“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”
Nassim Taleb, author of The Black Swan
If there is one revolution that is slowly paving the path towards a connected world, it is Blockchain technology. It has given way to the popularity of Bitcoin and Cryptocurrency and with spectacular gains of over 3000% in 2017 followed by volatility in 2018, it’s fair to say this asset class has got our attention.
Bitcoin is an electronic or digital currency that works on a peer-to-peer basis. This means that it is decentralized and has no central authority controlling it. Like currency notes, it can be sent from one person to another, but without a central bank or the government attempting to track it. The system depends on cryptography to control the creation of the currency. While no authority controls the generation of the coins or tracks them, the system itself is designed in such a way that the network maintains a foolproof system of the record of every transaction as well as tracking issuance of the currency.
Bitcoin is the largest of cryptocurrencies, which are virtual tokens with no physical backing. They function on a technology called blockchain, which is nothing but a record of all transactions on a decentralized network of computers around the world. Every computer that processes transactions and creates bitcoins is part of the network and all these computers work together. Bitcoin accounts for 55% of the value of all virtual currencies in circulation.
The beauty of this cryptocurrency is that if you receive a bitcoin from another, you can be as sure of the payment as you would on receiving physical currency notes, with the same anonymity ascribed to it.
This anonymity is lacking in other forms of digital payment such as online banking or e-wallets.
In May 2017, the demand for Bitcoin grew exponentially and abruptly, so much that India’s largest exchanges had to put a limit on Bitcoin purchases due to lack of supply. In June, Zebpay, one of India’s leading Bitcoin exchanges established back in 2012, became the seventh most popular app in the finance category on India’s Apple app store, even higher than the apps of many national banks. In October, it was reported that the major Bitcoin exchanges in India were attracting more than 200,000 new users every month.
On January 21, 2018, it was reported that a number of major banks in India had suspended or greatly curtailed functionality on exchange accounts. State Bank of India (SBI), Axis Bank, HDFC Bank, ICICI Bank and Yes Bank had all taken strong actions against crypto exchanges, either closing accounts or severely limiting functionality. The reason given was the risk of dubious transactions, according to local reports.
RBI’s abrupt move!
In its first policy statement of fiscal year 2018-19, the Reserve Bank of India (RBI) on April 6 dealt a body blow to all the cryptocurrency exchanges and individuals doing virtual currency business in India by asking regulated institutions like banks to stop providing services to them.
In February 2018, the income tax department, in a bid to tax the cryptocurrency transactions, issued several lakh notices to those who put money in bitcoins. Time and again, the RBI issued several warnings to the users and traders of Virtual currencies (VCs) -“Users, holders and traders of Virtual Currencies (VCs) including Bitcoins are cautioned regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs,” said the RBI. Even Government of India’s finance ministry issued a statement stating: “Consumers need to be extremely cautious so as to avoid getting trapped in such Ponzi schemes.”
Despite criticism against bitcoins, the government has supported the idea of blockchain technology that created bitcoins and other digital coins. During the Budget Speech, Union finance minister Arun Jaitley said that the government will look at the utilization of Blockchain. Reserve Bank of India (RBI) has set up an inter-departmental committee to explore feasibility and desirability of starting own digital currency in future.
But was this decision of the central bank — which stirred the whole digital currency market, especially Bitcoin traders and investors — based on a thorough research?
On April 9, Varun Seth, startup consultant filed RTI application in response of which the Central Bank said it does not have an internal committee that looks into VCs. The RBI specifically mentions that it conducted no research or consultation before the implementation of restriction in April.
Following which the Delhi High Court has issued a notice to the Reserve Bank of India after an appeal was filed to scrap a notification that barred banks from supporting bitcoin related transactions.
A writ petition has been filed in Supreme court against the RBI restriction. The lack of proper stakeholder consultation and the absence of reasonable grounds to restrict any business are the primary provisions under which the RBI notice is challenged in the Supreme Court. In this petition, petitioner submits that there is no clear definition of what constitutes VCs either in the impugned circular or in any other legislation. On May 12, the Supreme Court declined to grant an interim injunction against the RBI.
Later on, the Supreme Court came forward again and said that no petitions could be filed in any High Court of India against the RBI crypto decision. This decision will be in place until July, when the Court will set a hearing date for the existing petition on July 20.
Experts opines that the petitioner will likely attempt to use the response to show how the RBI’s decision did not rely on credible or neutral evidence of harm. This may affect the constitutionality of the RBI’s guidance.
Furthermore, a petition garnered over 17,000 signatures, urging the RBI to reverse its decision on Bitcoin and cryptocurrency.
The move by the RBI has put the cryptocurrency sector in jeopardy and may affect the basic rights of such entities to carry on any trade. The circular appears to be unconstitutional since it does not give strong facts as to why the RBI is against the business of cryptocurrencies. A logical and well thought arguments backed by solid facts are the primary requirements under the Constitution to put a stop to any business in India. However, the action taken by the government is for putting a stop to people who are doing scams and running ponzi schemes. The actions taken will only slow down the process but it cannot stop the adoption. It is a baffling situation that the Indian cryptocommunity finds themselves in as their central bank is slowing the progress of Bitcoin, blockchain, and cryptocurrencies in general. The government does not have a positive outlook on crypto, but they are not banning it. Rather it is being choked out by the banking system which is now under pressure from the community, who is involving the courts. India is fighting internally about the future of cryptocurrency with even the banks admitting that there is a lot of promise in the technology.
The next step in India’s battle for cryptocurrency legitimacy will come on July 20, when the courts sit down and look over the new petitions, but until then, the cryptocummunity has to try to survive even with the banking squeeze.
(Author is associated with Mamta Binani and Associates and can be reached at [email protected] )