Necessity is the mother of all inventions. After dealing with the archaic financial institutions that operate with lengthy procedures while also taking a cut in every transaction that happens through them, perhaps, it was felt necessary to bypass the system and trade with an alternative instrument. That was the idea behind the birth of virtual currencies (‘VC’). It also stems from the fact that a free market will always look for a laissez-faire situation with minimal interference from the established administrative organs of the State. It was then, only a matter of time for the technology to evolve to create an instrument for transactions, sale, barter etc.
Bitcoin was perhaps the buzzword around the world in 2017. Almost everyone had at least heard the term bitcoin and were all looking to own one, invest into it or just wanted to know what it was. Bitcoins were also actively traded and also reached a whopping $19,783 at its peak in late 2017. This had prompted everyone’s attention to VC and cryptocurrency. All the buzz has subsequently subsided now, however, the technology behind bitcoin, i.e., blockchain has become the backbone of every VC. At present, there are multiple VCs that are being actively traded with Bitcoin, Ethereum and Litecoin being some of the higher valued VCs. This brings up the essential question as to what drives the value of a VC and what is the actual value of it since it is not issued by any State backing and works on the principle of a decentralised ledger. Before attempting to know the future of VCs, from an Indian perspective, it is imperative to understand the position and sentiment towards VCs in India. In fact, the Supreme Court recently, in the case of Internet and Mobile Association of India v. Reserve Bank of India, had exquisitely analysed the position of VCs and cryptocurrencies around the world and the Reserve Bank of India’s (RBI) stance towards these VCs and in short, held them to be unconstitutional, and set aside the RBI’s circular. The Hon’ble Supreme Court has held that the RBI’s circular prohibiting the petitioner’s access to banking channels to be illegal, arbitrary of Article 19 (1)(g) of the Constitution of India and also set aside the circular on the ground of proportionality.
In what is being considered a landmark judgement for crypto traders in India, the Hon’ble Supreme Court had dealt with the RBI, the extent of the powers of the RBI and had gone at length about cryptocurrencies. In India, the RBI had always issued advisories against cryptocurrencies and VCs since 2013. The trouble brewed when the RBI issued it’s Circular no. RBI/2017-18/154, dated 06.04.2018, to all commercial banks, payment banks, non-banking financial institutions, payment system providers to immediately isolate and not provide any more financial services to any person or entity dealing in or settling with VCs, thereby effectively freezing out the entire formal system of banking facilities to all parties that deal with VCs. The above circular was issued by the RBI by powers conferred on it under Section 35A read along with Section 36(1)(a) of Banking Regulation Act, 1949, Section 35A read along with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949, Section 45JA and 45L of the Reserve Bank of India Act, 1934, and Section 10(2) read along with Section 18 of Payment and Settlement Systems Act, 2007.
The main issues before the Hon’ble Court were the scope of RBI to regulate VCs and whether the Circular issued by the RBI was in violation of Article 19(1)(g) of the Constitution. For the first issue, the main contention of the petitioners was that VCs are only goods and commodities and therefore, the RBI cannot regulate the trade of such goods and that by such regulations, RBI was acting out of its authority. The Apex Court had examined the RBI Act, the objective of RBI as per the Act was its obligation to operate the monetary policy framework in India and that the main objective of such operation is to maintain price stability while keeping in mind the objective of growth. The Court had examined The Banking Regulation Act, 1949 and the Payment and Settlements Systems Act, 2007 in-depth which was also sources of power to the RBI. However, the Court had not accepted the argument of the petitioners inasmuch as it was held that RBI still has a wide ambit to regulate the same. The Court held that RBI is the sole repository of power for the management of the currency and has an important role in evolving the monetary policy of the country. In Para 6.90, it was held as follows:
“Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system.”
Therefore, the Court rejected the contention of the petitioners that the RBI had no scope to regulate VCs and held that RBI has wide regulatory powers vested with them and therefore can, in fact, regulate VCs as well. The main contention of petitioners, however, is that access to banking channels is equivalent to the supply of oxygen in a modern economy and denying them that right to trade which is not prohibited by law is not a reasonable restriction and such an action is disproportionate. The RBI had raised two main fundamental objections to this argument. Firstly, they contended that the circular of the RBI was challenged by corporate entities/ bodies and not ‘citizens’ and therefore cannot claim the protection of fundamental rights. Secondly, the RBI also contended that there was no fundamental right to sell/transact or invest in VC, therefore, protection under Article 19(1)(g) cannot be claimed. For the first objection, the Court held that even though the petitioner was a not for profit organisation, the shareholders and promoters have come up with the second writ petition and therefore, the challenge of the Petitioners is valid. The second objection of RBI was also rejected by the Court on two main reasons namely,
(i) that at least some of the petitioners are not claiming any right to purchase, sell or transact in VCs, but claiming a right to provide a platform for facilitating an activity (of trading in VCs between individuals/entities who want to buy and sell VCs) which is not yet prohibited by law; and
(ii) that in any case, the impugned Circular does not per se prohibit the purchase or sale of VCs.
