Central Bank of India vs Crypto Exchanges of India: Who will win?

RAHUL SATIJA

Chennai, April 23: Kali Digital Private Ltd., an upcoming crypto exchange in India, challenged India’s central bank for its “arbitrary” and “unconstitutional” decision to prohibit banks from dealing with cryptocurrency exchanges.

The exchange, which plans to start operations in August, filed a petition in the Delhi High Court against the Reserve Bank of India (RBI) to quash the regulator’s circular asking banks under its purview to stop facilitating cryptocurrency transactions in 3 months.

The RBI’s decision is “devoid of any logic, unreasonable, irrational and against the tenets of law”, the petition registered by Kali Digital said.

The legal action by Kali Digital shows an escalating confrontation between central banks and crypto exchanges around the world. Bank Indonesia disallowed all payment operators and financial technology operators in Indonesia this January from processing cryptocurrency transactions. The People’s Bank of China banned initial coin offerings and all cryptocurrency exchanges last September and plans a wider regulation this year.

“I'm interested to see if RBI’s circular will withstand legal challenges,” said Greg Kerr, co-founder of ReNu Coin, a blockchain service company based in Los Angeles, California. “Indians practice the largest example of democracy on Earth and are dedicated to pursuing a free economy.”

Central Bank’s Crypto Crackdown

The Reserve Bank of India pulled the rug under crypto users and exchanges April 6, citing various risks associated with cryptocurrencies. The central bank forbade banks from assisting any crypto transaction.

“RBI has a firm view against letting banks have exposure to sensitive and volatile segments like real estate, stock market and precious metals,” said Rama Gandhi, former deputy governor of Reserve Bank of India. “Now, virtual currencies has been added to the list.”

RBI warned crypto users of permanent losses arising out of hacking, loss of passwords, compromise of access-credentials, malware attack etc.; of lack of recourse to customer problems, disputes and chargebacks etc.; speculative nature of the crypto investments; and use of crypto for illicit and illegal activities, in December 2013.

“Despite repeated warnings, the volumes in virtual currency trading increased exponentially.” said G. Padmanabhan, former RBI executive director. “Given the pure speculative nature of trade and exponential growth in infrastructures and volumes, RBI has chosen to firewall its regulated entities.”

RBI and government is in sync with the opinion that crypto neither can be a currency nor can be allowed as a part of payment system, Padmanabhan said. “While efforts were on, as far as I understand, to treat virtual currency as a commodity, this did not fructify.”

The rise of cryptocurrencies started with the rise of distrust in central banks. “Virtual currencies have come up because people have lost faith in central banks,” said Madan Sabnavis, chief economist of CARE Ratings Ltd. People said that “currencies are not being managed properly and financial problems are happening because of bad management.”

The surprise move by the central bank hurts India’s standing as an innovation-friendly country. “This ostrich-like attitude of our central bank (RBI) is likely to cause a great deal of retrogression in the international image of the country which is seeking to project itself as a ‘electronic economy driven market,’” said Sarosh Bastawala, an advocate practising in Supreme Court of India. “Imagine the condition of Americans in 1930s at the time of prohibition (referring to the nationwide constitutional ban on the production, importation, transportation, and sale of alcoholic beverages). This is where we are standing today.”

Blockchain and Cryptocurrency Committee of India (BACC) plans to face RBI and explain the consequences of the central bank’s decision. “We are looking at the implications and evaluating options,” said Ajeet Khurana, head of the BACC.

The decision to restrict bank transactions to buy and and sell cryptocurrencies caught exchanges off-guard. “We thought government will regulate it, come up with rules that will help the ecosystem. We were expecting a positive stand from the government,” said Naveen C T, vice-president of sales and business alliances at Unocoin, a cryptocurrency exchange based in Bengaluru, India. “Out of a sudden, we got this news.”

Did RBI make the move in a hurry? Praveen Kumar, chief executive officer of Belfrics Group, a bitcoin exchange based in Malaysia, called the move “unfortunate” and “at the time when RBI should have taken a more proactive step in understanding the crypto revolution.” Jeans Tang, founder of the Bench Marking Blockchain Research Institute in Guangdong, China, called the move a “major setback in India’s financial history.”

The RBI’s lethal blow to crypto exchanges doesn’t come without severe consequences. Paul Cliffe, chief executive officer of Block Venture Project, a crypto fund manager based in London, said “Central banks and regulators have a choice of either being a part of the technological and economic advances that cryptocurrencies bring, or alternatively face missing out on the benefits completely.”

