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Finance Ministry’s FinTech report discusses cryptocurrencies, but makes no recommendation on their regulation

Despite talking about cryptocurrencies briefly, the Department of Economic Affairs’ (under the Finance Ministry) FinTech report did not make a single recommendation on regulating them. The Steering Committee, which authored the report, however, made 45 concrete recommendations in the report on issues such as open APIs, consumer protection, drone technology, etc.

Using digital tokens

Benefits of digital tokens:

  • “Use of digital tokens resolves the issue of multiple currencies, improves liquidity and capital compliance costs.”
  • “It allows for micro-payments and expedites the payment process that eliminates liquidity risks.”
  • Token issuance, through Initial Coin Offerings (ICO) “has emerged as an innovative way of capital raising by fintech businesses”.

Cryptocurrency ICO statistics: According to the report, in 2018, by September 25, 2018, 790 ICOs had been issued, and total funds raised through ICOs amounted to US$20 billion [₹1,438.7 crore]. (Thus far in 2019, $366 million have been raised through ICOs, according to ICOdata.)

Broad categories for digital tokens

The report suggested that digital tokens can be grouped into two categories depending on the objective of their issue.

  1. Utility tokens: “They entitle future access to a company’s product or service. They can be understood as digital coupons for the service the company is developing. For example, tokens issued by a hotel service provider in exchange for deposits or investments.”
  2. Security tokens: The report noted that some token issuance has the attributes of a security, referring to the U.S. SEC vs. Howey court case which established the guidelines for determining if “a financial arrangement involved an investment contract and was subject to securities regulations”. As per this ruling, a token would classify as a security when:
    1. There was an investment of money
    2. There was an expectation of profits
    3. The investment of money was in a common enterprise
    4. Any profit came from the efforts of a promoter or third party

In July 2019, the Finance Ministry released a draft bill titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” which effectively proposed banning cryptocurrency in India. It also made promotion, advertising and abetment in participation of use of cryptocurrency punishable with a fine, or a prison term of up to 7 years. The same day, the Inter-Ministerial Committee (IMC), under the chairmanship of former DEA Secretary Subhash Chandra Garg, submitted its report on virtual currencies that hailed blockchain technology, but categorically recommended banning cryptocurrencies.

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