Tag: RBI

Metadata by TLF: Issue 5

Posted on by Tech Law Forum @ NALSAR

Welcome to our fortnightly newsletter, where our Editors put together handpicked stories from the world of tech law! You can find other issues here.

RBI Releases Discussion Paper on Guidelines for Payment Gateways and Payment Aggregators

The RBI on 17th September released a discussion paper on comprehensive guidelines for the activities of payment aggregators and payment gateway providers. It was acknowledged that payment aggregators and payment gateways form a crucial link in the flow of transactions and therefore need to be regulated. The RBI has suggested that these entities be governed by the Payment and Settlement Systems Act, 2007 which requires all  ‘payment systems’ (as defined in the Act) to be authorised by the RBI. Additionally, different frameworks have been proposed for regulating payment aggregators and payment gateways, and full and direct regulation has been discussed in detail. This would entail payment aggregators and gateway services to fully comply with any guidelines issued by the RBI.

Further Reading:

  1. Trisha Jalan, RBI proposes regulation, licensing of payment aggregators and gateways, Medianama (18 September 2019).
  2. Full regulation by RBI will require payment gateways, aggregators to be incorporated in India, The Hindu (18 September 2019).
  3. Shayan Ghosh, RBI could bring payment aggregators, gateways under direct supervision, livemint (18 September 2019).
  4. RBI paper on payment gateways: Maintain Rs. 100 crore net worth or wind up operations, moneycontrol, (19 September 2019).

Twitter removes more than ten thousand accounts across six countries

Political turmoil and instability in countries is majorly aggravated by the internet and various portals online. In light of this crisis, Twitter has decided to remove more than ten thousand accounts across six countries. These accounts were found to be actively spreading unrest in countries which were already in the wrath of a political turmoil. Twitter removed more than four thousand accounts in United Arab Emirates and China, around thousand in Ecuador, and more than two hundred in Spain.

Twitter has been making an active effort since the past one year to identify and remove accounts which were agitating sensitive issues in countries facing crisis. Online portals even have the power to sway the election processes in Democratic countries. In order to curb these impending threats, Twitter has been removing certain accounts on its platform. Even though thousands of new accounts are created everyday and several people have termed this removal process as arduous and never ending, these measures have to be taken.

Further Reading:

  1. Trisha Jalan, Twitter removes 10,000 accounts from six countries for political information operations, Medianama (23 September 2019).
  2. Ingrid Lunder, Twitter discloses another 10,000 accounts suspended for fomenting political discord globally, Tech crunch (20 September, 2019).
  3. Abrar-al-Hiti, Twitter reportedly removes over 10,000 accounts that discourage voting, Cnet (2 November 2018).
  4. Christopher Bing, Twitter deletes over 10,000 accounts, that sought to discourage voting, Reuters (3 November 2018).

California passes AB 5 Bill requiring business to hire workers as employees

California legislators approved a landmark Bill on 11 September, 2019 that has the potential to disrupt the gig economy. The Bill known as “AB 5” requires companies like Uber and Lyft to treat contract workers as employees, which gives hundreds of thousands of California workers basic labour rights for the first time. Apart from its immediate impact, the move by the California legislature might set off a domino effect in New York, Washington State and Oregon, where stalled moves to reclassify drivers might witness renewed momentum. The move has been criticised by ride-hailing firms Uber and Lyft which built their businesses on inexpensive labour, and the companies have warned that recognizing drivers as employees could destroy their businesses.

Further Reading:

  1. Kate Conger and Noam Scheiber, California Bill Makes App-Based Companies Treat Workers as Employees, New York Times (11 September 2019).
  2. Manish Singh, California passes landmark bill that requires Uber and Lyft to treat their driver as employees, Tech Crunch (11 Septemer 2019).
  3. Rosie Perper, California passes landmark bill to treat contract workers as employees, sending it to the governor for signature, Business Insider (11 September 2019).
  4. Alexia Fernandez Campbell, California just passed a landmark law to regulate Uber and Lyft, Vox (18 September 2019).
  5. Andrew J. Hawkins, California just dropped a bomb on the gig economy — what’s next?, The Verge (September 18, 2019).

