SC Nixes RBI's Curb on Crypto, but Industry Still Not Convinced Though a welcome move, the supreme court's judgment to squash RBI's curb on cryptocurrency transactions through banks does not solve the core problems ailing the industry, say experts

The Supreme Court (SC) on 4 March annulled the Reserve Bank of India's 2018 directive that prohibited banks and other financial institutions regulated by it from dealing in transactions involving cryptocurrencies.

The Internet and Mobile Association of India (IAMAI), which represent the interests of online and digital services industry, along with founders and stakeholders of some of the cryptocurrency related companies had challenged RBI's circular in SC soon after its release. The petitioners argued that the central bank is not empowered to take action on cryptocurrencies and it's reasoning is not well thought out. They also contended that in the absence of a legal ban on virtual currencies, RBI's directive violates the freedom of business, trade and profession under Article 19(1)(g).

It is contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the 144 denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate. - Supreme Court Order

Agreeing with the petitions, the three-judge bench headed by Justices R F Nariman, has set aside the circular on grounds of disproportionality.

"SC has held in its judgment that RBI failed to show that any of its regulated entities—banks and NBFCs—have suffered any loss on account of the cryptocurrency exchanges," says Aditya Nayyar, Partner, Ortis Law Offices. "The SC also took note of the position that even though cryptocurrencies are not banned in India by any law, the RBI circular has comatose the various cryptocurrency exchanges by disconnecting them from the banking sector."

...we are testing (...) the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. - Supreme Court Order

Price of Bitcoin, the first and arguably the largest cryptocurrency, remained unaffected by the SC verdict, as per TradingView, a data analysis platform for financial markets. It was trading around $8700 at the time of filing the story and had last crossed the $10,000 mark on 19 February.

One Less Hurdle

The April 2018 circular directed all banks and non-banking financial companies (NBFCs) under its ambit to not deal in virtual currencies in any capacity. This included no transfer or receipt of money in accounts relating to purchase or sale of cryptocurrencies, opening accounts of exchanges dealing with them and even maintaining existing accounts.

Cryptocurrency exchanges were left defunct in the fallout of the move, forced to either shut shops or shift base to crypto-friendly countries. Zebpay, which was once one of the leading exchanges in the country, had folded its Indian operations five months after the directive was issued. Some entrepreneurs even pivoted their business models to keep floating—some survived, most couldn't.

Not just that, the circular also left many less aware retail investors confused about the legality of virtual currencies, discouraging them from dealing in them.

So, of course, the industry has welcomed the judgment with open arms.

Edul Patel, co-founder, Mudrex, a platform that allows cryptocurrency traders to automate trading strategies, believes that the SC verdict may restore retail confidence in the near term. "RBI's circular added negative connotation to cryptocurrencies. SC's verdict might restore retail investor's trust and interest in virtual currencies," he says.

Vishwas Patel, Executive Director, Infibeam Avenues Ltd and Chairman, Payments Council Of India (PCI) concurs. "IAMAI and PCI welcomes the judgment as it will open the door for millions of Indians to invest, buy and sell cryptocurrencies via bank accounts in a safe and responsible manner."

On the business side, Ankit Aggarwal, co-founder, Bitazu, a fintech startup that specializes in algorithmic trading, believes with one less hurdle crypto startups can now focus on scaling up. "Startups can now prosper and innovate without the fear of regulators breathing down their necks. This step may also contain brain drain of crypto entrepreneurs that mainly began after the RBI 2018 ruling," he says.

This (SC's judgment) step may also contain brain drain of crypto entrepreneurs that mainly began after the RBI 2018 ruling - Ankit Aggarwal, co-founder, Bitazu

That said, some industry players—both startups and legal experts—are not beating the drum as yet.

Once Bitten Twice Shy

Patel of Mudrex has welcomed the SC verdict but for him the step is toothless. "The judgment does not solve the original problem, which is that the country does not have any regulations whatsoever around cryptocurrencies," asserts Patel.

The verdict is toothless because it does not solve the core issue ailing the industry, which is absence of definite regulation - Edul Patel, co-founder, Mudrex

In the absence of formal regulations, neither businesses nor investors can operate properly. "Individuals still don't know how to account for gains they are making from crypto trading. As for businesses, without regulations there is no playground for us," Patel asserts. "There is no sandbox for companies to innovate and build on and venture capitalists (VCs) will not look at this space seriously until definite laws are put in place."

Most importantly, this move is not enough to get businesses back to India that have already moved out of the country, points Patel. Currently US-based, Mudrex was originally conceived as an exchange in India but had to change its business model owing to the RBI ruling. "Businesses that have borne the brunt of uncertain regulations, it's unlikely for them to start afresh in India," says Patel. "Once bitten, twice shy."

Aggarwal echoes the same concern. "Most crypto companies run by Indian founders are registered outside of India. Even though there are crypto-related jobs in India, most ajob seekers shy away from them for the fear of getting linked to the so-called illegal activities. The ecosystem definitely needs clearer regulations," he says.

Another thing to note is that the judgment also marks that it is well within the purview of RBI to issue directions to its regulated entities in the public interest. This means that the central bank can step in again with similar, but less severe, or a different set of regulations.

Moreover, a separate draft bill by the government that proposes banning the use of cryptocurrency and 10-year prison sentence for anyone found dealing in them is looming large over the industry. "It remains to be seen if the government reconsiders the proposed bill to ban cryptocurrencies and rather regulates them," says Siddharth Mahajan, Partner, Athena Legal.