Is cryptocurrency a threat or an alternative? - Business Guardian
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Policy&Politics

Is cryptocurrency a threat or an alternative?

Imagine a bank or exchange that operates 24×7. No agency or regulated authorities can track your transactions. Sounds cool, right? But there are many roadblocks and intricacies to make it happen. The legality of cryptocurrency in India is not quite clear as there isn’t any proper mechanism or law to regulate cryptos. This article depicts the legality and importance of cryptos for our future financial system. The article tries to cover the scope and limitation of cryptos and the banking systems.

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Imagine having a currency that is accepted everywhere that too in a virtual form. Imgine you can buy or sell anything, anywhere in the world at a same price through an integrated system without using any paper money? Imagine if we do not have to wait for any employee of any regulated bank just for their lunch break to get our work done. Imagine a bank or exchange that operates 24*7. No any agency or any regulated authorities can track your transactions. Sounds cool, right? But there are many roadblocks and intricacies to make it possibly happen. The legality of cryptocurrency in India is not quite clear as there isn’t any proper mechanism or say law to regulate cryptos. This article depicts the legality and importance of cryptos for our future financial system. In this article, I have tried to cover the scope and limitation of cryptos and the banking systems.

People have received mails from major banks of India with a drafted subject head as ‘Caution Advice”. It stated that trading or investing in Virtual Currency or Cryptos or having probable Virtual Currency transactions are not permitted as per the RBI circular DBR. No. BP.BC. 104/08. 13.102/2017-18 dated April 06, 2018. They have also mentioned that regulated entities (Banks) shall not deal in virtual currency or provide services for facilitating any person (traders) or entity (Crypto platforms) in dealing with virtual currency. Banks also need to exit relationship with such customers as per the RBI guidelines. Banks are threatening the customers to restrict or close their account if they don’t comply with the RBI Guidelines.

Reserve Bank of India (RBI)’s 2018 decision to bar banks from providing services to crypto companies was set aside by the Honorable Supreme Court of India, ruling the ban on crypto was unconstitutional on March 2020. But banks are still citing that circular to deny banking services to the platforms and the traders. The Reserve Bank of India (RBI) on Monday, issued a notification, clarifying these banks and other regulated entities cannot cite 2018 circular that was set aside by the Hon’ble Supreme Court, declaring the ban on cryptos unconstitutional on March 04, 2020 in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India.

Although, the Central Bank advised banks and the regulated bodies to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.

The banks have observed that the trading in crypto platforms has increased significantly. The crypto market is booming and volume of money that is flowing is around $2 Trillion where, India constitutes around 1.5 million investors pouring about $2-3 billion in cryptocurrencies.

According to India’s major crypto trading platforms this number is supposed to increase exponentially. India’s biggest crypto trading platform WazirX claims to have hit $5.4 billion in transaction volumes in April as it deals $19-26 million daily trading volumes, with 89% of the transactions coming from India. CoinDCX, the platform sees $20-25 million worth of trading every day. CoinSwitch Kuber also raised $25 million with a valuation of 500 million.

The global equities market represents around $90 trillion in assets like gold and silver and other precious metals accounts for another $12 trillion. When we include other assets like physical cash in circulation plus deposits, global real estate and other liquid money instruments is mounting to $70 trillion. When we include other forms of investment like, global debt, and financial derivatives, the world’s total wealth tops at somewhere just over $1 quadrillion. The total value held by cryptos of the world’s total wealth is around 0.2% i.e., miniscule and that if we assume that this quadrillion roughly represents the total value of assets in the world.

Nigeria and China banned its financial and banking services to all the crypto platforms. and the prices of cryptos have declined gradually and still plummeting. Turkish central bank also issued a ban on the use of Cryptocurrency as a payment method in Turkey. Counties like Iran, Nepal, Thailand, India, Bolivia, Kyrgyzstan have also been reported to ban Cryptocurrency. It does seem the growth of cryptocurrencies are affected by the actions and statement of the government and federal officials.

The prices of cryptos have declined gradually and still plummeting after these events. The total market cap of cryptocurrencies i.e., (9,541 types of cryptocurrencies) has increased from $1 trillion to around $2.5 trillion within three months amid the pandemic. After the circulation of ban of cryptos in these countries, the total market cap of cryptos had contracted to 38 per cent from $2.5 trillion on May 12 to $1.5 trillion, according to the data from CoinMarketCap.

