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Table of Contents
Introduction to Cryptocurrencies and Blockchain 5

Cryptocurrencies 5

Blockchain 5

Pseudo Anonymity 6

Opinions of Leaders on Cryptocurrencies and Bitcoins 7

National Cryptocurrencies (LakshmiCoin) 8

India On Cryptocurrencies and Bitcoins 10

Business in India 11

Existing KYC 11

Denial of Banking Services 11

Cooperation with Law Enforcement Agencies 12

Challenges in identifying user transactions 12

Security 12

International Regulatory Framework 12

USA 12

European Union 13

Japan 13

Singapore 13

Switzerland 13

Other Countries 14

Global Industry Snapshot 14

Bitcoin Trade Volumes 14

Bitcoin Market Cap 15

Transaction Value of Bitcoin Exchanged on Bitcoin Blockchain 15

Market Cap of all Cryptocurrencies 16

Conceptual Framework 16

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Identifying Risks 16

Other Risks 17

Potential For India 19

Reserves of a global asset 19

Micro Remittances 21

Banking the unbanked 21

Fintech Hub 22

Socio Economic 22

Suggestions for Regulation 23

Assumptions 23

Self-Regulating Organization 24

Code of Conduct 24

Operations 25

Composition of the Managing Committee 26

Membership 26

Corporate Governance 27

Conflicts of Interest 27

Criteria for Digital Asset Exchanges 28

Minimum Criteria for Registration of Exchanges 28

Compliance by Registered Exchanges 28

Other 28

Capital Requirement / Insurance 28

KYC 29

Tier 1 - Customers for whom No KYC is required 30

Tier 2 - Customers for whom e-KYC is required 30

Tier 3 – Customers for whom physical KYC is required 30

AML / STR 31

Blockchain Intelligence Tools 31

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Maintenance of Records 32

Import / Export of Cryptocurrencies 33

Exchanges 33

Remittance 34

Taxation 34

Value Added Tax / GST 35

Income Tax 35

FDI 35

Government Industry Consultation 36

Ponzi Schemes 37

ICOs 37

Benefits to the Government of India 38

Conclusion 39

Contact Us 40

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Introduction to Cryptocurrencies and Blockchain

Cryptocurrencies

Cryptocurrency is not a new concept, Bitcoin was the first decentralized digital currency
discovered back in 2009 by Satoshi Nakamoto, an anonymous person or group of people from
Japan. It is also known as a peer-to-peer electronic payment system, is perceived to be a
revolutionary idea for remittance over the internet.

Bitcoin and other cryptocurrencies have become a global phenomenon known to most
people, has extended beyond their applications as units of account or mediums of exchange.
Rather, the unique technology designed with the help of cryptography to encrypt its
transactions and controls the creation of additional units. In short, it is a public ledger that
functions as a decentralized system for recording ownership and value transfers. So there is
no chance of duplicating or manipulating the transaction.

The complex technical operation of the leger seems to be rather simple. When a
cryptocurrency holder transfers the cryptocurrency to another recipient, the transactions are
verified in a process called ‘mining’. An army of ‘miners’ consults the ledger, verifies the
transfer of assets, and documents they transfer to the recipient, which is a public database,
functioning as a distributed ledger. The verification is very complex in nature, it is not just
simply verifying the transactions, and rather it is a competitive one which requires solving the
complex cryptographic problem. The first miner to validate the transactions wins the
competition. Successful miners obtain new cryptocurrency as a reward. This new batch of
cryptocurrencies is automatically generating and tally the transactions with the help of
powerful computers. Their function is to update the transaction each time and also ensures
the authenticity of the information through the decentralized mechanism. One has to just
download the software to become a miner, which is open-source and generally not controlled
by any central entity. Therefore, each transaction is secure and is processed properly and
safely, despite the absence of a centralized authority.

Blockchain

Blocks are the files where data consisting of the transaction network which are permanently
recorded. A blockchain is a continuously growing list of records which are linked and secured
using cryptography. Blockchain allows digital information to be distributed and create
backbone for new type of internet. By design, blockchains develop the cryptocurrency on
which the person who developed the ledger would not be able to modify or have any kind of
control on it. Miners are interested to participate in mining to get rewarded a new batch of

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cryptocurrencies. These cryptocurrencies have a real-world value which they recover from
their operational costs.

For this technology to fulfil its promise as advertised, all elements in the ecosystem must be
interconnected and with high estimated blockchain, mining and cryptocurrency market-
driven value. The blockchain has a limited scope without miners computing logs or any
popular cryptocurrency should be associated with market-driven value like Bitcoin and
Ethereum, Money Trade Coin and many more.

There is no middleman in the picture such as a Bank, Credit card company, Escrow agent, or
any other recording agency. Certain protocols are to be followed which is essential for the
validation of transactions. The cryptocurrency market has a potential for great innovations in
the industry in the coming future, a “generative” technology to be described on which
powerful applications can be built. For example, if cryptocurrencies may dramatically reduce
transaction costs associated with value transfers, engender access to financial transactions
within sectors of the population that do not have access to traditional financial institutions,
avoid the pitfalls of managed or commodity-based monetary systems, and allow for the
creation of self-enforcing smart contracts that do not rely on financial institutions, lawyers,
or accountants for their execution.

Cryptocurrencies are unique for other reasons:

Pseudo Anonymity

Cryptocurrencies are not completely anonymous, majority of them are pseudonymous. For
example, if the identity of some wallet owners is known, it is theoretically possible to use
these known nodes in the system to build a “transaction graph” that tracks each particular
cryptocurrency. By doing so, one could expose the identity of owners of unknown wallets with
which the known wallets transacted.

However, the purpose of the anonymity is NOT to excite the use of illicit activities, rather it
enables the fungibility which in other aspect means that all tokens are similar. Which is an
essential characteristic of cryptocurrency, as the cryptocurrency is convertible into fiat
money.

For example, if every Rs token that we would receive in our bank account has the history of
all the past transactions attached to it, then as a receiver you might not accept a Rs token that
has, say been used by a cigarette company. If a market starts differentiating tokens based on
their past use, the currency system will collapse as it will lose fungibility.

In virtual currency networks, all transactions are publicly verifiable ledger in which all
transactions are recorded and stored forever. That means, with minimal details, one can
verify the transactions actually occurred, gather information about the origin, the destination
and potentially figure out with reasonable certainty, the identities of the sender and the

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recipient. To ensure the fungibility, the transactions have to be made pseudo-anonymous.
This is an essential characteristic of cryptocurrencies to ensure the system works.

