Naavi.org

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

The Committee of Finance Ministry has called for public opinion on whether Bitcoins (and other Virtual Currencies) should be banned or regulated or observed and thereafter the committee may come a decision at its own convenience.

If we observe the pages of Mygov.in where the discussion has been opened, there is a concerted effort by the Bitcoin supporters to post comments that Bitcoin should be legalized.  Of course, if any person has already got a stake either because he has bought a Bitcoin already or would like to buy it and convert some of his black money into anonymous Bitcoins, he has to support Bitcoin legalization.

In the meantime the Bitcoin price is skyrocketing in the last few days which could indicate one of the two reasons namely,

1. There is more and more ransomware attacks demanding bitcoins and the victims are scrambling to buy bitcoins and the increased demand is pushing the price up.
2. The Bitcoin community has already convinced the committee that the Government may continue to “Observe” which is an euphemism that we will turn a blind eye to the blatant violation of law in India regarding investment.

The Bitcoin exchanges which are functioning in India are promoting the buying of Bitcoins. Some of them are trying to collect PAN card photocopies and calling it as “KYC. Some are allowing trading only through Bank accounts and some through credit card borrowings. However many are encouraging trading of Bitcoins in cash,  and even by converting legacy currency to Bitcoins and vice versa through Lindens. (virtual currency of secondlife.com).

Though legally we say that Bitcoin is an electronic document, a commodity and not a “Currency” and hence it is not illegal to mine, etc. it is being perceived like a “Foreign Exchange” and an “Investment”.

In India, such investments should come under the watch of either RBI or SEBI. It is unfortunate that both are dilly dallying on how to tackle Bitcoin regulation. While RBI has been “Observing” for the last 3 years SEBI appears completely at a loss on deciding how to respond. In fact it is easy to consider Bitcoin trading as similar to commodity trading and determine that it should automatically come under SEBI regulations. This is obvious and does not need the Government committee to decide. As long as the price is spiralling up, it looks like a great investment but if Bitcoin price heads down, then there will be lot of investors who will burn their hands. Then the Ponzi nature of the scheme would get displayed.

Will SEBI take responsibility for dereliction of duty if the speculative investment of Bitcoins continue?

While RBI should be concerned with the Foreign Exchange use in buying and selling of Bitcoins through the exchanges, and to regulate the Bitcoin wallets,  SEBI should consider it as its birth right to regulate trading in Bitcoins and there is no need to wait for any Government committee to make up its mind.

Additionally, if one goes through the schemes of investment suggested by some Bitcoin exchanges, it is like a lesson in money laundering. How can RBI, the Finance Ministry and SEBI keep quiet is a mystery.

I have today brought the need for regulation of Bitcoin trading to SEBI and the Finance Ministry and wait for their response.

I have also tried to draw the attention of the PMO and FM so that nothing should be done behind their backs to legitimize the “Currency of the Criminals” which Bitcoin has unfortunately become.

I have many friends in the technology domain who are staunch supporters of Bitcoins and also hold stock of Bitcoins. By no stretch of imagination they are into money laundering but have invested in Bitcoins because it is a technological fascination and ofcourse profitable as investment. It is to ensure that such people donot lose their genuine hard earned money that I have proposed that Government while banning Bitcoin should give a window for conversion of genuine investments out of tax paid income back to legacy currency under an amnesty scheme for a limited period.

Some of them are of the view that there is no way Bitcoin can be banned. I agree that even if Bitcoin is legally banned and the Government criminalizes holdings after the amnesty scheme expires, there will be many who will continue to hold it just like we still have stocks of demonetized currency with some.

This does not mean that we should stop from banning Bitcoin use, exchange, and stocking by any Indian national or in India.

ICICI Bank and HDFC Bank which are bankers to some of the Bitcoin exchanges need to rethink if they have to support this illegal system.

I also request the legal firm Nishit Desai and the NGO , The Center of Internet Society not to allow their names being used prominently in the promotion of Bitcoin trading knowing fully well how the legal status of Bitcons and the way it is perceived and promoted are completely different.

