Government initiates debate to regulate Bitcoin

Experts says that over-regulation risks are killing the industry

The Union finance ministry has invited suggestions on whether digital currencies like Bitcoin should be banned or allowed but regulated, and if so, if self-regulation is desirable. It wants feedback by the end of the month.
 
Earlier, a committee of bureaucrats had been asked to study the issue. In recent times, Bitcoin has been recognised by Japan; it has also been used to ask for ransom money.
 
Bitcoin start-ups Zebpay, Unocoin, Coinsecure and Searchtrade had in February jointly launched a Digital Asset and Blockchain Foundation of India (Dabfi) as a self-regulatory body. Nishith Desai Associates, a global legal entity, was appointed advisor for developing the regulations.
 
They argue that currencies such as Bitcoin should be allowed self-regulation. Banning it, say they and others, does not seem sensible, with its rising acceptability in parts of the world. If the government is to regulate it, there would be various issues. Digital or virtual currencies are not so defined under the laws and a mechanism to regulate it and tracking the transaction trails would have to be formulated.
 
"Crypto currency doesn't fit into any (standard) definition of currency, foreign exchange or money. Defining something which is an internet product, has a barter value and getting that approved in Parliament will be a difficult task. The way the Bitcoin industry is growing, it will be difficult for the government not to recognise its legality," says Nishith Desai, founder of Nishith Desai Associates.
 
Experts say over-regulation risks killing an industry. Had e-commerce firms been regulated from the start, the segment would not have grown the way it has.
 
Sandeep Goenka, co-founder of ZebPay, the largest Bitcoin exchange, with about 500,000 app downloads, says: "The best way to regulate is to first allow Bitcoin and crypto currency exchanges to operate. These companies do Know Your Customer (KYC) checks and can follow the anti-money laundering (AML) provisions and suspicious transaction reporting (STR) processes. They can help build an identity layer on top of this technology. This has been the global trend."

Digital Currencies Caught Attention

• Currently, bitcoin in India is trading at around Rs 1,55,000

• Total market cap of four major currencies globally — bitcoin, ethereum, litcoin and ripple —is above $70 billion

• Bitcoin’s market share, last week, had fallen by half

• Recently, an Indian bitcoin exchange helped the police in Bank of Maharashtra robbery case to nab a culprit who had robbed the bank and purchased bitcoin with the money

• Last week, the people behind the WannaCry cyberattack had asked ransom in bitcoins

• Industry body is working on  investor protection measures for members

• Govt has invited suggetions on what should be the effective self-regulatory mechanism

On cases of ransom, Sathvik Vishwanath, chief executive at Unocoin, says: "Trade in bitcoin always leaves a trail of every transaction. It can eventually be traced back to the identity of the person when these reach a self-regulated Bitcoin company or exchange which collects KYC and follows the AML procedures. There could be a long transaction chain that needs to be traced backwards before the culprit is identified but it is possible. Bitcoin is a bad payment method to use for doing anything illegal, as the traces can never be erased."
 
"If the government allows self-regulation, it would be faster and the government could set up an agency which coordinates with the self-regulating body of the industry regarding an investigation," says Desai.
 
Desai says Dabfi is ensuring the member-exchanges do a proper KYC, will prepare norms for regulating members and blockchain ledgers, and will provide any information the government requires for investigation. The government, he notes, lacks expertise on crypto currencies and cryptography. If it takes regulations on itself, it will be time consuming and training of enforcement agency officials will be another challenge. Hence, "allowing the industry to self-regulate, with government oversight, is the best approach".

Criteria on net worth would be gradually fixed. And, to get insurance agencies to insure Bitcoin exchanges and wallets, to prevent customer loss. Beside asking exchanges to create settlement guarantee funds.
 
"We propose to follow the Australian self-regulation model for Bitcoin," says Desai. Also promised is an appellate body or ombudsman to address customer complaints. And, the exiting Income Tax Act could apply on profit or loss.