Appointments & TransfersNews

On 15-07-2022, Mr. Pramod Rao took charge as Executive Director in SEBI.  He will handle the Department of Debt and Hybrid Securities (DDHS) and Enquiry and Adjudication Department (EAD).

Prior to this assignment, Mr. Pramod Rao held the position of Group General Counsel at ICICI Bank  and provided strategic oversight to the legal function for the ICICI group.

Earlier, he served as a member of Board of Directors of ICICI Securities Ltd., ICICI Prudential Trust Ltd. and ICICI Trusteeship Services Ltd.

Mr. Rao has also served as General Counsel for Citi India cluster and was responsible for the Legal, Secretarial and Security & Investigative services within Citi India.  He also worked with IndusLaw, a law firm as a resident partner, overseeing its Banking and Finance practice. He has also participated and contributed to various legal and regulatory reform initiatives of the government, regulators and industry forums.

He holds degree of B.A.LL.B. (Hons) from National Law School of India University, Bangalore.

 

Experts CornerPramod Rao

The Reserve Bank of India (RBI) has the sole right to issue banknotes in India[1] and the RBI Act, 1934 precludes the issuance of currency notes by the Central Government[2] (which prior to coming into force of the Chapter III of the RBI Act, the Central Government could and did issue the currency notes). An overlap period was contemplated in the provisions during which time RBI would issue the currency notes of Government of India supplied to it by the Central Government, with all of the provisions of the RBI Act applying to such currency notes (unless otherwise provided).

 

Within RBI the issuance of banknotes is the preserve of the Issue Department, having a separate and distinct nature from that of other departments of RBI, including to the extent of specification that assets of the Issue Department shall not be subject to any liability[3] other than the liabilities expressed as an amount equal to the total of the amount of currency notes of Government of India and banknotes for the time being in circulation[4].

 

The independence is carried forward in terms of prohibition on issuance of banknotes to the Banking Department or to any other person except in exchange for other banknotes or for such coin, bullion or securities as are permitted by the RBI Act to form part of the reserves[5].

 

It is hence made clear that the banknotes are issued against (specified ratio or percentage of) assets held by the Issue Department, and free from any liability other than as specified. These are the reserves which underpin banknotes in circulation. The banknotes can be issued in exchange for specific types of financial or other assets. Hence, the often heard cries of currency just being printed ignore this fundamental aspect that financial or other assets need to be received against the issue of banknotes.

 

Accordingly, it will be of interest to see what assets the Issue Department is mandated to maintain as reserves for the banknotes it issues.

Such assets are to consist of: gold coin, gold bullion, foreign securities, rupee coin[6] and rupee securities.

 

The aggregate value of gold coin, gold bullion and foreign securities held as assets is required not to be less than Rs 200 crores, and aggregate value of gold coin and gold bullion so held is required to be not less than Rs 115 crores (thereby requiring foreign securities being held to be at least Rs 85 crores)[7]. The valuation of gold coin and gold bullion held is to be at a price not exceeding the prevailing international market price. Mere ownership of gold coin or gold bullion is not sufficient: RBI or its agencies are mandated to keep in its custody in India not less than seventeen-twentieth of such gold assets. If such gold is in any other bank, in the mint or treasury or in-transit can be regarded as part of the assets of the Issue Department.

 

The remainder of the assets of the Issue Department is held in rupee coin, Government of India rupee securities of any maturity, promissory notes drawn by NABARD (National Bank for Agriculture and Rural Development) for specified loans and advances[8], bills of exchange and promissory notes payable in India[9]. Rupee coin is valued at its face value and securities are valued at rates not exceeding market rates.

 

Foreign securities which may be held as part of the assets are also defined and specified. These include:

  • Securities of the following kinds payable in the currency of any foreign country which is a member of the International Monetary Fund (IMF), namely:
    • Balances with a bank which is the principal currency authority of that foreign country.
    • Any other balances or securities in a foreign currency maintained with or issued by IMF, World Bank (IBRD International Bank for Reconstrucion and Development), IDA (International Development Association), IFC (International Finance Corporation), ADB (Asian Development Bank) or the BIS (Bureau of Indian Standards).
    • Any other balances or securities in a foreign currency maintained with or issued by any banking or financial institution approved by the Central Government, provided they are repayable within a period of 10 years.
    • Bills of exchange bearing 2 or more good signatures and drawn and payable at any place in the foreign country (which is a member of IMF) and having a maturity not exceeding 90 days.
    • Government securities of the foreign country (which is a member of the IMF) maturing within 10 years.
    • Any drawing rights representing a liability of IMF.