Black Money Multiplied?

Reserve Bank of India’s decision to stop bank-based crypto transactions may lead to an unintended consequence: increase of black money in India.

“If they stop crypto exchanges, the over-the-counter (cash-based and peer-to-peer) business will start increasing and that totally goes against what the government's intention is,” said Shashwat Gupta, co-founder at Altcoin Buzz, a YouTube media channel informing, educating and updating audiences on happenings in the blockchain space with more than 201,000 subscribers. “It will lead to increase of black money,” Chartered Accountant at Bluechips Corporate Services Pvt. Ltd. Minal Agrawal said.

“By just taking the banks away from cryptocurrency, Reserve Bank of India has worsened the condition,” said Tejinder Singh Rawal, partner and chartered accountant at T S Rawal & Co.

RBI’s prohibition is short of a complete ban on crypto. “If public see the value in virtual currency, unless it is totally prohibited, transactions can move overseas or cash-based,” said G. Padmanabhan, former RBI executive director. “This could prove to be more destabilising.”

The challenge with cash-based crypto transactions is that they are difficult to trace and track. Exchanges served as one of the best channels for government in monitoring the crypto market.

“Income Tax Office came to exchanges. We helped them,” said Rajdeep Singh, chief executive officer of Coindelta, a cryptocurrency exchange based in Pune, India. “Now no one knows.”

RBI doesn’t agree. “To say that the RBI’s decision will facilitate black money is mischievous,” said Rama Gandhi, former deputy governor of RBI.

Cash transactions are risky. “With restrictions on cash transactions in Income Tax (Act), people will find it difficult to explain if lot of cash is found with them,” said Pawan Sarda, partner and chartered accountant at SPAN & Co. “Doing transactions by cash, though is the most obvious way of escaping the audit real, it is not so easy now as compared to the situation few years back.”

Will the constraints on using bank transactions limit black money transactions using cryptocurrencies? Prithvira Srinivas, chief economist at Axis Capital Ltd., said, “If you restrict something, something that everyone wants, there’s always a chance of it going underground. It’s always a possibility.”

Crypto Crimes to Climb?

The RBI’s plan to oust crypto exchanges raises significant risks for crypto users. “The chances of frauds and loots will be very high,” said Hesham Rehman, chief executive officer of Bitxoxo Bitcoins Online Pvt. Ltd., a cryptocurrency exchange based in Warangal, India. “Bank transfer creates a transaction trail which can be easily traced in case of frauds.”

From the start, cryptos have been associated with criminals. “The very cryptocurrency concept had been to keep transactions away from the law,” said Rama Gandhi, former deputy governor of Reserve Bank of India.

Crypto crimes aren’t unheard of. “There is a lot of scope of misuse for illegal activities,” said Mrigakshi Punga, Deputy Manager at SBI Capital Markets Ltd. “I personally am agreeable with RBI.” The restriction placed on banks cuts-off the spark from the crypto mania in India.

Blockchain Blocked?

The RBI’s move not only hit crypto exchanges but also blockchain companies. “Investments are on one side and innovation on the other. Decentralized network (or blockchain) is way more important than anything,” said Rajdeep Singh, chief executive officer of Coindelta, a cryptocurrency exchange based in Pune, India.

Blockchain technology and cryptocurrencies coexist. “For building even a simple application on blockchain Ethereum, I need the cryptocurrency Ethereum to execute it and test it,” Singh said. “If I won’t be able to buy cryptocurrency Ethereum, it means all the options for me to work on blockchain projects are closed.”

Cryptocurrencies serve as a gateway to blockchain. “It was the first (cryptocurrency) transaction that motivated me to know the technology,” Singh said. “The way I got into blockchain was when I did a transaction.”

The RBI’s maneuver pushes blockchain ventures out of India. “All such businesses will move out of India to operate,” said Toshendra Sharma, chief executive officer of RecordsKeeper, a blockchain-based data security solution based in Gurgaon, India. That will drive the blockchain businesses to countries with friendlier policy, such as Singapore.

The tough regulation made India less appealing to blockchain engineers. “I see a lot of graduates from NITs and IITs (India’s top engineering schools) working on the blockchain. We’re actually asking those individuals to get out of India.” said Singh, who is an alumnus of Indian Institute of Technology, Mumbai. “We’re losing our top minds by taking this crude decision.”

Could RBI have prevented the fallout of its decision on blockchain? Anurag Srivastava, co-founder of Zeonlab, a blockchain application builder in Mumbai, India, said “RBI may ban trading of it but should and must allow its use in applications.”