Opinions of Famous Personality from across the Globe:

1. Quotes by Bill Gates (Microsoft), Richard Branson (Virgin Group), Eric Schmidt (Chairman
Google) https://youtu.be/pWkbXEz9UQU

2. Opinion on Virtual Currencies by Christine Lagarde, Managing Director of IMF

https://www.imf.org/en/News/Articles/2017/09/28/sp092917-central-banking-and-fintech-
a-brave-new-world

3. Quote by Jeff Sprecher, Chairman, NYSE https://youtu.be/6JocJNrgeh0

4. Quote by Vikram Pandit, Ex-CEO of Citigroup https://youtu.be/VSaVdvVHdTs

5. Quote by Mark Zuckerberg (Facebook) https://goo.gl/RVRHfk

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6. Quote by Sir Al Gore and Peter Thiel Co- Founder of PayPal
https://medium.com/@MartinRosulek/14-bitcoin-quotes-by-famous-people-6e7a1a009281

National Cryptocurrencies (LakshmiCoin)

India is set to launch its new national cryptocurrency ‘Laxmicoin’, it is named after Laxmi, the
Hindu goddess of wealth. Apart from India other countries such as China and Russia are also
opting actively for their own cryptocurrency.

The Reserve Bank of India (RBI) is now looking forward to launching Laxmicoin after the big
success of Bitcoin. The central bank is examining the possibility of a fiat money which would
become an alternative to the Indian rupee for digital transactions.

What are national cryptocurrencies?

The Bureau of International Settlements recently introduced a paper on Central Banks

Cryptocurrencies that extensively covered the concept of Central Banks launching a
cryptocurrency on the DLT(Distributed Ledger Technologies) powering Bitcoin.

DLT is a digital system for recording the transaction of assets in which the transactions and
their details are recorded in multiple places at the same time. Unlike traditional databases,
distributed ledgers have no central data store or administration functionality.

• Issuer — Central Banks are the issuer of the cryptocurrency. Hence, they will dictate
the price of the cryptocurrency and the value of the cryptocurrency is backed by the
sovereignty of the nation. For cryptocurrencies such as Bitcoin, the price is determined
by the market through demand/supply and the issue happens through miners earning
Bitcoin as a reward for validating transactions.

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 • Transfer Mechanism — there are two types of transfer mechanism- Centralized and
Decentralized (Peer to Peer). A centralized currency requires the presence of a third
party validating all transactions such as RBI being the central point of authority for all
banks. Cryptocurrency is a decentralized currency where there is no necessity of a
third party validating your transaction.

Evaluating the Pros and Cons of National Cryptocurrencies:

Pros

• Prevents counterfeiting – Due to strong cryptography techniques, it would be almost

impossible to make duplicate and hence the problem of counterfeit money will be
rectified.
• Speed – There is no middleman like banks intervening between the transactions. As
the cryptocurrencies work 24/7 the transactions.
• High acceptance – There won’t be any trust issue as the cryptocurrency will be
accepted among all the citizens as it is backed by the full faith of the government.
• High Efficiency – This will help to enhance the efficiency as cash will be removed from
the ecosystem and ultimately it will eliminate the cost of transporting cash.
• Volatility – The price of the coin will not be affected as the central bank would be
determining the prices. Whereas citizens can purchase Treasury bonds with assured
returns.

Cons

• Centralized – The centralized governance of the national cryptocurrency would be

expensive as the Distribution Ledger Technology is costly. However, the database can
be functioned like similar to Banks work on the Rupee today.
• Security – Centralized database is at risk to be hacked. With the cryptocurrency, each
user’s wallet has to be hacked and funds siphoned off with a central issuing authority
can get hacked.
• Permissioned – The currency would need permission access, in fact, the whole
concept of this cryptocurrency was permission-less, where you didn’t need anyone’s
permission to transfer value but with national cryptocurrency this whole concept fails.
• Anonymity – The national cryptocurrency will require heavy governance and
surveillance. Any kind of fraud or burglary would be blamed on the government. KYC
requirements will remove the anonymous feature of the national cryptocurrency.
Since these require Banking and other infrastructure, they will carry the existing
limitations of national currencies.

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The Future of National Cryptocurrencies

The exponential growth of Bitcoin and alt-coins is enticing millions of people every day to this
new technology and encouraging them to invest in them. This prompted central banks to
adopt this technology because of the frenzy situation in the country about Bitcoin. Bitcoin
and other means of exchange have become popular in these countries because transactions
can be performed on cell phones, and their value is more stable than the hyper-inflated
national currency, as the currency has failed because of hyperinflation. Most cryptocurrency
experts, however, argue that a national cryptocurrency is an idea that will not work and
hence, will not affect the future growth of cryptocurrencies.

India on Cryptocurrencies and Bitcoins

To the knowledge DABFI, the only regulatory document specifically dealing with
cryptocurrencies and bitcoins are the 3 RBI circulars and 1 circular by Ministry of Finance. The
circulars caution the users, investors, and traders of Virtual currencies (VCs), about the
potential financial, operational, legal, customer protection and security related risks that they
are exposing themselves to. The irony is that Income tax of India has passed a law that
government will be charging interest on the capital gains from the cryptocurrency.

1. https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247
2. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435
3. https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462
4. http://pib.nic.in/newsite/PrintRelease.aspx?relid=174985

The Payment and Settlements System Act 2007 and the regulations articulated had no co-
relation and reference to cryptocurrencies. Similarly, RBI has issued several circulars including
the Master Circular of 2014, which controls and regulates prepaid gadget including digital
wallets, there is no recommendation irrespective of cryptocurrencies.

Investors have already started buying, selling and holding cryptocurrencies bought by both
individual and corporate sectors in India. Bitcoin and Ethereum have gained its popularity in
the crypto space along with newly launched cryptocurrrency Money Trade Coin. Company
which offers registration with the Registrar of Companies in India are observing the regulatory
processes mandated under the Companies Act. These companies are also duly registered for
the payment of income tax and service tax. Reckoning on the self-regulation to ensure the
platforms are not being used for money laundering, terrorist funding or any other illegal
activity. KYC norms are being imposed on to verify large transactions, also ensuring the
transactions are linked and completed only through bank accounts.

Additionally, some of the companies have already approached regulatory authorities for the
clarification on prerequisite agreements.

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For example, the company Zeb IT Service Pvt Ltd sought for clarifications from RBI, DGFT, FMC
on their positions and guidelines on cryptocurrencies.

• On 4th March 2016, RBI replied that “Bitcoins are not recognized as currency in India.”

• On 31st May 2016, RBI responded that the company “may seek clarification from DGFT
as to whether bitcoins can be considered as goods or services. In case the company
intends to trade in bitcoins as a commodity, the said company may seek clarification
from the Forwards Market Commission (FMC).”

• On 18th July 2016, RBI responded stating that “bitcoins/cryptocurrencies has not been
defined under section 2 of FEMA Act, 1999.”

• On 22nd September 2016, DGFT replied in a letter asking the Department of Financial
Services to take necessary action, as deemed fit.

The RBI has cautioned users, holders, and traders on the risk of these currencies and clarified
that it has not given any license or authorization to any entity or company to operate such
schemes or deals. Currently, RBI is making the self-regulatory process more stringent, drawing
conclusions substantially from best practices globally.

Business in India

Last update: 3rd Jan 2018

• ~10 cryptocurrency exchange companies

• ~Rs 10,000 crores exchange volume per month
• ~50 lac users
• ~0.5% - 2% transaction charge
• ~10x growth per annum

To put in above in perspective, global cryptocurrency exchange is ~Rs 100,000 crores per day.

