CRYPTO IN INDIA, EXAMINED THROUGH THE PRISM OF ITS FORMERLY CONTEMPTUOUS RELATIONSHIP WITH THE RBI

This Article has been authored by Melvin Joseph, a student at NUALS, Kochi.

Introduction

The mainstream exposure of the concept of crypto-currency to the Indian populace can be traced, back to December 2013, specifically to the issuance of a Press release by the Reserve Bank of India that cautioned against trading of virtual currencies (VC). This was in response to not only the presence, but also the steady increase in the prominence of certain early Indian crypto-currency exchanges such as Unocoin. In its circular, the RBI cited the lack of regulation, potential exposure to malware, absence of customer recourse, the potential for unintentional violation of money laundering regulations, the lack of backing by an underlying asset and possible volatility as grounds for concern.

However, the circular failed to inhibit Crypto-currency’s steady rise in popularity, which was aided immensely by the Central Government’s abrupt announcement of demonetization of high denomination notes in November 2016, which led to an increased demand for alternate modes of currency, to the point that ‘Bitcoin’ was one of the most googled terms in India in 2017. Even though investment in crypto-currency was somewhat limited by the relatively sparse presence of Crypto exchanges in the nation, India still accounted for approximately 10 percent (16,754.76 coins in trade volume) of the global Virtual Currency trade in 2017.

RBI’s official prohibition

Cryptocurrency’s burgeoning mainstream prominence prompted the RBI to issue a circular on April 6, 2018 which, while not banning cryptocurrency in the nation, barred all entities under the regulation of the bank from dealing in virtual currency or facilitating any transaction involving the same. This predictably resulted in an unofficial boycott of cryptocurrency by most banks in the nation. The action was met with considerable public criticism, but nonetheless had the desirous effect of curbing widespread financial activity involving Cryptocurrency as individuals intending to trade were now limited to conducting direct transactions, sans the facilitation afforded by banking entities. Adapting to the regulations, Cryptocurrency exchanges began to function as escrow agents that would conduct transactions by only allowing the transferal of the VC, after confirmation of receipt of payment.

The ban unwittingly and rather predictably invited a considerable number of applications under the Right to Information Act of 2000, the most prominent of which was filed by Mr. Varun Sethi and petitioned the RBI for the public disclosure of the (constitutionally valid) rationale guiding its April 6 Circular. The RBI was restrained and rather evasive in its response, even dismissing certain queries as not being constitutive of “information” under Section 2(f) of the RTI Act. But, the bank did concede to the fact that the regulation was neither informed by the expertise of industry professionals, nor by the deliberations of a select committee, and its subordinate banking entities weren’t given prior notice.

Subsequent to the RBI ban, an Interministerial Committee (IMC) was constituted with the intention of passing legislative action addressing the state of affairs regarding Crypto-currency in India. Initially the IMC suggested that the passing of the ‘Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018 would have dictated the provisions for the regulation of crypto-currency exchanges, as well as brokers, while also setting up safeguards against fraudulent activity in regards to crypto-token investment in the country. But the bill was later disregarded, as the-then deputy governor of RBI advocated for a complete prohibition of cryptocurrency trading in the country, and the committee clearly assented to the suggestion, as the final IMC report recommended the passing of the ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.’

Supreme Court Decision overruling the RBI ban

In the case of Mobile Association of India v. Reserve Bank of India (2020), the validity of the April 6 Circular was challenged before the Supreme Court. The Court reaffirmed the RBI’s authority to regulate virtual currency, by citing the Payment and Settlement Systems Act of 2007 (Article 18), and refused to declare RBI’s actions as either unsubstantiated or a colorable exercise of authority. This was on account of the bank’s multiple years of research on the subject, and its heavily documented concerns and apprehension of the same. But, the Supreme Court nonetheless struck down the prohibition.

The reasoning behind this judgment hinges on the fact that the RBI’s actions were ultra vires of the Constitution. The ban undermined one of the fundamental rights of the Indian citizens (Article 19(1)(g) – freedom of trade), while failing to satisfy the Proportionality test justifying the same. The crypto-currency traders were denied access to banking facilities despite the legality of virtual currency in the country, and in the absence of any evidence indicating either fraudulent activity within exchanges or potential impairments being caused to the nation’s financial system. Thus, the Court held the April 6 circular to be a disproportionate measure, before striking down the same and rendering it void ab initio.

The present landscape regarding Cryptocurrency in the country

In May of 2021, the RBI issued a revisionary circular disavowing the provisions of the one issued in 2018. Herein, the RBI resigned itself to only providing broad instructions in regards to customer due-diligence, which are to keep with regulatory standards set by KYC, AML, CFT and the Prevention of Money Laundering Act, (PMLA) of 2002, as well as Foreign Exchange Management Act (FEMA), which is concerned with overseas remittances.

The Central government announced its intention of introducing the 'The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’, which would theoretically streamline the VC trade in the country by establishing an official channel for crypto-currencies to attain legitimacy, while banning all VC not recognized by this prospective regulatory system. This system would also be supplemented by the official cryptocurrency that the RBI intends to launch under Central Bank Digital Currency (CBDC). Regardless, the discussions regarding the act have stagnatedrecently, mostly because of continuing negotiations with stake-holders.

Thus, currently the cryptocurrency regime in India remains unregulated. In light of the recent prominence of CoinDCX(and other blockchain-based startups), and the seemingly unprecedented levels of public engagement that has accompanied the same, the legislature might be put in an interestingly precarious situation. Its plan of streamlining the country’s cryptocurrency market looks considerably more logistically onerous now, than it did even 2 months ago.

Thus, further deliberations may be required in determining the provisions of the concerned law, which considering the constantly evolving nature of the market, might be the first of several pauses the government may have to take, before developing a comprehensive and hopefully, accommodating regulation for VC in the country.