 

These assets in essence underpin the banknotes, even if the banknotes are not exchangeable into such underlying assets. It is of course noteworthy that at a point in time, certain banknotes and currencies were exchangeable into pre-specified quantity or value of commodities or assets such as US $ or the Sterling Pound £ into gold, and which ceased to be so. It is from then on that the global financial system entered the era of fiat money.

It is also noteworthy that while the above provisions specify the type and nature of financial or other assets the Issue Department can hold, the Banking Department can hold far wider nature of financial or other assets[10].

 

The RBI Act goes on to specify the permissible denominations of banknotes[11] and the design, form and material of the banknotes[12].[13] RBI is also exempt from payment of any stamp duty in respect of banknotes issued by it.[14] Banknotes which are torn, defaced or excessively soiled are not permitted to be reissued.[15] In fact, the right of any person to recover the value of any lost, stolen, mutilated or imperfect currency notes or banknote from RBI or Central Government is precluded.[16] It is noteworthy that RBI can, with previous sanction of the Central Government, prescribe the circumstances in and conditions or limitations subject to which the value of such currency notes or banknotes may be refunded “as of grace”.[17]

 

The RBI Act also affirms the character of its banknotes as legal tender at any place in India in payment or on account for the amount expressed on the banknote, which is guaranteed by the Central Government.[18] This legal tender character means and implies that tendering of the banknotes discharges the payment liability to the extent of the denomination of the banknote, and that none can refuse to accept the same.

 

The RBI Act also contemplates issuance of special banknotes and special one rupee notes for use outside India (using the phrase “without India”).[19] The design, form and material of the special banknotes of specified denominations (of Rupees 5, 10 or 100) require approval of the Central Government after evaluating the Governor RBI’s recommendations. The one rupee notes can be as the Central Government thinks fit to adopt. These special banknotes or currency notes are not legal tender in India, and the provision was introduced to control the circulation of Indian banknotes and currency notes outside India[20].

 

Demonetisation

Given that demonetisation has taken place three times in the country — 1946, 1978 and 2016 — it would be useful to understand the legal underpinning of demonetisation.

 

In terms of Section 26(2), the Central Government may, by notification, on recommendation of the Central Board of RBI, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.

 

As may be construed from the description of the savings clause, while the notified banknotes would cease to be legal tender, such banknotes would still be legal tender at such offices of RBI or its agencies and to such extent as notified. Hence, while the notified banknotes would need to be withdrawn from circulation and not utilised any further for payment obligations, the holders can seek due exchange of such notified banknotes for valid banknotes. The procedure or manner for exchange would be as per the notification.

In general, the notification would suffice for effecting demonetisation.

 

However, for several more reasons, a specific legislation has also been considered necessary. Hence, whether in 1946[21] 1978[22] or in 2016[23], an ordinance was promulgated and later replaced with an Act of the Parliament[24]. Such reasons include:

  • The extinguishment of:
    • RBI’s liability as expressed in the demonetised banknotes.
    • Central Government’s guarantee of the amounts expressed in the demonetised banknotes.
    • RBI’s obligation to exchange such demonetised banknotes for valid banknotes beyond a specified period (including a grace period).
  • Outlawing the possession, transfer or receipt of the demonetised banknotes (subject to certain exceptions).
  • penalties for:
    • misdeclarations or wrong declarations submitted at the time of exchange of the demonetised banknotes for valid banknotes; or
    • possession, transfer or receipt of demonetised banknotes.

 

There is also a view[25] that the obligation on RBI to provide rupee coins on demand in exchange for currency notes or banknotes tendered or to provide banknotes on demand in exchange for  rupee coins tendered[26] also requires being extinguished in respect of demonetised banknotes. With the extinguishment of RBI’s liability as expressed in the de-monetised banknotes and also its obligation to exchange demonetised banknotes beyond specified period, this could be a moot point.

 

Reasons for demonetisation have been usually linked to curbing black marketeers, curbing tax evasion, combating black money, combating counterfeit currency, and belief that demonetisation would flush out the hoarders of high denomination banknotes which are the veritable storehouse of illicit wealth.