Existing KYC

All cryptocurrency exchange companies allow users to buy, sell and hold only after doing KYC.
KYC includes PAN card and bank details of users, which makes the users do all the transactions
via banks only.

Denial of Banking Services

Cryptocurrency exchange companies are facing problems in their banking relationships. Big
banks have been known to “de-risk” correspondent banking relationships that are considered
high risk for their businesses. Due to the tightening control over activities of money
transmitters, the companies are forced to voluntarily close bank accounts. These have been

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more than 10 bank accounts closed of 3 cryptocurrency companies. These companies have
been preparing the recommendation report regarding the denial of the banking services to
such entities.

Cooperation with Law Enforcement Agencies

Bitcoin is perhaps facing a challenge of being a speculative bubble. Cryptocurrency has

already proven that they can be helpful to law enforcement agencies to go after illicit use
cases. For instance, there are companies helping cyber-crime departments in various
countries to resolve cases.

Challenges in identifying user transactions

• Buy and sell transactions done by users with cryptocurrency exchanges are easily
identified to users.
• Challenges are there in tracking transactions if done by users later on the blockchain.

Security

• Public blockchains are the most secured networks that exist today, where each
participant maintains a replica of a shared append-only ledger of digitally signed
transactions.
• Cryptocurrency platforms run by companies use existing security processes like other
technology companies. These processes are being improved continuously as the
companies are maturing in size and scale.

International Regulatory Framework

Some of the regulatory documents and developments in other countries are given below.

The USA

• Financial Crimes Enforcement Network (FinCEN), United States Department of the

Treasury’s guidance on cryptocurrencies.
(https://www.virtualcurrencyreport.com/2014/10/fincen-issues-new-rulings-
covering-virtual-currency-exchanges-and-payment-processors/)

• Global Advisors Bitcoin Investment Fund (GABI) is the first regulated bitcoin hedge
fund to receive regulatory approval from the Jersey Financial Services Commission
(JFSC). (http://www.bbc.com/news/world-europe-jersey-28247796)

• New York State Department of Financial Services (NYSDFS) started issuing BitLicense
to businesses related to virtual currency activities.
(http://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework.htm,
http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf)

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 • Coinbase launched the first regulated bitcoin exchange in the U.S.
(http://www.wsj.com/articles/first-u-s-bitcoin-exchange-set-to-open-1422221641)

• Winklevoss brothers’ bitcoin exchange, Gemini, had been granted a license by the
New York State Department of Financial Services.
(http://fortune.com/2015/10/05/gemini-winklevoss-bitcoin/)

European Union

• European Union’s top court, European Court of Justice, ruled that exchanging bitcoin
should be exempt from value-added tax in the same way as traditional money.
(https://curia.europa.eu/jcms/upload/docs/application/pdf/2015-
10/cp150128en.pdf)

• Bitstamp to be the first fully licensed bitcoin exchange in Europe, w.e.f. July 1, 2016.
It has been granted the license by Luxembourg Financial Industry Supervisory
Commission (CSSF).
(http://www.forbes.com/sites/laurashin/2016/04/25/7886/#9bc9a36518de)

Japan

Japan passed a law on 1st April 2017 that defines Bitcoin and other virtual currency as a form
of payment method, not a legally-recognized currency. Bitcoin will continue to be treated as
an asset unless there are future revisions or directives to Japanese tax law.

(https://bravenewcoin.com/news/bitcoin-regulation-overhaul-in-japan/,
http://www.fsa.go.jp/news/28/ginkou/20170324-1.html)

Singapore

Inland Revenue Authority of Singapore (IRAS) has issued tax guidelines for Bitcoins stating
that businesses that choose to accept cryptocurrencies such as Bitcoins for their
remuneration or revenue are subject to normal income tax rules.
(https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-
Taxes/Specific-topics/Income-Tax-Treatment-of-Virtual-Currencies/)

Switzerland

Zug becomes the first town in which you can pay city fees (taxes) in bitcoin
(http://www.dw.com/en/alpine-crypto-valley-pays-with-bitcoins/a-19371082?)

Swiss National Railway SBB sells bitcoins at all its offices (https://www.sbb.ch/en/station-
services/services/further-services/bitcoin.html)

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Russia

• Russian Ministry of Finance and the Bank of Russia expects to levy a mining tax by analogy
with the taxation of business activities.

(https://news.bitcoin.com/russian-cryptocurrency-bill-ready/)

Other Countries

https://coin.dance/poli#legalitybycountry

https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country#cite_note-TOI_noreg-17

Global Industrial Snapshot

Bitcoin Trade Volume

Source https://blockchain.info/charts/trade-volume?timespan=2years

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Bitcoin Market Cap

Source https://blockchain.info/charts/market-cap?timespan=2years

Transaction Value of Bitcoin Exchanged on Bitcoin Blockchain

Source https://blockchain.info/charts/estimated-transaction-volume-usd?timespan=2years

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Market Cap of all Cryptocurrency

Source https://coinmarketcap.com/charts/

Conceptual Framework

The Cryptocurrencies (Digital currencies) in the financial market system provide a huge
platform for development and growth and also open tremendous opportunities for
innovation and transformation. However, every coin has two sides, every good is somewhere
accompanied by a bad.

As such, the use of cryptocurrencies also comes with certain risks. The power and capacity of
cryptocurrencies, as well as the perils involved, make it mandatory to frame certain laws to
regulate the utilization. This will help to reduce the illegal use of cryptocurrencies and also
enhance the transparency and certainty.

Recognizing Risks involved in Cryptocurrency

1. Use of cryptocurrencies for money laundering and terrorist activities

Money laundering involves the process of transforming the profits of crime and corruption
into ostensibly "legitimate" assets. A number of organizations have addressed this issue in
reference to cryptocurrency providing a platform for trading. Therefore, facilities such as KYC
and verifying large transactions can prove to be helpful to curb or reduce these activities.

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 2. Use of cryptocurrencies for illegitimate and unlawful purposes

The WannaCry ransom ware cyber-attack that affected the world in 2017 and the usage of
cryptocurrencies in Darknet has tarnished the image of cryptocurrencies despite its many
benefits.

Control and regulations on cryptocurrencies will help in tracking such transactions more
effectively. Software solutions to track and attach identities to transactions are already
available in markets.

3. Fraudulent schemes launched depicted as cryptocurrencies

Cryptocurrencies naturally are not based on Ponzi schemes. However, according to reports,
there are chances of promotion of cryptocurrencies by some personalities through multi-level
marketing process.

Such a situation arises in absence of laws governing and monitoring the activities. If specific
directives and rules are set for the same, it will lessen the risks of such schemes mushrooming
in future.

4. Fake currencies introduced

The popularity and success of some cryptocurrencies have led to swindlers cheating investors
by launching fake currencies where the promoters exploit the prices and flee the place after
gaining large profits. Regulation which would mandate registration of companies dealing in
cryptocurrencies would keep out such fly by night operators and protect innocent users.