Further, the Court had demarcated three main categories who trade in cryptocurrencies. The first category is those who engage in such trading as a hobby and they cannot claim the protection under Article 19 (1)(g) as it only covers trade, occupation, profession or business. The second category of users who also cannot claim that the circular had completely shut down their business are those who trade crypto to crypto pairs or peer to peer transactions as those transactions still accept payments for the purchase of goods and services. The Court, therefore, concluded that only the third category i.e., the cryptocurrency exchanges that completely rely on the banking systems that are deprived of their fundamental right under Article 19(1)(g). The straw that broke the camel’s back, however, was the disproportionality of the damage caused by the circular. The Court held that a heavy burden is cast upon the RBI to show that there existed a larger public interest warranting such a measure of denying banking facilities. Further, the Court held that the RBI did not find any evidence to show that the activities of these VC exchanges have actually impacted adversely to the economy or any other entity regulated by RBI or caused any semblance of damage suffered by its regulated entities. In view of the above and in absence of any legislation that bans VCs or exchanges dealing in VCs, denying access to formal banking channels was held to be a disproportionate measure.
Aftermath: What Does The Future Hold?
- For crypto currency/ VC:
While the Hon’ble Supreme Court has delivered a rather poetic and a magnificent judgement on VCs and had gone into explaining all the intricacies of the VC and delivered it in favour of the petitioners, it may be pointed out that future still looks rather bleak for the general populace dealing in cryptocurrencies. Whilst a majority of related parties have enjoyed drawing the first blood and victory, VC still can be totally banned by proper legislation. The main issue with a decentralised currency is the fact that, as noted by the Hon’ble Supreme Court as well, is the very fact that it can be used for anti-social activities, money laundering, economic instability and also terrorism. Therefore, if there is proper data in the hands of the lawmakers that VCs are being used for purposes as listed above, nothing stops the legislature from placing a blanket ban. In certain jurisdictions such as Russia and China, such bans are already in place. The Court itself has noted that the RBI itself still has wide powers and can still frame policies to tackle VCs effect on the economy or the fiat currency. Thus, the effect of the judgement on allowing VCs to operate in India is rather ephemeral inasmuch as they can be terminated at any time as a reasonable restriction. The Hon’ble Supreme Court had technically only restored banking services to pure VC exchanges as it’s their fundamental right to trade and continue business and removing banking services essentially paralyses their entire operations.
With this being said, to equitably predict the future of VC’s in India, then, becomes a rather futile exercise when the RBI or the legislature can cease the same through their powers, especially, in the interests of the economy or security of the country. In this, the attitude of the particular jurisdiction comes into play and in the instant case, in India, the general official outlook towards VChas always been rather hostile. This can also be concluded by various RBI advisories against cryptocurrencies since 2013, to not deal or trade in VC and also based on the draft bill, “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019”. This draft bill seeks to prohibit mining, holding, selling, trading, issuance or use of cryptocurrency in India. If passed, this Bill requires everyone in possession of cryptocurrency to declare and dispose the same within 90 days of its commencement. Further, anyone in possession or using cryptocurrency can face a fine along with a maximum imprisonment of 10 years. Mere possession of cryptocurrency is also illegal as per this Bill. The only exceptions permitted are for the experiment, research or teaching.
Herein lies the crux of the problem, the reason VC was invented was to bypass traditional banking and regulatory systems and therefore a VC is decentralised and is not physical, therefore, can exist anywhere. Accordingly, by their very nature, VC’s inherently are hard to block/ban. However, whether or not possible, banning it cannot be a solution as it does not work in most cases. Alcohol, free access to internet and gambling have always been heavily regulated and banned at some point of time in India and it is safe to say that it has not always worked as it was hoped. Further, in the absence of an actual physical commodity and acting on a worldwide scale, banning or regulating bitcoins or any other VC’s makes the task even tougher and laborious. Instead, India has tremendous scope and opportunity to regularize VC’s and let them run through proper channels and monetize on the same. For example, in the United States, Bitcoin is categorised as a property for the purposes of taxation by the Internal Revenue Services. The fact of the matter is that technology is expanding at a pace that legislation cannot possibly keep up with. For example, a social media firm had created South Korea’s fastest-growing bank, which has no physical banks but only operates through mobile. Within a fortnight of its launch, it surpassed two million customers amassing US$930m in savings and providing US$701m in loans. These are perfect examples of disruptive technologies and they disrupt the market, create jobs and also can affect the economies. The RBI and legislature at large should look at these as opportunities and avenues to keep up with the pace of this disruptive world. Prohibition and embargos probably worked in the previous century, but banning VC and placing harsh sentences on legitimate uses of it not only hurts our image as innovator friendly market but also does not serve any ultimate purposes because in the world of peer to peer payments and the internet, prohibition is somewhat akin to placing a gate on a river.
