- What is Cryptocurrency?
- Why the RBI banned cryptocurrencies in 2018?
- The Supreme Court Verdict
- What is the impact of SC verdict?
- Way forward
Cryptocurrency: Looking ahead
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- Recently, the Supreme Court overturned the Reserve Bank of India’s de facto ban on cryptocurrencies. In April 2018, RBI had banned crypto traders and exchanges from accessing formal banking channels. The apex court found RBI’s actions ‘disproportionate’ to the risks it sought to address and unconstitutional.
What is Cryptocurrency?
- A Cryptocurrency is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography. Cryptocurrency made the leap from being an academic concept to (virtual) reality with the creation of Bitcoin in 2009.
Why the RBI banned cryptocurrencies in 2018?
- Although cryptocurrencies are intended to function as a means of payment, unlike fiat currencies, they lack a sovereign guarantee and their source of value is not quite clear. There is possibility of the disruption of business models of commercial banks.
- Crypto-assets indeed pose several risks, including anti-money laundering and terrorism financing concerns (AML/CFT) for the state and liquidity, credit, and operational risks for users. Particularly for consumers, the pernicious effects of cryptocurrencies are heightened by the striking paucity of information on their design, use and operation and indications of market manipulation.
The Supreme Court Verdict
- This verdict gives a thumbs-up to the crypto exchanges and crypto as an asset class, as indirectly they have not been found violating any other law of the land. The verdict removes the arbitrariness of regulatory actions even though it does not disgrace it at all.
- The order upholds the principle of fairness and equal opportunity. The fact that the apex court outright shot down a strong policy step by RBI against a whole industry has consequences on the fairness of our regulators given their quasi-judicial status. It also means the industry was probably not provided equal opportunity to exist and grow.
- The verdict would raise questions on how our regulators understand themselves and their role and jurisdiction. RBI was formed under an act of Parliament and that act gives it powers to form regulations. Those regulations cannot, therefore, supersede the rights and freedoms given to citizens and corporations through acts of the Constitution.
- The right to create something that does not violate any existing law is an unsaid fundamental law. When combined with the fundamental right to trade, it is not constitutional for the regulators to shut down industries, when they do not violate anything fundamental or are not fraud. This void in understanding was stifling fintech innovations and the SC verdict lifts that veil, albeit only by interpretation.
- The SC verdict tells regulation is not an absolute right or power, it’s a duty as well: Since the authority to regulate is vested with a single identified regulator, companies do not have a choice to go to anyone else.
What is the impact of SC verdict?
- With this ruling, the road ahead looks clearer for the cryptocurrency and blockchain space, a lot more clarity is required in terms of regulations in this space.
- The top court’s ruling caused a rise in the crypto activity in India and also a surge of newcomers trying to hop onto the crypto bandwagon.
- After nearly two years in the waiting and multiple adjourned hearings, the ruling came as a breather and new growth opportunity for many in the Indian cryptocurrency space.
- The rise in activity was expected as cryptocurrency users in India lacked a straightforward way to enter into the cryptocurrency markets.
- A robust consultation would have allowed Government of India and RBI to appreciate technical intricacies and the impact of regulation on the cryptocurrency industry, and design an appropriate regulatory framework.
- Technology will have far-reaching implications on multiple stakeholders, all of whom are very differently placed. As such, the only way to make informed regulatory decisions is to take into account these diverse perspectives and implications of cryptocurrency.
- The RBI must set clear parameters on functional grounds to evaluate the appropriate course of action.
- A regulatory framework that is aligned with the economic functions of a product or service, or a same risk, same rules principle, can avoid the pitfalls of policy that narrowly strikes at business models and technologies already observed.
- One of the more useful takeaways from the crypto storm is the worldwide proposal for central-bank digital currencies, which could allow for money to be transferred between users without the involvement of a third-party (commercial bank).
- Like electric vehicles and the Internet, money has also evolved with time. Changes to systemic architecture are iterative and so, the rules must be carefully calibrated.
The story of crypto regulation in India is now a classic example of the harms of opaque regulation on disadvantaged customers and an expensive litigation. Greater transparency in law-making allows businesses to plan and be future-ready. India need consultative regulation which is about much more than ease of doing business.
The emergence of Bitcoin has sparked a debate about its future and that of other cryptocurrencies. A cryptocurrency that aspires to become part of the mainstream financial system would have to satisfy very divergent criteria. While that possibility looks remote, there is little doubt about cryptocurrencies in the years ahead.