Fans of Bitcoin in India got a huge shot in the arm this week, after the Supreme Court ruled that the Reserve Bank of India (RBI) could not impose a blanket ban on banks from dealing with or providing services to individuals or businesses dealing with or selling virtual currencies. To be sure, virtual currencies or cryptocurrencies (of which, Bitcoin is but one) haven’t been legalised by this judgment — the draft Bill proposing to ban cryptocurrencies is awaiting Parliament scrutiny.
However, the basis on which the Supreme Court came to its conclusion — the doctrine of proportionality — is probably what should mark this decision out. A read through the judgment would suggest that the court rejected most of the arguments that the lawyers for the cryptocurrency companies made — it said that the RBI had jurisdiction over, and therefore could not be barred from regulating alternative currencies; as well as that the mere fact that a majority of countries had not banned the currency cannot be a reason to preclude India’s authorities from doing so.
All the same, it found that the RBI’s decision — to foreclose banking channels to cryptocurrency businesses — had the effect of shutting them down, a disproportionate response, when you consider that the central bank had not shown any instance where a regulated entity (such as a bank) had suffered any loss due to the actions of any person or business dealing with cryptocurrency. Similarly, for all its posturing, the government had not declared cryptocurrencies illegal (by law), and therefore, the court reasoned, it wasn’t for the court to permit a virtual ban.
Where does this leave the crypto-community? It would be a mistake to assume that the road ahead has suddenly cleared. In fact, the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, is still before Parliament, and not only proposes banning the mining, generation, holding, selling, dealing in, issue of, transfer of, disposal or any other use of cryptocurrency within the territory of India, but also recommends a maximum jail sentence of 10 years.
This judgment was a hyper-technical analysis of the RBI’s powers to regulate a pseudo-currency. The case was not fought on the basis of the benefits that cryptocurrency might bring in, or even its potential dangers. In fact, the court took a swipe at the petitioners for claiming that they were prevented from doing business by the central bank’s ban, when the very currency (Bitcoin) was created expressly to ‘kill the demon of a central authority’, according to its founder (the hitherto unidentified) Satoshi Nakata.
Neither did it go into the many risks that might emanate from cryptocurrencies — In India, it had become a favoured avenue for ponzi schemes, with unscrupulous promoters promising gullible investors returns of up to 50 percent in a matter of months. Cryptocurrencies, being anonymous or semi-anonymous, depending on their architecture, also ran the risk of being used for illegal, or even downright criminal, activities. Without the ability to trace the owner of the wallets (their equivalent of bank accounts), police could never trace the money trail. These will come to the forefront if and when the government imposes a ban through law, and it is challenged.
As this author has argued before, it is in the inherent nature of virtual currencies that they cannot be regulated. Anybody can start a virtual currency (it is a software programme, after all), which if it gets sufficient traction so as to be bought and sold on any of these virtual-currency exchanges that have cropped up (many of the petitioners before the court were such exchanges), will gain in value, albeit notional. To expect that any of these fledgling exchanges will provide investors the level of scrutiny, monitoring, or even protection akin to what the Bombay Stock Exchange provides, will be a stretch, if at all it were practical.
Perhaps what the government can do is ring-fence both investors as well as employees (who are often arrested for theft of coins — something they may be well innocent of) of the crypotocurrency environment by making liability for loss of value on promoters. It is not the most ideal of solutions — but the only practical one.
Abraham C Mathews is an advocate practicing in Delhi, and a chartered accountant. Twitter: @ebbruz. Views are personal.
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