 

The demonetisation efforts does not appear to have succeeded in achieving the above-mentioned objectives and instead created an artificial shock to the economy and the society, had a debilitating impact on daily wage earners and the poor, causing untold miseries for the ordinary folk and also had an adverse short to medium term impact on micro, small and medium enterprises (MSMEs) sector which operate on cash and carry basis for their products and for their raw material purchases and who also engage daily workers paid in cash (as they do not have bank accounts).[27]

 

There were also reports of widespread gaming of the demonetisation process through purchase of gold or other precious commodities or other consumables in demonetised banknotes (with applicable discount on value of such banknotes) or availing of services on a long-term basis by prepaying for the same in demonetised banknotes, compromise of weak links in the exchange process, and other infirmities in the demonetisation process. RBI took to issuing clarifications or further guidance on a daily basis to address issues encountered by the citizens, and while it did come in for a fair share of criticism, their responsiveness deserves appreciation (as more often than not, authorities stick to their position, rarely addressing issues immediately or clarifying the matters with promptitude).

 

Certain outcomes on the positive side include:

  • Bringing more accountability to cash holdings and the reduction in anonymity of cash transactions.
  • Ability to undertake data analytics of deposits made in the wake of demonetisation to identify potential tax avoiders or black money operators.
  • Increase in filing of suspicious transaction reports by financial intermediaries indicating that cash deposits made were not commensurate with the previously assessed profile of the customer, thereby shining a light on potential black money holdings.
  • Identification of shell firms suspected of being conduits for money laundering of demonetised banknotes.
  • Increase in the new income tax assesses and increase in future tax revenues with better tax compliance.
  • The surge in digital transactions and adopting of digital payments even for low value transactions.
  • Inflows into mutual funds and insurance companies promoting more formalisation of the economy and financialisation of savings.

Future forward

Statutory framework for currency and coinage is rarely revisited. What is noteworthy is that in 2011, India did update the Coinage Act and repealed five legislations (including four pre-independence legislations). India is again at a critical juncture vis-à-vis currency, especially as RBI is contemplating launching pilots to test Indian digital rupee, as a CBDC — central bank digital currency[28]. A successful pilot would signal a launch and availability of the Indian digital rupee for use in wholesale or retail sphere or both.

 

In the past couple of years, the Indian Government has mooted bills[29] that, inter alia, permit the issuance of official digital currency. The relevant provisions of the 2019 Bill contemplate that the Government of India, in consultation with RBI, may issue digital rupee as legal tender. RBI may also notify a digital currency recognised as legal tender in a foreign jurisdiction, as a foreign currency.

 

In keeping with the provisions of the RBI Act dealing with currency notes, the legislation for Indian digital rupee will need to specify the nature and extent of reserves that will be maintained by the Issue Department of RBI for the Indian digital rupee. Given the dual nature of Indian digital rupee  — wholesale and retail – being taken forward for pilot,  there may also be a requirement for provisions that distinguish the treatment in wholesale and retail usage respectively. Measures for addressing the risks of digital fraud and of ensuring cybersecurity will also be required to be specified.

All in all, an interesting period ahead for India and the Indian public.

 


 Pramod Rao, Group General Counsel at ICICI Bank. Views are personal.

[1] Reserve Bank of India Act, 1934, S.22(1).

[2] Reserve Bank of India Act, 1934, S. 22(2).

[3] Reserve Bank of India Act, 1934, S. 23(1).

[4] Reserve Bank of India Act, 1934, S. 34.

[5] Reserve Bank of India Act, 1934, S. 23(2).

[6] The Coinage Act, 2011 governs the rupee coins and replaced the Metal Tokens Act, 1889, the Coinage Act, 1906, the Bronze Coin (Legal Tender) Act, 1918, the Currency Ordinance, 1940, and the Small Coins (Offences) Act, 1971.

[7]  Vide S. 37, only with the previous sanction of Central Government for period not exceeding 6 months in the first instance and thereafter with similar sanction, for further periods not exceeding 3 months at a time, can RBI hold foreign securities less than this value.

[8] Specified in S. 17(4-E) of the Reserve Bank of India Act, 1934.

[9] As are eligible for purchase by RBI under Ss. 17(2)(a), (b) or (bb) or under S. 18(1) of the Reserve Bank of India Act, 1934.

[10] See following news reports on RBI exploring investments beyond traditional instruments: See HERE, <HERE> and <HERE> (behind a paywall) and see here for a contrarian perspective: <HERE>.

[11] S. 24 of the RBI Act: Bank notes shall be of denominational values of Rupees 2, 5, 10, 20, 50, 100, 500, 1000, 5000 and 10,000 or of such denominational value not exceeding Rs 10,000 as Central Government may specify on the recommendation of RBI Central Board.