If Bitcoin community was itself not supportive of the criminal use of Bitcoins they would have by this time identified and published the identity of ransomware introducers whose bitcoin wallets  IDs were available for analysis.

The community is guilty of looking the other way because there is financial benefit to them and not care about the victims of ransomware. This is corruption of a kind.

Today, Bitcoin no longer remains just a technical innovation of the fascinating Block chain technology. It is also no longer an economic issue of currency in circulation outside the central bank’s control.

It is a national security issue where

-Cyber Financial terrorism called ransom ware needs to be choked to death and

-the terrorists and naxalites should not be allowed to use Bitcoins for funding their operations and

-Blackmoney holders should not be allowed to convert their black money into Bitcoins.

I hope regulators like SEBI and RBI will act atleast now before things go out of hand.

Naavi

This is our response to the Government seeking public comments on Bitcoin regulation:

Query 1: Whether Virtual Currencies (VCs) should be banned, regulated or observed?

Response:

Firstly we would like to say that “Banning” is also “Regulation”. Hence when we say VC should be regulated, it includes the option of “Banning”.

Secondly, by “Virtual Currency” we are speaking of Crypto Currencies and not the money kept in digital form in Mobile wallets, Internet Banking accounts, virtual prepaid cards etc.

Thirdly, “Observing” is meaningless. Government of India has been observing the development of Bitcoin from being a technology wonder to a currency of the criminals. Just as our “Procrastination Policy of Kashmir” has today brought Kashmir to the brink of disaster,  while RBI kept on observing the Bitcoin, the epidemic spread far and wide. Most black currency holders have found it more convenient to transfer their Swiss Bank balances to Bitcoins before the Government could make up its mind. Now the seasoned criminals have started moving out of Bitcoins and acquiring other Crypto currencies and hence it has become necessary to regulate/ban all Crypto currencies to ensure that the adverse impact of Bitcoin on the society is mitigated.

Three years back, we suggested that RBI should start its own version of a Bitcoin. It did not listen. At the same time while countries like China started accumulating Bitcoin wealth, our economists did not understand the impact of lopsided holding of Bitcoins when this decision of whether to legitimize Bitcoin or not came up. They kept observing and observing and I donot know what the Government means that it is also an option to consider.

After seeing that the recent ransom-ware attacks thrived on Bitcoins, there is a distinct possibility of ISI using Bitcoins as an easy option to distribute money in India instead of throwing fake currency bundles across the border in Malda is a definite possibility. We can safely make a guess that all stone pelters in Kashmir will in future get payments in terms of Centi BTCs or Milli BTCs (1 BTC=Rs 150,000/. 1 Centi BTC =Rs 1500/-. 1 Milli BTC =Rs 150/-).

In our opinion therefore, Bitcoin at present does not deserve the respect of a technology wonder. It is squarely the currency of the criminals and terrorists and it should be part of the National Security strategy to regulate Bitcoins in such a manner that it is not used to finance the terrorists and criminals in any manner.

If Bitcoin needs to be legalized today, it would also mean that we legitimize the current stock of Bitcoins all over the world estimated at around 16 million as against the theoretical maximum possibility of 21 million. It would also mean that all the current holdings with criminals, drug mafia, terrorists etc will get a recognized avenue to dump them in India.

The economic impact of allowing a Crypto Currency to take over the recognized Indian currency is definitely going to be adverse.

Many of the bureaucrats may in fact try to support Bitcoins because either they may already have parked their current Black money in the form of these Crypto Currencies or looking at the possibility of  using it in future.

Modi Government which is trying to tackle the Black Money menace in India should not fall into this trap of looking at Bitcoins as an acceptable risk just because Canada or  Japan has legalized it. In fact we should not only oppose Bitcoin use in India but also bring pressure on other countries not to legitimize Bitcoin or other private Crypto Currencies.

The net opinion is clear. We should not allow Bitcoin or other Private Crytpto Currencies to be legitimized in India.

