Naavi.org

Yesterday, we pointed out that MCX of India Limited which manages the Commodity exchange operations and is therefore a stake holder in Bitcoin being banned or legalized had placed a comment on the MyGov.in discussion board that Bitcoin was proposed to be legalized.

MCX is an insider to the stock market operations and is carrying the permissions from SEBI and RBI to carry on its activity and is considered as a quasi regulator for commodity transactions. It is also listed in BSE and NSE.

Being an insider, it was inappropriate for MCX to release its views on Bitcoin regulation to the public on the forum unlike other private companies and individuals. Also since MCX is a company, any policy decision of this nature should have carried the permission of the Board of Directors in the form of a resolution. Also being a listed company and probably the exchange which woould be entrusted with the management of Bitcoin exchanges in India if Bitcoin is legalized, the information put out on the public platform was an attempt to influence the policy of the Government which could affect its own business prospects. Hence it was a price sensitive information both for the price of MCX on BSE/NSE as well as price of Bitcoins in the unofficial exchanges.

We therefore were constrained to raise an objection and bring it to the notice of the Directors of MCX and also the committee on Bitcoin regulation besides other relevant persons.

Also the Stock exchange had not been informed earlier and hence it was a violation of the listing guidelines of SEBI.

We expected that if the posting was from a person in MCX not authorized by the Board of MCX, suitable corrective action including disciplinary proceedings would be initiated for this breach of a  Corporate Governance aspect.

We are happy to now report that some action seems to have been initiated by MCX as indicated by the removal of the comment from the discussion board as indicated by the following two screen shots captured by Cyber Evidence Archival Center yesterday and today.

As we can observe, the comment of MCX which was between the comments of Amit Kumar Maurya and Shashank Rao is no longer there.

We appreciate the action initiated by MCX and hope it would take further action as may be necessary including issuing a press release expressing regret. BSE/NSE also needs to clarify if it has taken any action in this regard. Further the Bitcoin regulation committee also may clarify and assure that they will not be influenced by the views of MCX and it will take an independent decision in this regard.

It would be a good corporate Governance aspect if the Directors of MCX confirm that they donot have stock of Bitcoins in their possession as of now and they have no conflicting interest in the decision of the committee.

Naavi

Copy of the PDF document removed is available here

Naavi.org has been maintaining that Bitcoins is a menace to the civilized society and India should ban it. We have given our logic through a series of articles in this site.

We have also made a note that many of the opinions expressed at My Gov.in discussion page are from persons who have no idea of what is Bitcoins and how it can damage the Indian economy but were expressing support on the site because they were plants from vested interests.

Today there was a huge surprise in store and it has to be brought to the notice of the public so that public can take their own view about the need for what kind of regulation is required to be considered by the Government of India on Bitcoins.

I would like to re-iterate that Bitcoin is  the “Currency of the Criminals” and under the current legislative scenario in India it cannot be regularized either as a currency nor as a Commodity fit to be traded in a legal exchange regulated by SEBI. Bitcoin recognition in any form or even continuing the current status of “Observation” will promote Black Money and Money Laundering and the act of supporting it is itself a betrayal of the country’s interests.

Not initiating action to stop the current use of Bitcoins as a perceived “Currency” and ignoring the fact that there are exchanges which are buying and selling Bitcoins in India against Cash is a dereliction of duty on the part of regulators and the situation has to be corrected before the matter becomes a scandal in the media and attracts rebuke from the honourable Supreme Court of India.

On perusing the comments posted on the MyGov site, it was found that a comment had been posted by Multi Commodities Exchange of India Limited operating under the regulations of SEBI.

The objects clause of the Memorandum of Association of MCX India Limited states as follows

“To establish, operate, regulate, maintain and manage facilities in Mumbai and elsewhere in India and abroad enabling the members of the Exchange, their authorized agents and constituents and other participants to transact, clear and settle trades done on the Exchange in different types of contracts in commodities and other instruments and derivatives thereof, in futures markets and to provide accessibility to the markets to various members of the Exchange and their authorized agents and constituents and other participants within and/ or outside India, and to provide, initiate, facilitate and undertake all support services relating thereto as per the Articles of Association, ByeLaws, Rules and Regulations of the Exchange.”

The exchange carries the permissions from RBI and SEBI making it part of the regulatory system at present and its expression of support for legalization of Bitcoins means that the Committee of the Finance Ministry has insider interests in legalizing Bitcoins.

From a prima facie indication the Committee and collection of opinion from the public etc could be a farce and part of a conspiracy in which a decision has already been take to legalize Bitcoin.

The copy of the PDF document enclosed in the opinion is not typed on the letter head of the exchange nor is signed.

It says as follows:

QUOTE:

Multi Commodity Exchange of India Ltd

Comments/Suggestions for the Existing Virtual Currencies Framework

We propose that Bitcoin be accepted as legal financial instrument in India and the regulations be governed under a separate ‘Virtual Currency Act’. The adoption of virtual currency should be encouraged in India since Blockchain technologies are now considered to be the future of electronic financial transactions. A very strong impetus to legalize virtual currency is its potential to drastically reduce corruption, shrink transaction costs and eliminate third party involvement.

To ensure consumer protection, companies who wish to deal with Bitcoin must be subjected to stringent regulation to ensure that the virtual currencies are not being used for criminal purposes. Currently in Japan, a company wishing to use Bitcoins is required to have at least $100,000 in reserve currency, report their activities to the government regularly and undergo routine audits by the National Tax Agency. Meanwhile in Philippines, Bitcoin is largely used for remittances and payments with transaction volumes reaching up to US$6 million per month for certain major players and therefore Bitcoin companies are treated as remittance companies. That means that all requirements for remittance companies such as registration, minimum capital, internal controls, regulatory reports, and compliance with know-your-customer (KYC) and anti-money laundering (AML) policies applies to Bitcoin startups in Philippines.

Although counterfeiting of Bitcoin is not supposedly possible, extra caution should be improvised and special cyber law be drafted under Ministry of Information and Technology to protect against security breaches on the Bitcoin network. The following are some notable breaches in the past:

1. In 2013, about 850,000 Bitcoin valued at over $400 million were stolen by hackers in a service attack against the most popular Bitcoin exchange Mt. Gox, following which they declared bankruptcy.

