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1.Challenges in regulating cryptocurrencies (Live Mint)

2.Understanding the journey of section 377 (Indian Express)

3.Explained: Aadhaar’s new 16-digit Virtual Identity

 

1.Challenges in regulating cryptocurrencies (Live Mint)

Synoptic line: It throws light on the issues and challenges with the regulation of crypto currencies. (GS paper III)

Overview

  • A statement by the ministry of finance on cryptocurrencies warned investors to “stay away from such Ponzi schemes” as there is a “heightened risk of investment bubble of the type seen in Ponzi schemes”. This is the latest in a series of warnings and advisories issued by the government and the central bank in India.
  • Countries across the world are grappling with the choice of an optimal regulatory framework in this field. Any regulatory framework in this field requires a comprehensive understanding of the functioning and structure of cryptocurrencies.

Understanding the difference

  • At the outset, it is essential to understand the difference between virtual currencies (VCs)—a term now synonymous with cryptocurrencies and electronic money. While electronic money is legal tender that can be stored on a chip, VCs are a form of money or currency which does not derive its value from any sovereign authority, but by its technology.
  • More specifically, cryptocurrency relies on principles of cryptography to implement a decentralized peer-to-peer ledger. The key ideas that underpin bitcoin have been elaborated upon in its creator, Satoshi Nakamoto’s 2008 white paper, where bitcoin was introduced as an electronic, peer-to-peer, fully decentralized cash system, which does away with the need for a centralized entity.
  • Since the validity of a transaction is arrived at through solving a computationally challenging exercise based on a cryptographic hash (known as proof of work), any malformed transaction is rejected by the participants (or miners) who keep working on finding the next valid block, after the successful completion of which they are rewarded with a transaction fee and a newly issued unit of currency. Transactions in this network are identified by public-private keypairs a string of letters and numbers used to protect messages cryptographically.

Concerns

  • These widespread cryptocurrency transactions have also led to concerns regarding consumer protection, money laundering, and financing of criminal activities. By design, cryptocurrencies allow anonymous funding; potentially acting as conduits for money laundering and terror financing. The consumer protection, in particular retail consumer protection concerns, stem from their volatile nature.
  • The clamour around regulation of cryptocurrencies poses a pertinent question: what is the optimal policy choice? Is a ban potentially more fruitful than regulation? Even if regulated, will the execution be foolproof? These are valid concerns, aggravated by the pace of evolution of this technology, which has outstripped regulation.
  • To be sure, there is no physical existence of money in the forms of notes, or cash, or gold bars. As a result, regulatory jurisdiction becomes complicated. One might argue that the location of the public-private keypair, the pseudonym identifying the transaction, could serve as a basis for regulation. However, not only is such a key non-existent physically, it could further be split into multiple components and spread across the globe, physically and electronically. Unless there is a robust de-anonymization framework, identifying the individual will not be easy, especially with the prevalence of remote servers.
  • The most centralized channel to control the transactions and speculation would be to control the exchanges. Many exchanges in India and other countries follow “know your customer” and other regulatory mandates, which grants the investors significant protection while maintaining their privacy.
  • While the location of exchanges simplifies the question of jurisdiction, possibilities exist where an individual transfers coins from their private wallet in Country A, to buy goods in Country B through an exchange located in Country C. Even though the actual value is being transferred between Country A and Country B, the virtual currency transaction is taking place across Country A and Country C and from Country C to Country B.
  • The determination of location has important implications for cross-border payments’ purposes. Since virtual currencies enable quick transfers of huge amounts of money, regardless of the location of the payer and the payee, the threshold of permissible cross-border transaction amounts could be different. Taxation-related issues also become more complex. The Internal Revenue Service in the US treats cryptocurrencies as “property”, hence making them applicable to capital-gains tax, while bitcoin mining is subject to self-employment tax regulations.
  • The recent legislation in South Korea subjects income from cryptocurrency trading to capital taxation rules. Again, if the public-private keypair is stored at one location, then the tax jurisdiction is clear. If however, the key is split into multiple parts and stored at different locations, the applicable tax would need to be reconciled with the taxation laws of all these locations.
  • While the ability to mask identities while performing transactions in cryptocurrencies has led to suspicion, the reassuring part emerges from the underlying technology of cryptocurrencies itself—blockchain. The fundamental difference between pseudonymity and anonymity is worth reiterating. The public-private keypair assures that the transaction leaves traces on every node (or system) which stores the blockchain, and can be linked to real-world identities using transaction-graph analysis.

Way ahead

  • There is a clear message for governments and regulators —step up your technology or you will lose. Banning cryptocurrency mining or trading would eliminate financial incentives to further the distributed ledger technology and restrict the positive spillovers in the field of healthcare, finance, governance and so on.
  • However, an active effort in linking research to policymaking to better understand the implications of cryptocurrencies and its underlying technologies would be optimal.