On the other hand, if RBI wants to start its own Crypto Currency such as “Bit Rupee”, then it is welcome. This will be a fully regulated Crypto Currency where every unit is tagged with an RBI code. This stock of Bit Rupees will be a replacement of the current paper currency where instead of printing of the Paper currency, RBI may either itself mint the Bit Rupee or license Bit rupee mining through a secure non tamperable hardware control chip that has to be used by all licensed miners. The exact rules and regulations of such a “Bit Rupee Mining License” may be discussed at the appropriate time as a part of the regulation of such a system.

As a part of current regulation, Bitcoin and all other private Crypto Currencies have to be declared as illegitimate and its holdings should be considered as illegal. All present owners of these coins should surrender them to the Government with a proof of the acquisition through known sources of income as a “One time amnesty scheme”.

Part of the support that the Bitcoin legitimization is now receiving is from those who already have some holding and fear a financial loss if Bitcoins are banned. There is also one part of the community which is supporting Bitcoin because they think it is similar to other digital money and hence part of the digital progress which we want to achieve. By declaring the amnesty scheme and properly explaining the adverse impact of a currency that finances terrorists and operates outside the economy, most members of the public will support immediate de-recognition of Bitcoins and other private Crypto currencies. They will all and support the Bit Rupee creation as an alternative use of the Block Chain technology which is definitely innovative and useful.

Query 2. What measures to be taken to protect Consumer Protection?

Response:

If Private Crypto currencies are allowed, then it may work like a Ponzi scheme where the early birds will get the benefits and late entrants will lose.

Secondly, Bitcoin holdings are held in “Bitcoin Wallets” which are services provided by private organizations many of them with unknown reputation. If these Wallet companies close shop, all the holdings become unrecoverable. Since the essence of Bitcoins is the secrecy and confidentiality, there will be no evidence based on which the consumer can seek legal protection against either the fraudulent practices of wallet companies or exchanges or the security breaches that may arise in such companies because of their vulnerabilities, real or faked.

There is therefore no way Consumer Protection can be enabled for Bitcon/Crypto currency transactions.

The only precaution that the Government may be able to take is to say that the KYC of wallet owners have to be verified. But this will be abused royally since it goes against the basic tenets of any Crypto Coin system.

If RBI introduces its own Crypto currency, there may be a possibility of the digital signature of a person issued by an Indian Licensed Certifying Authority is embedded into every transaction. But this may not be practically possible.

Query 3.What measures should be taken to promote orderly development of VCs.

Response:

All Crypto currencies which are managed by private algorithms must be banned. Only Crypto currencies issued by RBI should be permitted. If any foreign Government wants to start a similar Government controlled Crypto Currency, it can be given recognition similar to the current foreign exchange system as part of FEMA provided conversion of private crypto currencies into such Government controlled Crypto currencies is not freely permitted. The total value of Crypto currencies issued by a country should be considered as part of the “Notes Issued” so that indiscriminate printing of crypto currencies should be avoided.

Query 4. Which appropriate institution(s) should monitor/ regulate the VCs?

RBI should be the institution to regulate the Crypto currencies. If required they can create a subsidiary to manage the techno-legal- financial implications with a representation of appropriate experts from the public.

In the past RBI working groups have been constituted with vested interests from industry being part of the group for manipulating the decisions from within.

This should be strictly avoided.

Query 5: In case VCs are not suggested to be regulated:

i). What should be the effective self-regulatory mechanism?
ii). What measures should be adopted to ensure consumer protection in this scenario?

Response: 

It is our firm opinion that “Not Regulating Crypto Currencies” is not an option. There is no “Self Regulatory” mechanism that can bring in privately created “Money” to be brought into the system. If private minting of digital currency is printed, Government will not have any legal logic to prevent private printing of paper currency. Every group of people like say residents of a 1000 apartment housing complex may say that they will print their own Coupons which will be currencies within their complex. Gradually there will be myriad versions of closed group paper currencies that will compete with the legal currency and Government will not be able to say that there will be one rule for digital money and another for paper money.