5. New cryptocurrencies being launched (ICOs) which are similar to stocks

There are global guidelines which are already being developed to differentiate between
decentralized cryptocurrencies that are based on blockchain technology vs digital tokens that
are company stock disguised as a cryptocurrency. Regulators can apply ‘The Howey Test’ to
identify this.

6. Volatility

Another risk that comes when dealing with cryptocurrency is that the market keeps on
fluctuating almost every day. Since there is no steadiness in the market structure, the
investments are at high risks. If the trading activities are controlled and regulated, the prices
will surely be driven by the market forces only and there will be no chances of manipulation.

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 7. Cryptocurrencies could be used to avoid tax

Regulations which include clarity on reporting by users or traders on income tax and penal
provisions on nondisclosure would increase compliance.

8. Hacking of Payment Gateway

Last year, the most popular Web wallet for the Ethereum Classic cryptocurrency, with the
original address, suddenly started stealing money from users’ wallets. Since then, there have
been many instances of hacking investors account. A regulation would help keep a check on
such activities, thereby, safeguarding the investments.

9. Insecure ICO’s

Fundraising through ICO (Initial Coin Offering) has gained huge popularity since the previous
year. However, the problem is that the cryptocurrency market still isn’t regulated by any
means, there are no risk assessment mechanisms, and there is no guarantee — like at all —
of return on investments, except the word of honour of people who came up with the project.
So, regulations can help in creating a more transparent and credible medium.

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 10. User Address error

Cryptocurrencies add their own wrinkles making transactions difficult and risky. For example,
there is a risk that’s very specific to cryptocurrencies — loss of money due to an error in the
address to which the money transfer is made. In such a case, KYC and other control can play
a major role.

Potential for India

Reserves of a global asset

There is always a tough competition between all the nations in the world increase reserves of
the global assets. Be it a fiat currency like USD, precious metals like gold and precious
commodities like oil, the race to achieve the highest position is always on.

The new age cryptocurrencies constitute a new class of global asset. Ahead of
cryptocurrencies, digital things in the financial market system were not considered as assets.
The reason being, anything from music to movies can be replicated at low or no cost. Also,
the digital copy is an exact replica of the original.

The inception of cryptocurrencies has created history in the world of computer science. For
the very first time, cryptocurrencies permitted the creation of a digital asset that guarantees
integrity through a protocol, which provides an officially approved authentication process.
The fact that there is a limitation to its usage makes it eligible to be accepted as an asset.

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Following the footsteps of Bitcoin, there are more than 1,000 cryptocurrencies based on the
technology with some innovations.

(https://coinmarketcap.com)

The cryptocurrencies based on the very efficient blockchain technology, enjoy a value
globally. In future, they have the potential to increasingly be a part of a nation’s reserve.

The process through which cryptocurrencies are created is known as mining. Here, the
transactions are verified and added to the public ledger. The mining process involves
compiling recent transactions into blocks and trying to solve a computationally difficult
puzzle.

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This process has gained popularity in China, US, and Scandinavian and is a well- acclaimed
multi-billion market there. Since the process of mining requires specialized computer
processing chips and electricity to run them, China is innovating and transforming its sector
to adapt to the technology and become energy efficient entity in computing and renewable
energy.

Nations, which do not act recognize cryptocurrencies are at the risk of limiting their reserves
of a potential global asset and cutting short the potential economic and innovative activities
this industry can bring about in the future.

(http://www.cnbc.com/2015/11/03/bitcoin-to-be-6th-largest-reserve-currency-by-2030-
research.html)

Small Payments

The largest inward remittance market earning more than $70 billion per year in India. The
present remittance business model suggests setting up an end-to-end payment channel from
the country of origin to India. In India, most of the overseas financial transactions are done
through international companies like PayPal and Western Union. These businesses are not
faced with much competition, as such the international companies charge 5-20%. Also, the
present remittance system doesn’t allow payments below $200.

Therefore, to help reduce the transaction costs and also to circulate a larger amount of money
in the Indian financial system rather than non-Indian companies, cryptocurrencies can play a
major role. Also, global transactions will become easy, secure, reasonable and feasible
through cryptocurrencies.

Some countries including the Philippines have understood the importance and potential of
cryptocurrencies and have recently permitted local companies to use bitcoins for
remittances. (https://www.forbes.com/sites/chynes/2017/02/27/new-guidelines-give-
bitcoin-startups-in-the-philippines-a-fighting-chance/ - 6accdba03e4d,
http://www.bsp.gov.ph/downloads/regulations/attachments/2017/c944.pdf).

Banking the unbanked

The advent of Internet has made our lives easier and better. It has aided the nation’s dream
of allowing the citizens to communicate to each other.

The utilization of Cryptocurrencies in place of fiat currency can help us to move a step forward
and increase our financial potential globally. It is essential to adapt to the changing
technologies, so as to sustain in the global economy.

Cryptocurrency accounts are easy and efficient to make and operate. It’s similar to making an
email account. It is instant, fast and free. It provides a high range of transparency and is more
efficient and effective than the traditional payment system.

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This new industry has the potential to bank the unbanked and provides them modern
financial services at costs lower than currently possible.

(https://www.forbes.com/sites/chynes/2017/04/21/virtual-currencies-could-spread-
financial-inclusion-one-mobile-phone-at-a-time/#21fe24b8239b)

Financial Hub

India in the last 10 years has achieved the position of a technological hub worldwide,
considering the availability of a large number of English speaking engineers. However, just
like other financial and business hubs such as London, Singapore, Hong Kong or Shanghai,
India also aspires to be a financial hub globally.

As cryptocurrencies utilize the internet and heavy electric power, these digital currencies
have also touched the Internet. Cryptocurrencies are the result of the intersection of
technology and finance. With India’s leadership in technology, cryptocurrencies give India a
chance at becoming a global financial hub.

Financial hubs like UK, Switzerland, Singapore and South Korea have already realized this

1. UK’s FCA and Singapore already have sandbox programs for bitcoin businesses.
(https://www.finextra.com/newsarticle/29480/fca-to-kickstart-sandbox-with-24-applicants,
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/FinTech-
Regulatory-Sandbox.aspx, http://coinjournal.net/singapores-bitx-joins-fca-
fintehttps://www.finextra.com/newsart)

2. Switzerland is at the forefront of trying to become a bitcoin powerhouse.

(http://www.reuters.com/article/us-swiss-fintech-cryptovalley-idUSKCN11E0L9)

3. South Korea (https://news.bitcoin.com/korea-cryptocurrency-fintech-hub/)

Socio-Economic benefits

The Internet and the smartphones have a number of advantages, but they are also in several
illegitimate and unlawful activities harming the society such as terrorist communication or
piracy. However, despite the threats posed by them, the use of Internet and smartphones
weren’t discouraged or the prohibited by any of the countries. Instead, certain regulations
were decided to maintain the system. If it was to be banned completely, nations would have
missed the chance to use the Internet to allow poor people to communicate at near zero cost,
allow farmers to check prices of their products and allow India to become a technology hub.
Such a situation would have hampered the growth and development of the country.

