Tag: KYC

Cryptos, far from the regulators’ glare

Banking & Finance

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The manner in which cryptocurrencies which began as innocuous playthings of geeks went on to become the most sought after asset class and a threat to traditional cross-border payment channels, while managing to stay beyond the reach of regulators, shows the challenges that digital innovation pose.

The original white paper on Bitcoin, put out by its founder, the anonymous Satoshi Nakamoto, described it as, “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Most regulators did not take it seriously then, since its usage appeared to be limited to a few rebels who wanted to express their displeasure against the traditional fiat currencies. But Bitcoin has cloned thousands of other cryptocurrencies, which are no longer innocent payment channels but have morphed into a highly speculative asset and conduits of illicit cross-border money transfers.

The experience with cryptocurrencies shows that fintech products and innovations need to be taken more seriously going ahead and quickly brought under the regulatory radar before they grow in to a many-headed monster. There are other similar digital innovations such as digital lending or algo trades that have grown surreptitiously in the shadows in a similar manner with the regulators struggling to frame rules them.

Digital lending entities

More than a decade ago, the usurious practices of microfinance companies charging exorbitant rates of interests, harassing and shaming borrowers had led to a spate of suicides making the RBI issue regulations to check the lenders in this space. The same sequence of events is now being repeated, but in digital space.

As the Covid-19 pandemic hit the livelihoods and small businesses, digital lending apps turned out to be a ready source of money to these small borrowers. While funds could be accessed for extremely short periods, ranging from 7 to 15 days, the rates of interest charged by the digital lenders were extremely high, ranging from 60 to 100 per cent, according to reports. These apps required the borrower to give them permission to access all the information on their smartphones under the garb of doing KYC checks. The problem started when the borrowers were unable to repay the loans. They were harassed, publicly shamed and even blackmailed leading to some borrowers even resorting to the extreme step of taking their lives.

The RBI had taken note of these malpractices and issued an advisory in December and had also opened a portal for registering complaints. It recently set up a working group to give recommendations on regulating these businesses.

The swiftness shown by the central bank in trying to bring digital lending entities under regulatory purview is laudable. It’s clear that there is demand for loans from such digital lenders and total clamp-down on this space is not a good idea. Weeding out the bad players and ensuring that the lending activities continue with sufficient protection to borrowers is the way forward.

But the point to note is the manner in which the miscreants were quick to find a regulatory gap and begin operations. This requires equal amount of agility from regulators as well.

Dealing with algo trading

Another instance of a digital innovation blind-siding regulators was seen in the proliferation of algorithmic or programmed trading in Indian stock exchanges. These trades that require little or no manual intervention, where computer programs shoot orders to the exchange servers at lightning speed, currently account for over 60 per cent of turnover in derivatives section and 50 per cent in cash segment of the NSE.

There was a lot of furore about these algo trading around 2012 when it was first revealed that programmed trading, especially from colocation sites located close to exchange servers, are ahead of the small investors in trade execution due to their proximity to the exchanges. Further, the high-frequency-trading programs and other rogue programs were gaming the market to stay ahead of other traditional traders.

But no one could explain how or when algo trading had started on Indian exchanges and how they had become so widespread by 2012. The market regulator was in a fix then, since banning algos would have resulted in depriving liquidity from market and making FPIs turn away. SEBI decided to embrace algos and regulate them by issuing guidelines to exchanges, intermediaries and investors about dealing with algos.

We had dealt with this logjam in https://www.thehindubusinessline. com/opinion/columns/lokeshwarri-sk/ learn-to-live-with-algo-trading/ article22995759.ece

Regulating cryptos will be tricky

With fintech adoption growing at a break-neck speed in the country with growing smart phone and data accessibility, it is clear that innovative products that fox regulators and at times border on the illegal will keep cropping up. Regulators need to be on their toes and increase the strength of their digital surveillance team which has the skills to understand these products.

But, while innovations like digital lending and algo trading can be regulated and streamlined by regulators, cryptocurrencies will be much more challenging. This is because — one, it is hard to categorise cryptocurrencies as either currency or asset. So determining the regulator for them is quite difficult. Two, the creation or mining of the cryptocurrencies takes place globally and hence cannot be controlled. While trading can be banned in India, it will continue in other global trading platforms which can be easily accessed by Indians. Three, the investors of these crypto assets are mostly not the investors of traditional asset classes.