Despite of huge dips and certain market crashes crypto’s investors still manages to obtain huge profits from it. Cryptos have now a 10 year of track record and has generated more returns than any other investment in the same time period. Huge returns from cryptos attracted many investors in India and as for now 1.5 crores are investing actively in Cryptos.

This created a cavity among cryptos, traditional investment and banking and this has created anxiety among the banks. The Reserve Bank of India is concerned that cryptocurrencies may impact financial stability in Asia’s third-largest economy. Investors are running towards Bitcoin and other Cryptocurrencies as safe haven. It is therefore obvious that when people will invest in cryptos then the flow of money will automatically be diverted to crypto market and results in absence of money flow in stocks and will depreciate the value of stocks if cryptos continues its bullish market.

Crypto platforms also happen to be a major problem for banks. As it provides peer to peer exchanges, virtual currency wallets which entertains the traders to buy or sell products, exchange different currencies without using the paper money and of course it’s not traceable. Many organisations, companies and entities are now accepting cryptos to buy or sell services and products. Many fortunes and multi bagger companies like Tesla, Facebook, Paypal, Visa, Mastercard, many hedge funds, and even family institutions began investing in this new asset class and had shown interest in cryptocurrency as a hedge against their traditional investments.

Involvement of these fortune companies had set precedent to make money from cryptos and people have started putting their hard earned money in cryptos. The urge to make million figures within a small amount of time also escalated investment in cryptos. This was long due as banks are not providing much interests as compared to inflation and stocks and other equity markets are keep dipping amid pandemic. The looming threat of inflation has also encouraged investors to take risks to hedge against inflation.

According to various central banks of the world, cryptos could put an end to paper money as it can easily paralyse the real currencies and could endanger the financial mechanism of a country. It already replaced intermediaries, reduced transactions, cost, time, and eliminated the need of brokers to perform transactions, causing democratization of money. It can also be a channel for money laundering and the financing of terrorism as, cryptos transactions are not traceable.

The other thing that worries the most is the presence of multiple operational vulnerabilities and volatility of the crypto market as it can be plunged or increased upto (20-30) % in a day and as its not centralised or say regulated by any authority in the world. The frenzy of Dogecoin and the craze of other meme oriented cryptos like Shiba Inu and StopElon were key reasons that led to banks placing informal restrictions on transactions related to crypto.

There are many challenges that are being faced by the banks around the world as the banking systems are degrading in the current scenario and on the other hand block chain technologies and cryptocurrencies are quite promising and being seen as a part of a potential “revolution” in finance. But the question is how can a citizen going to trust a payment system that does not have a central authority supporting it? If people continue to use these cryptos then ultimately, they will lose faith in central banking system and this tends to be the edge that haunts the central banks when they talk about cryptocurrencies.

CONCLUSION

However, blockchain for digital payment systems technology is breaking with these myths to provide a safe and efficient system. Some banks have already integrated this idea, as a result, banks are trying to keep up, seeking to outpace cryptocurrencies with a new competitive concept, “stablecoins.” These are digital currencies that are like crypto coinage in some ways, but instead of being decentralized like Bitcoin which is not overseen or regulated by governments they are fully backed with safe and liquid assets in a domestic currency. Currently, some 80 percent of countries surveyed by the Bank for International Settlements are studying versions of stablecoins and what have become known as “central bank digital currency” (CBDCs), led by China and Switzerland.

In India, the government is considering to introduce a bill to create a sovereign digital currency and simultaneously penalizing anyone holding or trading private currencies. However, it would allow certain exceptions to promote the underlying technology of cryptocurrency and its uses. The Reserve Bank of India (RBI) is “very much in the game” in getting ready to launch its own digital currency, joining other central banks including China’s electronic yuan. The time will tell if we can actually have cryptos as a universal currency or stablecoin as a regulated currency will be taking it place. Whatever happens innovation will always win!

Crypto platforms also happen to be a major problem for banks. As it provides peer to peer exchanges, virtual currency wallets which entertain the traders to buy or sell products, exchange different currencies without using the paper money and of course it’s not traceable. Many organisations, companies and entities are now accepting cryptos to buy or sell services and products. Many big companies like Tesla, Facebook, Paypal, Visa, Mastercard, along with several hedge funds and even family institutions, began investing in this new asset class and had shown interest in cryptocurrency as a hedge against their traditional investments.

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Policy&Politics

Govt extends date for submission of R&D proposals

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The Government has extended the deadline for submission of proposals related to R&D scheme under the National Green Hydrogen Mission. The R&D scheme seeks to make the production, storage, transportation and utilisation of green hydrogen more affordable. It also aims to improve the efficiency, safety and reliability of the relevant processes and technologies involved in the green hydrogen value chain. Subsequent to the issue of the guidelines, the Ministry of New & Renewable Energy issued a call for proposals on 16 March, 2024.

