The future of crypto currencies in India

Bill Maris, the founder and CEO of Google Ventures, rather presciently, once remarked, "the reality is [that] regulation often lags behind innovation".The Supreme Court in a peculiarly ornate judgement on March 4 set aside an RBI Circular of April 2018, which effectively denied all crypto businesses in India, access to formal banking channels. The circular not only choked many crypto businesses to death at the time, but also since, throttled new thinking and innovation in the crypto space. Resultantly, anything-crypto got relegated to the clandestine.

The judgement came as a huge relief for the nearly five-million plus strong crypto community in India. It is important to note that although most of the arguments of the petitioners were rejected, the decision of the apex court was based primarily on the proportionality principle. The RBI failed to demonstrate any actual harm suffered by the regulated entities as a result of their provision of banking services to crypto businesses. That being the case, it was held that the RBI's exercise of its wide powers even in the form of curative measures was disproportionate. For taking any pre-emptive action, the RBI needed to show at least some semblance of any damage suffered by the regulated entities.

While the court rejected the contention that VC businesses fall outside the statutory ambit of the RBI, it now appears that the central bank's powers to even ringfence the financial system from the adverse effects of the VC businesses could be exercised in extremely unlikely circumstances. It is highly unlikely that the RBI will suddenly discover new evidence of actual harm suffered by the regulated entities as a result of their provision of banking services to the crypto businesses. Given that, any fresh attempts by RBI at prohibition of crypto businesses will likely be similarly unsuccessful.

Committee's Recommendations and the Draft Bill

Unfortunately, the relief granted by the apex court may only be temporary. The government-appointed committee on the working of VCs recommended a total ban on dealings in VCs at both individual and institutional levels, with a few exceptions. The Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 contains a very wide definition of "cryptocurrency" viz. any information or code or number or token generated using cryptographic or any other means, providing a digital representation of value, exchanged with or without consideration with the promise or representation of having inherent value in any business activity involving risk of loss or an expectation of profit or income.

This is wide enough to cover all manner of cryptocurrencies, regardless of the nomenclature. Section 3 of the Draft Bill provides for a general prohibition on dealing in cryptocurrencies. Further, such dealing is punishable with a fine or imprisonment up to 10 years. It remains to be seen if a total prohibition in the form of a law passed by Parliament (if done) will similarly be hit by the doctrine of proportionality or saved by the doctrine of judicial deference to economic policies of the state.

Regulate, Don't Ban

The SC, in its endeavour to ascertain the true identity of VCs, methodically considered the literature on VCs as also the regulatory perspectives of other countries. Acknowledging the multiple characteristics of VCs, it observed that the exact identity of VCs eludes precision.

Considering the western experience, it is trite that VCs assume different forms and thus exhibit different characteristics in various use cases. For example, they can be used as a currency, security, asset token, etc. Therefore, a blanket regulatory approach for all cryptocurrencies may not be appropriate. Instead, a heterogenous and customised regulatory approach targeting specific types of cryptocurrencies appears to be ideal.

One issue of particular importance is data protection. Given the nature of information VC businesses handle and keeping in view SC's judgement in the Puttaswamy case, data protection and informational privacy concerns should be specifically addressed in any comprehensive cryptocurrency legislation.

A complete ban on VCs will almost certainly relegate them to the fringe. Moreover, enforcement of a ban on VCs, which were fundamentally designed to obviate the necessity of any central authority might be difficult. Also, anonymity of users compounds the problem.

Blockchain, the underlying technology of VCs, has very wide applications. Even the RBI acknowledged this in some of its publications. Implementation of government schemes at various levels can be monitored using distributed ledger technology. The government should take these considerations into account before taking any definitive measures on VCs. An outright ban on all VCs would amount to throwing the baby out with the bathwater.

Legal recognition of virtual currencies will take us one step closer to the government's long-term goal of building a "Digital India". Needless to emphasise, the quintessential object of regulation of any new technology is to limit the dangers of application of such technology and ideally, let markets figure out the optimum.

(The writers are practising advocates based out of Hyderabad and Delhi respectively)