Foreign Entities getting into Payment Systems in India

By Vinita Nair, Vishes Kothari, Rajeev Jhawar & Simran Jalan

(finserv@vinodkothari.com)

India is one of the most exciting markets for fintech startups. Several overseas entities, having already established businesses overseas, want to set up mobile wallets or payments systems in India. This makes them run into two laws, first by virtue of being an overseas entity desirous of moving funds in some form or the other into India, and second because it is entering the payment and settlement systems  space. These bring complexities of foreign direct investment covered by Foreign Exchange Management Act, 1999, and nuances of skeletal, regulation-based law under Payment and Settlement Systems Act, 2007. This article intends to provide an easy-to-comprehend guide to the applicable regulations for overseas entities getting into payment systems in India. Read more

Cryptocurrency on the path to Legalisation?

By Vineet Ojha (finserv@vinodkothari.com)

From conservative investors to cryptocurrency enthusiasts, cryptocurrency has been the hot button issue. In the tech world, a common phrase is “that’s so crazy it just might work”, and hence, an open-source, unregulated, P2P currency has been thriving for the better part of the last decade. The Indian regulators have not taken lightly to the phenomenal increase in the transaction of cryptocurrencies including Bitcoin, in India and globally as they don’t have any intrinsic value and are not backed by any kind of assets. The price of cryptocurrencies therefore is entirely a matter of mere speculation resulting in spurt and volatility in their prices. The recent introduction of crypto tokens by the Government of India may be the first step to the legalization of cryptocurrencies.

This year saw the gradual restriction on cryptocurrency investment by the regulators. The government went all out to eliminate its use in financing illegitimate activities. RBI, on 5th April 2018, directed lenders to wind down all banking relationships with exchanges and virtual currency investors within three months. Yet, it says the feasibility of these coins is being studied and hints at launching its own digital currency. This move saw protests from various exchanges through detailed representations to the RBI on why this ban should be lifted.

It looks like the plea of the investors and exchanges might have been heard as the government is considering launching crypto tokens in India for financial transactions and is evaluating if they can replace smart cards. Unlike cryptocurrency, crypto tokens do not impact the country’s monetary policy as one will have to pay physical money to buy a token. Although, the existing ban on cryptocurrencies is said to continue, it seems like the government is working on regulations and specific actions, including a roadmap for permitting cryptocurrencies in India sometime in the future.

Scenario in India

November 2017, Indian investors made a beeline for cryptocurrencies. The price boom being irresistible, registered an increase in the costumers enrollment for the currency. The value of the cryptocurrency breached the USD 11,000 per bitcoin effectively doubling within a single month. This was despite the murmurs that RBI could potentially declare bitcoin and its kin illegal in India.

December 2017, the regulators buckled up and issued the second warning against these currencies, with the first one being issued way back in December 2013. The finance ministry compares virtual currencies to ponzi schemes.

January 2018, the government continued issuing caveats to clarify that cryptocurrencies are not legal tender. The income tax department reportedly began sending tax notices to investors. Banks suspended the withdrawal and deposit facilities of some exchanges. Some lenders disassociated with them completely.

April 2018, investors were directed to slow transactions in cryptocurrencies on RBI’s command as it considered a proposal for issuing its own digital currency. It said that the feasibility of these coins was under consideration. Exchanges drag the central bank to court in protest.

July 2018, the ban became effective. Some petitioners sought  a stay order from the Supreme Court on the ban at least till the next date of the hearing. However, their request was denied.

August 2018, the government introduced crypto tokens, assuring the exchanges that they are considering a future for cryptocurrency in the economy.

Why Crypto Tokens?

The concept of crypto tokens is different to that of cryptocurrency. Although, terms like cryptocurrency, altcoins, and crypto tokens are often erroneously used interchangeably in the cryptocurrency cosmos, they are all different terms. Cryptocurrency is the superset, and altcoins and crypto tokens are its two subset categories. A cryptocurrency is a standard currency which is used for the sole purpose of making or receiving payments on the blockchain.

The foremost reason for the introduction of crypto tokens is to replace smart cards.  In words of a  senior government official

The committee is examining if crypto tokens can be used to replace smart cards such as metro cards in the public sector to start with. Similarly, in the private sector, it can be used in loyalty programs such as air miles where its use is limited to buying the next ticket and can’t be converted into money,”[1].

The convenience of the token is that it could be stored as a code in any basic mobile feature phone. Secondly, as stated above, tokens don’t expose the monetary policy of the economy as the transaction is basically done through physical money. Hence, the underlying currency is the Rupee. It seems that tokens are more like an experiment by the government or a method to slowly establish a regulated environment for crptocurrencies to thrive.

Conclusion

The government seems to be testing waters with the introduction of tokens. Their intentions are still unclear, either it be to bring back cryptocurrency or to introduce their own digital currency. We will have to wait and see the performance of tokens for a clearer picture.

Please read our related articles on cryptocurrency here:

Legal Nature of Bitcoins: the encrypted digital currency by Vallari Dubey: http://vinodkothari.com/blog/legal-nature-of-bitcoins-the-encrypted-digital-currency-by-vallari-dubey/

Cracking The ‘Bitcoin’ Nut This Budget Session: http://vinodkothari.com/blog/cracking-bitcoin-nut-this-budget-session/


[1] https://www.moneycontrol.com/news/business/markets/sensex-likely-to-be-in-40000-42000-range-by-next-independence-day-2019-poll-2835741.html

Furniture rental startups: A financial perspective

Estimates peg the global furniture rental market at anything between $5-8 billion. Leasing/renting of home durables has seen steep growth. The idea of ownership has been superseded by the desire to gain better experiences by renting or sharing resources. Whatever the absolute numbers, the growth in mobility and intra-country migration suggests that there is a large and ever growing clientele of urban professionals with transferrable jobs and disposable income. Increasing numbers of furniture and appliance rental startups have sprung up to cater to this clientele. This article takes a quick look at the market and its potential in time to come. Read more

SEBI proposes favourable amendments for “Angel Funds”

Integration of Financial Markets and Capital Markets

Cracking the ‘Bitcoin’ nut this Budget Session

Vallari Dubey & Saloni Mathur

finserv@vinodkothari.com
corplaw@vinodkothari.com

Introduction

In the words of Mr. Nassim Nicolas Talib, “Bitcoin is the beginning of something great, a currency without a government, something necessary and imperative.” Read more

RBI’s P2P Regulations: A step forward or backward?

The Reserve Bank of India issued a Master Directions – Non Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (hereinafter referred to as “Directions”) on 4th October, 2017[1], which is an extensive statement outlining in detail the various rules and regulations that all existing and prospective entities carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending (hereby known as NBFC-P2P) will have to comply with. These Directions shall come in force with immediate effect and shall apply to all NBFC-P2Ps, i.e. with effect from the date of issuance of the Master Directions, mentioned above. Read more