While the Call for Proposals is receiving encouraging response, some stakeholders have requested more time for submission of R&D proposals. In view of such requests and to allow sufficient time to the institutions for submitting good-quality proposals, the Ministry has extended the deadline for submission of proposals to 27th April, 2024.

The scheme also aims to foster partnerships among industry, academia and government in order to establish an innovation ecosystem for green hydrogen technologies. The scheme will also help the scaling up and commercialisation of green hydrogen technologies by providing the necessary policy and regulatory support.

The R&D scheme will be implemented with a total budgetary outlay of Rs 400 crore till the financial year 2025-26. The support under the R&D programme includes all components of the green hydrogen value chain, namely, production, storage, compression, transportation, and utilisation.

The R&D projects supported under the mission will be goal-oriented, time bound, and suitable to be scaled up. In addition to industrial and institutional research, innovative MSMEs and start-ups working on indigenous technology development will also be encouraged under the Scheme.

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Policy&Politics

India, Brazil, South Africa to press for labour & social issues, sustainability

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The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment.

India, on Thursday, joined the G20’s two-day 2nd Employment Working Group (EWG) meeting under the Brazilian Presidency which is all set to address labour, employment and social issues for strong, sustainable, balanced and job-rich growth for all. India is co-chairing the 2nd EWG meeting, along with Brazil and South Africa, and is represented by Sumita Dawra, Secretary, Labour & Employment.

The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment. India has pointed out that the priority areas of the 2nd EWG at Brasilia align with the priority areas and outcomes of previous G20 presidencies including Indian presidency, and commended the continuity in the multi-year agenda to create lasting positive change in the world of work. This not only sustains but also elevates the work initiated by the EWG during the Indian Presidency.

The focus areas for the 2nd EWG meeting are — creating quality employment and promoting decent labour, addressing a just transition amidst digital and energy transformations, leveraging technologies to enhance the quality of life for al and the emphasis on gender equity and promoting diversity in the world of employment for inclusivity, driving innovation and growth. On the first day of the meeting, deliberations were held on the over-arching theme of promotion of gender equality and promoting diversity in the workplace.

The Indian delegation emphasized the need for creating inclusive environments by ensuring equal representation and empowerment for all, irrespective of race, gender, ethnicity, or socio-economic background. To increase female labour force participation, India has enacted occupational safety health and working conditions code, 2020 which entitles women to be employed in all establishments for all types of work with their consent at night time. This provision has already been implemented in underground mines.

In 2017, the Government amended the Maternity Benefit Act of 1961, which increased the ‘maternity leave with pay protection’ from 12 weeks to 26 weeks for all women working in establishments employing 10 or more workers. This is expected to reduce the motherhood pay gap among the working mothers. To aid migrant workers, India’s innovative policy ‘One Nation, One Ration Card’ allows migrants to access their entitled food grains from anywhere in the Public Distribution System network in the country.

A landmark step in fostering inclusion in the workforce is the e-Shram portal, launched to create a national database of unorganized workers, especially migrant and construction workers. This initiative, providing the e-Shram card, enables access to benefits under various social security schemes.

The portal allows an unorganized worker to register himself or herself on the portal on self-declaration basis, under 400 occupations in 30 broad occupation sectors. More than 290 million unorganized workers have been registered on this portal so far.

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Policy&Politics

India to spend USD 3.7 billion to fence Myanmar border

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India plans to spend nearly $3.7 billion to fence its 1,610-km (1,000-mile) porous border with Myanmar within about a decade, said a source with direct knowledge of the matter, to prevent smuggling and other illegal activities. New Delhi said earlier this year it would fence the border and end a decades-old visa-free movement policy with coup-hit Myanmar for border citizens for reasons of national security and to maintain the demographic structure of its northeastern region.

A government committee earlier this month approved the cost for the fencing, which needs to be approved by Prime Minister Narendra Modi’s cabinet, said the source who declined to be named as they were not authorised to talk to the media. The prime minister’s office and the ministries of home, finance, foreign affairs and information and broadcasting did not immediately respond to an email seeking comment.

Myanmar has so far not commented on India’s fencing plans. Since a military coup in Myanmar in 2021, thousands of civilians and hundreds of troops have fled from there to Indian states where people on both sides share ethnic and familial ties. This has worried New Delhi because of risk of communal tensions spreading to India. Some members of the Indian government have also blamed the porous border for abetting the tense situation in the restive north-eastern Indian state of Manipur, abutting Myanmar.