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Instead of prohibiting the use of these useful technologies and the internet, so some people
do not take advantage and misuse the provisions, it is better to issue laws and control the
transactions for a smooth and fruitful future.

Declaring a particular technology illegal, only disallows legitimate use of the technology.
However, the activities are still carried on by people under the blankets, as the technology is
accessible to them irrespective.

A ban on cryptocurrencies would curb all the legitimate benefits in a nation. Also, it would
lead to illegal trading and usage as the facility is available to anyone having an access the
internet and can thus carry on the transactions without the governments notice. This could
lead to apps hosted outside the country to continue servicing cryptocurrency – trade, as they
have the option to get paid in cryptocurrency itself.

The unreported income and gains would, therefore, increase the amount of corruption in the
country and fuel other criminal and illegal activities or would be funneled overseas. This could
cause a loss of both capital and taxes. Since there would be no legitimate national
cryptocurrency exchanges, the government would lose visibility, control over the industry and
loss of economic activity, capital and taxes.

Companies involved in trading of cryptocurrencies ensure a high level of transparency. They

religiously follow the KYC norms and insist on transactions being routed only through banking
channels. Derecognizing cryptocurrencies would adversely affect the transparency and would
make tracking of illegal usages and enforcement nearly impossible.

Suggestions for Regulation

Assumptions

The recommendations are suggested on the following basis.

The main idea behind the demanding a regulatory framework for keeping a check on the
cryptocurrency transactions is to protecting the interest of the average user and them
protecting against Ponzi schemes used under the name of cryptocurrencies. Additionally, it
will also benefit to move towards a phase of innovation, thereby, pushing growth and
development.

Anonymity and privacy is the unique feature offered by cryptocurrencies; however, they also
pose certain threats. Suitable checks and balances may, however, be put in place to protect
against misuse or to prosecute the same.

Ultimately, if no new regulatory costs are imposed to use cryptocurrencies, it will allow the
technology to grow and expand thereby offering a number of benefits that the official fiat
currencies cannot provide.

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Self-Regulating Organization
• Industry sets up a Self-Regulating Organization on the lines of:
• Association of Mutual Funds of India
• Fixed Income Money Market Dealers Association of India
• Payment Council of India

Code of Conduct
One of the objects of the organisation is to promote the investors’ interest by defining and
maintaining high ethical and professional standards in the cryptocurrency industry.

The Code of Ethics sets out the standards of good practices to be followed by the
Companies in their operations and in their dealings with investors. The Code has been
drawn up to encourage standards higher than those prescribed by various regulators.

Integrity

Members and their key personnel, in the conduct of their business shall observe high
standards of integrity and fairness in all dealings with investors regulatory and other
government authorities.

Due diligence

• Members in the conduct of their business shall at all times

• Render high standards of service
• Exercise due diligence
• Exercise independent professional judgement and act in good faith

Members shall have and employ effectively adequate resources and procedures which are
needed for the conduct of business activities.

Disclosures

Members shall ensure timely dissemination of adequate, accurate, and explicit information
presented in a simple language about the objectives, policies, financial position and general
affairs of the business.

Professional selling practices

Members shall not use any unethical means to sell, market or induce any investor to buy
their product. Members shall not make any exaggerated statement regarding performance
of their product.

24
Members shall endeavour to ensure that at all times

● investors are provided with true and adequate information without any misleading
or exaggerated claims to investors about their capability to render certain services or
their achievements in regard to services rendered to other clients,
● Complaints from investors are fairly and expeditiously dealt with.

Operations
Members shall avoid conflicts of interest in managing the affairs of the business

Members shall not be party to

● creating a false market,

● price rigging or manipulation
● passing of price sensitive information
● take action which is unethical or unfair to investors.

Employees, officers and directors of the Members shall not work as agents/ brokers for
selling, except in their capacity as employees of the Member or the Trustee Company.

Unfair competition

Members shall not make any statement or become privy to any act, practice or competition,
which is likely to be harmful to the interests of other Members or is likely to place other
Members in a disadvantageous position in relation to a market player or investors.

Observance of statutes, rules and regulations

Members shall abide by the letter and spirit of the provisions of the Statutes, Rules and
Regulations which may be applicable and relevant to the activities carried on by the
Members.

Fair practices code

Members shall abide by the provisions of the Fair Practices code which may be applicable
and relevant to the activities carried on by the Members. The VCCI shall in due course
publish the Fair Practices Code for its members.

Enforcement

Members shall:

● widely disseminate the Code to all persons and entities covered by it

● make observance of the Code a condition of employment
● make violation of the provisions of the code, a ground for revocation of contractual
arrangement without redress and a cause for disciplinary action

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 ● require that each officer and employee of the Member sign a statement that he/ she
has received and read a copy of the Code
● establish internal controls and compliance mechanisms, including assigning
supervisory responsibility designate one person with primary responsibility for
exercising compliance with power to fully investigate all possible violations and
report to competent authority
● file regular reports to the relevant authorities on a half yearly and annual basis
regarding observance of the Code and special reports as circumstances require
● maintain records of all activities and transactions for at least three years, which
records shall be subject to review by the Trustees
● dedicate adequate resources to carrying out the provisions of the Code

Composition of the Managing Committee

The Articles of Association of a Self-Regulatory Organisation shall provide the following:

● There shall be a Board of the Self-Regulatory Organization and majority of Board

Members shall be independent.
● The Independent Directors shall not be required to hold any qualification shares.
● The General Superintendence, direction and management of the affairs of the Self-
Regulatory Organization shall vest in its Board of Directors, which may exercise all
powers and do all acts and things which may be exercised or done by the Self-
Regulatory Organization.
● There shall be a Chairman, who shall be an independent professional, appointed by
Board of Directors, with the prior approval of the Board.
● The Chairman shall be responsible for day-to-day administration of Self-Regulatory
Organization and implementing the decisions of Board of Directors.
● The Board of Directors may establish committees including disciplinary committee,
screening committee, arbitration committee or remuneration committee in order to
carry out the purposes of these regulations.
● The Board of Directors of the Self-Regulatory Organization shall be reconstituted as
and when required by the Board.

Membership
Any application for registration or renewal of registration as an intermediary with the Board
under the respective regulations applicable to such intermediaries, shall in case of any
applicant who is a member of a Self-Regulatory Organization or who ought to be a member
of a Self-Regulatory Organization, be made only through the Self-Regulatory Organization of
which he is a member, in the specified manner.

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Corporate Governance
In a mutual or cooperative ownership model, the owners are usually members or
participants regulated by the SRO, so membership or participation also defines the
jurisdiction of the organization. Corporate governance of SROs is a critical issue because the
composition of the board of directors and related governance policies determine how major
decisions on corporate policy are made. Those decisions include selection of management,
setting corporate strategy and overall regulatory policy, adoption of rules, and deciding the
approach to supervision programs and enforcement.

