Anirudh Rastogi and Ratul Roshan
March 4 was a historic day for tech-enthusiasts in India. The Supreme Court of India declared the April 2018 Reserve Bank of India (RBI) notification, prohibiting entities regulated by it from facilitating banking transactions relating to virtual currencies, unconstitutional. The RBI had prohibited virtual currencies purportedly seeking to protect the integrity of the Indian market, the interests of the common investor and preventing money laundering.
Since December 2013, when the RBI issued its first caution against virtual currencies to March 4, things have come a long way. The ban detrimentally impacted crypto-exchanges in India, causing most of them to wind up operations. Some of the leading exchanges of the time even struggled to gather resources to keep up the fight. The ban also discouraged blockchain related-innovation generally and caused money and talent to flee the country to more conducive jurisdictions such as Singapore, Malta, Estonia and Dubai.
At the same time, it cannot be said that the notification achieved its desired end-goal. The notification only banned the use of banking channels for transactions involving cryptocurrencies, leading investors to continue trade in cryptocurrencies from foreign sources or over-the-counter in cash.
The judgment is definitely a cause for celebration. The world has followed these proceedings closely over the course of the past two years, waiting with bated breath to tap into India’s 1.2-billion-strong market, because tech-policy in India is likely to influence policy elsewhere.
As of today, the RBI notification stands quashed, which means that nothing stands in the way of banks providing their services to crypto-exchanges and other ventures dealing in cryptocurrencies. This is certain to provide respite to crypto-ventures within India and more looking to enter it. The handful of remaining crypto-exchanges in the country may finally resume their operations.
That said, we cannot overlook two facts: first, the crypto-market has been decimated for the large part; and second, the judgment paves the way for the revival of the cryptocurrency ecosystem in India only theoretically. Whether or not it will be catalytic to the crypto-industry will have to be seen.
The judgment has not spoken about the wisdom of allowing or disallowing trade in cryptocurrencies at a policy level; it has also not said that the RBI does not have the power to regulate trade in cryptocurrencies. Instead, the court has observed that the blanket-ban proposed in the notification is disproportionate to the assessed threat posed by them. The court only found a problem with the proportionality of the move.
This hurdle may be overcome by the government by drafting a more nuanced law, to restrict trade in cryptocurrencies. While it is likely that regulators will be more cautious about any such move, there is nothing to rule out the possibility.
There is also the concern of banks avoiding business with crypto-ventures, even if only by way of abundant caution. While they are not held back by any legal restrictions, they are well aware of the mood of the RBI and the Indian government. One must sympathise that banks have already been through one cycle of turmoil on account of the April 2018 notification and would want to avoid a deja-vu at all costs.
Banks are aware that the Government of India is still not completely comfortable with cryptocurrencies, and, therefore, they may hedge against any future law which throws the regulatory landscape into a flux again. Banks globally have been suspicious of cryptocurrencies for other reasons such as the heightened risk of money laundering, the complexity of the KYC process, and not to mention the threat of competition from the cryptocurrency industry.
Summarily, practical challenges remain and doing business in this industry will continue to be challenging in the long run. India has already lost time, money and talent, and lags in the race to adopt cryptocurrencies and blockchain. While this judgment brings much needed short term respite, its impact in the long run may be tricky to adjudge. Should the government want to undo what our industry has lost, it would be a good step to first clarify its thinking on the subject and inspire confidence in the industry to take a bet with cryptos once again.Anirudh Rastogi, Managing Partner, and Ratul Roshan, Associate, at Ikigai Law, which specialises in technology law and represented the crypto-exchanges at the Supreme Court. Views are personal.