Fintech and the Information Technology Act, 2000

In the emerging world of the twenty-first century, it is often said that “Necessity is the mother of all invention”. In today’s cutting-edge technology times, we continue to see an increase in the number of fintech technology growing in India. According to invest India the overall transaction in fintech is estimated to be $65 billion in 2019 and is estimated to jump to $140 billion in 2023[1].

Fintech is a revolutionary concept as it forces and challenges the traditional banking systems to think differently. The RBI of India formed a Sen committee headed by Sudarshan Sen. The committee wanted a deeper understanding of fintech and various types of fintech prevalent in the market.

But the question remains “how will fintech and cryptocurrencies be regulated in India“?

Fintech or financial technology is a unique amalgamation of finance and technology. Fintech, in other words, is the technology that challenges the way traditional banking sector functions. Fintech can be traced back to 24th October 1862 when the first transcontinental telegraph line was established which directly and instantaneously sent messages from Utah to Washington DC. The more recent example is when in, 1967 the first Automated teller machine (ATM) came into existence. Thinking of fintech as a newly emerging field ignores the fact that the financial and banking industry has historically been the highest purchaser of IT.

Essentials of FinTech

There are three essentials to a fintech: –

  • There should be a blend of finance and technology.
  • The technology developed should be faster, convenient, and transparent.
  • Different from traditional banking sectors.

Rules and Regulations

The Indian fintech companies are regulated under two acts, namely, under the Information Technology Act, 2000 (IT Act), and the Payment and Settlement Systems Act, 2007 (PSS, Act). As per the section 4 of the PSS Act, no other person or entity can commence or operate financial activity other than RBI (Reserve bank of India) or unless authorized by the RBI to do so.

In many of the jurisdictions, financial supervision is done by the apex financial institution of their respective country. RBI has also proactively taken steps and encouraged people to adopt and adapt to digital payment systems. The PSS Act is a major step in that direction. It helps the RBI to lay down policies and control the payment system in India. RBI is also responsible for framing guidelines under the PSS Act including procedures for e-wallets.

The Need For RegTech

  • In this ever-changing world, technology is travelling at a much faster rate than light and to get the first-mover advantage it is best suited to have RegTech for FinTech. RegTech is a synthesis of two-word Regulations and Technologies.
  • First, an Emerging Risk Association body (ERA) should be formed whose primary motive would be to bridge the gap and resolve the issues between the regulators and the consumers and also to predict the future risk about the dynamic technology.
  • Secondly, laws should be framed to which extent, the nascent and existing technology companies can collect, organize, process, and analyze the data.
  • Third law should be, with respect to data transmission and data privacy. With the development of digital currencies and increasing dependence on digital wallets, it is pivotal that data is not transmitted, bought, and sold to any person or organization.
  • Technological neutrality should be implemented which means the government should not seek to regulate innovations, but instead find ways through which these technologies are instilled in day to day practices, with the primary motive of the consumer first and engage in better, efficient, convenient and faster technology.
  • To create an adequate pool for potential FinTech startups help them sail through various infrastructure issues, allot and protect special FinTech zones, provide them financial assistance and help them lay a global foundation.

Problems Faced by Traditional Banking Sector

  • Data security is very paramount to any banking sector, as a bank contains, data of thousands of customers, lenders, and borrowers. If data is breached it will lead to huge losses.
  • Also, the bank spends a lot of time in cautiously verify the details of each new customer leading to more time and money resources on due diligence.

Cryptocurrency

Cryptocurrency is the virtual currencies that are secured by cryptography[2]. Cryptocurrencies work on DLT (Distributed ledger technology) network. DLT is a database that saves and records the data. The database records the transactions made each time. The data is recorded in several nodes and these nodes are spread across the world. Each node saves an identical form of data and is functioned independently and is not under the influence of any central authority.

The Crypto Verdict

On the April 2018 the Reserve bank of India (RBI) [3]issued a circular cautioning the customers not to engage in trading, settling, and transacting in the cryptocurrency and put a blanket ban on entities regulating the virtual currencies stating that virtual currencies pose a threefold challenge namely operational, legal and regulatory risks.

