and then the Bitcoins can be traded on other exchanges (including those who have fled from India to safer havens recently) to convert the Bitcoins to US dollars or other currencies and again brought back to India as INR in legit inward remittances.

Similarly, Foreign money of criminals and others can be converted into Bitcoins in foreign exchanges into bitcoins and then traded in this ATM using fake SIM card based authentication and fake accounts into INR and paid out in cash.

This ATM is therefore a Virtual Havala Center and regulatory authorities need to explain how they are allowing this to happen. How can there be a Service Tax registration for such an operation which indirectly creates a perception of  legitimacy.

The Service tax department becomes an accomplice in this Havala transaction by being a co-beneficiary of the transaction and we need the department to explain this.

The Bangalore Police also has to explain under what provisions they have ignored the potential of this service to be a havala operation and why they have allowed this ATM to be set up.

The owners of the Kemp Fort Mall have to also explain why they should not be considered as an accomplice in this potential havala operation.

I hope these agencies make a public clarification on the grounds under which this ATM has been allowed to operate or be prepared to be considered as facilitating  the operations.

Naavi

Reference Articles in Naavi.org on Bitcoin

About a month back we wrote an article titled “Corporation Bank Net Banking System Goes for a toss?”.

Today I had visited the local Corporation Bank to resolve one of the issues that I was facing in the migration of my account from the earlier system to the new system. But the problem could not be resolved at the branch level and has been escalated to higher levels.

In the meantime, I also received a communication from one of the readers which reads as follows:

“I have two accounts in Corporation Bank ..one a SB account and also a current account , both of which I am not able to operate since 5 September , 2018 . I have been in touch with all the Senior Officers of the bank through mails ( including Chairman’s office , GM , IT and Omundsman .) Nothing has happened so far . And so I feel that the problem is much more serious than what we are all imagining …..The more serious thing is that they don’t even formally send response to your complaint . That again makes me feel that they are in a deeper pit ….. I was wondering if there a possibility of a class suit against them for deficiency of service ..”

My experience is similar and I had recently sent an e-mail to the head office as follows:

“For quite some time, I have been pointing out that your Internet Banking system for Corporate customers was not working properly. It was never fixed.

Now I see that you have migrated to some new system. I presume you have adopted Infosys Finacle. But you have created a faulty migration system …. I wonder if any body who knows Banking from the customer’s side were involved in the testing of the process….. ….Your helpline keeps ringing and there is not body attending it it at least at this point of time. They may come perhaps at 10.30 am ? like a branch? ….. I am not sure if you will respond to this e-mail either. Let me give it a try and see if at all you respond, how much time it may take and how you will respond.”

Root Cause of the Problem

But now after some searching over Internet it appears that the situation is a result of a  management decision in the selection and implementation of the CBS system.

Initially, Corporation Bank was working with a CBS which was developed by  Laser Soft Infotech, a Company promoted by Mr Suresh Kamat. After some time this company was taken over by Polaris and perhaps the next versions of the software were developed under Polaris by Mr Suresh Kamat’s team only.

About  2 years back, there was a major migration to another system when again there were problems.  At that time, all accounts were given new numbers and for many days the RTGS/NEFT of customers got affected. Some times remittances were working only under the old number where as the cheques were to be deposited under the new number. The system could not automatically map the old number to the new number.

Now Corporation Bank has further migrated to the Finacle System of Infosys. It appears that there was a huge competition between TCS and Infosys for the contract. Then it appears that HP-Infosys combined team was leading the race. But later it appears that Corporation Bank has settled for implementation with Wipro. Hence the current Finacle implementation appears to be under Wipro’s implementation.

The perception in the public is that Infosys and Wipro are competitors and hence it appears surprising that the product division of Infosys has let bifurcation of the contract so that Wipro could  win the implementation contract separately in competition from other vendors which might have included the Service division of Infosys itself.

In the industry it may be common to separate the product and implementation to two different companies. But when the product is a complicated system such as CBS and the implementation is done by a rival company, there will be conflicts of interest and potential for intended or unintended sabotage to adversely affect the brand reputation of the product supplier.

The problems which is seen in Corporation Bank could be arising because of lack of communication between the product supplier and the implementing company and the soundness of the decision taken by Corporation Bank to split the contract appears to be doubtful.

The impact of this decision is now being faced by the customers who are facing the “Denial of Access” to their accounts. It is possible that tomorrow the same issues will surface in the security aspects of its usage and lead to frauds like what happened in PNB. Then Wipro and Infosys would be trading charges at each other and pointing fingers.

While the management may justify the decision on the basis of cost, it is necessary for IT companies not to treat the customers of Banks as guinea pigs. If Finacle wants to own the brand, it should consider itself responsible for the brand reputation that is hurt by implementation. Perhaps Corporation Bank can clarify its customers what is the managerial control to ensure that the commercial rivalry between Infosys and Wipro does not affect the customer interests  in this implementation exercise.

I wish Reserve Bank of India conducts an enquiry on the problems that are faced by Corporation Bank in its implementation and whether it is due to the lack of cooperation between the two IT giants of India.

Naavi

Related Articles:

Corporation Bank makes progress with Core Banking system (2015)

Infosys, TCS in fray for Corporation Bank’s deal  (2013)

Corporation Bank selects Wipro to transform its Core Banking Solution

Ineffective Control systems helping frauds and irregularities; Corporation Bank Officers

Case Studies of Finacle