Reasonable restrictions on fundamental rights have already been provided in the Constitution, therefore, when VCs are being used for illegal purposes, such harsh punishments are justified, but when they are used for normal transactions, there is no need for such harsh punishments. Further, regulating using proper channels allows the Government also to keep a record in the blocks on transactions and actually prevent illegal transactions through VCs.
- For blockchain:
The future for blockchain remains as exciting as ever. Bitcoin and cryptocurrency are only the surfaces of the potential uses of blockchain. Governments, corporations and individuals around the world are working on and discovering the potential of blockchain technology. Blockchain is the future, as the transactions stored in these blocks are stores of data and companies can successfully use this data to learn customer trends, usages and patterns. While cryptocurrency is one use, blockchain has the potential to provide alternative and cheaper cross-border transactions in real-time. Another use of blockchain is its use in security. While being a decentralized ledger present in every user’s system and providing security sounds like an oxymoron, blockchain can be used for identity management and identity security. Especially, in the digital age where identity thefts are becoming common across the board, blockchain offers a tremendous level of security as the details are all stored at different nodes and therefore, are also impossible to be changed at every node of the chain.
Blockchain technologies are also being courted by big businesses such as Walmart, Nestle, Unilever etc which have huge supply chain networks. In these FMCG sectors, food traceability is extremely important since ingredients are sourced from all over the world, manufactured at multiple facilities and must be sold safely before their expiry to customers. In 2016, Walmart along with IBM established its Food Safety Collaboration Centre in Beijing and ran a pilot project involving tracking mango produce from South America to the USA. With a farm to table approach, Walmart’s blockchain solution had reduced the tracking time from 7 days to 2.2 seconds and it also promoted greater transparency across Walmart’s food supply chain. This is the revolution that blockchain can bring in supply chain industry that not only drastically reduces the tracking time of food but also ensures safety, transparency and all related information of the goods that ultimately end up with the customers.
Cryptocurrencies and VCs have indeed come a long way, especially, in India where an ever-growing and a young population is looking at different ways to invest in new avenues. Cryptocurrencies, therefore, are perfect since they are peer to peer and are by nature independent. However, VCs and cryptocurrency are still not understood by people and nature are inclined to place their trust in regulated fiat currencies. Thus, the judgement of the Hon’ble Supreme Court also caters only to a niche category of users that understand cryptocurrency and other related terms like mining and blockchain. Although the amount of people in the said niche category is small, it keeps ever-growing and finding more popularity especially after the demonetization. However, as discussed earlier, VC users in India must be aware of the regulations since India has largely adopted an anti-cryptocurrency stance in general. However, such a stance is unnecessary and this could actually be an opportunity for the Government as VCs are an excellent venue to move into and keep up with the ever-changing markets, but it seems, they are taking the easy way out by being overly cautious. While it is risky for Governments to deal with such VCs as they may pose a threat to fiat currency issued by the Government itself, it becomes all the more imperative for the Governments to regularise them and let them run through Government channels which gives a two-way benefit to the Government. First, all the fears that the Governments have over the parallel economy and VCs being used for anti-social activities and terrorism can be linked and tracked. Secondly, they also have access to a digital economy and keep track of all VC transactions done in India and from India. Largely though, the future looks bleak for cryptocurrency considering the view adopted by the Government and also amidst concerns of cryptocurrency exchanges being targets of cyber burglaries. It must also be noted that with various initial coin offerings and also companies coming up with their own cryptocurrencies like Facebook coming up with their own VC called Libra, whether we like it or not, the world is moving ahead with VCs. Therefore, the justification that they are still a nascent technology might not be entirely true but it just depends on the risk appetite of its users. It’s the Government right now that has the ball in its court and has the chance to give the backing cryptocurrency it needs and usher into the new era of innovation and digitisation of the currency.
Views expressed are strictly personal.
Sai Makarandh.P is a practising advocate in the domain of indirect taxation. He finished his B.A LLB., (Hons) from VIT University, Chennai. He has also authored research papers previously on the possibilities of a legal framework for cryptocurrencies and securities settlement system using blockchain. He appears before adjudicating authorities, appellate authorities including tax tribunals, and also assists various advocates in matters relating to High Courts and the Supreme Court. He can be contacted at [email protected]