A financial action task force (FATF)[4] formed a committee, named,” new payments products and services and guidance” (NPPS), which submitted a report in 2013 on “Emerging terrorist financing risk” taking note of various traditional and emerging modes of terror financing.

Financial stability board [5]in its report dated mid-march, 2018 stated that crypto didn’t pose a threat as even at their peal they are less than 1% of the total global GDP.

G20[6] took note, in 2019, of the fact that technological advancements like crypto-assets have the potential to improve efficiency, inclusiveness, and transparency.[7]

Can Virtual Currency Be Considered Money?

There are four characteristics of money, a medium of exchange, a unit of account, a store of value, final discharge of debt these characteristics were to be tested in terms of legal and social sense.  The United nations supreme court in the case of Wisconsin Central Ltd v. the United States[8] held that VCs are not considered money in a legal sense because it is not widely accepted as legal tender or in a social sense as the huge population doesn’t use as a mode of exchange.

The court further held that VCs falls under the term of payment instruments (said by the US Supreme Court), citing examples that some of the Miami restaurants accept bitcoin as a mode of payment.

However, the Indian supreme court took the cognizance of the fact that anything that may pose a threat or impact on the financial system of the country RBI has the power to regulate or prohibit the same.

Conclusion of The Verdict

This is indeed a great move by the honourable Supreme Court, as it can address the 21st-century issues. Those who are arguing that cryptocurrency will lead to money laundering and terror financing doesn’t hold water because that is also possible with the current physical notes in circulation.

Also Taking note of the fact, that the access to baking is the considered to be, equivalent to, the backbone of the economy. Laying the framework and establishing procedures for virtual currencies is of paramount concern.

Challenges and Vulnerabilities of FinTech

The Fintech companies are new as compared to the traditional banking systems and have limited experiences of the problems faced by the financial industry. They have fewer money resources and cannot spend heavy legal compliance cost leading. The benefits may outweigh the costs. Many investors may resist investing in the companies stating the risk of profitability. These small companies often can be a victim of a cyber-attack being to the closure of these firms also they face tough competitions by big fishes in the market that are the traditional banks.

Global Initiative

The global consulting and IT firm Gartner said that the cryptocurrency is a victim of Hype Cycle [9]  which means A visual representation of the fact that we tend to overestimate the new technology in the short run and underestimate the technology in the long run.

FinTech Wealth Management

Recently the fintech firms have developed a mechanism that provides tailor-made advice to consumers on wealth management. They are called robot advisors which help in financial planning based on investors’ past data and risk preferences. In the united nation, there is separate legislation known as Gramm Leach Bliley Act, 1999[10], or the financial services modernization act which aims and requires fintech firms and traditional banking financial institutions to safeguard consumer information.

Regulatory Sandbox

Itis a safe passage for the business where they can test their business model, delivery system, products, and services without any obnoxious ramification. It is a space provided by the government to conduct a trial and help facilitate funding.

Conclusion

There has been tremendous growth with respect to the amount of money invested in the fintech start-up. Earlier government makes favourable changes with respect to the FinTech start-ups the more growth we will see that will have a multiplier effect and lead to increase in job creation and other legal activities such as contracting and legal compliance.


[1] https://www.investindia.gov.in/

[2] It is a way to secure information. by using a set of mathematical expressions and a set of rules known as Algorithm.

[3] Regulator of the Indian Banking sector, 1st April 1935, Kolkata

[4] Is an intergovernmental organization founded in 1989 on the initiative of G7.

[5] FSB was established by G-20 in April 2009, as a successor to the Financial Stability Forum founded in 1999 by G-7 Finance Ministers and Central Bank Governors.

[6] International Forum for the governments and central banks from 19 countries and the European Union.

[7] Internet Mobile Association of India V. Reserve bank of India

[8] 585 US  2018, 138 S. Ct. 2067 (2018)

[9] https://www.gartner.com/en/research/methodologies/gartner-hype-cycle

[10] https://www.ftc.gov/tips-advice/business-center/privacy-and-security/gramm-leach-bliley-act

Anmay Agarwal from Symbiosis Law School, Noida

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