RBI's cryptocurrency ban: The way out after the Central Bank diktat

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Rashmi Deshpande & Anjali Krishnan
Khaitan & Co

With the start to the financial year, it appears that the Reserve Bank has finally followed through on the government’s stand on cryptocurrencies. On April 6, 2018, the RBI finally issued a circular which prohibits any regulated bank, or NBFC, from providing specified services to any person or entity which uses such services in relation to dealings in cryptocurrencies.

This move to ring fence the players dealing in cryptocurrencies comes after a couple of advisories issued in the past and the consistent negative statements given out by the top honchos in the government.

Nevertheless, this move begs the question as to what is really being intended by the RBI and the government, at large. By cutting all legitimate channels of conducting business i.e. the banking channel, it has now forced cryptocurrency exchanges to start trading on cash basis which is more likely to push money into the black market than if the businesses were regulated. Also, by cutting off any hope of ever legitimizing trade involving cryptocurrency, they are driving business away from India only to ensure India’s loss becomes other’s gain.

The abrupt manner, in which this sweeping move has been taken, showcases that there appears to be a breakdown in the consultative process that is usually adopted by the government. It was initially promised that regulations would be issued in the month of March that will give clarity on the status of cryptocurrency. Instead, the circular puts an end to everything even before they got to regulating the business.

Apart from the misses at the policy level, the circular leaves a lot of scope for challenges before a judicial forum. The bigger question that should be asked is if there was actually a sufficient or compelling reason for the RBI to come down so heavily on cryptocurrency exchanges? There is no denying that there were news of frauds and illegal transactions occurring in terms of virtual currencies along with thefts from e-wallets.

But then again, the banking systems has witnessed major frauds in the recent past as well and the approach adopted is to bring in more stringent regulations. Since the circular would tantamount to banning any business venture involving cryptocurrency, the RBI would be answerable to any challenge raised involving curtailment of the fundamental right to conduct business. Moreover, the term virtual currency is of a wide import and remains undefined.

One would assume even something like the ‘Miles’ earned on travel and reward points earned on transactions using credit or debit cards may also be included within the scope of virtual currency. This circular may, therefore, have a far greater impact than what was intended.

From all this, it becomes clear that it is time that an inclusive and a consultative approach should be taken by the government to protect the interest of trade and investors to cater to the demands of a growing economy.

It is no secret that a substantial portion of the community remains invested in the cryptocurrency sector and this will only grow for years to come. Pushing the entire business out of the legal sphere and refusing to acknowledge its existence may even lead to larger law and order problems than originally envisaged.

Disclaimer: The views expressed by Rashmi Deshpande & Anjali Krishnan of Khaitan & Co on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.