2. In April 3, 2013, Instawallet, a web-based wallet provider, was hacked, resulting in the theft of over 35,000 Bitcoins.

To promote orderly development of VCs we propose the following measures:

1. Allowing Bitcoin exchanges to operate in India. These companies perform KYC checks and can follow anti-money laundering provisions and suspicious transaction reporting.

2. Encourage Financial Institutions, government bodies and Tech companies to use blockchain technologies.

3. Allow e-commerce companies and to accept Bitcoin as a mode of payment
Finally institution(s) like the Indian Revenue Service , Ministry of Information and Technology and Reserve Bank of India should be allowed to should monitor/ regulate the VCs.

May 31, 2017

UNQUOTE:

The recommendation is clear and advocates that “Bitcoin be accepted as legal financial instrument in India” leaving no doubt to the intentions of making the instrument called Bitcoins be available for all those who want to park their wealth anonymously so that Black Money can proliferate and Criminals can continue to demand ransom in the form of Bitcoins.

At this point of time,I am not aware if this is an official communication from MCX or the logo of MCX has been used by some mole in the organziation.

This needs to be clarified by the organization and its Directors in particular.

The following are the directors of MCX:

I request these august members of the Board to

a) Confirm if they are aware of the official position that MCX has taken and published even before the Committee has met to consider the public opinion

b) Give a disclaimer that as of this date they have never held,  traded or benefitted from Bitcoin trading in the past

c) Confirm whether they individually endorse the opinion that Bitcoin should be legalized in India ignoring the fact that it is the preferred currency of Cyber Criminals and Cyber Financial Terrorists and could be the currency of the future for funding terrorist operations in India?

I request the Finance Minister Mr Arun Jaitely to order an enquiry on how the subordinate regulator working under RBI and SEBI has already taken a stand on legalization of Bitcoins and the entire exercise of collecting public opinion is therefore rendered as a farce.

I request the Prime Minister to take note that the attempt to legalize the Bitcoins is a betrayal of the Fight on Corruption and Black money initiated by him and there is a conspiracy that may be under hatching behind his back.

I will treat this as a public notice to all these directors and wish that they provide their views on this development immediately.

Probably Mr Subramanya Swamy and Arnab Goswami should follow up and ensure that if there is any conspiracy by MCX Exchange of India to influence the decision of the Committee, the illegality of it is brought out into the open.

I will also try to find out the e-mail contacts of these Directors and send them individual notices though it may not be strictly necessary.

P.S: If the posting of the opinion on the MyGov forum was not authorized by the Board, I expect the Board to initiate an enquiry and punish the person responsible. If an honest disclosure is made by these distinguished persons, I express my regrets that I had to bring this incident to the open.

Naavi

Fight against Corruption in India now has a new Slogan… Say NO to Bitcoins ..Every time… Even the first time.

Whatever we say for Bitcoins also applies to all private Crypto Currencies which are outside the purview of the currency regulators of the nation states such as RBI for India.

Why do we say that Bitcoin is connected with “Fight Against Corruption”?. 

Many people may think that “Anything Virtual is Good” and Bitcoin is a Virtual Currency and hence it should be good. They argue that Modi supports Digital India and hence he should support Bitcoins.

Some people think India needs to do what other countries do because we donot understand things as much as others and since countries like Japan have recognized Bitcoins, we need to follow. They forget that India under Modi is a “Global Leader” and not “A follower”.

Bitcoins is not like the Digital Wallets which we in India are familiar. We transfer money from our Bank account to a Mobile Wallet account such as PayTM or Phone Pay or Pay U or Ola Money and other wallets. Money remains in the wallet and can be used for spending on many websites, for phone recharge etc. If your vegetable vendor accepts PayTm, you can use the money in your PayTm wallet for buying vegetables on the street also. This is convenient and despite some Cyber Security risks, the system is well within the control of the RBI which knows how much money is flowing through the country in the form of “Currency”.

In the case of Bitcoins, they are generated by private persons. Generation of new Bitcoins is called “Mining”. It is created through a computer operation for which software can be downloaded freely. But at present, creation of Bitcoins has reached such levels of difficulty that no Individual can individually process the creation of Bitcoins. It is being created (or mined) by “Mining Pools” which is a congregation of computers like a “Botnet” all of which are trying to process a common problem and if they are successful, every new “Block” will create new Bitcoins roughly at the rate of 1 Bitcoin per minute across the globe. The difficulty level will keep on increasing and the reward will keep on coming down.

Most Bitcoins in visibility today are “Bought” in exchanges. Some sell the earlier bought Bitcoins through the same Exchanges. The trading is not regulated and anybody can start a website and become an exchange. The Exchanges operating in India are low level technology platforms which will simply try to identify a seller at a particular price and buyers who are willing to buy at a specific price and try to match the bids and offers. A few will offer a jobber’s spread undertaking to buy and sell simultaneously through a spread which can be around Rs 10000 to 12000 per Bitcoins.

When a new Bitcoin is created, the Bitcoins are given an identity in the form of a “Hash Value” and is credited to a “Bitcoin Wallet” of the person/pool to which it is created. The Bitcoin wallets are also in the form of a”Hash Value” and the central ledger of Bitcoins will not know who is the owner of the Bitcoin wallet. Hence the holding of Bitcoins becomes anonymous.

If the Bitcoin creator (we shall call him the Miner) has opened a Wallet account with a service provider, he would have shared an email address and his identity is linked to whether the E Mail service provider has conducted any KYC (Know Your Customer). Since no e-mail service provider does a KYC, any body can open an email account in any name and the service provider accepts it as declared. The anonymity therefore continues.

There are also Bitcoin wallet software which can be downloaded to a desktop (If required through the anonymous tor browsers) and Bitcoin wallets can be created from one’s own computer. In that case the anonymity is protected. People also create numerous bitcoin wallets and change it for every transactions like criminals changing their mobile SIMs often.

As a result of this process, Bitcoins largely remain anonymous when created and when tranferred from a wallet to wallet.