Hence it may not be possible for issuing reactive regulations for these crypto assets and absorb them into the mainstream as done for other tech innovations. A global consensus on crypto mining and trading could be the way forward, with uniform rules and regulations framed for crypto trading platforms in all countries. While the contours of the Cryptocurrency Bill to be presented in Parliament is awaited, the last word has not yet been said on taming this beast.

The last two decades have seen rapid innovation in fintech with these digital entities seeping into spaces hitherto occupied by traditional banks, insurance companies, stock brokers, investment advisories, and so on. Some of these entities have tried pushing the boundary between the acceptable and unacceptable, ethical and unethical, legal and illegal and, in many instances, regulators have been caught sleeping at the wheel. Regulators will have to upskill and increase the manpower equipped to deal with fintech entities so that they are not caught off-guard, once too often.

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ORF report, BFSI News, ET BFSI

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New Delhi, Nov 30 (PTI) With an estimated 15 million Indians holding digital currencies, cryptocurrencies need to be regulated like any other financial asset and it would be unwise for India to ban private crypto assets when it has the ability to capitalise on it, a study released by Observer Research Foundation (ORF) said on Tuesday. The Indian crypto asset industry has witnessed exponential growth over the last five years. An estimated 15 million crypto-asset holders have put in Rs 660 crore in these crypto asset holdings.

India now has two crypto unicorns and over 350 crypto startups in what is clearly a flourishing industry.

The report said the country is well placed to capitalise on the opportunity that crypto-assets present due to its expanding private crypto market.

“Cryptocurrencies, like any other financial asset, need to be regulated in order to ensure consumer welfare as well as promote innovation,” a statement summarising the findings of the report on Regulating Crypto Assets in India said. “It would be imprudent to place a blanket ban on private crypto assets. This would result in significant revenue loss to the government and may encourage nascent industries to operate illegally.”

The new monograph by ORF in collaboration with the Esya Centre presents a deep dive into the growth of cryptocurrency in India and proposes a balanced regulatory approach.

India, the report argues, has a history of banning goods and services that exemplify innovation in new markets. Such bans often lead to unintended consequences, which include large revenue losses to the government that impact the livelihoods of people, and have had severe implications for industries, forcing them to enter illegal markets.

It cited the recent example of the ban on the use of drones in India in 2014. That ban effectively clipped the wings of a nascent domestic industry, while people continued to use them in defiance of the ban.

Meanwhile, Chinese companies such as Da-Jiang Innovations (DJI) manufactured recreational drones during 2014-2018 at scale and now command 70 per cent of the global market. They have also diversified into end-to-end drone management services such as photo and video editing software.

In 2018, India realised that a blanket ban was ineffective and resulted in a missed opportunity for the domestic industry. It, therefore, introduced a regulatory framework to govern the use of drones in the country.

Similarly, much earlier in the pre-liberalised era, India tried to ban the import of gold. However, after several years of trying to clamp down on smuggling, the government had to withdraw the ban.

“A prohibition on the crypto assets may have similar repercussions for the crypto asset industry. Due to the decentralised nature of the technology and the ease of transferring crypto-asset using the public key, it is technically impractical to stop the inflow of crypto-asset from abroad,” the report argues.

The report is a first-of-its-kind deep-dive into the world of cryptocurrency in India – one of the fastest-growing consumer bases globally. This analysis comes at a time when the government is looking to introduce a bill to regulate the asset.

It offers key policy suggestions on building the ideal crypto regulatory framework that would both benefit India’s economy and ensure consumer welfare, the statement said.

Instead of banning, the report suggests a balanced regulatory approach, which addresses the concerns of fiscal stability, money laundering, investor protection and regulatory certainty while fostering innovation.

“Most regulatory formulae necessary to address the policy concerns related to crypto-assets, such as investor protection, foreign exchange management, money-laundering and tax evasion, already exist in financial legislation,” says co-author Meghna Bal. “They just have to be adapted to accommodate an emerging technological paradigm. The recommendations in our report show how this can be done.”

In India, classifying crypto as security, good or capital asset could lead to unintended restrictions on investment or leave regulatory gaps in key policy areas. A sui generis crypto framework that adopts the nuances of the crypto industry would be more appropriate and in keeping with emerging global trends.