[12] S. 25 of the RBI Act: Central Government has to approve the same after considering the recommendations of RBI Central Board.

[13] See Here for the designs and form of banknotes issued across various denominations over the years.

[14] Reserve Bank of India Act, 1934, S. 29.

[15] Reserve Bank of India Act, 1934, S. 27.

[16] Reserve Bank of India Act. 1934, S. 28.

[17] Reserve Bank of India Act, 1934, S. 28, proviso.

[18] Reserve Bank of India Act, 1934, S. 26.

[19] Reserve Bank of India Act, 1934, S. 28-A.

[20] The Reserve Bank of India Bill, 1959.

[21] High Denomination Bank Notes (Demonetisation) Ordinance, 1946 .

[22] High Denomination Bank Notes (Demonetisation) Act, 1978

[23] Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016.

[24] While the 1946 Ordinance was not followed up with an Act, the Supreme Court in Hansraj Moolji v. State of Bombay, AIR 1957 SC 497, in light of amendment made by the India and Burma (Emergency Provisions) Act, 1940 to S. 72 of the Ninth Schedule to Government of India Act, 1935 (that limited the life of ordinances to six months) noted that such amendment had the effect of treating all ordinances promulgated during such emergency as equivalent to legislations passed by the Indian legislature without any limitation of time; separately, in 1956 S. 26-A was added to the RBI Act which states “Notwithstanding anything contained in S. 26, no bank note of the denominational value of five hundred rupees, one thousand rupees or ten thousand rupees issued before the 13-1-1946, shall be legal tender in payment or on account for the amount expressed therein” to lay to rest any further controversy.

[25] See <HERE>; this article provides an excellent overview of judicial decisions concerning the 1946 and 1978 laws on demonetisation and propounds the view on obligation under S. 39 requiring negation vide an ordinance or an act. See also <HERE> regarding demonetisation not being valid without an ordinance or legislation for demonetisation.

[26] Reserve Bank of India Act, 1934, S. 39(1).

[27] Here is a historical retrospective comparing the impact of 1946 and 2016 demonetisation: <HERE>; also see <HERE> and <HERE.

[28] See here for comments and discussion on CBDC by RBI Governor and Deputy Governors: <HERE> (Edited Transcript of Reserve Bank of India’s Monetary Policy Press Conference: 8-12-2021).

[29] See here for the earliest version of the Bill: Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, the latest version is yet to be released by the Government.

Experts CornerPramod Rao

Cryptocurrencies or crypto assets continue to evoke mixed reactions among the knowledgeable and the lay public.

Do they portend a new world order and which would reshape the entire financial system? Or are they a new form of “tulip mania” or a South Sea Bubble or other mass belief suspending hysteria[1] and just a financial scam awaiting a damning expose?

In this context, stablecoins — a form of crypto assets — appears to present a halfway house, and deserves a closer review and a deeper understanding.

 


What are “Stablecoins”?


Stablecoins are a class or type of crypto assets that are backed by a commodity, a currency or an asset. Accordingly, the value of the stablecoins are pegged to, or derived from, the value of such underlying commodity, currency or assets.

Having such an underlying commodity, currency or assets serves to reduce the price volatility of stablecoins (or manages to peg it to the volatility that one observes in the prices of underlying commodity, currency or asset) as compared to other crypto assets. Crypto assets by contrast have shown wild swings in their prices, driven more by speculative forces rather than any practical or real world application (though always spoken as if they do).

Having such an underlying commodity, currency or assets also distinguishes stablecoins from other crypto assets which have no intrinsic worth or value and cannot be redeemed into anything.

Furthermore, any number of stablecoins can be created (subject to availability of the underlying commodity, currency or assets and its acquisition) unlike bitcoins or other crypto assets which are quite so often, by design, limited to a specific number that can be mined and create an artificial scarcity (while projecting the same as an anti-inflation measure).

The (relative) price stability of stablecoins (compared to the volatile prices of other crypto assets) is intended to provide a comfort to investors and merchants in anchoring the prices of goods, services or even other crypto assets.

Stablecoins draw upon the technology and protocols of crypto assets and are backed by or exchangeable into the designated underlying commodity, currency or asset, and hence are considered to represent best of both the worlds: of an important, emergent technology, and of being anchored in real world assets with intrinsic worth that is realisable on demand.

Popular stablecoins and how they describe themselves[2]


Costs, Income and Risks


Stablecoins are usually expressed in round numbers. Fresh issuance requires the stablecoin issuer to purchase an equivalent value of the commodity, currency or asset that backs such stablecoin.