For nearly a year, Manipur has been engulfed by a civil war-like situation between two ethnic groups, one of which shares lineage with Myanmar’s Chin tribe. The committee of senior Indian officials also agreed to build parallel roads along the fence and 1,700 km (1,050 miles) of feeder roads connecting military bases to the border, the source said.

The fence and the adjoining road will cost nearly 125 million rupees per km, more than double that of the 55 million per km cost for the border fence with Bangladesh built in 2020, the source said, because of the difficult hilly terrain and the use of technology to prevent intrusion and corrosion.

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Policy&Politics

ONLY 2-3% RECOVERED FROM $2-3 TN ANNUAL ILLEGAL TRADE THROUGH BANKING: INTERPOL

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However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity.

In a press briefing held on Wednesday, Interpol Secretary General Jurgen Stock unveiled alarming statistics regarding the extent of undetected money laundering and illegal trade transactions plaguing the global banking network. Stock revealed that over 96% of the money transacted through this network remains undetected, with only 2-3% of the estimated USD 2-3 trillion from illegal trade being tracked and returned to victims.

Interpol, working in conjunction with law enforcement agencies and private financial sectors across its 196 member countries, is committed to combating the rising tide of fraud perpetrated by illicit traders. These criminal activities encompass a wide spectrum, including drug trafficking, human trafficking, arms dealing, and the illicit movement of financial assets.

Stock emphasized the urgent need to establish mechanisms for monitoring transactions within the global banking network. Currently, efforts are underway to engage banking associations worldwide in setting up such a framework. However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity. The lack of real-time information sharing poses a significant obstacle to law enforcement agencies in their efforts to combat money laundering and illegal trade.

Stock underscored the role of Artificial Intelligence (AI) in exacerbating this problem, citing its use in voice cloning and other fraudulent activities. Criminal organizations are leveraging AI technologies to expand their operations and evade detection on a global scale. Stock emphasized the importance of enhanced cooperation between law enforcement agencies and private sector banking groups. Realtime information sharing is crucial in the fight against illegal wealth accumulation.

Drawing inspiration from initiatives such as the “Singapore Anti-Scam Centre,” Stock called for the adoption of similar models in other countries to strengthen the collective response to financial crimes. In conclusion, Stock’s revelations underscore the pressing need for concerted action to combat global financial crimes. Enhanced cooperation between public and private sectors, coupled with innovative strategies for monitoring and combating illicit transactions, is essential to safeguarding the integrity of the global financial system.

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Policy&Politics

FM defends Atal Pension Scheme, highlights guaranteed returns

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Finance Minister Nirmala Sitharaman defended the Atal Pension Yojana (APY) against Congress criticism, asserting its design based on choice architecture and a guaranteed minimum 8% return. She emphasized the scheme’s opt-out feature, facilitating automatic premium continuation unless subscribers choose otherwise, promoting retirement savings. Sitharaman countered Congress allegations of coercion, stating the APY’s guaranteed returns irrespective of market conditions, supplemented by government subsidies.

Responding to Congress’s claim of scheme misuse, Sitharaman highlighted its intended beneficiaries – the lower-income groups. She criticized Congress for its alleged elitist mindset and emphasized the scheme’s success in targeting the needy. Sitharaman accused Congress of exploiting vote bank politics and coercive tactics, contrasting it with the APY’s transparent framework. The exchange underscores the political debate surrounding social welfare schemes, with the government defending its approach while opposition parties raise concerns about implementation and efficacy.

Finance Minister Nirmala Sitharaman’s robust defense of the Atal Pension Yojana (APY) against Congress criticism highlights the ongoing debate over social welfare schemes in India. Sitharaman’s assertion of the APY’s design principles, including its opt-out feature and guaranteed minimum return, underscores the government’s commitment to promoting retirement savings among lower-income groups. The Atal Pension Yojana, named after former Prime Minister Atal Bihari Vajpayee, was launched in 2015 to provide pension benefits to workers in the unorganized sector. It aims to address the significant gap in pension coverage among India’s workforce, particularly those employed in informal and low-income sectors. The scheme offers subscribers fixed pension amounts ranging from Rs. 1,000 to Rs. 5,000 per month, depending on their contribution and age at entry, after attaining the age of 60. Sitharaman’s response comes after Congress criticism alleging the APY’s inefficacy and coercive tactics in enrolment.