The report also lays out suggestions for lawmakers on what a crypto regulatory framework must include: it must be technology-neutral, innovation-friendly and consistent, to fully harness India’s potential in this domain.

Among other things, the framework must lay down clear definitions, identify the relevant regulatory bodies and create KYC/anti-money laundering obligations, the report says.

The regulatory framework should also protect crypto asset service providers from being liable for the actions of investors on their platforms. This will help asset service providers innovate and scale new crypto-based products and offerings.

The report proposes that the Government adopt a co-regulatory approach where industry associations and authorities such as SEBI, the RBI, and the Ministry of Finance share the responsibility of oversight. Such an approach follows the Japanese model, where authorities have tasked industry associations to enforce regulations. Providing incentives to industry whistle-blowers could help players within the crypto-market self-regulate.

What India needs is a facilitative regulatory framework that would boost the growth of India’s crypto ecosystem while addressing any possible harms to consumers and society at large, it added.



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Finance Minister, BFSI News, ET BFSI

Banking & Finance

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Finance Minister Nirmala Sitharaman on Tuesday informed Parliament that the Centre has issued no specific directions to banks asking them not to give loans to “sensitive customers” like police personnel.

Sitharaman, during Question Hour in the Rajya Sabha, said there is no “official stated policy” directing banks not to give loans to certain categories of customers. “Banks make assessments based on KYC and other ratings like civil ratings. I don”t think any specific instructions are given to banks — please be careful not to lend to these people,” she said in the Upper House while responding to a supplementary queries.

However, banks do exercise a certain level of discretion based on their available KYC (know your customer), she added. Minister of State for Finance Bhagwat Kishanrao Karad said banks do have “problems” in lending to police and politicians. Banks see track record before lending to these customers, he added.

Responding to another question on banks not lending to politically exposed persons (PEPs), the Union Finance Minister said, “…this is more from the point of view of large sums of money are transferred from one account to another complying with the global requirement where the financial action on terror funding happens.” So according to them, the minister said every account will have to be kept on a tab where huge money is transferred to a sensitive bank account, she added.



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Time to clear the air on cryptos

Banking & Finance

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While the government has had mixed and probably even alternating stance on cryptocurrencies, the currency regulator RBI had been silent for a long time and, of late, has shared its concerns on cryptos with the government.

The securities regulator SEBI could be the ideal regulatory candidate if cryptos were to be treated as an asset class.

The Indian investor community has been euphoric about the instrument, despite noise that crypto investing could become illegal or taxed harshly. All this, when the issue of crypto was purportedly settled last year with the Supreme Court of India lifting the RBI’s crypto ban of 2018.

A to G of crypto

Arbitrary actions and reactions will continue as the financial industry has showcased so far. A few months ago, some banks stalled operations or pass-through of the crypto exchanges; purportedly, as the market guesses, to avoid irritating their regulator. The day there is clarity on how crypto would be seen under Indian law, and if it is for holding crypto as an asset, every BFSI and fintech would jump onto the bandwagon.

The banking sector’s lack of understanding of cryptos continues. It is more about understanding the liquidity of various cryptos available. As long as the rules bring clarity on what other information other than KYC would be needed, the sector can chug ahead.

Crypto consumers will stay invested probably until they get hurt by crypto falsehood or misleading investments. It is rightfully the RBI’s endeavour to have consumer protection in mind. But as we regulate the sector, we also have to move to a market-led economy, where, as long as the consumers get into an investment position without being mis-sold or forced to invest, the industry should not be ostracised.

It is also worthwhile to mention that the RBI is planning to launch its own CBDC (central bank digital currency). Debt leverage worry of the lending community will continue until they are allowed by the regulator. End-usage fears that cryptos could potentially be used for terror financing, etc., seem far-fetched, considering the granularity of its traceability. Interestingly, usage of gold or realty seems far in the wrong end of illegal funding.

Functionality of its core, which is blockchain, cannot be brushed away. It has tremendous usage and potential across public finance, banking and financial services; this could help build a secure financing backbone for the entire country as we seek to expand the inclusive-nature of our financial offerings.