When a person trades Bitcoins on the Exchange, then he provides some of his identity particulars to the Exchange. Some of the Indian exchanges are collecting the PAN card numbers though they may not be independently verifying the same and calling it as “KYC”. If you are aware that there have been incidents of people picking up PAN cards of railway passengers from the reservation list and using it for buying and selling jewellery, then you know that merely collecting the PAN card or even Aadhar Card numbers without verification cannot be considered as valid KYC.

Anyway we can expect that some information about the identity of the buyers and sellers in an exchange can be obtained in exchange transactions.

However, when a person buys a bitcoin in the exchange, there is no way to verify if the Bitcoin was originally held by some body who had mined it or he himself had purchased it from another person.

In the case of a Currency note, the currency does shift from hand to hand and some times it goes through criminals and comes out into the hands of honest persons. This process is what we normally refer to as “Money Laundering”.

A Currency is an obligation of the Government that the holder can claim the value mentioned there in from the Government. There was a time when such value could be claimed in the form of Gold because the Government was supposed to have a backing for currency in the form of Gold. Gradually the backing reduced to a small percentage of the total currency issued  and today if all currency holders want the Government to convert their value to Gold it may not be possible. If there is a failure of a Government and people think that the country has no capacity to earn, the currency gets devalued by market forces in terms of its exchange value as compared to other foreign currencies. It happens to INR and also to USD or Euro. If the economy of a country is strong the value of the currency remains strong otherwise it becomes weak.

As against Currency there are some instruments which are called “Negotiable Instruments”. (NI) which is backed by a legislation in India called Negotiable Instruments Act (NIA). Currency is not a Negotiable Instrument as it is excluded from NI Act.

In the case of Bitcoins, we say that it is an “Electronic Document” and hence under Section 4 of ITA 2000, it is recognized as much as a paper document. There is an authentication of the Bitcoin by means of a digital signature of the foundation server but the digital certificate is not issued by any Indian licensed Certifying authority.

Hence Bitcoin is like an unauthenticated paper document which makes some statement that” the owner of x bitcoin wallet is the owner of this Bitcoin”. Some people want to ascribe value to this piece of document and others want to accept the value and hence in a limited sense it acquires an ability to be used as a “Currency”.

If for example, Sachin Tendulkar releases an autographed message and says that he will issue only 100 such autographed messages, there would be many who would be willing to buy such an autographed message and also trade it just like currency. Bitcoin is nothing different except the scale at which it is accepted is huge and threatens to destabilize the economy.

Now if we consider that Bitcoin is an “Electronic document with value”, then it can be considered as a “Property” and comes under the provisions of law applicable to transfer of property like an actionable claim or a contractual document.

It is a general principle of law that except Negotiable Instruments, all other properties when they are transferred from one person to another, the transfer is always subject to the defects of the title of the transferor. In other words if the transferor had a defective title the transferee will also get a defective title even though he is an honest person and has paid value to get the property transferred to his name. Hence any buyer of Bitcoin will get only a defective title to the Bitcoin he purchases if it has once gone through the hands of a criminal. Hence all holders of Bitcoins become part of a Money Laundering Chain unless we are sure that we are buying from a known miner or where the chain from the miner to the buyer is all clean.

Since Bitcoin does not have the Government backing any way, RBI thinks that this is not a currency and hence hesitates to step into regulation.

If Bitcoin is considered a commodity, its trading has to come under SEBI regulations. The problem has been that since Bitcoin does not fit the definition of any physical commodity because it is “Virtual”, nor can it be called a “Derivative” of a physical commodity, SEBI does not know whether it should step in and regulate or stay out.

Like the proverbial Hiranya Kashipu who sought a boon that he should not be killed either inside the house or outside, neither in the morning or evening, neither by a human or an animal, Bitcoin is escaping regulation from both RBI and SEBI.

We need to therefore find a Narasimha to take an avatar and kill this demon.

If we donot Kill Bitcoin, then this anonymous currency will be accepted for transactions in the physical world and people will stop using Rupee currency notes and use Bitcoins. RBI will have no count of the transactions and Income Tax will not be able to track the flow of money. As a result people who want to keep their wealth in the form of Black money will be able to convert their current holding of Black currency in the form of Indian currency notes or foreign currency in the form of undisclosed foreign bank accounts into Bitcoins.

Bitcoins will therefore be a boon for Black money holders. Even Havala operators would find it convenient to transfer money from one place to other since they can receive INR in India for transfer buy Bitcoins from the exchanges against cash, then transfer the Bitcoin to the designated foreign country. Transferors of money also can directly purchase Bitcoins and transfer it to the addressee as a Bitcoin and let the addressee convert it into cash.

It is stated that ICICI Bank is transferring money from Gulf to India by accepting Bitcoins in the Gulf. This is an unconfirmed information and I want the Chair person of ICICI Bank to deny if this is untrue.

If therefore, Government of India under some kind of trance legalizes Bitcoins then all the black money in India will get converted into Bitcoins.

In future all bribe receivers will demand that payment has to be made in the form of Bitcoins just like how the Ransomware’s like WannaCry is demanding payment of ransomware in Bitcoins.

I therefore consider that the demand for legalization of Bitcoins is lead by that section of society which wants to ensure that there should be an easy channel for trafficking in corrupt money.

The Committee of the Finance Department which is looking into Bitcoin regulation will therefore have to decide if their decision will be “Pro Corruption” or “Anti Corruption”.

I feel that there is no alternative for the committee but to ban Bitcoin and all private Crypto Currencies, whether or not they accept our other suggestion of introducing India’s own Government regulated Crypto currency.

So our slogan is “Say No to Bitcoins…Every time… even  the First time”…

This message is for all the members of the public an especially those who think it is a great investment opportunity and currency of the future etc.

I request readers to copy the following banner image and put it up on their own blogs and join the campaign….

Naavi

The period for which the Government of India sought public opinion on Bitcoin regulation is coming to an end tomorrow May 31, 2017.

What will happen next? is the question on the minds of most of the observers who are following the developments.

