April 6 this year was Black Friday – the comparison is 1869’s Wall Street crash not holiday shopping – for cryptocurrency in India. The ecosystem is yet to recover from a notification that day by the Reserve Bank of India to all entities under its purview that they stop providing services to individuals or businesses related to cryptocurrencies.
Bam! The industry – a dozen or so cryptocurrency exchanges, a few million investors, crypto services companies, enthusiasts of the technology… – were all supposed to fold up what they were doing and walk away.
Not quite. A few spirited individuals and companies are fighting back. They believe the RBI and the Union government’s stand in the matter is unconstitutional.
Some have challenged the notification in the Supreme Court, yet others are asking the apex court to decide on the legality of cryptocurrencies, and multiple other petitions are being filed at various high courts asking for the RBI decision to be struck down.
So far the petitions before the Supreme Court have been filed by various groups of exchanges and individuals under their personal capacities. Kali Digital Eco-systems, which runs CoinRecoil, was one of the first to file a petition challenging the RBI circular in the High Court of Delhi. Cryptocurrency exchange consortium Digital and Blockchain Foundation of India, formed last year and later merged into the Internet & Mobile Association of India, has also petitioned the Supreme Court. Exchanges including Coindelta, Koinex, Throughbit, and CoinDCX have also jointly filed another petition in the apex court.
“The right to trade is a right available to citizens. Their right to do business and carry on trade is also being violated because of the RBI circular,” says Anirudh Rastogi, founder and managing partner at New Delhi-based TRA Law, which is representing 11 petitioners as part of a writ petition.
What the RBI notification has done is cut out businesses and individuals from the formal economy by denying them access to banking, which is a public utility and an essential service, Rastogi insists.
“How can you carry out day-to-day business operations when you can’t have money in the bank,” asks Rastogi. “The broad arguments being made is that there is a right to equal treatment under the law. One business cannot be treated differently from any other business unless there is a good reason for the law to make that distinction and we believe that there is no good reason.”
RBI circulars in the past have cautioned users about trading in cryptocurrencies and highlighted concerns around money laundering, terrorism, scams etc. While this concern may be legitimate for trading on peer-to-peer platforms or WhatsApp groups that enable trades in cash, much of the fear is unfounded on exchanges.
Most exchanges, if not all, have implemented a number of self-regulatory measures over the years, which also includes know your customer or KYC processes. Late last year, the income tax department’s survey across cryptocurrency exchanges in India had shown adequate KYC information of traders on their records. In April, a senior department official told FactorDaily that most traders the department had reached out to were forthcoming and had records of their transactions. This, the official said, was mainly due to the KYC process put in place by exchanges.
In its response to a public interest litigation in the Supreme Court, the RBI said whether cryptocurrencies are legal or not should be decided by the Parliament and urged the court not to hear the petition. The RBI, in a 15-page response, added that it (the central bank) alone could not take a decision on the legality of cryptocurrencies.
“On the one hand, the RBI is saying that they don’t have the jurisdiction to decide on the legality of cryptocurrencies and, on the other, you are indirectly seeking to curb it because cutting off banking facilities essentially means that you kill these businesses,” says Rastogi. “You are denying cryptocurrency businesses of a public utility like banking when cryptocurrencies have not been declared illegal.”
After the RBI notification was released, one of the first concerns for Pune-based Shubham Yadav, the founder of cryptocurrency exchange Coindelta and one of the petitioners in the Supreme Court, was how his company would manage daily operations.
“If banks will close our accounts, it will make it virtually impossible to operate our businesses in India. Bank accounts are how we process salaries and manage operational expenses,” says Yadav of his early worries.
Repeated messages by banks to customers warning them of account closures if they transacted with cryptocurrency businesses was a double whammy — even though the government had not declared cryptocurrencies illegal.
“The number of users, be it new users or unique users visiting our website has dropped significantly as the result of these warnings. Before the circular, we were receiving around 6,000 to 7,000 new registrations a day but now the number has dropped to 50 to 60 new registrations,” Yadav told FactorDaily.
Yadav and his team, like other cryptocurrency and blockchain-related companies, even thought of moving operations out of India but decided against it “as customers still won’t be able to transact in Indian rupees,” he adds.
Even for those taking the legal route, there is a problem looming ahead: the next hearing in the Supreme Court is scheduled for July 20, once the court reopens after its vacation. But the RBI notification had directed banking entities to stop offering services to cryptocurrency business within three months: that is, by July 5.
It is not clear what will happen in the July 5-20 time frame. Several exchanges have already moved to a crypto-to-crypto model doing away with fiat transactions. Earlier in April this year, two of India’s largest cryptocurrency exchanges Zebpay and Koinex introduced crypto-to-crypto trading on their platforms, this way they could continue to operate without banking dependency until there is some clarity on the future fiat-based cryptocurrency trade in India.
Those in the business talk about a rise in peer-to-peer or over the counter (OTC) cash-based trades in cryptocurrencies. “If you look at the numbers, the volume in India has not decreased in India after the RBI circular. The number has decreased on the exchanges but at the same time the volume of peer-to-peer transactions has increased,” says Yadav. Data on this could not be immediately obtained.
For now, petitioners and their lawyers are hoping for an interim relief from the Supreme Court. If that happens, it will ensure that the RBI circular will be kept in abeyance until a final decision is made.
So far there have been four hearings in the matter. The Supreme Court has directed all pending and future cases regarding the matter towards itself. It has also asked for the attorney general to be present at the next hearing.
Despite the delays, experts say the current crop of cases will make clear the way forward for cryptocurrency businesses in India. “Only with clarity, be it regarding legality or regulations, can an ecosystem grow, but that has not been the case in India,” says Joel John, an analyst at UK-based Outlier Ventures’ India team.
He cites the example of how the Japanese financial regulator, the Financial Services Agency, laying out its regulations for cryptocurrency businesses has led to the development of the ecosystem there which has led to even mainstream banks working with cryptocurrencies.
“For now, with the kind of uncertainty looming around there is no saying what the outcome will be. But if there is an interesting use case for a cryptocurrency or blockchain business, that is not speculative in nature, then you should go ahead and build it. Regulations usually play catch up to technology,” says John.