Microsoft Announces Change in Policies

Microsoft has stated that most large tech law companies, will change the manner in which content is moderated on their social media platforms, irrespective of the US Congress implementing new laws. Their Chief Legal Officer and President, Brad Smith has indicated that most companies will take initiative, irrespective of U.S. Lawmakers. The statement has been made in light of the recent Christchurch shootings which were livestreamed on most social media platforms. Further, major tech companies are responding to the changes in laws around the world. S. 230 of the U.S. Communications Decency Act, 1996 presently protects these companies from being sued on the basis of the content that is uploaded by its users. Microsoft itself has claimed that it has refused the government’s requests for facial recognition software due to the fear that it may be misused. The President of Microsoft has called for other tech companies as well to stop following the “if it’s legal, its acceptable approach” since companies need to start refusing selling their products to certain clients, irrespective of the legality of the action. However, ACLU, senior legislative council has accused Microsoft of continuing to sell software that can track faces and fear in real-time, leading to violation of privacy.

Further Reading:

  1. Sheila Dang, Microsoft’s Brad Smith: Tech companies won’t wait for U.S. to act on social media laws, Reuters (13 September 2019).
  2. Alex Hern, Microsoft boss: tech firm.s must stop ‘if it’s legal, it’s acceptable’ approach, The Guardian (20 September 2019).
  3. Tom Simonite, Microsoft’s Top Lawyer Becomes a Civil Rights Crusader, MIT Technology Review (8 September 2019).
  4. Microsoft’s Brad Smith: Tech Companies Won’t Wait For U.S. To Act On Social Media Laws, Communications Today (15 September 2019).

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Indian Government’s Stance on Cryptocurrencies: An Analysis

Posted on by Tech Law Forum @ NALSAR

This post on the recent recommended ban on cryptocurrency has been authored by Shivani Malik, a final year law student at the Vivekananda Institute of Professional Studies.

Current Scenario

The Ministry of Economic Affairs in its recent press release dated July 22, 2019, prepared a report on the Committee on Virtual Currencies, which proposed a ban on the so-called “private cryptocurrencies”.

The Government of India had constituted an Inter-Ministerial Committee (IMC) on November 2, 2017 under the Chairmanship of Shubash Chandra Garg (Secretary, Department of Economic Affairs) in order to study the issues related to virtual currencies and propose specific action to be taken in this matter. The committee recommended that all private cryptocurrency like Bitcoins should be banned due to the volatile nature of their price. Additionally, a fine of INR 25 Crore may be levied and imprisonment of up to 10 years may be awarded for carrying on activities associated with cryptocurrencies in India.

The report garnered a lot of negative attention, with the crypto community taking the view that it was extremely backward looking and had a regressive approach to such a futuristic concept. In order to recognize the impact of the announcement, it is necessary to first understand what virtual currency is.

What is Virtual Currency?

A virtual currency is a digital representation of value that can be digitally traded and functions as (a) a medium of exchange, and/or (b) a unit of account, and/or (c) a store of value, but does not have legal tender status. A virtual currency is a private medium of exchange that does not in any way reflect a sovereign guarantee of the value or legal tender status. Virtual currency is therefore distinguished from the FIAT currency of a country that is designated as its legal tender. Cryptocurrencies are a subset of virtual currencies that is decentralized and protected by cryptography. Bitcoin is an example of a cryptographic virtual currency, and was the first of its kind.

Currently, the term “legal tender” finds expression under Section 26 of the RBI Act, which states that, “every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government”. The main point of difference between fiat currency and virtual currency is that while the former is expressly guaranteed by the Central Government, the latter does not provide for the same. In order for any virtual currency to be declared as legal tender, it would need to be expressly guaranteed by the Central Government. Only in that scenario would the parties be legally bound to accept it as a mode of payment.

In the third chapter of the report committed projected the idea of Central Bank Digital Currency (CBDC) that shall be the “Digital Rupee” to be the sole cryptocurrency in India having the following key attributes-

  1. Issued by Reserve Bank of India
  2. Variant to Cash and Reserve Money
  3. Possibility of being served as a competitor to cash.

View of the Committee

Having discussed the above, the Committee appreciated the regulatory concerns associated with virtual currencies. The topics relating to Distributed Ledger Technology (‘DLT’) and Blockchain were delved into deeply and their complexity duly recognized. DLT refers to technologies that involve the use of independent computers to record, share and synchronize transactions in their respective electronic ledgers. Keeping such distributed ledgers obviates the need for keeping the data centralized as is done in a traditional ledger, which is why DLT is extensively utilized by virtual currencies.