On the MyGov.in site where the opinion is being collected, there are more than 3200 comments at this point of time.  The Bitcoin industry took this as an opportunity to flood the forum with comments from their supporters and since one of the main stake holders was an advertising firm more than a “FinTech Firm”, it was not difficult to gain a numeric majority for the Bitcoin supporters on the forum.

Now it is for the Government Committee of unknown members to take a decision on

a) Whether Bitcoins (and other Crypto Currencies which the committee calls as virtual currencies) should be banned, or regulated or observed?

b) If it has to be regulated, how should it be regulated?

We must appreciate that the Government actually sought public opinion. However, most people were unaware of it until, the Bitcoin community itself came up with what could have been a planted report in Business Standard that Government is unlikely to ban Bitcoins.  It is intriguing to note why the article was published. Probably,  it was to create a support base for the decision in that direction which the Committee was expected to take. But at the same time, it has also alerted those who consider that Bitcoin is the “Currency of Criminals” and particularly as “Currency of Terrorists”.

Can anybody deny that ransomware attacks normally demand payment in the form of Bitcoins?.. and after the recent WannaCry attack, the exchange rate of Bitcoins spiked?..indicating the direct relationship between Cyber Crime and Bitcoin.

Mr Modi took a bold decision to demonetize the Rs 500 and Rs 2000 currency notes because there was not only a huge hoarding of Black money in these denominations but also because there was a huge quantity of fake currency in these denominations pumped in from Pakistan.

There is no doubt that even Bankers are  unable to identify fake currency in their midst and many ATMs were dispensing fake currency to the unsuspecting public. I have personally heard from an ex-Banker that his manager was forcing him to dispense identified fake currency in the Bank to the customers across the counter by mixing it up so that he would not have to personally bear the loss. This is one of the reasons that the total demonetized currencies returned to the system exceeded the RBI’s original estimates and it stopped giving information on the amount of demonetized currencies that were surrendered.

Now the Government is conducting separate enquiry on more than 60,000 cases of deposits of old currency as to whether they were clean or unaccounted.

At this point of time, Bitcoin holds itself as the better alternative for holding Black money for all those who can surrender their unaccounted money to havala operators or Bitcoin exchanges which accept cash against purchase orders. In fact Bitcoin is also the instrument that havala operators themselves can use to shift currency from one country to another and from one currency to other.

If we go through the My Gov feedback, there are admissions by many that they have been using Bitcoins to send in remittances from foreign countries to India instead of routing it through banking channels. I am also informed (unconfirmed) that ICICI Bank itself provides such transfer from Gulf.

It is therefore no rocket science to imagine that the support of Bitcoins will come strongly from all those who want to keep their money away from the eyes of the regulator.

Many honest persons who are not criminals I refer to when I speak of Bitcoins and some of whom are in my personal friend’s circles, think that a “Decentralized Monetary Control” that Bitcoin represents where no Government can exercise control is actually good for the global economy. They even hold out an argument that if US Dollar dips or INR loses value, Bitcoin can preserve their wealth better than what Gold can do.

When many respondents in the MyGov site say that Bitcoin should be legalized for the betterment of the Digital India and make an appeal to Mr Modi, I am certain that they are really not understanding what Bitcoin is, how is it different from the digital payment systems such as BHIM or UPI and what will be the consequence of Bitcoin usage as a replacement of currency.

For the sake of argument, let us assume that 100% of Indians convert their Bank balances into Bitcoins… What will be the scenario ahead?

Then Banks will have “Zero Balance” with them since all the deposits will get converted into Bitcoins. They will not be able to lend one rupee to any person.

If Banks say they will accept Bitcoin deposits, then all the current Bank deposits will get transferred to an “Inflated Bitcoin” which would cost something like US$ 10000 per BTC. There will be no SLR investments or CRR deposits wtih RBI and RBI itself will go bankrupt since it would not be able to pay its financial debts to foreign countries. 

Government does not know how much of taxable income Indians get because service providers and product sellers receive their payments in Bitcoins and not through the Bank accounts. There will be no GST nor VAT or IT. Government will not have any revenue to run its affairs. All Government servants will not receive their salaries since Government will not have any income. 

The Bitcoin holdings will be fungible against any foreign currency as it can be simply withdrawn as US dollars or Japanese Yen while the initial deposit is in Indian Rupees. There will therefore be no foreign exchange regulation in India and since there will be no demand for INR against Fiat currencies like US dollars or Euros, INR gets devalued into nothing. The foreign debt will  jump and FDI will vanish.

Since no trade gets recorded, the GDP of the country will plummet to near Zero and the World Bank and Credit Rating agencies will dump India from any international financial commitments. 

Pakistan and China will be happy since Modi’s dream of not only 2030 but even 2019 would go for a toss. 

Arvind Kejriwal, Rahul Gandhi, Mamata Bannerjee, Sitaram Yechury Omar Abdulla and all the Hardik Patels and Kishan Kannaiha’s dreams of “Breaking up India” would be easily realized.

We also feel that the ISI and Naxalites would use Bitcoins to fund their terrorist operations and hence Bitcoin would become a currency of convenience to criminals and terrorists of all kinds. India will therefore hurtle towards destruction much before 2019 when Mr Modi will seek re-election. 

Is there any dooms day prediction worse than this for India?

Well I am sure that we all understand that the above scenario is not desirable and hence we cannot allow usage of Bitcoins as an alternate to holding rupees.

The above situation is considered hypothetical only because not all the 100% of currency users would convert their holdings into Bitcoins. Your neighborhood vegetable vendor will say he wants cash.

But the direction in which the economy will move is clear. It will be towards less cash and less INR usage. But we cannot debate if 10% of the above doomsday implications is tolerable or some thing lesser.

Bitcoin problem is like drugs.

Say No to Bitcoins every time…..even the First Time

There are many who oppose the “Say No To Drugs” campaign, and there will also be many who will oppose the Say Not o Bitcoins campaign also. There are many who say that the “Say No to Drugs campaign did not succeed” . They are saying that  “Bitcoins cannot be banned” because it has already been embraced by many foreign Governments and many Indians. hence, they will say tht “Say No to Bitcoins” campaign will also fail.

