The Supreme Court of India (On March 4, 2020), gave the landmark verdict on Virtual Currency that signaled revival for this industry – by allowing trading in virtual currency through Indian banks, including cryptocurrency. The verdict was against the backdrop of the Government of India’s Draft Bill (through RBI) that banned cryptocurrency for trading purposes. The Draft Bill had imposed hefty fines and penalties that included jail term, for those indulging in cryptocurrency trade and/ or transactions.
Background
The Haiku-type story that revolved around the Draft Bill was:
The Internet and Mobile Association of India (IMAI) opposed the Draft Bill by petitioning with the Supreme Court (SC). They had stated that regulating virtual currency was beyond the control of the apex bank of the country, the Reserve Bank of India.
In response to SC’s directive to respond to the petition, the RBI submitted necessary documents. It counter-argued quoting integrity, security, and the issue of monetary policy transmission as prime reasons behind the Bill (which was, as SC had noted, at the behest of the Government of India).
The landmark verdict based on ‘proportionality’ was that:
a) When RBI has not banned virtual currency (VC), how can it ban VC transactions?
b) With no evidence till date to prove the case against VC hindering integrity and security, RBI’s stand holds little water.
c) When RBI itself has contemplated on having its own VC with proper regulatory measures, why should other private stake-holders be stalled from trading/ transacting with VC like cryptocurrency?
d) After thorough research, when RBI was satisfied with building its own blockchain technology (BCT) on which virtual currency operates, why then was the Draft Bill the exactly opposite to it? Accepting Digital Ledger Technology (DLT) and rejecting VCs is a paradox.
SC verdict and Indian Cryptocurrency Industry
The SC ruling allowing Indian banks to service crypto firms was a lifeline to the pre-mature cryptocurrency world which was awaiting SC verdict
Pic: Screenshot from supreme court’s website
The immediate effects were:
A gush of oxygen to many startups to gear up their work and raise funds for their firms working on BCT and DLT (cryptocurrency platforms).
Many foreign investments on BCT that pulled out of India due to RBI circular, were coming back. India offered huge potential for its investments in this space. For instance, the blockchain-enabled advertising platform AdsDax announced its plans to expand its cryptocurrency product offerings for brands to deliver innovative ad campaigns that would ensure accurate reporting and transparency.
Head of research for Blockchain.com, Dr. Garrick Hileman, opined that the SC ruling will not only attract new foreign direct investments in this sector but will also attract new talent and innovative ways to make India crypto-friendly and global competitor.
Nischal Shetty, the founder of WazirX, one of the first startups in the Indian cryptocurrency sector, stated that this sector would get a boost in developing public blockchains. This would not only help in providing employment opportunities during its expansion phase but would also decentralize finance control.
Pros and Cons of Adopting Cryptocurrency
Institute for Development and Research of Banking Technology (IDRBT), the research arm of RBI, had already researched the advantages and disadvantages of transacting in cryptocurrency in the banking and financial sector and had published a report in 2017.
Some noteworthy advantages highlighted were:
- Like fiat money, it can function as a medium of exchange coupled with the property of store value.
- Cryptocurrencies are not tied to any sovereign currency. They are denominated in their own units of value. This acts as a check in the creation of additional units of currency.
- Based on shared information among limited users, it is secure with limited sharing of personal information (privacy of users ensured), reduces transaction cost, and helps in preventing fraud.
- Protocols of transactions would become an open source for all involved, ensuring transparency.
- Transferring cryptocurrency can happen to any place in the world at a given point of time, without any controlling authority.
- Cryptocurrency transactions can help merchants process them in exchange of fiat money, at a lower processing fee when compared to other digital modes of payment like credit card or PayPal.
Disadvantages: On the flip side, the following points were raised by IDRBT
- The degree of anonymity maintained by users might stall other participants in the financial system to use cryptocurrency.
- Not backed by any regulatory mechanism and not pegged to any sovereign currency, cryptocurrencies have zero intrinsic value. Trade and transactions are based on the belief that goods and services can be exchanged for VCs and VCs can be exchanged for fiat money.
- The limited amount of cryptocurrency availability would surge the demand for these coins, making it highly volatile.
- Increased use of cryptocurrency might hinder monetary policy implementation as they function without a regulating authority.
- Illegal transactions and money laundering are the two principal areas of concern for RBI. To quote two such examples: (i) In 2015, Ali Shukri Amin, through social media, gave instructions to donors of ISIS to use Bitcoin as such transactions would be untraceable. (ii) $4.2 billion cryptocurrencies were siphoned off by cybercriminals from Binance and Bitcoin. As the SC judgment has rightly pointed out, India is not free from nefarious activities sponsored externally. RBI being extra cautious can be treated equivalently to taking preventive measures.
- Last but not the least, it was found that India was not equipped enough to build the necessary infrastructure for BCT and DLT.