Given the underpinning of the commodity, currency or asset for stablecoins, one needs to factor in the following costs:

  • Transaction costs for acquisition or sale of the commodity, currency or asset in form of brokerage, fees, costs, charges and/or stamp duty.
  • Assayers fees, charges and costs when the commodity or asset is in a physical form for verifying and validating the quality and quantity of the underlying commodity or asset.
  • Storage, custody and insurance costs when the commodity or asset is in a physical form.
  • Bank, depository or custodian charges for holding the currency or financial assets.
  • Auditors fees, charges and costs for verifying and validating the underlying.

Separately, for a holder of stablecoin, there could be costs for purchasing or acquiring stablecoins, storage costs (in a wallet), or transaction costs when making or receiving payments via stablecoins. There are marginal income generation opportunities, for instance by lending the owned stablecoins (with attendant risks).

On the income front, certain underlying assets could generate income for the issuer (akin to but not the same as central banks earning seigniorage[3]), and help offset its costs. Such income streams can include:

  • When commodity or physical assets are the underlying: can be lent to earn interest income.
  • When financial assets are the underlying: these could generate dividend or interest income.
  • When currency is the underlying asset and has been placed with a bank: interest on deposit.
  • When the underlying significantly appreciates in value: capital gains.

Such income earning opportunities bring their own commensurate risks.

When the commodity or physical asset has been lent, the risk of borrower failing to return such commodity or asset in a timely manner or failing to service the interest payment obligation or both. Risk of financial assets failing to generate any income. If such financial assets are bonds, debentures or commercial paper of corporations, the risk of such corporations defaulting or failing. When the financial asset is a bank deposit, there is the risk of bank failure[4]. Price appreciation of an underlying could also mean a later day price correction: if gains have been realised through sale, the issuer may need to purchase the underlying afresh to preserve the equivalence assured for the stablecoin.

 


Perspectives for a Stablecoin Holder


Acquiring stablecoins closely resembles keeping money as a bank deposit or investing in a liquid mutual fund scheme. The fact that there is an underlying of a commodity, currency or an asset backing the stablecoin and its redeemability inspires enormous confidence.

Apart from the perception of lower transaction costs, stablecoin holders should also evaluate the nature and quality of the income generated from the underlying commodity, currency or asset, even if they are not entitled to the same. This is because any such income brings commensurate risks. Hence, while the income stream may belong to the issuer, when the risks materialise, it could be the stablecoin holders who are left holding the can, and who would have to face the permanently diminished value of the stablecoins.

A further factor to consider is the expectation of quick, simple and ready redemption of stablecoins. Depending on the commodity, currency or asset underlying the stablecoin, unusual high levels of redemption could cause the collapse of the stablecoin. This is akin to how usually high levels of withdrawals of bank deposits can cause a run on such a bank and even lead to its collapse.

Bear in mind that banks have obligations to maintain statutory or cash reserves, are subjected to regulatory supervision and inspection and which is subject to prudential standards for capital adequacy, income recognition and provisioning.

Stablecoins and their issuers have no such obligations or supervisory or regulatory requirements governing them. This can make the issuers of stablecoins susceptible to errors, mistakes or even fraud, which may go undetected for long periods of time. The aspect of underlying commodity, currency or asset if incorrectly valued, not adequately safeguarded or if is uninsured or underinsured may serve to bring operational risks that issuers of stablecoins may not be properly equipped to evaluate and address, but with risks and losses having to be borne by the stablecoin holders.

Given the digital only nature of stablecoins, an investor should be mindful of cyber risks – of hacking, security breaches or compromises of credentials[5] – that can result in theft or loss of the stablecoins whether at the investor’s end, at any platform where these are traded, at the issuer’s end or at the service providers engaged by the issuer.

Finally, to a large degree, ambiguity over the legal status of crypto assets and of stablecoins should dissuade an investor from putting her hard earned money into such a class of assets. Once there is clarity on the legal status of stablecoins, confidence that one will not run afoul of laws, rules or regulations, and clarity on several aspects mentioned in this paper, is when one could consider making such an investment[6].

 


Perspectives for Policymakers, Legislators and Regulators: More Questions than Answers


Stablecoins (or as many a central bank or even  Bank of International Settlement (BIS)  are known to say: “so-called stablecoins” perhaps with a latent fear of endorsing such coins or tokens as indeed being stable) have projected a halfway house between crypto assets and tokens (which display high volatility and price fluctuations) and local currency and payments systems (which are construed as slow or costly or both).