The government’s stand cannot vacillate on policy matters without taking wide range of inputs, not just from a commercial angle but also from a deeper technological understanding if it can bring potential good. Let’s remember that our grandparents could not have imagined mobile-payments or transactions without seeing/touching the monies or writing a cheque. So let us not discount the emerging digital monies, for the short term notion of “not wanting it happen in my watch.”

Any asset class’ trade-worthiness and consequent liquidity is determined by a crucial factor: “trust”. Regulations can offer confidence around legality of the asset class and its usage, but cannot determine public acceptance or asset pricing. Regulations can surely offer consumer confidence and consumer protection if they are light-touch and use latest digital supervisory capabilities.

It is essential that the government does not give into knee-jerk reactions of the stakeholders, and takes a pragmatic call. It has displayed tremendous initiative by adopting digital across various facets including financial markets, e-governance, public outreach, etc. It should engage in depth with various stakeholders to understand how digital finance can be used for larger public good, and not give in to short-term worries and lack of capacity.

It’s a good sign that the Parliamentary Standing Committee on Finance has invited crypto industry players to hear their views on the opportunities and challenges. If our regulators take a leaf from this and invite multi-stakeholder discussions and seek inputs about the draft Bill, it would be a comforting exercise.

In the spirit of democratic transparency, it would be welcome if the ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ is put in public domain, and comments sought.

The writer is corporate advisor and markets commentator

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APIs help India build one of the finest digital financial systems, BFSI News, ET BFSI

Personal Finance

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APIs or application programming interfaces are these little pieces of code at the endpoint of a software that allows other software to connect and communicate with it. They have brought a revolution to the Indian banking and finance industry – one that many other countries are trying to learn from – and they could do the same in healthcare and other fields.

In many cases, organisations charge a fee for their API connections, and that brings substantial revenues. In other cases, they offer APIs free, in the expectation it will help create an ecosystem that will eventually benefit everyone, including them. So profound is their influence that many now talk in terms of the `API economy’.

The government initiative called IndiaStack, which is a set of public APIs, is the finest example of this. Its Aadhaar Auth API launched in 2010 is what allows a vast number of third-party service providers today to connect to the Aadhaar database and authenticate you when you provide your biometric inputs. Its eSign API allows service providers to enable an Aadhaar holder to electronically sign a form or document anywhere and on any device. Its UPI API, in combination with a virtual payment address, enables bank account holders to send and receive money instantly from their smartphones without the need to enter bank account information or net banking user id and password. Even third party service providers can use these APIs, which is how the likes of Google Pay and PhonePe made transfers so delightful.

Sharad Sharma, co-founder of iSpirt Foundation, which has been central to building India-Stack, notes that a shared API that Aadhaar created that allows you to do KYC of an individual in a presence less but trusted manner suddenly unlocks the platform’s ability to serve the customer virtually. No other country in the world, he says, has built such a comprehensive suite of open APIs for digital financial services.

Older banks are saddled with older IT infrastructures, and cannot move very fast. So they are opening up more of their systems through APIs so that newer digital players – call them fintechs or neobanks, who have cloud-based architectures based on what are called containers and microservices – can quickly offer a variety of new services to new segments of people that older banks cannot.

“Banks have opened their APIs so that different fintechs can utilise them,” says Akash Jain, principal analyst at Gartner. Neobanks don’t have a banking license. They partner with traditional banks, and API integrations with these banks are core to their operations.

Next-gen shift

Shashank Mehta, head of RazorpayX, the B2B neobank of payments solutions company Razorpay, says the country is now seeing a next-gen shift, where apart from money movement, APIs are being used to help businesses interact with money better. Digital-native businesses, for instance, can’t afford to manage their money manually – so RazorpayX offers an easy-to-use bank account, a one-click payroll solution, and a corporate card to run ads on social media and for other purchases.

Neobank Zolve provides working professionals and students who are bound for the US with a host of financial facilities they would need, like bank accounts in the US, high-limit credit and debit cards, all without the need for a US social security number or credit history.

At the root of these are the neobanks’ connections with traditional banks. The latter also takes the big burden of compliance with RBI regulations off the backs of fintechs.