The most significant corporate governance issues at SROs concern the degree of
independence an SRO should have from its owners, regulated persons, and regulators. The
composition of an SRO’s board of directors, management, and committees needs to strike a
delicate balance between the level of independence needed to be a credible regulator and
to manage conflicts of interest on the one hand, and the level of involvement that regulated
firms, market operators, and supervising regulators should have to ensure the effectiveness
and accountability of the SRO on the other.

Transparency is an important principle of SRO governance, which reflects SROs’ quasi-public

status and responsibilities to multiple stakeholders. Transparency in governance is achieved
by making public the following types of information:

● Publication of corporate governance policies and procedures

● Publication of directors’ qualifications
● Publication of annual reports
● Public notice and comment processes on rule changes
● General publication of rules and policy notices
● Public reporting on the SRO’s regulatory plans and performance
● Publication of disciplinary decisions and penalties

Conflicts of Interest
The biggest risk of self-regulation has always been conflicts of interest. Since conflicts of
interest are inherent in the concept of self-regulation, the objective is not to eliminate all
conflicts – rather it is to ensure that potential conflicts are properly managed, with a view to
ensuring that conflicts do not inappropriately influence an organization’s policies and
activities.

The standards on implementing its principles for self-regulation state that:

● the law or regulator should ensure that potential conflicts of interest at an SRO
should be avoided or resolved, and
● an SRO should have procedures in place to address potential conflicts of interest.

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Practices by SRO for Managing Conflicts

● Ensure that market participants and qualified independent directors have a

meaningful role in its governance.
● Establish appropriate structures, policies, and procedures to ensure that potential
conflicts of interest between its regulatory and commercial or advocacy activities are
appropriately managed.
Criteria for Digital Asset Exchanges

Minimum Criteria for Registration of Exchanges

● Capital requirements / Insurance
● Board requirements - Advisors and Company Secretary

Compliance by Registered Exchanges

● KYC - tiered KYC, after a certain limit, physical verification
● AML - velocity based limits, STR reporting, user profiling
● AML software for Rs transactions (Amlock) and bitcoin transactions (Chainalysis)
● Maintenance of Records
● Compliance / Security Officers

Other
● Import / Export of cryptocurrencies
● Taxation
● FDI
● Government Industry Consultant
● Ponzi schemes
● ICOs

Capital Requirement / Insurance

Bitcoin and cryptocurrency companies that hold user funds face a risk that in case they
become bad actors or get hacked and lose user funds.

A company typically can hold both or any one of the following user funds:

1) Rs kept as an advance for user to buy bitcoins

2) Cryptocurrencies kept as a service provided to users for convenience

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Cryptocurrency funds can be proved by technical process like ‘proof of reserve’. Both of
these can be subject to regular audits by certified agencies.

However, to protect users from a bitcoin or cryptocurrency hack, in which the company
might lose part or all of the cryptocurrency balance of users, a company might be required
to have a minimum capital requirement or tiered capital requirement. This also ensures that
fly by night operators do not enter the market. The case against this requirement is that it
hinders competition.

The Regulations may prescribe capital adequacy requirements for cryptocurrency

companies to ensure that they have enough capital to honour all their commitments to their
business associates as well as their customers. A balanced capital adequacy requirement
would ensure that new entrants are able to enter the market, thus providing greater
competition, while at the same time ensuring that customers’ interests are taken care of
and they are not deceived by unscrupulous enterprises.

The other solution is that companies are required to take insurance on the cryptocurrency
balance held by the company.

Both of the above would also have a positive side effect that companies would discourage
holding cryptocurrencies on behalf of users and encourage educating users to store it by
themselves. This prevents centralisation of user funds and thereby possible hacks and shock
to the system. This also encourages companies to innovate to come out with simpler
solutions in which users control their digital assets.

KYC

The sole feature that distinguishes cryptocurrencies from other currencies is its provision of
Anonymity. Though it helps to provide transparency, such anonymity can also lead to misuse
of the provisions. Therefore, a simple way to reduce the risks involved in cryptocurrency is to
link your identity at cryptocurrency exchanges. KYC (Know Your Customer) is the facility used
by exchanges globally to obtain information of the users and to provide a secure platform.
The users are asked to submit personal documents for KYC verification and national
identification numbers before they are allowed to trade on the exchange. Therefore, it is
essential to draft a clear and suitable KYC procedure to carry forward the cryptocurrency
transactions smoothly.

A proper regulatory framework will provide umpteen benefits. A strong protocol will not only
discourage people to use the technology for illegal purposes but will also make it less
appealing to them. As the transactions are taken place through a public ledger, addresses of
some users are known, however, the provisions of KYC will help to identify all the user
addresses and thereby stop the usage of cryptocurrencies for terrorist and other harmful
purposes.

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Thus, a regulatory framework that incentivizes legitimate users to give up their anonymity will
produce a cascade effect: the more users that identify themselves, the less anonymous the
entire system becomes.

For smooth and practical working of the KYC system, companies should follow 3-tiered KYC
procedure which would be as follows:

Level 1 - No KYC required

Customers that come under this category shall only be permitted to sell cryptocurrencies and
hold fiat currency received from such sales. Such customers can be allowed to buy
cryptocurrencies only from the fiat currency received from the previous sale of
cryptocurrencies. They shall not be able to withdraw their fiat currency or transfer it to any
other account unless they complete the KYC process.

Level 2 – E-KYC required

A user who has submitted his documents such as PAN Card, Address Proofs, Bank Account
Linkage details (cancelled cheque, etc.) through online images without actual physical copies
being sent to the company is a part of this tier. These documents shall also be backed up by
Aadhaar based verification through AUAs and AVAs designated by the UIDAI for the purpose
of verification of Aadhaar details. Customers opting for e-KYC would have their deposits and
withdrawals from their bank accounts limited to Rs. 2,00,000/- per month or Rs. 10,00,000
per annum.

Further, the customers will also undergo Aadhaar based verification through AUAs and AVAs
designated by the UIDAI for this purpose.

Tier 3 –Physical KYC required

In this case, customers would be required to send duly attested photocopies of their PAN
Card, Address Proofs, Bank Account Linkage details (cancelled cheque, etc.) to the company
office which will be followed by a tele-verification process to ensure authenticity. These
customers may also be asked to undertake Aadhaar based verification as an added measure.
There shall be no limits to the transactions that such customers can undertake.

Anti- Money Laundering/ Suspicious Transaction Reporting

If, during the establishment or course of the customer relationship, or when conducting
occasional transactions, a reporting entity suspects that transactions related to money
laundering or terrorist financing, then the entity should:

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Normally seek to identify and verify the identity of the customer and the beneficial owner,
whether permanent or occasional and irrespective of any exemption or any designated
threshold that might otherwise apply; and

Make a STR to the FIU in accordance with the Money Laundering & Terrorism (Prevention)
Act, 2008 Section 17 (1)(a).

