The Supreme Court has struck down a ban on trading of virtual currencies (VC) in India, which was imposed by a Reserve Bank of India order in April 2018. The court in its 180-page judgment said that the ban proposed on trading of virtual currencies was not proportionate and that the RBI itself had not found any adverse impact or harm done by the activities of these VC exchanges.
The top court allowed a batch of pleas challenging the 2018 circular of the Reserve Bank of India, which prohibited banks and financial institutions from providing trading services with relation to virtual currencies, which includes cryptocurrencies. Popular forms of cryptocurrencies such as Bitcoin, Ethereum use blockchain technology and operate independent of a central bank.
The RBI order had banned trading of all virtual currencies in India. The Internet and Mobile Association of India (IAMAI) was the petitioner in this case on behalf of all the virtual currency trading companies.
“We welcome the Supreme Court verdict. The industry is looking forward to work closely with the regulators including the Reserve Bank of India to mitigate all possible risks related to virtual currencies and foster the growth of these game changing innovations,” Naveen Surya, Chairman, Fintech Convergence Council of IAMAI told indianexpress.com.
What does Supreme Court judgment on virtual currencies say
“We have allowed the writ petitions,” a bench headed by Justice R F Nariman said while pronouncing the verdict, noted PTI.
In the judgment, the bench noted, “While we have recognised elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order 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.”
According to the judgment, the RBI’s circular was not proportionate. It also pointed out the contradiction in the RBI’s stand where it insisted that virtual currencies are not banned in India, but the circular had then gone on to ban all trading around them.
The bench said that by banning trading and the VC exchanges, the virtual currencies have been disconnected from their lifeline. “What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned,” the court said.
The judgment also refers to the differing position from the government of India, and notes how the same inter-ministerial committee has come to two completely different conclusions in 2018 and 2019. In the 2018 version of the Crypto-token Regulation Bill, the inter-ministerial committee approved the sale and purchase of digital crypto asset at recognised exchanges.
But this position completely changed in 2019. The same committee called for a complete ban on “private cryptocurrencies,” while also calling for the creation of a digital rupee as legal tender. This inherent confusion in the stance of the government is noted in the judgment.
What does the judgment mean for this industry? Can Bitcoin trading begin again?
According to Naveen Surya, the RBI circular had baffled the industry, and was seen as a knee-jerk reaction. “The industry always wanted to work with regulators, and there were several responsible, skilled players who understood the risks and had reached out to SEBI, the government and RBI. But the sudden circular had baffled the industry,” Surya said.
While the industry will welcome the Supreme Court order, the fact remains that the issue is not completely at rest, as legislative action is still remaining.
“The matter is still critical as there is a bill to ban virtual currencies in the Parliament and we hope that the government takes appropriate decision to balance between innovation and risk, rather than looking at just one dimension,” Surya said.
He said that until the existing cryto-token bill is changed from its current form, one could still see virtual currencies being banned in India and called for a more holistic view of the subject.
“Digital/virtual currencies (both private or government backed) are integral part of digital economy and digital countries. India is at forefront of all things digital and an inspiration to world, our balanced approach between risk and innovation can become role model for the world. We hope to achieve the same with guidance of the government as well as the regulators,” he added.
What did the RBI order of April 2018 say
In its 2018 order, the RBI had said, “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.”
All regulated entities involved in trading of virtual currencies had to exit the relationship within three months from the date of the circular.
What are virtual currencies? What is blockchain?
A virtual currency in simple terms is a digital currency, which is not a legal tender, meaning it does not have the backing of a central bank, like the Reserve Bank of India. A virtual currency is used by the community of developers who create it. Cryptocurrency is a form of virtual currency which is protected by cryptography.
Bitcoin, Ethereum, etc rely on the blockchain ledger technology to protect the currency. A blockchain is best defined as a open ledger, updated in real-time and the records are permanent, meaning they cannot be changed. Every time a transaction is done, a new block is added and each node or computer, which is part of the entire network, helps to maintain this blockchain. There is no central network or computer, which is keeping the records in one place.
For example, all Bitcoin transactions which have taken place since 2009 are part of the blockchain. One cannot change or modify these records, because they are protected by complex cryptography. One would technically have to control a majority of the blockchain or 51 per cent in order to tweak these records.
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