That foundational role is what players like Digio do as well. Digio enables authentication services – Aadhaar eSign and eKYC, digital signatures – for fintechs. Digio does the heavy-lifting involved in, for instance, the constant changes in KYC regulations. They have a battery of legal consultants to ensure systems are compliant. “People wanted a solution which could abstract out the technology, maintenance, as well as the compliance factor. That’s where we put out these APIs that allow any business entity to connect and pretty much create a complete digital KYC, signing and recurring payments workflow,” says Sanket Nayak, co-founder of Digio.

Zerodha too opened up its core capability of executing trades, and it does not even charge those who use its APIs. “That was a philosophical call,” says Kailash Nadh, CTO. He says technologists were not coming forward to build securities tech because of legal barriers, red tape and compliance requirements involved in a broking license.

Today, there are entire businesses built on top of Zerodha’s APIs. Smallcase, with over 2 million customers, offers tailor-made baskets of stocks people can trade in; Sensibull enables options trading; Quicko pulls people’s transactions to do taxation. An entire ecosystem is getting created that will also benefit Zerodha. For one, its demat account is an option for Smallcase customers.



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IT department freezes Rs 53-crore deposits of Maharashtra-based urban cooperative bank, BFSI News, ET BFSI

Banking & Finance

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The Income Tax Department has frozen deposits worth over Rs 53 crore of an urban credit cooperative bank in Maharashtra after it found “glaring irregularities” in the opening of accounts in a recent raid, the CBDT said on Saturday. The department raided the headquarters of the bank and the residence of its chairman and a director on October 27, it said.

While the official statement did not name the searched entity, sources identified it as Buldana Urban Cooperative Credit bank.

“The analysis of bank data on core banking solutions (CBS) and the statements of key persons recorded during the search action have revealed glaring irregularities in opening the bank accounts.

“More than 1,200 new bank accounts were opened in the said branch without PAN (permanent account number),” the Central Board of Direct Taxes, which frames policy for the tax department, said in a statement.

The investigations, it said, found that these bank accounts were opened “without following KYC (know your customer) norms and all account opening forms are filled in by the bank staff and they have put their signature/thumb impressions”.

The department alleged that multiple cash deposits of “exact” denomination of Rs 1.9 lakh each were made and they totalled Rs 53.72 crore.

“Out of these, more than 700 bank accounts have been identified which were opened in a series where cash deposits of more than Rs 34.10 crore were made immediately within seven days of the opening of bank accounts, mainly during the period August 2020-May 2021,” it said.

“These deposits have been structured to avoid the mandatory PAN requirement for cash deposits over Rs 2 lakh,” it added.

The money was subsequently converted into fixed deposits in the same branch, the statement claimed.

The CBDT said enquiries in a few cases of such account holders showed that they were “not aware of cash deposits in the bank and categorically denied any knowledge of such bank accounts or even the fixed deposits”.

“The chairman, CMD and the manager of the branch, could not explain the source of cash deposits and accepted that these were done at the behest of one of the directors of the bank, who is a prominent local businessman engaged in trading of grains.

“On the basis of the evidences gathered and statements recorded, the entire amount of Rs 53.72 crore has been restrained,” the statement said.



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RBI imposes penalty of Rs 1.95 crore on Standard Chartered Bank, BFSI News, ET BFSI

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The Reserve Bank of India has imposed a penalty of Rs 1.95 crore on Standard Chartered Bank – India, for non-compliance with the directions on customer protection, cyber security, credit card operations, among others, the central bank said in a circular.

Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Banking Transactions, Cyber Security Framework in Banks, Credit Card Operations of banks and Creation of a Central Repository of Large Common Exposures – Across Banks – were the norms the bank failed to comply with, according to the RBI.

A Statutory Inspection for Supervisory Evaluation of the bank had been conducted with reference to its financial position as on March 31, 2020, and the examination of the risk assessment report, inspection report and all related correspondence pertaining to the same revealed the non-compliance with the above-mentioned directions to the extent of failure to credit the amount involved in the unauthorised electronic transactions, not reporting cyber security incident within the prescribed time period, authorising direct sales agents to conduct KYC verification, and failure to ensure integrity and quality of data submitted.

Based on this, the RBI had issued an notice to the bank advising it to show cause as to why penalty should not be imposed on it.

After receiving the bank’s replies to the notice, the RBI came to the conclusion that it would charge a fee for the non-compliance.



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