We should remember that when we try to ban Bitcoin there will be a shift of present Bitcoin holdings into other 700 odd alternate Bit coin lookalikes which are “Privately Created and Controlled Crypto Coins by various names including a few already being touted as an Indian version many of whose supporters can be identified ont he MyGov platform.

But let us remember that Modi’s India is not the same as any other India we know. If Mr Modi cannot be fooled by the Committee of the Finance Ministry into believing that Bitcoin is either good to be retained or we need to defer a decision for another few years, then I think the days of Bitcoins will be numbered.

No strategy works better in eliminating one vice than replacing it with an alternative that is preferably not harmful. Like, giving up smoking can be achieved by a Nicotine Chewing Gum, Bitcoin Ban can be effectively achieved if we divert the current interests in Bitcoins to a “Crypto Currency” which is fully under the control of RBI which is having a legal mandate to manage the currency system in India.

I am therefore suggesting an immediate Ban of all Private Crypto coins by the Government clarifying in no uncertain terms that

“Holding, Buying, Selling  of any form of Crypto Coins other than what may be specifically approved by RBI, by any person whether or not he is a Citizen or Resident of India shall be considered illegal and punishable with imprisonment”

“If any person of Indian nationality or origin acquires any Crypto Coin through a process of Mining, he shall declare the holding immediately (not later than 3 days) to a designated authority and surrender the same against INR at the then prevailing exchange rate.

“If any person possesses any Crypto Coin as of the date of this notification, he shall immediately (not later than 3 days)  declare it to the designated authority and surrender the same against INR at the prevailing Exchange rate along with a declaration as to the source of funds from which the Crypto Currency was acquired”.

“Where the person who surrenders the Crypto Currency may not be able to satisfy the authorities as the source of income form which they were acquired, Government will impose a tax penalty of not less than 25% with a further penalty of 10% for every month of delayed declaration”.

” All Exchanges operating in India who are providing services for buying and selling of any Crypto Currencies shall seize their operations forthwith and also send a complete list of transactions put through their exchange for the last 3 years in the relevant format to the designated authority.”

RBI may also add 

“The designated authority proposes to start a Crypto Currency under its own control for which the details will be announced in due course”

(The designated authority for the time being could be the RBI)

As the next phase of activity, RBI may consider introducing a Crypto Currency which is under complete control of RBI where by from the generation of the Coin a tag will be placed on the coin and all transactions of the coin would be monitored .

The Mining of this coin (say Bit Rupee) can be done by pools started by and marketed by licensed Authorized Banks and the members would be  registered Indian Citizens who will get paid a suitable reward and the mined coins would be the property of the Government.

This may not be a speculative currency like Bitcoin but would be a replacement of the currency printed by RBI.

It is also possible for RBI to consider a complete replica of Bitcoin where the miner will keep the mined coin to himself while he may pay a royalty to RBI. This will provide the transaction tagging but the economic impact of allowing a currency outside the legacy system has to be acceptable and therefore this may need further evaluation.

The above announcement will itself indicate the Regulations applicable for Bitcoins and other Virtual Coins as envisaged by the Committee.

It will also pave the way for further regulations which may be confirmed through the amendments proposed in the Payment and Settlement Act 2007 as recommended by the Watal Committee report.

If the Committee decides to continue “Observing” it will continue the uncertainty and it will only benefit speculative investments in which new investors may lose lot of money.

Also any decision not to ban  Bitcoin and Private Crypto Currencies now, would mean that the Committee has ignored the points raised in this article, a copy of which is also being  sent to the relevant authorities and would be followed up through RTI enquiries in the future as to on what basis the decision was taken.

Naavi

Naavi.org has a history of raising issues that are necessary to create a “Responsible Cyber Society”. Towards this end we have been critical on many aspects of Law and Governance of Cyber Society, but always tried to provide a positive suggestion of how things have to change. It is not our claim that our suggestion is always the only best solution but it is always one school of thought to be considered. Even if this is not accepted, the  debate generated by it should bring in some benefit to the society.

It is with the same spirit that I would like to supplement my criticism of Bitcoins with a suggestion that we should be able to find a solution to the Crypto Currency Conundrum.

Before I start, I would like to point out to those die hard Crypto Currency supporters who must be wondering who on earth is this person who is opposing what several Governments like Japan have already approved and 10 million people in perhaps 90-100  countries are using. If they have the patience to research through the website naavi.org, they will find that I was also a supporter of Bitcoin as a concept and technology some time back and advocated “Self Regulation”. I even tried to push RBI into abandoning its “observation stance” which creates uncertainty. I even opposed the raids conducted by ED some time back on Bitcoin exchanges in India.

All this time however, we have been saying that Bitcoin as an “Electronic Document” is already legal in India but should not be promoted as a “Currency”. But the Bitcoin community considers that being perceived as a “Currency” is the USP of Bitcoin and it is unthinkable that the positioning of Bitcoin as a “Currency” can be diluted. Similarly, “Anonymity” is considered an inseparable attribute of Bitcoin and is non negotiable, while Naavi is the champion for the concept of “Regulated Anonymity”. This was the concept of 2012 and when Bitcoins were being promoted in India after 2013, I continued to maintain the need for some kind of regulation on Bitcoins to make it’s anonymity attribute changed into a “Regulated Anonymity” attribute.

However the Bitcoin community was too intoxicated with its success in other countries and did not have an open mind to come out of its fix on “Anonymity”. As a result, the Bitcoin today has come under the firm grip of Criminals whose main support to Bitcoin is that they can remain anonymous, launch ransomware attacks and collect money from honest citizens and grow rich. Even honest persons have tasted the success of holding black wealth in the form of Bitcoins and have come to experience a sense of tax freedom from which they are finding it difficult to come out. Even now, I am sure that many technology savvy persons are willing to take a risk with Bitcoins. I only want people who misunderstand the nature of Bitcons and support its legalization to be warned.

I am reminded of a funny incident some time around 2002 or so when Police in Chennai approached me with a complaint which they could not decipher. The complaint was from a doctor and stated that he had purchased 5 Sites at the instance of a particular company. Some time back whenever he checked in his computer, it was showing him as an owner of the site. But suddenly, now the site is no longer there. He presumed that his “Sites” were stolen.