Primarily, a transaction under DLT refers to the transfer of ‘value’ from one to another, which could be a record of ownership of assets— money, security, land titles, etc. — or the record of specific information such as information about one’s identity or health. Blockchain, on the other hand, refers to a specific kind of DLT which uses codes to encrypt transactions and stack them up in blocks, creating Blockchains.

As mentioned above, the IMC recognizes the potential of DLT and Blockchain and acknowledges that the application of DLT is being explored in the areas of trade finance, mortgage loan applications, digital identity management or KYC requirements, cross-border fund transfers and clearing and settlement systems. To that effect, the Committee advised the Department of Economic Affairs to take necessary measures to facilitate the use of DLT in the entire financial field after identifying its uses, and further suggested that regulators such as RBI, SEBI, IRDA, PFRDA, and IBBI explore the idea of evolving appropriate regulations for development of DLT in their respective areas.

Consequently, the IMC is of the view that it “would be advisable to have an open mind regarding the introduction of an official digital currency in India”. It is pertinent to note that that the RBI Act has the enabling provisions to permit the central government to approve a “Central Bank Digital Currency” (CBDC) as legal tender in India.

Reasons for attracting the ban

While the use of technology in virtual currencies has multiple upsides, it is not without grave risk. The IMC was of the view that private cryptocurrencies lack the necessary attributes of a currency, such as a fixed nominal value that characterizes legal currency.

Another concern plaguing the committee is that non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors. The IMC gives the example of the Rs. 2,000 crore scam involving GainBitcoin in India where investors were duped by a Ponzi scheme. In addition to the above, it has been observed that certain volatility exists when dealing with such currencies. In a country where lakhs of traders get involved in such currencies, this could have huge implications. Secondly, the IMC is worried that if private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over monetary policy and financial stability, as it would not be able to keep a tab on the money supply in the economy.

Also, the anonymity of private digital currencies poses a risk to law enforcement, due to the potential for its use in illegal activities such as money laundering and terrorist financing activities. The lack of grievance redressal mechanisms is another major issue, due to the irreversible nature of such transactions.

The Road Ahead

The IMC report promulgates that the government should consider an official digital currency in lieu of private virtual currencies or crypto coins and tokens. On the other hand, the committee notes the risks involved and volatility in the prices of private cryptocurrencies, which inevitably led to them recommending a ban on cryptocurrencies in India and imposing fines and penalties for carrying on of any activities connected with cryptocurrencies.

This has been subjected to backlash from private traders who have sharply criticized Section 2.7 of the Recommendations which states that “the Committee notes with serious concern mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these cryptocurrencies. All these cryptocurrencies have been created by non-sovereigns and are in this sense entirely private enterprises.”

The IMC has opined that these crypto-assets are not backed by any intrinsic value, which have not been recognized as a legal tender in any jurisdiction, but that’s not entirely true. Many cryptocurrencies, these days, are backed by petroleum, gold, as well as the US dollar in the case of Facebook’s Libra. The IMC does not make any differentiation among cryptocurrencies that are not backed by any central banks. The report presents energy consumption as an issue in the context of Bitcoin mining, however, the report does not delve into the numerous solutions suggested world over to curb this consumption. Cryptocurrencies have never been used as a legal tender or currency in India, nor was it the expectation of any crypto startup. It has always been traded as an asset, which is now being banned.

In reference to the same, the panel has asked the government to consider the launch of an official government-backed digital currency in India, to function like banknotes, through the Reserve Bank of India. Authorities in various countries are considering how to regulate cryptocurrencies, particularly after Facebook announced plans to launch one called Libra, because of risks to the financial system and consumer data. According to recent reports, Libra will not be launched in India due to the current Indian regulation of not endorsing private cryptocurrencies. While Libra is likely to have a massive impact on global e-commerce, it is in the money transfer space where it could be a potential game-changer.

Aside from an extremely brief inspection of the application of DLT in India, the report also includes the proposed bill banning crypto assets that will be presented to the Supreme Court as well. It remains to be seen whether the Supreme Court accepts or rejects the same in toto or comes up with their own guidelines on the issue.

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