If a reporting entity suspects or has reasonable grounds to suspect that funds are the
proceeds of a criminal activity, or are related to terrorist financing, it shall as soon as possible
but no later than 3 days report promptly its suspicions to the Financial Intelligence Unit (FIU).

In order to comply with legal or regulatory requirements reporting entities need to have
systems in place which ensure that reports are made when required. Where a legal or
regulatory requirement mandates the reporting of suspicious activity once a suspect has been
formed, a report must be made and, therefore, a risk-based approach for the reporting of
suspicious activity under these circumstances is not applicable.

A reporting entity should allocate resources based on its risk assessment, focusing on those
areas that present a greater vulnerability to money laundering and terrorist financing.
Effective resource allocation will better assist the reporting entity in identifying suspicious
activity and filing reports. In preparing a STR, reporting entities are encouraged to use the
most reliable customer records containing verified customer identification information, when
available.

Blockchain Intelligence Tools

Legitimate companies can use sophisticated blockchain intelligence tools to track criminal
activity. These tools are increasingly available and becoming more sophisticated. These tools
can help as follows.

Activity Monitoring Report

Activity Monitoring provides visibility into your virtual network to ensure that security policies
at your organization are being enforced correctly. By providing user and application level
detail, Activity Monitoring translates high-level security policies to low-level IP address and
network-based implementation.

This will enable one to receive reports on the blockchain activity that users are doing to raise
alerts and issues in quarterly review meetings. The blockchain activity will be divided into
different categories so one can assess the risk of doing business with individual users.

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Cyber Threat Intelligence

The experts and analysts can be trained to be able to spot emerging threats from the deep
web and investigate ransom ware or extortion notes in-house.

The UK's Centre for the Protection of National Infrastructure (CPNI) distinguishes four types
of threat intelligence

Tactical: attacker methodologies, tools, and tactics - rely on enough resources and involve
certain actions to go against potentially dangerous actors trying to do infiltration

Technical: indicators of specific malware

Operational: details of specific incoming attack, assess an organization’s ability in determining

future cyber-threats

Strategic: high-level information on changing risk (strategic shifts) - senior leadership is

required for thorough determination to critically assess threats

Risk Score

Real-time risk scores are available that can determine the activity associated with the source
or destination of Bitcoin funds in real time. Types of activity can be customized that a
company wishes to avoid and take appropriate action.

Quantify Cyber Criminal Revenues

Connections between victims can be established and the criminal’s revenues estimated.

Attribution

Follow traces of Bitcoin to find the services that cybercriminals are using to convert Bitcoin
into cash or other digital currencies.

Maintenance of Records

Since cryptocurrency companies are currently not regulated, they do not have any legal
guidelines as to how to maintain and delete their records. In the absence of any specific data
retention guidelines, some Bitcoin companies are trying to follow the guidelines given in Rule
5(4) of the Information Technology (Reasonable security practices and procedures and
sensitive personal data or information) Rules, 2011, even though these provisions apply only
to “sensitive personal data”. On the other hand, since cryptocurrency companies are not
mandated by law to keep any records, they may destroy records of relatively recent
transactions, which may be required for investigation purposes at a later stage. However, if
the data is deleted or destroyed in the absence of any mandate to retain the same, it would
cause serious problems for any investigation where such information is needed. Under Rule
3 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 every

32
reporting entity is required to maintain certain kinds of records in the manner and for the
period as prescribed in Rules 4, 5 and 6. The requirements contained in the abovementioned
provisions or other similar requirements may be made applicable to cryptocurrency
companies through regulations. By ensuring that cryptocurrency companies are regulated
and have mandatory data retention requirements, it can be ensured that the investigating
agencies can collect as much information as possible from them which may give them a huge
advantage in their investigative efforts.

Import / Export of Cryptocurrencies

Exchanges

It is an integral part of Indian cryptocurrency exchange platforms to offer international rates

to their users so that the import and export could grow steadily. The reason why
cryptocurrency from global exchanges has to sustain the liquidity for the functioning of the
market. This means that cryptocurrency has to maintain a regulatory system drafted to openly
allow national; exchanges to remit money to purchase cryptocurrencies or to receive
payment in exchange for the sale of cryptocurrencies to global exchanges.

However, if this is not the case Indian exchanges will not be able to transact fiat currency and
end up trading only with customers locally. Since the prices are not able to maintain the
liquidity, their prices will significantly differ from international prices. This will force individual
users to take advantage of rate arbitrage. Due to the lack of clarity on the transactions, the
task is then completed by outside financial intermediaries like a bank. This would allow a pass-
through for illegal activities on these exchange platforms.

In the world of cryptocurrencies, hard-fork is a common phenomenon. However, for a hard-

forked coin’s valuation, it is important to have the backing of some independent exchanges
that could benchmark their values. By allowing legitimate exchanges to manage liquidity on
a global scale, the use of financial intermediaries to supervise the movement of
cryptocurrencies in and out of the country is encouraged and developed.

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Remittance

Several Indian employees of overseas companies are bringing their money into India as
bitcoin, a cheap substitute for converting dollars into rupees. By clearing the regulations on
allowing the import of cryptocurrency will help Indian cryptocurrency companies to
collaborate with foreign companies like bitcoin and concede remittance services at a fraction
of the current cost.

Cryptocurrencies can also be used for making payment internationally. The transaction
originally initiated by the user takes up to 10 minutes for settlement timing to validate.
Already many big merchants like Dell and Expedia in the US, Rakuten Japan’s biggest online
company have started accepting bitcoin payments. Airbnb’s most requested feature in
January 2017 was to accept cryptocurrency for payment
(https://twitter.com/bchesky/status/814956246864396288).

Taxation

If an investor has invested in cryptocurrencies, it is important for them to understand how

cryptocurrency transactions are treated for tax purposes. As it has spurted its trading value
all over the world, it offers an opportunity for an increased economic activity like the Internet.
More trade will in return offer the opportunity for increased tax collections. Currently, the
global cryptocurrency exchange is worth more than a billion.

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Value Added Tax / GST

Most of the countries have recommended that the transaction of cryptocurrency from peer-
to-peer should be made tax free. There is no value added tax (VAT) on the buying and selling
of cryptocurrency. Also, cryptocurrency companies should be charged a service tax on the
services they provide to their users.

For example, most exchanges charge a transaction fee. There should be regulation clarifying
that cryptocurrency transactions are VAT-free and service tax should be payable on services
provided if they are charged from customers.

Income Tax

Income tax department slapping tax notices on almost five lakh high net worth individuals
transacting in bitcoin, the market cap of cryptocurrencies has gained 10x every year. Allowing
the cryptocurrency industry to develop can have significance in the development of the
economy by collecting the taxes.

The other regulatory issue is regarding income tax from cryptocurrency transactions.

Income can be derived in following ways:

• The opportunities can be for short term and long-term capital gain income tax on the users
who have gained the return on investments on this new asset class. According to the Foreign
Exchange Management (FEMA) Act, 1999, includes currency notes, postal notes, postal
orders, money orders, cheques, drafts, traveler’s cheques, letters of credit, bills of exchange
and promissory notes, credit cards and other such instruments, as notified by the RBI.