Congress General Secretary Jairam Ramesh described the scheme as poorly designed, citing instances of subscribers dropping out due to unauthorized account openings. However, Sitharaman refuted these claims, emphasizing the APY’s transparent and beneficiary-oriented approach. The finance minister’s defense focuses on three key aspects of the APY: Choice Architecture: Sitharaman highlights the opt-out feature of the APY, which automatically continues premium payments unless subscribers choose to discontinue.

This design element aims to encourage long-term participation and ensure consistent retirement savings among subscribers. By simplifying the decision-making process, the scheme seeks to overcome inertia and promote financial discipline among participants. Guaranteed Minimum Return: Sitharaman underscores the APY’s guarantee of a minimum 8% return, irrespective of prevailing interest rates. This assurance provides subscribers with confidence in the scheme’s financial viability and incentivizes long-term savings.

The government’s commitment to subsidizing any shortfall in actual returns further strengthens the attractiveness of the APY as a retirement planning tool. Targeting the Needy: Sitharaman defends the predominance of pension accounts in lower income slabs, arguing that it reflects the scheme’s successful targeting of its intended beneficiaries – the poor and lower-middle class. She criticizes Congress for its alleged elitist mindset and suggests that the party’s opposition to welfare schemes like the APY stems from a disconnect with the needs of marginalized communities. Sitharaman’s rebuttal also addresses broader political narratives surrounding social welfare policies in India.

She accuses Congress of exploiting vote bank politics and coercive tactics, contrasting it with the transparent and inclusive framework of the APY. The exchange underscores the ideological differences between the ruling Bharatiya Janata Party (BJP) and the opposition Congress, with each side advocating for their vision of social welfare and economic development. In addition to defending the APY, Sitharaman’s remarks shed light on the broader challenges and opportunities facing India’s pension sector.

Despite significant progress in expanding pension coverage through schemes like the APY, the country still grapples with issues such as financial literacy, informal employment, and pension portability. Addressing these challenges requires a multifaceted approach involving government intervention, private sector participation, and civil society engagement.

As India strives to achieve its vision of inclusive and sustainable development, initiatives like the APY play a crucial role in promoting economic security and social equity. Sitharaman’s defense of the scheme underscores the government’s commitment to addressing the needs of vulnerable populations and ensuring their financial well-being in the long run.

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Economic

Regulatory steps will make financial sector strong, but raise cost of capital

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India’s financial system regulator, the Reserve Bank of India (RBI), is demonstrating a serious commitment to improving governance and transparency at finance companies and banks, with the RBI’s recent measures aimed at curtailing lenders’ overexuberance, enhancing compliance culture and safeguarding customers.

While the global ratings firm has appreciated the RBI’s “diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues”, it has cautioned that increased regulatory risk could impede growth and raise the cost of capital for financial institutions. “Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” says S&P Global Credit Analyst, Geeta Chugh. “India’s regulator has underscored its commitment to strengthening the financial sector. The drawback will be higher capital costs for institutions,” Chugh cautions.

The RBI measures include restraining IIFL Finance and JM Financial Products from disbursing gold loan and loans against shares respectively and asking Paytm Payments Bank (PPBL) to stop onboarding of new customers. Earlier in December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages. These actions are a departure from the historically nominal financial penalties imposed for breaches, S&P Global notes.

Besides, as the global agency points out, the RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities and become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors. “We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices,” adds Chugh. The global agency has also lauded the RBI’s recent actions demonstrating scant tolerance for any potential window-dressing of accounts.

These actions include the provisioning requirement on alternative investment funds that lend to the same borrower as the bank finance company. Amidst the possibility of some retail loans, such as personal loans, loans against property, and gold loans getting diverted to invest in stock markets and difficulty of ascertaining the end-use of money in these products, S&P Global underlines the faith of market participants that the RBI and market regulator, the Securities and Exchange Board of India, want to protect small investors by scrutinizing these activities more cautiously.

On the flip side, at a time of tight liquidity, the RBI’s new measures are likely to limit credit growth in fiscal 2025 (year ending March 2025). “We expect loan growth to decline to 14 per cent in fiscal 2025 from 16 per cent in fiscal 2024, reflecting the cumulative impact of all these actions,” says Chugh. The other side of the story is that stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities and the RBI’s decision to raise risk weights on unsecured personal loans and credit cards may constrain growth. Household debt to GDP in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24 per cent in March 2024 from 19 per cent in March 2019. Growth in unsecured loans has also been excessive and now forms close to 10 per cent of total banking sector loans.

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