Technology persons may have a good laugh that the doctor was actually talking of a website which he had purchased with the hope that it would appreciate in value over time like the physical sites but did not know that it needs to be renewed from time to time without which it would vanish into thin air.

I feel that amongst many persons who are supporting Bitcoins on the My Gov website, there are such people who think that Bitcoin is like any other mobile wallet and it should be part of Mr Modi’s vision to legalize it. Perhaps they think that I am opposing the Modi’s vision of Digital India.

Let me remind them that “Bitcoin is Anti Modi”as it is a perfect instrument for various political parties  to park their black money if they posses.  I would be surprised if they are not doing it already. Bitcoin as it exists today is a boon for Black Money owners and far, far better than holding Swiss Bank accounts. Any intelligent Black money owner should be already aware of this and I am not revealing any state secret.

I donot want this to be taken as a promotion of Bitcoins but a warning to the Government. I want to say that the Government now has no option but to curb the spread of this Black Money tool if they are serious about preserving the integrity of the Indian financial system. If they continue to keep “Observing”, they will see a deterioration of the system to a level when we will soon reach a point of no return.

However, I am more worried about the possibility of Bitcoins being used by ISI to fund the Kashmir unrest operations and the Maoists to use it to fund their operations to buy advanced weapons from the international markets. The drug mafia in India may also use it effectively besides the Cyber Criminals. That is the reason that I consider banning of Bitcoins as a National Security requirement. Let Japan go ahead and legalize it since they donot have the ISI terror threat. Our requirement is different.

I am confident that there are several RBI executives who agree with the hard stand that I am suggesting but will be facing tough arguments from others particularly those who can be influenced by the Bitcoin community.

Even Bankers like ICICI Bank and HDFC Bank who are “Partners” to Bitcoin business cannot be trusted to provide sincere advice to the Government since they have a vested interest. In fact ICICI Bank is experimenting using Block Chain technology for authenticating some Banking transactions which I doubt very much to be a proper application of the technology.

I understand that the Government Committee on Bitcoin regulation consists of a sole representative from SBI who along with RBI represents the Banking perspective. All other members are from different parts of the Government some of whom are from the MeitY. I sincerely hope that they will not be enamoured by the “Technical Beauty” of the Bitcoin concept and take decisions which will be against the security interests of the Country.

Having said that

-the only option before the Committee is to “Ban” the holding of and transacting in Bitcoins by any Indian from now on and

-that any new mined Bitcoin should be reported to a designated authority  and exchanged within say 24-48 hours of the miner coming to know of his success, and

-such a ban should extend to all other “Privately Created Crypto Coins” which does not have the sovereign backing of a Government for immediate exchange into a legacy currency”,

I now advocate to suggest creation of an “Indian Law Compliant Crypto Currency”.

I have already received a response from one of my Virtual Friends that he has developed an algorithm for creation of a Crypto Coin that can be introduced in India to the full satisfaction of the regulatory authorities. He is a technology person who has developed his own crypto coin system and has been trying to convince the authorities that it can work in India. He has identified the following features avaialble in the  Comparative chart sent by him. ( available here.)

His proposed “India Coin” concept is similar to what I called “Bit Rupee” and is configured as a trackable and identifiable system. This system along with a Cyber Law Compliant Exchange can be constructed either for RBI or under license by RBI into a system which is as efficient (except in terms of anonymity) as Bitcoins and could be a global leader of a new strain of Crypto coins which will have the sovereign backing of the respective Governments. Let this “Bit Rupee” or “India Coin” compete with privately created anonymous Crypto coins in a free market. Then it will be the free choice of individuals who like the Bitcoin technology but want to be law abiding.

I openly invite RBI to accept this system for a pilot project and simultaneously invite the Start Up funding enthusiasts to come forward to make this dream of an Indian Crypto Currency that can create a new global system of “Law Compliant Crypto Coins” a reality. I already have some thoughts on how such a regulatory system may function which can be discussed with the team of regulators and the technology providers jointly. Probably a pilot proof of concept can be created if a go ahead is given by the regulators.

This will be a fitting response from a “Modi Vision” of a “New India” which aspires to be a global leader in new technological concepts and absorbs the old values with new innovative thoughts.

If Mr Modi is listening, I wish that he incorporates this thought in his next Mann Ki Baat….

Naavi

P.S: Disclosure as requested by one reader querying about whether I have a financial stake in India Coin:

I have called the person advocating Indian Coin as a “Virtual Friend” because he has been corresponding with me on e-mail for a couple of years since I started writing about Bitcoins.

So far I have not had the privilege of meeting him in the physical society.

At this point of time, I donot have any financial interest in Indiacoin. My own proposition is a theoretical thought and if it is similar to that of Indiacoin, it is a coincidence. I may have some extension ideas on the technological concept which makes my suggestion more robust. (At least as much as my intelligence perceives).

I am not however a technologist and cannot create my own algorithm. So, if there is a technologist who is interested in associating with me and developing what I consider as a challenge to Bitcoin, provided the regulators of India are also part of the project, things may change.

My vision is that through an “Indian Government promoted Crypto Coin”, we should help all law abiding crypto currency supporters across the world to come together to meet the currency requirements of the “New India” and the “New World”. I would like India to emerge as a global leader in this Crypto Currency global network.

Yes, such a proposition will attract attacks from the competition and this is the challenge to the technology people who need to manage the proposed system and its security.

So far it has been the private sector which is disrupting the established world through various innovations in technology.

I now want the Government sector to disrupt the established private world of Bitcoins and other Privately created crypto currencies.

I hope to see a battle of the Good Cryptocoins Vs Bad Cryptocoins and see who will win eventually.

Naavi

Ever since the news was out that Government of India had formed a “Committee” to take a policy decision on whether Bitcoin and other Crypto Currencies are to be “banned”? or “Regulated”? or “Observed?” there has been a flurry of activity in the MyGov discussion site where a number of people are trying to support legalization of Bitcoin. Some are saying that it is required to support the “Digital India Program” of Mr Modi.