Non Regulation would be a fraud on Indian society and if Government even thinks about it, the decision would be challenged in the Court and Mr Modi’s image will be tarnished.

Summary:

-Ban all Private Crypto Currency

-Provide a one time amnesty scheme for conversion of current holdings but only if the acquisition is with accounted money.

-Introduce an RBI controlled Crypto currency with an RBI tag and owner identity tag embedded into every transaction unit.

-Create a subsidiary of RBI for managing the regulation with proper representation of independent and reliable experts

(Further Comments from readers are welcome)

Naavi

Today livelaw.in flashed a report stating that the  Madurai Bench of the High Court of Madras has reportedly observed that “Primary Evidence of electronic record under Section 62 of Indian Evidence Act would be admissible without compliance of Section 65”.

This was directly in contradiction with the Supreme Court judgement in the case of P.V.Anvar Vs P.K.Basheer and raised an eyebrow as to how the High Court could have blatantly ignored.

A copy of the report is available here:  report in Livelaw.in,

However when the order was perused in detail it was found that it was the report which was blatantly wrong and misleading and the order had not said what the report stated.

The Court had before it a petition from the accused of a Dowry harassment case in which the complainant had adduced a CD as evidence while the argument was in progress in the trial Court. The CD was said to contain some conversations but it appears that there was no certification under Section 65B. It also appears that the IO nor the prosecutor had not signed the revision petition. The magistrate had ignored the irregularity and proceeded to admit the evidence.

Naturally the accused objected and brought this petition to challenge the trial court order to accept the evidence.

It appears that this is a case of incorrect reporting by the blog which is regrettable.

Copy of the Judgement is here.

The Court has actually allowed the petition and set aside the trial court’s order to accept the CD as evidence. It has asked the trial court to proceed with the trial based on the existing documents and closed the miscellaneous petition under which the complainant sought to bring in new evidence.

It is interesting to note that the honourable judge in this case was Justice A.M. Basheer Ahamed and it would have been a Basheer overriding the Basheer Judgement if the report had been true!. It would have made an interesting headline for the media but fortunately the report was untrue.

Naavi

Before the public want to respond to the request for the Government of India for an opinion on regulation of Bitcoins/Virtual currencies, there is need for us to understand clearly the nature of Bitcoins and why it is popular and why it is desirable or undesirable.

There are many technical guide to the Bitcoin which is one of the types of what is called a “Crypto Currency”. There are more than 766 other Crypto Currencies in the market and the number is growing by the day. Bitcoin is the most popular and is today quoted at over US$ 2100 and hence attracts special attention.

The Finance Ministry in its communication has also used a term “Virtual Currency”. I prefer to call the Bitcoin more as a Crypto Currency since today “Virtual Currency” can apply to any currency held in virtual form. For example, Rs 100 I have kept in Phone Pe is virtual currency for me. I can use it for a virtual transaction and I may not be able to credit it to my Bank account and withdraw. I may have a mobile recharge balance which I can share with my friend as if I have withdrawn money from my Bank account and paid to my friend. This system works like a currency and hence can be considered as “Virtual Currency”.

Hence the term Virtual Currency is more generic and is inappropriate to the context of Bitcoin regulation. “Crypto Coin” is a better term to use in this context since it represents not only the Bitcoin but also other 765 plus Crypto coins which work on similar technology using the Block Chain technology base without any  regulation from a statutory regulator of a sovereign country.

However, “Crypto Coin” is a “Technology” and it can be used both by the general population without any regulatory control of a sovereign Government as well as under the control of a sovereign Government.

Amongst the available Crypto coins, Bitcoin and a few others have acquired notoriety because they have established themselves as the “Currency of Terrorists”. (COTs) With the current adverse attention, I presume that the terrorists are spreading their Bitcoin wealth by converting it to other currencies also and hence there are many popular Crypto Currencies that can be called “COT”s .

Any ransomware attack (which is to be classified as a Terror activity) in which a particular Crypto Currency is mentioned as the means of payment should be treated as a potential COT.

