With the pervasiveness of technology in almost all major aspects of our lives, even money has taken an electronic form. Popularly known as ‘e-money’, this money is stored in e-payment mechanisms such as e-wallets or digital wallets, and other prepaid e-payment online accounts.
In India in the last few years several digital wallets have cropped up. To name a few- PayZapp by HDFC, Amazon Pay, Airtel Money, Paytm, Ola money, Jio money are popular digital wallets in India.
The payment and Settlement Act, 2007 is the nodal legislation which regulates digital wallets and other digital payment systems in India. Under the payment and Settlement Act, 2007, the Reserve Bank of India has been given the power to supervise and regulate digital payment systems.
WHAT IS MONEY?
Our ancestors started off with the barter system- something like “I will give you 2 horses in return for 5 shiny new super-sharp axes”. Soon they realized that the barter system had too many limitations- everyone didn’t want horses, horses were neither divisible (not too many people want 0.35 horses) nor very portable (imagine having to carry a horse on your shoulder while going shopping).
So they moved on to more acceptable, divisible, a homogenous and portable form of money- cowry shells, salt, gold, silver and lots more. The Chinese invention of paper eventually led to the birth of paper currency, which was initially backed by gold or other precious metals. Then the world moved on to fiat money-currency that’s declared as legal tender by a government but not backed by a physical commodity.
Have a look at a 100 rupee note, It carries a promise signed by the governor of the Reserve Bank of India (RBI):
I promise to pay the bearer the sum of one hundred rupees.
The RBI gets the power to issue currency notes by section 31 of the Reserve Bank of India Act, 1934. This section states that “No person in India other than the Bank or, as expressly authorized by this Act, the Central Government shall draw, accept make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of such person…”
This brings us to an essential question –What is money?
Money’s a matter of function four, a Medium, a Measure, a Standard, a Store. So goes the couplet based on William Stanley Jevons analysis of money, it must function as a medium of exchange, a measure of value, a standard of deferred payment and a store of value.
The birth of computer and the internet brought in many electronic payment systems including debit cards, stored value cards, giro transfers, credit cards, net-banking, electronic bill payments, electronic cheques, mobile wallets, digital gold currencies, digital wallets, electronic funds transfer at point of sale, mobile banking, SMS banking, online banking, payment cards, real-time gross settlement system, SWIFT, wire transfers and more.
And then came Satoshi Nakamoto’s path breaking whitepaper- Bitcoin: A Peer-to-Peer Electronic Cash System in October 2008. This brought the world its first truly peer-to-peer electronic currency.
VIRTUAL & CRPTO CURRENCIES
Bitcoin earned a lot of notoriety primarily because of its use by members of the now shut-down Silk Road-an illegal online marketplace that facilitated the sale of hundreds of millions of dollars worth of drugs, guns, stolen financial information, counterfeit documents and more. All Silk Road transactions were conducted exclusively in bitcoin.
A lot of crypto-currencies piggybacked on Bitcoin’s underlying innovation- the blockchain. In fact, we now have hundreds of virtual currencies being used around the world. And now we have become a world where bankers wake up each morning wondering- “ has the meaning of money and banking changed while I slept..”
This rapid change in the global money ecosystem has implications for all of us- from government looking to clamp down on money laundering, tax evasion and terrorist funding to banks looking to understand the implications of the blockchain technology. From law enforcement looking to clamp down on the mafia using Bitcoin to business looking for faster and cheaper ways to receive and transfer money globally.
The FATF report on Virtual Currencies – Key Definition and Potential AML/ CFT Risks distinguishes between the terms Virtual currency and cryptocurrency.
VIRTUAL CURRENCY is a digital representation of value that can be digitally traded and functions as
- A medium of exchange; and/or
- A unit of account; and/or
- A store of value, but does not have legal tender status that is when tendered to a creditor, is a valid and legal offer of payment in any jurisdiction.
It is not issued nor guaranteed by any jurisdiction, and fulfills the above functions only by agreement within the community of users of the virtual currency.
Virtual currency is distinguished from fiat currency, which is the coin and paper money of a country that is designated as its legal tender; circulates and is customarily used and accepted as a medium of exchange in the issuing country. It is distinct from E-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency. E-money is a digital transfer mechanism for fiat currency i.e., it electronically transfer value that has legal tender status.
- CRPTOCURRENCY refers to a math-based, decentralized convertible virtual currency that is protected by crotography-i.e., it incorporates principles of crptography to implement a distributed, decentralized, secure information economy.
Crptocurrency relies on public and private keys to transfer value from one person (individual or entity) to another, and must be crptographically signed each time it is transferred. The safety, integrity and balance of crptocurrency ledgers is ensured by a network of mutually distrustful parties (in Bitcoin referred to as miners) who protect the network in exchange for the opportunity to obtain a randomly distributed fee (in Bitcoin, a small number of newly created bitcoins, called the “block reward” and in some cases, also transaction fees paid by users as a incentive for miners to include their transactions in the next block).
Hundereds to currency specifications have been defined, mostly derived from Bitcoin , which uses a proof-of –work system to validate transactions and maintain the block chain. While Bitcoin provided the first fully implemented crptocurreny protocol, there is growing interest in developing alternative, potentially more efficient proof methods, such as systems based on proof-of-stake.
RBI CIRCULAR ON VIRTUAL CURRENCIES
Reserve Bank has repeatedly cautioned users, holders, and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
The April 6,2018 circular titled Prohibition on dealing in Virtual Currencies prohibits all commercial and co-operative banks, payments banks, small finance banks, non banking finance companies and payment system providers from dealing in virtual currencies or providing services for facilitating any person or entity in dealing with or settling virtual currencies.
Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral opening accounts of exchanges dealing with them and transfer/ receipt of money in accounts relating to purchase/sale of virtual currencies.
This circular has been issued under relevant provisions of the Banking regulations Act, Reserve Bank Of India Act and the Payment and Settlement System Act.
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