RBI does a Modi on Bitcoin

This Christmas has been a real merry Christmas for India…. and also Pakistan. In a stunning move which stunned everybody from his supporters to detractors, Indian PM Mr Narendra Modi dropped in at Lahore wished happy birthday to the Pakistani Counter part, Nawaz Shariff, gave gifts to his grand daughter for her wedding, touched the feet of Nawaz’s mother in respect, travelled in Pakistani military helicopter along with Nawaz Shariff, and virtually created an earthquake in the region. Whether immediate results are seen or not, the developments of 25th December 2015 in Indo-Pak relations will be a key development in the  history of the region and will permanently change the perception about Mr Modi in the minds of the Anti-Modi-Congress supporters in India.

Today morning when we opened the news papers, there was another development which was equally “disruptive” but in the domain of the Financial regulations in India. In what is a huge turn around, RBI came out with a statement “Technology behind bitcoin can help fight Counterfeiting”.

In 2014, we had discussed at length the “Legal Validity” of “Bitcoins” in this site and some of those discussions have continued from time to time.

(The articles can be accessed here)

Following a Bitcoin conference in Bangalore and subsequently in a well read interview in Times of India, Naavi argued that “Bitcoin” was an electronic document and recognized in ITA 2000/8 and hence cannot be banned. In the follow up detailed article at Naavi.org titled “Why RBI cannot/neednot/should not ban Bitcoins?”, Naavi explained why Bitcoin as a category of “Crypto Currency/Virtual Coin” has huge advantages that can be harnessed by RBI. Naavi also explained that while part of the Bitcoin holdings and transactions may involve violations of PMLA or FEMA which can be tackled under the relevant laws, part of the Bitcoin holdings, particularly those mined in India could be considered as legal holdings.  Naavi also provided some suggestions to RBI on what it should do and stated as follows.

QUOTE

What RBI Should Do

.. RBI of course has a duty to advise the public through an open advisory not to consider Bitcoin as a currency. This is more for public education so that they are not cheated by smart operators.

Apart from the caution notice that RBI should release, they may consider some steps of their own to meet the situation arising out of the Crypto Currency phenomenon.

…if RBI so desires, it can provide some concessions to Bitcoin Exports  (Sale of Bitcoins by an Indian against receipt in foreign currencies) and Bitcoin Mining (Production activity similar to software development), It can also consider production of Bitcoins by Indians through foreign pools as a “Software Service Export”. In my opinion, RBI should consider these measures.

On the other hand, RBI may clarify limits on the import of Bitcoins (Buying of Bitcoins from foreign sources where the payment is designated in a foreign currency). While RBI has the right to ban such imports, it may consider permitting imports through designated exchanges upto a limit of say Rs 75000/-.

RBI may have to however caution the public that buying and selling of Bitcoins must be restricted to persons whose identity is known and records kept. Public must understand that in the current legal environment, Bitcoin is a “Virtual Commodity” and it does not have the immunity that “Negotiable Instruments” posses where a holder in certain circumstances claim the status of a “Holder in due course” which is free from the defects of the transferor.

STPI may consider declaring its own policies if some body wants to set up a Bitcoin (or another cryptocoin) mining facility as an STPI unit.

UNQUOTE

Naavi also gave a wishlist on Bitcoins which included a Crypto Coin Exchange of India, India Crypto Currency Pool and Hybrid Vareity of Crypto Coin and invited RBI to constitute an expert committee to take the discussion further.

However, as was feared, RBI came out with an “Advisory”, ED conducted a couple of raids on Bitcoin operators in India and put a fear of God in the techies who had enthusiastically embarked on a “Bitcoin Journey”. Naavi had held out during the time that the “Technology behind Bitcoins” is a very useful technology and must be harnessed by RBI. Subsequently one of the Bitcoin enthusiasts demanded that the RBI advisory needs to be clarified further as it introduced uncertainty in business. RBI however came out with a harsh rebuking reply . In the RBI also stated that the person “..is not entitled to call upon RBI to clarify the legal position in this regard..”

RBI was visibly angry with the person sending a notice demanding clarification and it went on to warn the person that if inspite of the clarifications, the person goes ahead with any legal proceedings, RBI would defend at the risk of the person’s cost and consequences.

This was nothing different from the stand Indian Government had taken in respect of its dialogue with Pakistan which Modi has now changed.

Subsequent to the RBI’s angry reply, Naavi has been reminding from time to time that “Bitcoin” may be tainted because of it’s past but the Block Chain technology has the potential of revolutionalizing the Digital Currency concept.

However there appeared to be no hope of a re thinking… until today morning news paper reported a positive view point on the Block Chain technology attributed to RBI. The article quotes RBI saying

“With its potential to fight counterfeiting, the ‘blockchain’ is likely to bring about a major transformation in the functioning of financial markets, collateral identification (land records for instance) and payments system,” said the RBI. The central bank pointed out that the traditional system of record maintenance works on the basis of ‘trust’ and the ‘regulatory’ and ‘controlling’ power of central entities/counter parties. “As against this, the ‘blockchain’ technology is based on a shared, secured and public ledger system, which is not controlled by any single (‘central’) user and is maintained collectively by all the participants in the system based on a set of generally agreed and strictly applied rules,”

This turn around to my mind is as bold as Modi dropping into Lahore to wish Nawaz Shariff a “Happy Birthday”.

Now it is time for RBI to walk its talk and set up a proper Expert Committee which can study “How RBI can harness the Block Chain Technology”.

As always, we need to point out that RBI needs to find appropriate members for this committee who can provide appropriate inputs. ..and request the committee to watch the space of Naavi.org where some voluntary inputs can be found not only from Naavi but also from its erudite readers.

I call upon the readers to contribute their views to the “Virtual Special Interest Group of Naavi.org on Harnessing of Block Chain Technology” which is deemed to be constituted right away. Naavi has already proposed a VSIG on Amendments to ITA 2008 and the Harnessing of Block Chain Technology can also be taken up in the same VSIG as an additional sub group. Volunteers are welcome.

Naavi