Additionally we can for the purpose of debate and regulation consider the possibility of a “Currency of Terrorist” being partly rendered as “Sanitized Currency of Terrorists” (SCOT) which can be trusted and used.

The appropriate classification to discuss is

a) “Virtual Currency” (VC) which is a digital form of legacy currency

b) “Crypto Currency” (CC) which is a form of recognized payment system in which an Electronic Coupon is created with the use of a cryptographic use such as hash process or digital signature process

c) Currency of Terrorists (COT) of which  Bitcoin is one

d) Potential Currency of Terrorists (PCOT) which is flagged for being declared as a COT if certain minimum criteria is fulfilled.

e) Sanitized currency of terrorists (SCOT) which is a part of COT that has an established clean track record for which a process can be established.

The Government has raised two important queries namely

1. Whether Virtual Currencies should be banned, regulated or observed?
2. If VCs are to be regulated what measures are to be taken for consumer protection, promote orderly development etc

We presume that in this query, Government has used the term VCs as “Crypto Currencies” of the Bitcoin type. In our classification we have used the term VC to current versions of digital currencies for which a regulation is already in place. Hence the term VC used in the Government communication could be applied to the other four categories of Bitcoin like systems namely the CCs, COTs, PCOTs and SCOTs.

We can discuss the need for regulation or banning for all these four types of systems.

In our opinion “Banning” is also part of “Regulation” and “Regulation” includes “Banning”. Hence we shall look at “Regulation of CCs” as inclusive of “Banning of VCs” that the Government has raised.

Also the suggested classification of CCs as COTs, PCOTs and SCOTs is also part of the regulation and hence they are considered together.

Before we proceed, let us also be clear on some basic aspects of Bitcoin which represents a unique technology which is of course fascinating by answering in simple terms some questions. These answers may be technically incomplete but have been so expressed for simplicity. (If any experts consider this as misleading, they may kindly suggest modifications”.

1.What is Bitcoin?

Bitcoin is an electronic document which says that “So and So” is the owner of 1 Bitcoin. It is like a public declaration of ownership. The “So and So” is mentioned not as a name but as a “Hash Value”… a number that identifies Bitcoin wallet of the owner.  The entire electronic document itself is digitally signed and has an identity in the form of a hash value. In effect it is like saying that Hash value X belongs to Hash value Y, where X is the BITCOIN identity and Y is the OWNER identity.

The Bitcoin wallet is held with a service provider just like the other digital wallets and is registered to an email address and/or a mobile. The wallet itself will have an anonymized ID.

2. What is the Mining Process?

A bitcoin transaction when it occurs is broadcast to the public through a network and is recorded by individuals. The individuals then process the transactions on certain rules.

The rules require that the transactions during the immediate past have to be listed showing the seller, buyer and the number of BTC (Or its sub units which may be called centi bits, milli bits etc upto the lowest satoshi which is 10 to the power -8 of 1 BTC or 1 in 100 million parts. It may roughly be 1 in 30 parts of a paise).

The transaction record should include some header information such as the identity of the previous set of records taken on record, the hash identity of the recorder etc and finally a “Random number” (called the nonce).

After creating the record a hash value of the entire record is calculated. This hash value has to be lower than a present minimum value. If not, the Nonce value has to be changed and hash value re-calculated. When this exercise is successfully completed, the set of recorded transactions constitute a “Block” and is broadcast as a successful block creation and is added to the previous block chain. The successful creator of the block is rewarded with free Bitcoins and this process is called “Mining”.

The creation of a successful block chain is therefore considered as “Solving a mathematical puzzle” and it requires millions of random attempts using the computer resource of adding a nonce value and calculating the hash, changing the nonce value and recalculating the hash value until the right hash value is arrived at for the block and broadcast. The new Bitcoins issued is a reward for being the first in the crowd to solve the puzzle. Currently 12.5 new Bitcoins are issued for every successful block creation that gets added to the Chain and confirmed by others.