• In a Business the tax trading with cryptocurrency is payable.

35
• In the cryptocurrency mining process, miners process the transactions and secure the
network by using specialized hardware, in exchange for cryptocurrency. It is awarded to
individuals in lieu of their services to secure the network. Hence, the miners may be required
to pay GST on the fair market value of the crypto-coin at 18 percent.

The difference in price of the goods and services by using cryptocurrencies from which it was
initially purchased: Since taxes of a country are in the country’s national currency, currently,
there is only one source for the Tax is from the income of short term and long term capital
gain tax.

To encourage the use of cryptocurrencies, a minimum transaction amount below which users
will not be liable to pay this can be mentioned. For example, merchant transactions using
cryptocurrencies below Rs 1,00,000 will not attract capital gain tax. This is also important for
practicality. For example, if the user buys coffee with bitcoins, bitcoins at this point is more
like a currency instead of a commodity. He will have to show 2 transactions in his books. 1)
For capital gains based on the original price, he purchased the bitcoins. 2) Capital gains. This
will not be practical for small transactions.

FDI

Foreign investors have been investing largely in cryptocurrency and other digital assets on the
online exchange platforms. There is colossal activity in India too. However, investments have
been negligible due to regulatory confusion.

There are chances of FDI to invest in India once the government passes the regulations and
show some clarity to the foreign investors.

This business will progressively develop like stock exchanges and commodity exchanges
evolved has in the past. Due to its importance as a potential infrastructure entity and privacy
of user transactions, FDI should be capped at 25%.

This will help in an engagement of foreign entities and aid in bringing global best practices
and at the same time limit ownership to an Indian entity.

Government-Industry Consultation

The Indian cryptocurrency ecosystem is currently being evaluated by the country’s

government to keep up the pace with the explosion of innovation in cryptocurrency industry.
This means new developments could be important from the government’s perspective.

To cope up with the advancement in the technology, government-industry consultation

process can be formed to counterpart the development. Hence, a committee which is
represented by all stakeholders should meet periodically. Public announcements can be made
which aids start-ups looking for regulatory clarity on various problems affecting the industry.

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Ponzi Schemes

The fad of cryptocurrency among the people has attracted by night operators to use this
technology to market traditional scams like ponzis. Regulation can forbid any cryptocurrency
company to advertise fixed gains.

A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with
money from later investors.

ICOs

Blockchain tokens like Bitcoin and Ethereum have far-reaching potential for innovation like
the Internet. Also, Money Trade Coin is the next new emerging cryptocurrency company in
India, also launching tokens which would attract security law under SEBI.

A great document to identify a decentralized blockchain token from a token which can be
identified as a security has been published by Coincenter:
https://www.coinbase.com/legal/securities-law-framework.pdf

They have also published a spreadsheet which blockchain developers can use to check
whether their token would fall under securities law:

https://docs.google.com/spreadsheets/d/1QxOV2dgxO3C_TyVE0-41ZwLlzPmB-
EE1NNshJGuedCU/edit - gid=0

It is critical to understand the differences between these 2 type of tokens:

1) Decentralized tokens which power public, global blockchains like Bitcoin, Ethereum,
Money Trade Coin, etc.

2) Centralized tokens like Laxmi coin which are used by entities to raise funds similar to a
security.

Once this difference is understood, it is possible to regulate the centralized tokens mentioned
above under existing securities law. And not stifle innovation or potential launches of new
decentralized tokens like Bitcoin and Money Trade Coin.

Further reading:

Framework for Securities Regulation of Cryptocurrencies:

https://coincenter.org/entry/framework-for-securities-regulation-of-cryptocurrencies

SAFT, a reasonable approach to securities law when pre-selling useful network tokens:

https://coincenter.org/entry/the-saft-is-a-reasonable-approach-to-securities-law-when-
preselling-useful-network-tokens?mc_cid=a7bfc69a19&mc_eid=bdb0a506da

37
Benefits to the Government of Indian

A step towards Digital India

Cryptocurrency is a digital asset that enables users to transfer, pay and use money in a
virtual form rather than the traditional paper system. As such, its acceptance and usage will
enhance the use of the Internet and other Digital devices, thereby taking a step towards our
honoured Prime Minister, Mr. Narendra Modi’s dream to turn India into a Cashless and
Digital Society.

The official launch of Cryptocurrency will empower the country digitally. It will surely prove
to be fruitful as it takes off the weight of investing time over paperwork and devotes man
labour in the various field, it is highly efficient and effective.

Beyond the Boundaries – Global Acceptance

The wave of Cryptocurrency has reached far and wide. The year 2017, marked a significant
entry of Cryptocurrency in the Global Financial Market. Many countries have accepted
Cryptocurrency as a legitimate form of transaction, thereby, enhancing its utility. Countries
such as Australia, Brazil, France, Germany among many others have understood the
importance of cryptocurrencies.

Since India is still fighting its way out to be a technologically better and developed country,
the legalization of Cryptocurrency will help it attain the position. Additionally, it will improve
India’s status on the global front and the country will powerfully compete with the world
leaders.

Government Welfare

Cryptocurrencies will provide an all-around benefit to every sector of the society, including
the citizens and Government, leading to betterment and enhancement of the society.

The Government will be benefitted in a number of ways with the acceptance and
legalization of Cryptocurrencies such as Additional Fund Contribution for the development
of the nation, More Tax Revenue and Better Control over cryptocurrency transactions.

Also, the legalization of cryptocurrency will aid the government of a technologically

advanced India, which will boost the morale of the citizens and pave the way to a bright and
progressive future.

Increased Employment

The air of cryptocurrency will not only provide easy and secure financial transactions, it will
also aid in providing better and more employment opportunities to the citizens of the
country. The initiative will employ thousands of youth for a number of work profiles
including Back Office, Rural BPO’s and others. It will also lend a helping hand to people who

38
aim to open their own ventures. In all, the evil of unemployment in the country will be
reduced to a great extent.

Conclusion

A blockchain protects you or anyone else from making a copy of that Bitcoin you just bought
it is intimately linked to each other. Blockchain and cryptocurrency is a dawn for the industry
like Internet and has a lot of potentials to generate economic activity in the coming future.
The market scale is abnormally high and there is a lot of scope for innovation. As there are
potentially high chances of the uprising the Indian financial structure similar to mobile phones
and the internet.

According to the media reports and heavy research on the subject, the technology will provide
better transparency for law enforcement agencies to chase manipulators and cheaters. A
regulatory framework has to be formulated distinctively to prevent illicit uses of this
technology and user protection while promising the legitimate business to development and
advancement of the business.

Thank You!

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Contact Us:

Dr. Amit M. Lakhanpal

Founder and Director of Money Trade Coin Group

amitmlakhanpal@gmail.com

https://www.moneytradecoingroup.com

https://www.moneytradecoin.com

https://www.mtcxindia.in

Appellant

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