“The issue with central authorities dealing with decentralised technology (blockchain) in such an obtuse and authoritarian manner only causes the potential for them to look foolish,” said Paul Cliffe, chief executive officer of Block Venture Project, a crypto fund manager based in London, United Kingdom.

Crypto regulation has divided the world into pro-disruption and anti-disruption nations. “Economic shield and sword tools will disappear, replaced by economic guns and barrels,” said Yann Le Floch, Blockchain Business Architect, BNP Paribas Corporate and Institutional Banking from Paris, France. “May the best win.”

Rupee Risk Resolved?

If cryptocurrencies were to become mainstream, central banks will become irrelevant. “You cannot have two parallel systems operating in the country,” said Madan Sabnavis, chief economist of CARE Ratings Ltd. “It’s a very good move.”

RBI wants to prevent cryptocurrencies from becoming popular. “If bitcoin becomes global in usage, the central bank would lose control of monetary policy,” said Prithvira Srinivas, chief economist of Axis Capital Ltd. The RBI’s decision is “driven by fear.”

Does pushing cryptocurrency transactions to be cash-based help the RBI’s cause? Praveen Kumar, chief executive officer of Belfrics Group, a bitcoin exchange based in Malaysia, said, “Now the crypto trading will push towards peer-to-peer over-the-counter market where it is even more difficult for RBI to exercise any kind of action.”

RBI didn’t have a clear choice. Atulya Bhatt, co-founder of BuyUcoin, said, “Even if the central bank thinks of cryptocurrencies as its enemies, it should keep its enemies closer.”

Cryptocurrency Continues?

RBI’s directive comes into effect in July. “Anything will happen in 3 months of time,” said Karthick Sivalingam, who is creating a platform for freelancers using blockchain.

The central bank’s refusal to allow crypto exchanges to have a bank account is forcing them out of India. “None of the exchanges will be able to operate in India,” said Hesham Rehman, chief executive officer of Bitxoxo, a cryptocurrency exchange based in Warangal, India. “We have recently registered our company in Australia.”

Companies can move their operations to a more favorable jurisdiction and carry on as though nothing ever happened, said Paul Cliffe, chief executive officer of Block Venture Project, a crypto fund manager based in London, United Kingdom. “We saw this last year when exchanges moved from China to Japan or South Korea.”

Most of the exchanges will convert themselves as crypto to crypto marketplace before July. Whenever investors want to liquidate their cryptocurrency, they can sell it for cash.

“People, at their own level, can continue to buy, hold and sell cryptocurrencies,” said Rama Gandhi, former deputy governor of Reserve Bank of India.

Cryptocurrencies are difficult to ignore. “In the past few years, cryptocurrency has given very huge return to the investors,” Rehman said.“People will continue trading cryptocurrency due to its attractive return.”

Crypto traders seem unperturbed by RBI’s circular. “You can trade easily even after RBI directive,” said Ishan Sharma, who trades cryptocurrencies. “What you can do is buy and sell bitcoin for cash from a local trader near you.”

Crypto Ban Conceivable?

Cryptocurrency is “a bubble which is going to burst sooner or later. This is for sure,” said Tejinder Singh Rawal, chartered accountant and partner at T S Rawal & Co. “It’s just a short-term phenomenon.”

The central bank is “pretty vague” on cryptocurrency, he said. “It should have been banned a long time back. But they have not done it yet.”

RBI will have “hard time banning cryptocurrencies,” said Shashwat Gupta, co-founder at Altcoin Buzz, a YouTube media channel informing, educating and updating audiences on blockchain with more than 201,000 subscribers. “The best way to start is regulating exchanges.”

Does banning cryptocurrencies help? Gupta said, “Making crypto illegal is like banning knives and stopping its manufacturing. You can use knives to cut another person or cut a carrot, how does banning knives help?”

Cryptocurrencies survived for more than half a decade. They might be here to stay. “The central bank needs to take a longer term view on Blockchain and cryptocurrencies,” said Constant Tong, chief executive officer of BlockStar Worldwide, a blockchain consulting firm based in Singapore.

“Draconian banking policies against cryptocurrencies will only serve to fuel cryptocurrency acceptance among the people,” said Greg Kerr, co-founder of ReNu Coin. “Bottom-up adaptation will prove to be more powerful than policy.”

I strive to be fair and unbiased in my reporting. If you feel the article doesn't represent the best obtainable version of the truth, write to me at [email protected] or comment below.