Question: Why crypto currency transactions have led to concerns regarding consumer protection, money laundering, and financing of criminal activities

 

2.Understanding the journey of section 377 (Indian Express)

Synoptic line: It throws light on the journey of section 377 and ups and downs related with it. (GS paper II)

Overview

  • A three-judge Bench of the Supreme Court has decided to revisit the court’s December 2013 order that upheld the constitutional validity of IPC Section 377, which criminalises consensual same-sex relations. The order (Navtej Singh Johar & Ors vs Union of India case) invoked the court’s verdict in Justice K S Puttaswamy (Retd) & Anr vs Union of India & Ors the so-called Right to Privacy judgment.

The 90s: AIDS Bhedbhav Virodhi Andolan vs Union of India (Delhi High Court)

  • The first legal challenge to Section 377 grew out of concerns over male sexual health and HIV/ AIDS. After Kiran Bedi, then the superintendent of Tihar Jail, refused to allow health workers to distribute condoms to male inmates, the NGO AIDS Bedhbhav Virodh Andolan (ABVA) filed a petition for the repeal of section 377.
  • The organisation, however, failed to follow through with the petition, leading to it being dismissed in 2001. But the initiative set the ball rolling. Earlier in 1991, the ABVA had published Less Than Gay: A Citizens’ Report on the Status of Homosexuality in India, the first detailed advocacy of gay rights in the country.

Naz Foundation vs Govt of NCT of Delhi & Ors (Delhi High Court)

  • This case, filed in December 2001, is often cited as the first proper challenge to Section 377. Like ABVA, Naz Foundation, too, was working on sexual health interventions for men having sex with men (MSM) when it filed its PIL in Delhi High Court. Three years later, a two-judge Bench of Chief Justice B C Patel and Justice Badar Durrez Ahmed dismissed the petition on the grounds that there was no cause for action, terming it as a mere academic challenge to the constitutionality of a legislative provision. A review petition was filed, which, too, was dismissed.
  • The petitioners then filed a special leave petition (SLP) before the Supreme Court, which reinstated the case in the High Court on the grounds that an issue of public interest was involved, which should be entertained. In 2006, Voices against 377, a coalition of gender and child rights groups, became an intervening party to the petition.
  • Around the same time, the Ministry of Home Affairs and the National AIDS Control Organisation (NACO) under the Minister for Health and Family Welfare, filed separate and contrarian affidavits the former against the decriminalisation of IPC 377; the latter arguing that criminalisation impeded the efforts to control HIV/AIDS.
  • In 2009, in a historic judgment, a division Bench of the Delhi High Court comprising Chief Justice Ajit Prakash Shah and Justice S Muralidhar said: “We declare that Section 377 IPC, insofar it criminalises consensual sexual acts of adults in private, is violative of Articles 21, 14 and 15 of the Constitution”. However, the court ruled, the provisions of Section 377 IPC will continue to govern non-consensual penile non-vaginal sex and penile non-vaginal sex involving minors.

Suresh Kumar Koushal & Anr vs Naz Foundation & Ors (Supreme Court) 

  • Koushal, a Delhi-based astrologer, and a few others, challenged the Delhi High Court order in the Supreme court the same year. On December 11, 2013, a two-judge Supreme Court Bench of Justices G S Singhvi and S J Mukhopadhaya held that IPC 377 “does not suffer from the vice of unconstitutionality and the declaration made by the Division Bench of the High court is legally unsustainable”.
  • The court left it to Parliament to “consider the desirability and propriety of deleting Section 377 IPC from the statute book or amend the same”, if it so wished. The High Court had “overlooked that a minuscule fraction of the country’s population constitute lesbians, gays, bisexuals or transgenders and in last more than 150 years less than 200 persons have been prosecuted”, the SC said.
  • Review petitions filed by Naz Foundation, the union government, and others in 2014 were quashed by the SC. In February 2016, a curative plea was referred to a five-judge Bench.

The Right to Privacy judgment (Supreme Court)

  • In its unanimous verdict, a nine-judge Bench of the Supreme Court demolished the “minuscule fraction” argument of the 2013 ruling, saying that “sexual orientation is an essential attribute of privacy”. It said that “the invasion of a fundamental right is not rendered tolerable when a few, as opposed to a large number of persons, are subjected to hostile treatment”.
  • In its judgment in National Legal Services Authority vs Union of India & Ors on April 15, 2014, a Supreme Court Bench of Justices K S Radhakrishnan and A K Sikri, directed the union government to declare transgender persons as ‘Third Gender’, and said that they would have all rights of marriage, inheritance, and reservation under the OBC category.
  • The Transgender Persons (Protection of Rights) Bill, 2016 was a result of this order. A parliamentary panel criticised the government’s watered-down Bill, remarking: “While there is no shame in being gay, lesbian, bisexual, transgender or intersex of even straight, there is most certainly shame and dishonour in being a homophone, a transphobe and a bigot.”