Before we go further, we need to raise some doubts about how people are expressing their opinion on the forum.  It is unclear whether they are fully aware of the technical, legal and economic implications of deciding about Bitcoins one way or other? Or Or they just trying to run a social media campaign as “Social Media Marketing” Companies operate?.

There was a basic flaw in the way the Government has floated the enquiry which was just to float a discussion in the online forum.

I want the Government  to provide a clarification on the following points.

1. The MyGov discussion page does not show the composition of the Committee. It is necessary to provide the names of the members of the committee so that people will undertand how it represents the stakeholders and public interests.
2. It is also ideal if every member gives a declaration that either they or their close relatives donot posses any Crypto coin themselves?.
3. Also it would have been better if a notice had been given through  news papers so that all person who have a stake in Black Money and Corruption elimination could have responded even if they are not active on the MyGov.

Let us now forget these and proceed with the presumption that the Committee consists of honest and reliable members.

Then the following questions arise.

5.  It was incorrect to combine “Virtual Currency” and “Bitcoin” in one breath in the introduction.  This will confuse a lot of people who donot know the difference between a “Privately Constructed Crypto Currency like Bitcoin” and the “Virtual Currency in the form of balances in a PayTM wallet”. Many of the responses in the MyGov site indicates that people are equating the need to legalize Bitcoins as part of Modi’s Digital India agenda. This confusion is directly attributable to the confusion in the use of terminology.

This public opinion gathering without explaining the problems of a “Privately Created Crypto Coin” is therefore not going to be of use and will not provide the committee with any reliable feedback.

In a complicated decision involving complex technology, interpretation of law and the economic impact, even experts will find it difficult to form an opinion and hence calling for an opinion on the social media is not the correct form of getting the feedback. It can lead o wrong conclusions.

(We hope this is not done deliberately as a show of the formality of getting public opinion.)

6. Government of India on the other hand should have conducted roundtables in different cities inviting relevant experts to discuss the Technical, Legal and Economic impact of legalizing “Privately Created Crypto Coins”.

7. The opinion is sought on “Banning”, “Regulation” and “Continued Observation”. This again introduces confusion. “Continued Observation” is meaning less as it indicates “No Decision”. RBI has been on observation mode for atleast 3 years now and if it has not yet formed an opinion, then it never will in the next few months or years. The choice is therefore between “Not banning Now” and introducing some form of “Licensing or Regulation” and “Banning Now”.

8. “Regulation” automatically means “Declaring that Bitcoins are Legitimate, it can be held by an Indian Citizens and it can be traded” etc.  Once Bitcoin is recognized, “All Privately created Bitcoins” will become automatically legalized.

9. The only form of regulation would be, “Licensing  of Exchanges”, “Taxing of Profits” etc.

I have a serious doubt if RBI currently has any powers to legalize “Bitcoins” in the way it is perceived as a “Currency”. If we look at Bitcoin as an “Electronic Document”, there is no need for any kind of “recognition”. It is an “Electronic Document” which some have assigned value and trading. Though it is not a “Physical Commodity”, it is a “Virtual Commodity”.  Since no body promises to pay consideration, Bitcoin document is not a security nor even a derivative. If a “Virtual Commodity” has to be traded in the market, then it has to be under the guidelines of SEBI.

However, if Bitcoin is treated as a currency which is the perception in the market place, then RBI needs to declare if it is the “Currency of the Cyber Nation” which is “neither India, nor America nor Russia etc etc…”. Without recognizing the existence of a “Cyber Nation” which has no sovereign Government nor an international supervising body like UNO, RBI cannot declare recognition for the currency which does not belong to any recognized Country.

Just as the Caliphate of ISIS, the”Bitcoin Nation” will remain independent of all known sovereign regulations and promote a “Law Less Financial Society”.

When we integrate this “Lawless Financial Society” with  the “Law abiding Financial Society”, we will create a financial chaos in the system.

The biggest beneficiary of such an integration which would mean that Bitcoins can be used to buy goods in the physical society, convert into Rupees or other legacy currency etc is the Criminals and Black Money holders.

All the good work that Mr Modi had done by demonetizing high value currency at a great inconvenience to part of the law abiding society would be wiped out if the Committee suggests “Regulation” and not “Banning” of Bitcoins and all “Privately Created Crypto Coins”.

Some Bitcoin exchanges operating in India are misleading the public that by obtaining the PAN numbers of the members, they are creating a system where Bitcoin trading is within regulation and should be allowed.

When the commodity “Bitcoin” is exchanged into Rupees or other legacy currencies, the owner of the Bitcoins will get his wealth converted into wealth recognized by the physical world. The Bitcoin itself is being used predominantly as the “Currency of Criminals” and hence when such Bitcoins are converted into legacy currency, it becomes “Money Laundering”. Physical world laws recognize “Negotiable Instruments” which are the only types of financial instruments which can create a “Holder in Due Course” who gets a title free from the defects of the title of the transferor in certain circumstances. Since “Bitcoin” is not a “Negotiable Instrument”, once a Bitcoin passes through a criminal transaction such as a ransomware or drug traffiicking etc it remains tainted for ever even after it changes hands or split up.

Does the Exchange guarantee that all sellers are genuine miners or those who have acquired their Bitcoins without any taint on them?… It is impossible for them to guarantee though theoretically every Bitcoin can be traced to a block chain and the transactions that identify Bitcoin wallets. As long as these Bitcoin wallets remain anonymous, there is no way that the Exchange can provide a guarantee that the commodity that they are selling is free from defects. Hence the buyer is always at the risk of receiving a tainted Bitcoin which he may have to return to a legitimate holder.

I draw the attention of the viewers to Buybitcoinworldwide.com/india which lists about 12 Bitcoin exchanges in India where you can buy and sell Bitcoins.

One of the exchanges listed is “Purse.io” which says

” With Purse.io, you purchase bitcoin with a credit or debit card but indirectly; Purse.io connects you with a buyer who wants to make a purchase on Amazon. You use your credit/debit card to order items from the buyer’s Amazon wish list. When the items have been delivered to the buyer, you’re given some bitcoin equivalent to the value of the items you ordered for the buyer. Purse.io is available in the United States, Canada, Japan, Brazil, France, Italy, Spain, China, and India”

Purse.io is linked to Amazon and permits purchase of goods on Amazon using Bitcoins. It encourages buyers of goods to place orders against Bitcoins. It simultaneously identifies sellers of goods who may accept Bitcoins and acts as an agent to complete the transaction.

