On March 4, in a historic day for the cryptocurrency industry in India, the Supreme Court of India quashed the Reserve Bank of India’s (RBI) prohibition on the trade of virtual currency (VC). The road towards the day of the verdict has been long and arduous. Even this verdict is a small win and how the cryptocurrency industry moves ahead remains to be seen. The Supreme Court concluded that the interdiction of VCs failed the four-pronged proportionality test and violated the fundamental right of the cryptocurrency exchanges to carry out any occupation, trade or business. The Court believed that there were less intrusive measures to achieve the purposes that RBI intended. It also added that the RBI had not presented any empirical evidence to show that entities regulated by it suffered harm due to VC exchanges.
Nevertheless, the Court refuted almost all other arguments made by the petitioners. It upheld the right of the RBI to regulate VCs and commented that the RBI could regulate/prohibit anything that may impact the financial system of the country. On the claim by the petitioners that the circular was an executive action by the RBI and did not afford similar judicial acceptance as a legislative action, the Court observed that the RBI was an autonomous institution responsible for maintaining the financial integrity of the country and enjoyed broad powers to govern activities that impact the monetary, credit and payments systems in India.
The latest judgment came almost two years after the RBI, through a circular, had prohibited the use of virtual currency. The circular forbade entities regulated by the RBI from dealing with or providing services to individuals or business entities dealing with or settling virtual currencies. All entities which were already involved in the provision of the aforementioned services were asked to wind down in three months. Cryptocurrency tokens could undermine international policy frameworks such as the AML (anti-money laundering) and FATF (Financial Action Task Force), designed to counter money laundering and terrorist financing, RBI had posited. It could also adversely impact market integrity and capital control, RBI’s deputy governor, BP Kanungo had further explained at a press conference on April 5th 2018.
This led to the closing of many fledgling crypto exchanges within the country. Koinex, India’s largest crypto exchange was shut down because of the circular. Unocoin, one of the early entrants in the bitcoin space in India, resumed fiat deposits on March 5, 2020, after suspending it in the summer of 2018. Unocoin had to lay off 50 percent of its employees after the ban. India has already lost valuable time, money, talent in a promising industry.
It is believed that the government and the RBI have similar opinions on cryptocurrencies. In February 2018, in his budget speech, then Finance Minister Arun Jaitley had categorically said that ‘the government does not recognise cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payments system’. An inter-ministerial committee also submitted its recommendations on July 22, 2019 and suggested banning of private cryptocurrencies and criminalisation of activities related to VCs. The committee also submitted a draft bill – Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. The current Finance Minister Nirmala Sitharaman has said that ‘countries will have to show extreme caution’ on cryptocurrencies.
It will take much more to kickstart a decimated industry. Sensing the inclinations within the Finance Ministry and the RBI, and having been at the receiving end once before, the banks are likely to be circumspect in lending to the crypto exchanges.
A consistent policy framework needed
Coherent policy action by the government is required now. The government must identify the policy objective it wishes to achieve. These objectives would be a combination of checking money laundering, preventing terrorist financing, promoting greater financial inclusion, and ensuring financial stability. Evaluating all options and analysing empirical data and then choosing the most effective and less invasive measure is necessary.
RBI set up a sandbox for testing fintech products in April 2019. Opening this sandbox to cryptocurrencies as well would enable companies to live-test their new products in a controlled environment. This would not only promote innovation but also enhance the knowledge and awareness about cryptocurrency projects amongst the government officials, allowing them to take appropriate regulatory measures if and when global players such as Facebook launch their products in India.
The government should set up a specialised cryptocurrency advisory council which would liaise with multiple stakeholders in the government, industry, academia and suggest enabling regulation for the industry in India. The advisory council would be cognisant of the legislations in different parts of the world and conduct India-focused studies and recommend measures suited to the Indian landscape.
The Supreme Court judgment is a small step in the long road towards realising the immense potential of cryptocurrency and the government should leverage this opportunity to inspire confidence and implement progressive legislation.
(Utkarsh Narain is a technology policy researcher at Takshashila Institution, a centre for research and education in public policy in Bengaluru. This commentary was published in Deccan Chronicle on March 12. The views expressed are personal.)