Navtej Singh Johar and Ors vs Union of India (Supreme Court)

  • In June 2016, Navtej Singh Johar, a Sangeet Natak Akademi awardee Bharatnatyam dancer, and four others, all members of the LGBTQI community themselves, filed a writ petition in the Supreme Court challenging IPC 377 (The Naz Foundation case was a PIL.) It was in this case that a three-judge Bench of Chief Justice of India Dipak Misra, and Justices A M Khanwilkar and D Y Chandrachud noted that “a section of people or individuals who exercise their choice should never remain in a state of fear”.
  • The Bench ruled that the decision in Suresh Kumar Koushal needed to be reconsidered, and referred the matter to a larger Bench, to be constituted by the CJI.

Question: A section of people or individuals who exercise their choice should never remain in a state of fear. Comment.

 

3.Explained: Aadhaar’s new 16-digit Virtual Identity 

Synoptic line: It throws light on the issue of Aadhaar’s new 16-digit Virtual Identity. (GS paper III)

Overview

  • The Unique Identification Authority of India (UIDAI), which is facing criticism in the light of alleged data breaches, Wednesday announced a new method of identification called Virtual Identity or VID in short.
  • It also introduced what it described as a system of “Limited KYC” (Know Your Customer) to reduce the storage of Aadhaar numbers with the Authentication User Agencies (AUAs), while still letting them do paperless authentications. Essentially, the new VID system will hide the Aadhaar number from the authenticating agency, while still confirming the identity of the user.

What is VID

  • UIDAI has said VID will be a 16-digit number, which will be temporary in nature. So, unlike the 12-digit Aadhaar number that is permanent, the VID will have a certain period of validity, at the end of which it will expire, and the user will have to generate a new one. UIDAI is yet to say what the minimum validity period for the VID will be. A VID will automatically expire when a user generates a new one, as there can only be one valid VID number against a particular Aadhaar number at any given point in time.
  • While it is not compulsory to use or generate a VID, the UIDAI is pitching it as another option for authenticating identity, which it claims is more secure. Think of the VID as a 16-digit OTP that can be used to validate your identity without actually giving out your Aadhaar number. The VID can only be generated by the user in question and, according to UIDAI’s circular, it is not possible to “derive Aadhaar number from the VID”. The VID cannot be used by agencies for duplication, and it cannot be generated by the Authentication User Agency (AUA) either.
  • The UIDAI has said that VID “is only mapped with the Aadhaar number”. So, while the VID will help confirm your identity to the AUA (for example, a bank), it will not necessarily share your Aadhaar number and other data with the AUA. But more on this in the answer to a later question.

How will the public generate the VID?

  • No documents or proof will be needed to generate a VID. But an Aadhaar number will be essential. UIDAI has said users will be able to generate the VID from the Aadhaar resident portal, Aadhaar Enrolment Centres, and the mAadhaar app on Android.
  • The circular says that once the new system comes into effect, all agencies will have to provide this as an option, instead of just relying on the Aadhaar number. However, UIDAI has not so far listed the detailed steps to generate the VID, and how users can complete the process to mask their Aadhaar number from the agencies that demand it.

How will VID help with Aadhaar-linking?

  • UIDAI has also introduced a Limited KYC, which is supposed to allow “paperless” authentication, while ensuring at the same time that the Aadhaar database is not accessed. But it appears that AUAs will be divided into two separate categories: “Global AUAs” and “Local AUAs”.
  • The Global AUAs will have complete access to the full eKYC (Aadhaar number), and will also be able to store Aadhaar numbers in their systems. This is something privacy activists have been cautioning against, because the number can used to reveal various other signifiers about an individual.
  • According to the circular, the Global AUAs will be decided on the basis of “laws governing”, and whether “laws require them to use Aadhaar number”. As of now, it is unclear which agencies will be chosen to be Global AUAs. So, a public sector bank could be a Global AUA, and so could a private player like Paytm, which has its own Payments Bank and expects customers to do an eKYC in order to use it.
  • Not all customers may be keen to share their Aadhaar data with every single player that demands it. And if this player is a Global AUA, even using a VID will not do much, because that player will still have the option of doing a complete eKYC and storing Aadhaar data. It also remains to be seen whether telecom players will be declared Global AUAs, and allowed to access and store Aadhaar data.
  • Local AUAs, on the other hand, will have “Limited KYC”, and will only get a UID token which they can use to identify customers. This UID will be unique for each Aadhaar number a 72-character alphanumeric string, which the circular says will be meant only for system usage. Each Aadhaar will have a unique UID for each particular AUA entity. So, the UID token for your Aadhaar number at one agency will be different from the one at another agency. Every time a Local AUA sends an authentication request, it will rely on this UID token, not the Aadhaar number, to verify identity.
  • According to the UIDAI, all agencies will need to set up the UID token system. However, Global AUAs will have the freedom to use the UID token as “per their need for authentication and database usage”, according to the circular.
  • UIDAI also says it will decide what other “demographic fields” will be shared with the Local AUAs other than this UID token which adds to the confusion. While Local AUAs will not be allowed to store Aadhaar numbers in their systems, it is still unclear who will be designated as a Local AUA.

Question: The flaws in Aadhar security regime dispose the confidence of people. What safeguards can be adopted to prevent such a situation?