However, a much stronger look at the following aspects is necessary for stablecoins:

  • Is the issuer “fit and proper”?
  • Is the underlying duly acquired, and acquired on an arm’s length basis?
  • Is the underlying duly validated and verified both at the time of its acquisition and at periodic intervals?
  • Are the costs incurred by the issuer of the stablecoin fair and appropriate for acquisition, storage or custody, insurance or other related costs and charges? Are the arrangements with such service providers arrived at on an arm’s length basis, and are they regulated or inspected and audited at periodic intervals?
  • Are the underlying assets available in a risk free (or at least, low risk), liquid, easily convertible to cash basis, and can meet redemption requirements?
  • If the underlying assets are risky, illiquid and difficult to convert to cash when needed, then has there been due disclosure of such risks to the holders of stablecoins?
  • Can there be avoidance or reduction of the moral hazard of income belonging to the issuer (who, in all fairness it should be said, quite so often also bears some or all of the costs), while the risks are allocated to the stablecoin holders?
  • Inasmuch as stablecoins resemble bank deposits (or even liquid mutual fund schemes) albeit with features of being digital, transferable and redeemable, should its issuers or its issuance or its holders be regulated? If so, should the regulator be the Reserve Bank of India (if treated akin to bank deposits, with appropriate reserving for the liability and prudential norms for the assets apply) or Securities and Exchange Board of India (SEBI) (if treated akin to liquid mutual fund schemes, with due offer document, disclosure and investments in financial assets, arm’s length and caps on costs) in either situation after the issuer has passed muster with either regulator as “fit and proper”?
  • Given the projected utility of stablecoins in facilitating payments, should it and its issuers be regulated as a payment and settlements system and its operators respectively?
  • In case of existing stablecoins issued outside India, what should be the approach? Is such purchase by a holder compliant with foreign exchange remittances limits[7]? Should the overseas issuer be required to hold or store the underlying in India to the extent Indians hold the stablecoin? Can the underlying be ring fenced? Is localisation and ring fencing desirable, feasible and necessary?
  • Given the key and material factor of stablecoin requiring or having an underlying commodity, currency or asset, is it collective investment scheme, or a “derivative” and a “securities” in terms of the Indian securities law[8]? Do its issuers adhere to the securities law on creation of stablecoins? Do stablecoins as a derivative or as securities or both, require being listed and traded only as contemplated in the securities law? Do holders of stablecoins need to hold it only in demat accounts or can they hold it in crypto wallets?

 


The American View


On 1-11-2021, the President’s Working Group on Financial Markets (PWG), joined by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report on stablecoins[9].

The press release[10] notes that: “To address the risks of payment stablecoins, the agencies recommend that Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis. Such legislation would complement existing authorities with respect to market integrity, investor protection, and illicit finance, and would address key concerns:

  • To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions.
  • To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers to be subject to appropriate federal oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk management standards.
  • To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.”

In short, the recommendations appear to place the issuance of stablecoins with banks, and ensuring banking level of supervision extends to such issuance, wallet providers and requiring arm’s length treatment.


Concluding Remarks


The halfway house approach of stablecoins — in providing low volatility, being speedy and low cost —  can bring broader acceptance and adoption, and even provide a playbook or a template for central bank digital currency (CBDC) to follow. These require the questions posed above being satisfactorily addressed.

What also requires being evaluated is that in a country where digital payment tools and technologies such as Unified Payments Interface (UPI) (value across rising volumes of which have crossed USD 100 billion in a single month[11]), Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) being available at a low cost and 24×7 basis and which are within the regulated domain requires stablecoins or crypto assets? These stablecoins or crypto assets could bring risks that are still not fully understood by the lay public, have unaddressed moral hazards, lack of transparency and could be inherently unstable.

Asking that such stablecoins be regulated requires also an understanding and acceptance by the crypto ecosystem that the legal and regulatory framework will bring its scrutiny of fitness and propriety of the players, their dealings and bring additional compliance costs, impose all too necessary fetters (which creators of crypto assets quite so often decry), and perhaps take away the relative cost advantages currently enjoyed over the regulated financial services sector.

For those who already own or hold crypto assets and particularly stablecoins, it is perhaps time to take a closer look at what are the terms of such crypto assets and stablecoins: are these terms fair, appropriate and does the underlying exist, with sufficient assurance that whenever required, redemption will happen. It should not be that in times to come that we discuss and describe these as “so-called stablecoins” or as unstable coins.