Recent Developments
Unmindful of the verdict, banks prohibited crypto-based services since RBI maintained stoic silence in directing them accordingly. RBI was forced to clarify its stance when confronted with the filing of a query by Unocoin co-founder B V Harish, under the Right to Information Act on April 25, 2020. On May 27, 2020, the RBI had to release an official statement that there were no laws that prohibited banks from offering banking services to its crypto-based clients. No sooner was this statement made, came the whip behind from the Finance Ministry in June 2020 voicing on behalf of RBI with a much higher decibel against VCs.
A high-level panel on virtual currency led by Finance Secretary Subash C Garg has submitted a report recommending a legal law enforcing:
• A complete ban on any activity involving cryptocurrency by private individuals
• Any such act will be considered as a cognizable, non-bailable offence inviting a fine up to Rs. 25 crore or thrice the loss caused/ gains made from their activities
• It could also attract up to 10 years jail term for any direct or indirect use of cryptocurrency
• RBI to float and regulate the digital currency. Ministry of Electronics and Information Technology (MEITY), RBI, Department of Financial Services (DFS) and Department of Economic Affairs (DEA) to examine the model for RBI-managed digital currency, supervised by DEA on developing the DLT
• However, allowing research on DLT not involving cryptocurrency.
• At the same time, recognizing foreign digital currency as foreign currency
But, chalking the ouster of VC without substantial evidence of its dangers within the country would be like aborting a technology before its implementation. If the recommendation clears the Table, then it would mean the permanent doomsday for VC operations in India by anyone except the RBI!
Conclusions
Researchers analyzing the other side of the coin feel that RBI is vested with much more responsibilities than any other regulatory body like the Securities and Exchange Board of India (SEBI). Hence, a light-veined approach like legal steps aftermath occurrence of incidents, cannot be adopted. To top it, RBI is responsible for weaving a regulatory mechanism around technology and infrastructure to streamline the financial system of our country. Despite being conservative and stringent in its rules, a series of non-performance by public and private sector banks alike during recent times has shaken the financial system. A regulation-less, anonymous-bound VCs would:
• Create economic mayhem if there is unrestricted growth of money supply, the money here is a cryptocurrency, and the like.
• Make monetary policy ineffective if RBI does not know the quantum of VC in circulation.
Discussion Questions
1) Can VCs be a threat to sovereign currency and national security?
2) How essential should the taxonomy of VCs be in India, given the existing status/ functioning of the banking and financial system?
References
- IDBRT. 2017. ‘Applications of Blockchain Technology to Banking and Financial Sector in India’. RBI.
- Bismah Malik. March 5, 2020. ‘Start-ups welcome lifting of cryptocurrency ban’. The New Indian Express
- Best Media Info Bureau. March 6, 2020. ‘AdsDax expands cryptocurrency product offerings in the Indian advertising market’. Best Media Info
- Shouvik Das, March 6, 2020. ‘Legalizing Cryptocurrency in India Will Do More Than Attract Investments, Say Experts’. News18.com
- Ateesh Tankha. March 10. 2020. ‘View: Why it’s better for RBI to just wait and watch on cryptocurrency’. The Economic Times
- The Editorial Board. March 11, 2020. ‘Virtual Money: A case to bring back ban’. The Telegraph
- India 2020 Crypto verdict: Major Red Flags, Predictions, Detailed analysis of judgement!
Appendix
Blockchain Technology: It is a decentralized, distributed ledger that records the provenance of a digital asset.
Pic: flaticon.com
Distributed Ledger Technology is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time.
Pic: flaticon.com
The Doctrine of Proportionality: This doctrine is inherent in Article 19 of the Indian Constitution and Law and partakes four separate lines of analyses: (1) that the measure has to be designated for a proper purpose; (2) that the measure undertaken is rationally connected to the fulfillment of that purpose; (3) that there are no alternative and less intrusive measures available that may similarly achieve that same purpose with a lesser degree of limitation; and (4) that there needs to be a proper relation between the importance of achieving the aim and the social importance of preventing the limitation on the constitutional right.
Pic: flaticon.com
Virtual Currency: Virtual currency, or virtual money, is a type of unregulated digital currency, which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community.
Pic: flaticon.com
Foot Notes
[1] In other words, the argument leveled by RBI asking stakeholders not to indulge in virtual currency transactions (like bitcoin, cryptocurrency, etc.) quoting security and integrity reasons was disproportionate while weighing against the reasons (a) – (d) quoted in this paragraph.
[2] If virtual currency falls under the domain of RBI and its regulatory system, then it would ultimately become the monopoly issuer of virtual currency like the sole supplier of money: As mentioned in the Supreme Court Judgement
[3] White Paper on “Applications of Blockchain Technology to Banking and Financial Sector in India” by Institute for Development and Research in Banking Technology (2017), a subsidiary unit at Hyderabad established by Reserve Bank of India.
[4] WazirX was acquired by the global cryptocurrency leader Binance in 2019.
[5] Both are legitimate exchanges
Dr. R. Kanakasudha
Purely an academician, R. Kanakasudha holds a Doctorate in Economics (Econometrics) from ‘University of Madras’.
She has more than seven years of teaching experience in the academic field, handling regular, distance, and online students. Currently, she is working as an Assistant Professor in Economics (T) at the Institute of Distance Education, University of Madras, Chennai.