It is not clear what is the involvement of Amazon in this “Money Laundering Exercise”.

There is another Exchange called VirWoX which claims

“Technically, VirWoX isn’t even a Bitcoin exchange. It mainly serves as a way for people to buy Second Life Lindens, a currency used in the virtual world Second Life. You can’t buy Bitcoin with PayPal directly at VirWoX, but it’s possible to first buy Second Life Lindens (SLL) and then trade your SLL for Bitcoin. This process works perfectly, but in the end will cost you about 10% in fees.

This workaround/hack has made VirWoX the easiest and most popular way to buy bitcoins with PayPal.”

This is another “Money Laundering Exercise” which involves Secondlife.com and Paypal.

We need to also look into Localbitcoins.com which offers buying and selling  of Bitcoins agaisnt Cash.

At this point of time 27th may 2017, 11.59 AM, several Cash buying and selling options for Bitcoins are listed  listed on the site as shown  in this document. Refer here:

I want RBI and SEBI to let me know if these transactions are legal in India and if not why they are not taking action.

I want BJP to recognize that many of these transactions could be from political parties having black money defeating the purpose of demonetization.

If these transactions are not legal, is it not proper for us to say that there is a serious dereliction of duty on the part of RBI and SEBI?

Zebpay claims itself to be a leading Bitcoin Exchange in India and prominently displays reports from Nishit Desai Associates and Center for Internet Society. It is not clear in what context these reports were given and whether it was permitted to be used for promotion by ZebPay. It also prominently displays support of ICICI Bank and HDFC Banks as their Banking partners. When things go wrong, all these partners of illegal business become answerable to law.

The general argument of many is that “Bitcoin” is a technology innovation and it needs to be supported for this purpose. Law is presently not clear so that we should interpret it favourably and RBI should support the technology innovation.

While we are all for “Innovation”, innovation for the purpose of creating a “Black Money World” is not acceptable. Some legal luminaries who are supporting Bitcoin today should also reflect why Napster was not allowed to continue with its business. Was it not an “innovation”?, “Was it not something 20 million users had endorsed”?. If respect for Copyright law struck down Napster, the same concern should strike down Bitcoins.

Bitcoin is a rogue concept in economy and has to be killed at the earliest. The same goes for all privately created Crypto Currencies.

My support is however for Government backed Crypto currency such as “Bit Rupee”. This could use Cryptocurrency technology with full control of RBI and SEBI for mining, transfer, trading and conversion into or from Cash or any other currency crypto or otherwise. What kind of regulation is required for this purpose can be determined once the idea is accepted.

Further,  I want people not to treat Crypto Currencies on par with the term “Virtual Currency” which is the virtual form of legacy currency. Digital India needs Virtual Currencies but not Cryptocurrencies.

Modi’s vision of Digital India is not related to legalizing Bitcoins and we should not use that excuse.

Public should know that when Banks are given license to accept Public Deposits, RBI expects them to maintain certain levels of financial discipline and ensure maintenance of Cash and Liquidity ratios, maintenance of Non performing Loans below certain levels and so on. Even the Payment Banks and Mobile Wallet companies are required to have certain minimum networth and Management team before they are permitted to take any money from public.

On the other hand, Bitcoin exchanges today function with a paid up capital of Rs 1 lakh, with a management team which has no financial or economic experience and credentials nothing more than being software start ups.

When public are opening Bitcoin wallets they have a choice of opening their wallets with these technological upstarts in India with an Indian postal address and hope that if some thing goes wrong, you can hold them responsible. But a company with a paid up capital of Rs 1 lakh may not be able to take liability of even 1 bitcoin today.

How can anybody trust these companies with their Bitcoin wallets?. What if they simply transfer the bitcoin holdings to themselves and claim “I was hacked”? What if real cyber criminals hack into these bitcoin wallets and rob your money? What if some terrorists kidnap the Wallet company executive and use his admin password to clean up your Bitcoin holdings?

If you open your Bitcoin wallets with some foreign agencies then it may be difficult even to launch a case against them if your account is lost.

At a time “Hacking” of even big Banks with robust security is common, will these technology start ups who may not much more than creating a Mobile App be able to have security measures that will firewall global hackers?

These are some thoughts that investors should consider before thinking of supporting Bitcoin legalization.

If the investors are not intelligent enough to understand these risks and think of investing with a greed to make profits, then when they lose money they will all flock in front of RBI gates and ask RBI ..”What was RBI’s responsibility in simply being an observer and allowing the public to be looted? . Questions will also be asked about SEBI, the Finance Minister of the day and of course the Prime Minister.

Today none of the regulators can say that the risks were not pointed out to them because I have personally ensured that these risks are brought to the attention of all relevant persons. It is of course their prerogative to ignore and let the innocent public suffer.

I am looking forward to persons like Mr Rajeev Chandrashekar (MP) who can understand both the technology and the risk to take up this issue with the Finance Cum Defense Minister and the PM so that India bans Bitcoin and all Privately created Crypto currencies forthwith and declare any possession of undeclared assets of this nature as a punishable offence. At the same time, mined crypto coins must be converted to legacy currencies and declared. Any other legitimate holdings can be allowed to be converted into legacy currency under a special amnesty scheme which may run for about one week within which all current holders who want to declare their holdings and escape further action should be given an opportunity.

Subsequently, India should take steps to convince the international community also to take similar steps to that the “Currency of the Criminals” namely the Bitcoin and the ilk must be eliminated from the face of earth.

I also want the honourable Supreme Court of India to take note of the dangers of Bitcoins and privately created Crypto coins to the Indian economy and ensure that Government is not swayed from its principles of cleaning up corruption in India by eliminating all tools of Black wealth accumulation.

The Highest authority which can really act in this instance is only Mr Narendra Damaodar Das Modi and I therefore directly appeal to him to ensure that a right decision is taken in this regard.

Naavi