 Pramod Rao, Group General Counsel at ICICI Bank. Views are personal. 

[1]Recommended reading: HERE and HERE.

[2] Source and a recommended read: HERE accessed on 12-11-2021.

[3] See HERE.

[4] While the last risk may seem remote, bank failures have been known to happen. Take Northern Rock in the UK, umpteen bank failures in the US where FDIC undertakes an orderly dissolution (which does not necessarily translate to depositors receiving higher than the insured limit in all situations) and closer home where many a cooperative banks have failed (while commercial banks have been by and large rescued by way of forced or voluntary mergers or recapitalisation, and with moratoriums of varying lengths being specified until such rescue took effect).

[5] There are even incidents of an investor forgetting the password to the wallet resulting in losing access to the crypto asset HERE.

[6] Read here for views of a SEBI registered investment advisor HERE

[7] See HERE for RBI posted FAQs on liberalised remittance scheme.

[8] See definition of “derivatives”, “commodity derivatives” and “securities” in Securities Contracts (Regulation) Act, 1956 (SCRA): Ss. 2(ac), 2(bc), and 2(h); additionally, legality of transactions in derivatives requires such transactions to be in adherence of S. 18-A or of S. 30-A of SCRA.

[9] See HERE.

[10] See HERE.

[11] See HERE.

Experts CornerPramod Rao

As many of the discerning readers of the SCC Blog may be aware, your columnist is a big believer and evangelist of Online Dispute Resolution (‘ODR’).

Check this out here for a brief on what ODR is and where it is currently at.

ODR represents a singular opportunity to reimagine dispute resolution at scale for consumers, citizenry, enterprises and ecosystems.

Rather than making individuals or organisations go to a designated location i.e. the courtroom (itself inaccessible at times due to distances, costs and time), ODR is accessible anywhere (and at times, anytime) that the individual desires. Cost and time savings accrue to both the sets of disputing parties when the medium is online: be it voice, video, chat, document (or combination of all of them) as the medium. ODR serves to level the field for the disputing parties.

ODR institutions build and operate the platform which connect the disputing parties and the neutral/s, and provide the online medium required for dispute resolution. Due safeguards for managing conflicts, ensuring confidentiality and data privacy, onboarding neutrals as well as assistance to those unfamiliar with the platform are some of the roles played by ODR institutions.

Harnessing neutrals – arbitrators, mediators or conciliators – brings independent, experienced individuals committed to furthering the rule of law, and helping resolve disputes amicably (mediation or conciliation) or decisively (arbitration) all in a short span of time.

Automated dispute resolution takes this one step further: where the dispute revolves around information, data or records, the system searches the records, assesses the claim or grievance against the same, and provides the verdict. It is at once free of bias, is objective and provides an auditable trail for the verdict it renders.

In this paper, your columnist will articulate the use cases for ODR by startups and commercial enterprises.


Why does an entrepreneur or an established enterprise need to harness ODR?


Almost every economic activity brings together two or more parties who undertake a transaction or a series of transactions with one another.

For a vast majority, the transactions are concluded smoothly and without a hitch. In a way, this is also the biggest hurdle or mental block for startups or established enterprises to embrace a well-designed dispute resolution mechanism.

 

To them, to design something which addresses a very small set of transactions or parties is regarded as unnecessary or wasteful. However, such exceptions can contribute disproportionately to the costs, time and bandwidth that is spent dealing with the exceptions.

Furthermore, disgruntled consumers may:

  • refrain from engaging in further transactions (an opportunity cost);
  • engage in badmouthing the enterprise or the counterparties that adversely impacts the reputation of the enterprise; or
  • file complaints or claims with the regulatory authorities, or law enforcement agencies or in the courts.

 

So if one has to think for the long haul – cost, time and bandwidth being saved, retention of consumers (probably acquired after a huge cost and/or effort), maintain goodwill and good repute in the market (important for attracting and acquiring future potential customers), and to avoid situations compelling interventions by authorities, agencies or courts would be the biggest reasons to embrace ODR.

 


Harnessing ODR for almost everything: Nothing too small – Nothing too large


You have embraced the entrepreneurial journey and established a startup.

Among the first few things you would probably do is: find the right set of individuals who will join your startup. They might be few in number, but as the startup scales and goes through various rounds of funding or growth or both, their numbers will rise. Whether they be co-founders or employees or such other designation that is conferred, anticipating situations of conflict, differences or disputes is something you should consider. By incorporating the dispute resolution process (of the ODR variety) in the employment letter, employment agreement or founders agreement, you will be able to ensure that there are amicable, confidential, closed-door resolution of issues, conflicts, differences and disputes which arise.

