Dear RBI, there is no hiding from the Crypto Sun!

Crypto currencies such as bitcoin, ethereum, ripple etc are virtual currencies (VCs). These virtual currencies are not regulated by any government. RBI has not validated these currencies, but at the same time not rendered them illegal. Due to increase in global price of VCs, Indians have too started investing in VCs. In last two years several crypto currencies exchanges have opened in India which buy and sell VCs and a medium to convert VC into fiat currency and vice-versa.

RBI has in past cautioned the public about VC and risks involved with it. The Government has set up a committee headed by Economic Affairs Secretary Subhash Chandra Garg and other members which include SEBI Chairman Ajay Tyagi and RBI Deputy Governor R.P Kanungo. The Committee aims to regulate VCs in India and has not submitted its report yet.

However, on 6 April 2018, RBI decided to prohibit banks, financial institutions and payment aggregators from providing banking services to any person of company involving in buying/selling or settling VCs. Although, ban by RBI was aimed to deter common people from mindlessly investing in crypto-currency the prohibition on banking services to users and exchanges has wide consequences. The same is evident from a perusal of the language of the RBI order dated 6 April 2018, which states:

In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs . Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.

The above order has following implications:

a)      RBI order clearly states that Banks will not provide services for facilitating any person/entity in dealing or settling in VCs. This means that even if the exchanges change their jurisdiction, RBI will not allow the transfer of Indian currency to a foreign jurisdiction for the purpose of purchasing VCs.

b)     Even if the exchanges start crypto-crypto trading having their base in India, still they will not be able to get banking services as settling of VCs is also prohibited. 

c)      Further trading using cash will also be an issue as the same will fall under the proposed Unregulated Deposit Schemes Bill, 2018 likely to be passed soon.

d)     Neither the government or the RBI has defined VCs, therefore all forms of virtual currencies may fall under the ban ambit. This may be a concern for entities dealing with reward points, or tokens.

e)     Any blockchain firm even though working on providing innovative solutions or working in area of technological development will be unable to list its tokens, VCs on crypto echnages for Indian investors.

f)       Any ICO i.e. Initial Coin Offering, (which is similar to IPO, but decentralized) is not possible in India. ICO are being regulated in other jurisdictions and provide great opportunity for start-ups seeking investment for their businesses.

g)      Some Indian tech companies, websites providing world-wide services and get paid in VCs from foreign clients. Even though they are not investors and use VCs as simpler medium to receive funds will be affected by ban.

h)     Any Indian company accepting payment in VCs for website usage/games will be unable to convert the VC to fiat currency. There could me more implications of the RBI ban depending how other industry sectors use it or proposed to use VC in near future.

Possible grounds of challenge

In terms of law, prohibition is the harshest form of action government can take and therefore the threshold to pass such prohibition order/direction has to be high. RBI’s order can be questioned/challenged on the following grounds:

a)      RBI acted as per Section 35A of the Banking Regulation Act, 1948. However, to pass such prohibition directions, RBI did not ‘satisfy’ itself as per mandate given in Section 35A before taking such coerce step (no evidence given by RBI)

b)     Did RBI consult the Garg Committee which is formed to give suggestions on regulating the VC? If not, then the ban is premature as RBI could have awaited the report of the Garg Committee to ‘satisfy’ itself before issuing directions of 6 April 2018.

c)      Ban may affect other ventures of the exchanges such as blockchain research, advisory services etc. The Blockchain firms will too get affected. Since the intent of RBI as can be seen from its past notifications was to stop buying/ selling of VC as investment purposes, the ban would overlap the bonafide business of blockchain firms/ tech companies accepting payment in VC for their services. Therefore, the ban exceeds its object and thus liable to be quashed or modified.

d)     Ban will promote illegal trading of crypto currencies and possible remittance of INR into foreign jurisdiction to purchase/ trade crypto currencies.

e)     Broadly as per the law, ban violates Art. 19(1)(g) i.e. right to carry on trade/business and Art. 14(right to equality) under the Constitution and not in terms of Section 35As of the Banking Regulation Act, 1949.

 How other countries are dealing with VC

VC are not given legal tender yet however, the manner in which VC exchanges work are being regulated to ensure that other activities linked to VC such as blockchain innovation/ ICO development is not affected. In U.K, a self-regulatory trade association named CryptoUK, recently addressed several Members of Parliament (MPs) to advocate for favourable regulations in VC. The association also gave out its proposals in writing to the Treasury Select Committee which intends to examine the role of digital currencies in the UK, including risks connected to their usage by consumers, businesses, and the government.

Last week, Abu Dhabi Global Market in collaboration with Financial Services Regulatory Authority published draft regulations which will amend the existing laws in the country to make it crypto friendly. The consultation paper proposes:

a.      To regulate VC/ crypto currency exchanges like any other multilateral trading facilities.

b.      To Define VC which can be traded on exchanges. Emphasis is given to market capitalisation as basis for a VC to be listed.

c.      To address consumer protection issues. Strict guidelines on security protocols, KYC and obligations to disclose risks to customers are proposed.

d.      To introduce reporting and disclosure obligation of the exchanges.

Why Regulation and ban is not the solution in India

After the ban is in full effect after the end of 90 days deadline, there are high chances that VC sill be purchased from other channels such as cash or through foreign exchanges. If the exchanges move to other jurisdictions, or even continue to operate in India by doing crypto-crypto trade and not covert VC to fiat currency, even then consumer protection will still be a concern. Coinsecure, a leading crypto exchange hacked on 9 April 2018, three days after the ban and bitcoins worth more than 22 crores were stolen. Till today, the customers have not received any refund. Company only sends emails buying out time.

Therefore, as advocated by CryptoUK, it is important to regulate the exchanges and users not the VC. Unfortunately, in India after the RBI’s ban on 6 April, all the exchanges are finding ways out at individual level and not coming as united front. Even the writ petitions filed in Delhi H.C are by companies which are yet to enter the market clearly thus do not address the true concerns of the affected entities.

Let us hope, that members of crypto community, tech lawyers and lawmakers will come together and resolve the issues. Because, whether government/ RBI like it or not, there is no hiding from Crypto sun!

(Prakhar Deep is a lawyer specializing in commercial remedies and writ jurisdiction. He is also a blockchain enthusiast and affected by the RBI ban as investor in crypto currency.)