Former finance secretary Subhash Chandra Garg has dominated headlines for a week since his surprise transfer from the Ministry of Finance to Power. Garg’s exit from the power corridors of North Block has prompted a critical analysis of his policies as well as his public clashes with institutions like the Reserve Bank of India.
Now, a policy recommendation by an inter-ministerial committee on virtual currencies – that Garg was heading at the time – appears to clash directly with the policy positions of the RBI, as well as the Centre, on a core aspect of Digital India campaign.
Submitted on 22 July, just two days before Garg’s transfer, the “Report of the Committee to Propose Specific Actions to be Taken in Relation to Virtual Currencies” strongly advocates the adoption of Blockchain or Distributed Ledger Technologies (DLT).
Sounds good, so what’s the catch?
Garg’s report bluntly cautions that the adoption and benefits of blockchain to Indian businesses and consumers can be “inhibited” by data localisation – a policy aggressively promoted by the RBI as well as several central ministries over the last one year.
The report makes a spirited case for Distributed Ledger Technology across sectors – banking, payments infrastructure, insurance, securities and commodities, eKYC, land records among others.
In doing so, it recommends that the RBI, among other regulatory institutions, “explore evolving appropriate regulations for development of DLT in their respective areas.”
A Rare Recommendation Against Data Localisation
RBI has been among the strongest endorsers of data localisation – the controversial requirement to store all payments data only in servers within India’s borders.
Any implementation of Garg Committee’s recommendation on DLT, therefore, will necessitate a relaxation of its own policy of locally storing data.
On 6 April 2018, in a letter titled 'Storage of Payment System Data' RBI ordered all banks to, “ensure that the entire data relating to payment systems operated by them are stored in a system only in India.”
The letter specified that this data should include full end-to-end transaction details.
Garg Committee’s evaluation, however, recommends such measures to be “applied carefully” because the nature and design of DLT/Blockchain is predicated upon the free flow of data among servers across the world.
“The Committee is of the opinion that data localisation requirements proposed in the draft Data Protection Bill may need to be applied carefully, including with respect to the storage of critical personal data,” the report recommends.
Moreover, in a rare instance of discussing the limitations of data localisation, the document recommends its watering down “so as to ensure that there is no adverse impact on Indian firms and Indian consumers who may stand to benefit from DLT-based services.”
It is significant that the recommendation also includes critical personal data as a category that should be allowed to be stored outside the country. While other data could be stored outside with a copy in India, the draft Data Protection Bill had specified that critical personal data can only be stored in India.
A Push For Distributed Ledger Tech
At the heart of Garg panel’s policy recommendations is an evaluation of cryptocurrencies and it’s underlying infrastructure, ie, Distributed Ledger Technology or blockchain.
The committee, constituted on 2 November 2017, comprised:
- Subhash Chandra Garg (Chairman), then Secretary, Department of Economic Affairs, Ministry of Finance
- Ajay Prakash Sawhney, Secretary, Ministry of Electronics and Information Technology
- Ajay Tyagi, Chairman, Securities and Exchange Board of India
- BP Kanungo, Deputy Governor, Reserve Bank of India
Distributed Ledger Technologies allow the recording, sharing and transfer of data or value without the need for a central record keeping, as in the case of a traditional ledger.
Blockchain is a specific kind of DLT which rose to prominence as the underlying technology for the cryptocurrency Bitcoin.
The report identifies several benefits of the system:
- Records are immutable: They cannot be changed or tampered with over time.
- Records are non-repudiable: They cannot be invalidated.
- Decentralisation: It is able to store records of ownership of assets without the need for a centralised record-keeping mechanism.
- The legitimacy of transactions is arrived at using “consensus mechanism”: An underlying algorithm which takes into account the consensus of all the participants in the network to verify/validate a transaction.
The report states that “the advantages of using DLT are mainly seen in terms of reducing administration and transaction costs, obviating duplication and improving accuracy of data, improving the speed and efficiency of transactions and detecting fraud.”
In recommending DLT, the panel specifies several use cases in financial services:
- As payments system
- KYC requirements by various financial entities
- Collateral and ownership (including land) registries
- Loan issuance and tracking
- Trade financing
- Securities and commodities
- Internal systems of financial service providers
Blockchain vs Data Localisation
As every aspect of our lives gets connected to the internet, we end of generating more and more data. Governments, businesses and researchers can gain immense information about users and on nearly any subject under the sun by mining this data.
Data localisation, then, is prompted by the emergence of big data as a highly valuable commodity.
Since 2017, India has seen at least three separate proposals for comprehensive and sectoral localisation requirements based on type of data across sectors, including the draft:
- Personal Data Protection Bill 2018 (Ministry of Electronics and IT)
- Draft E-Commerce Policy (Ministry of Commerce and Industry)
- Draft E-Pharmacy Regulations (Ministry of Health and Family Welfare)
“Such requirements may inhibit the uses of DLT in financial services being offered to Indian consumers. For example, the benefit of global or regional DLT-based services in trade financing, re-insurance and other similar services may not be available to Indian consumers if their data cannot be part of a regional or global DLT-based service.”Report of the Committee to Propose Specifications to be Taken in Relation to Virtual Currencies
“This may affect the ability of Indian manufacturers and consumers to benefit from the benefits of global supply chains and international services infrastructure in the medium to long-term,” it adds.
Subhash Garg vs RBI
This impasse on how and where to store and process data illustrates another example of an policy issue on which the 1983-batch IAS officer and the RBI do not see eye to eye.
Among the most controversial moves under Garg as finance secretary was a threat to invoke Section 7 of the RBI Act against the Central bank.
Section 7 empowers the ministry to issue written directions to the RBI to comply with its decisions but had never been invoked in the RBI’s 83-year history until then.
In August 2018, an internal memo circulated by Garg had claimed that the RBI has surplus cash reserves and subsequently shot off three letters, reportedly drafted by Garg himself. This included the threat to initiate proceedings to invoke section 7 to compel the central bank to act.
It remains to be seen if the RBI or the central ministries act on the recommendations.
According to an Economic Times report, MeitY has called for second round of consultations on the draft Data Protection Bill where modifications to data localisation norms are likely to be discussed before being tabled in Parliament.