As again, maybe none ever arises, and you make the list of best workplaces and best employers – congratulations and well done. Keep in mind that embedding the ODR clause did not hinder nor detract that.

While Covid-19 may have encouraged work from home, if you have an office in a space that is taken on lease or leave and licence, ensuring any differences or disputes with the landlord are resolved satisfactorily to both of you is something ODR can do.

You have now moved from ideation to MVP – minimum viable product, and started the client acquisition process. You have chosen the direct model – perhaps it is a mobile app or on the website that your potential clients, customers or consumers experience the product. They want to sign up and avail of the product or service.

If what is promised by you is exactly what is understood by the consumer, and the product or service does what it has been said and understood, you are home free and have succeeded. Congratulations and keep at it.

Pause to consider the alternatives. What if what you promised:

  • Is miscommunicated or misunderstood (amounts to misselling).
  • Is well communicated and well understood, but the product or service does not perform in the manner it was communicated and understood (becomes product or service deficiency or defect).

You get the picture.

Any of these will lead to conflict, disputes and differences. How you propose to deal with these situations is important for the reasons already outlined above: of time, cost and bandwidth savings, of customer retention, of keeping goodwill and good repute and of avoiding intervention by authorities, agencies or courts. That it should be ODR would be clear by now.

Moving forward: you have added distribution heft for customer acquisition. These distributors are well-regarded establishments and have well-trained, experienced staff. Once you have explained the product or service construct, they become your startup’s representatives to potential clients, customers or consumers. They will communicate what you promise such that it is exactly what is understood by the consumer, and the product or service does what it has been said and understood. You are home free and have succeeded once more. Congratulations.

Pause to consider the alternatives.

Could the distributor or its staff foul up the communication to potential consumers? Could the consumers have misunderstood what has been shared with them? Could the commission you pay the distributor be incentivising making a sale at any cost? Could the distributor despite commitments to you be deploying inexperienced, poorly trained staff, and/or be departing from well-thought-out sales practices?

How do you deal with such distributors? Can you just disassociate and pick up the pieces? Can you instead hold them accountable and help you fix the mess they may have created? As again, ODR can come to aid and help enforce the commitments you were given or being compensated for lack of adherence to them.

Then again: perhaps your startup is the vendor or supplier to an established enterprise. If you are an MSME, and end up facing delay in payment (life-threatening to your startup), ODR being harnessed can help in providing swift, timely and enforceable outcomes.

In every direction that you had consider: vendors and suppliers, or other intermediaries (warehouses or wholesalers), service providers or partner organisations, if you can have conflicts, differences or disputes, then choosing ODR will make sense again and again and again.

As far as established enterprises go, it is much the same. However, admittedly they come with their own baggage.

You can almost hear them say: this is the way we have always done things around here. Why fix something which is not broken? We would be upsetting the apple cart of how we deal with these things today? It really baked into our pricing and costing and it does not matter.

What may not be said out loud: we are at the receiving end of many grievances and disputes – this will make it far easier for the consumer to hold us accountable.

The fact is that it does matter. Those having the grievance start to treat it as a grudge. The as-yet unaffected consumers start to become anxious and require constant reassurances. The social media powered word of mouth makes potential customers and consumers apprehensive of availing of the product or service. The stakeholders become far more watchful of what you do and do not, and swoop in when the situation is precarious.

In the meantime, your competitor is already embarked on the journey or is seriously considering doing so. Guess what the marketplace will think of its embracing ODR and your lack of embracing ODR.

Across all areas and across the lifecycle

ODR is capable of being embraced across all the areas that a commercial enterprise has, does or needs, and across all of the lifecycle of the enterprise, be it a startup or an established enterprise. More and more enterprises and ecosystems are embracing ODR.

Choose wisely and choose immediately. Embrace the emerging dispute resolution solutions and systems, and the future.

ODR also represents a greenfield opportunity for law students and lawyers among others to consider pursuing as a career. In fact with the right training and skills being imparted, almost anyone can consider becoming a neutral – helping resolve conflicts and disputes and bridging the differences.

 


Group General Counsel at ICICI Bank. Views are personal. His Linkedin profile can be accessed HERE

This column is inspired a brief status of ODR  outlined, Here.

 

Here are further reading materials for those interested:

  • See HERE
  • The ODR Handbook HERE
  • Example of an ecosystem/digital platform harnessing ODR HERE