Thus “Mining” is creating “bitcoins” through the use of computers and has no illegality in it.

3. What is a Bitcoin Exchange:

Currently the resources required to create these Bitcoins is considered too high and hence there is a large secondary market of buying and selling of Bitcoins through an Exchange. The prices may vary like any other stock price. Sellers and Buyers may come from different unidentified locations and the transaction may be settled in foreign exchange. Sellers or buyers may be criminals and the transaction may be a money laundering transaction.

The illegality of Bitcoins come through this process.

Since under law except “Negotiable Instruments” no other commodity or instrument can be transferred from one person to another free of defects in the title of the transferor, once a Bitcoin stock gets tainted, it remains tainted for .life. This is the essential difference between Bitcoin as a document and Cheques, Promissory notes, Bill of Exchange.

4. Why is Bitcoin called a “Currency”

Bitcoins can be mined and bought in an exchange and held as an investment. It can also be used for buying some other services or products if the service provider or the seller of the product is prepared to accept payment in Bitcoins instead of Rupees, Dollars or any other form. If more and more persons are freely willing to accept Bitcoins, then it becomes very much like a currency.

However, in the case of a conventional currency there is a Government which says that it guarantees its value. In the case of Bitcoins, there is no such guarantee.

5. Is Bitcoin Buying a Profitable Investment?

The value of Bitcoins is today around US$ 2000 plus in exchanges and it has given good investment returns to those who invested in it earlier. But will it continue in future?… No Body can answer. In a Ponzi Scheme, the early entrants make money at the expense of late comers. The same thing can happen in Bitcoins.

The reason the value of Bitcoins appreciate naturally is because the total stock of Bitcoins in the world is limited by the mining algorithm and progressively, the effort required for mining keeps increasing. Hence the “Cost of Mining” keeps increasing and makes the future value higher and higher apart from other speculative reasons.

If the demand for Bitcoins increase because WannaCry ransomware wants the victims to buy and pay by Bitcoins, then the value has to jump up. If Indian Government tomorrow announces that Indian Citizens cannot hold Bitcoins legally, then the value may drop.

Bitcoin is therefore a highly speculative proposition. If tomorrow the system is banned in most countries, the value will vanish into thin air.

6. What sustains Bitcoins

The general rule in the society is that majority of people often decide what is accepted as a law unless an authority comes in to change it.

The belief that Bitcoin cannot be banned is that there is a very large holding of Bitcoins in the world as of now, and hence it would be difficult to ban the Bitcoin.

Many Governments including China and Probably Japan have themselves mined and otherwise bought Bitcoins at low prices and are therefore supportive of retaining the global recognition of Bitcoins so that they can exercise a higher influence on global economy. (This is like insider trading in Stocks).

Indian Government may not currently have a stock of Bitcoins and if it accepts the system now, it will start with a very low market share of the total Bitcoin wealth in the globe.

Hence any regulatory measure should keep in mind that there is an economic consideration to either legalizing it or not.

An easy to understand example is that If a large number of people in Kashmir support terrorism and indiscriminate killing of Non Muslims,  then terrorism gets redefined as “Freedom Struggle”. The difference is thin and guided by the majority opinion. If the Kashmir Hindu population is slowly eliminated, then the balance can only tilt in favour of today’s terrorists.

Similarly, if a large number of population want to use Bitcoins for transactions which is anonymous because they can keep their black money in the form of Bitcoins, then there will be value to Bitcoin as a “Currency” and there will be popular support. There are a large number of such Black money supporters in the Government, Politician Circles and even among the public. Many of them might have converted their Black money after November 8, 2016 into Bitcoins. Even now, if the Bitcoin exchanges in India distribute one Bitcoin each to all our politicians and bureaucrats of relevance, then there will be so much support for Bitcoins that it will be legalized.

Hence Bitcoin popularity may be sustained by various illegal means and this itself is a cause of worry for honest citizens. When Citizens express their opinion on the regulation, they have to keep this in mind.

(…Discussions will continue… send me your comments or queries)