Cryptocurrency: To Be or Not To Be?
By: Kaushalya Venkataraman
Warren Buffet famously said that crypto-currency is a mirage and that it would come to a bad ending. While there are many detractors of crypto-currency like Warren Buffet, there are many such as Elon Musk and Peter Thiel (co-founder of PayPal) who believe that it could change the world. In very simple terms, a cryptocurrency is a digital representation of value that can be stored and transferred digitally. For many of the crypto-currencies, there may or may not be an underlying asset from which it derives value, for example, Bitcoin does not have an underlying asset and its value is derived from its scarcity, for some other crypto-currencies, the underlying asset may be a commodity (such as gold or oil).
Cryptocurrency represents an alternative to fiat currency and its value proposition is that it is (arguably) not tied to the same parameters with which the value of a fiat currency is determined by, for example, the value of bitcoin is tied to the demand and supply for it, cost of production and the cost of verifying transactions through the underlying technology, all of which are unrelated to the economy. This is particularly relevant currently because many governments are printing more fiat currency (especially the Federal Reserve of the United States of America) to combat the economic crisis brought about by the COVID-19 pandemic and many countries are either headed to a recession or will experience a sharp decline in their growth. Therefore, could crypto-currency then represent the ‘digital gold’? Could it then act as a hedge against recession?
While the jury is still out on this, recent developments in India suggest that crypto-currency has once again garnered a lot of interest among investors. This is primarily because of the recent Supreme Court ruling (on March 4, 2020) in the Internet and Mobile Association v. Reserve Bank of India (2020 SCC Online SC 275) right before the onset of the COVD-19 pandemic in India.
In 2018, the Reserve Bank of India issued a circular by which it directed that the entities regulated by the Reserve Bank of India (i.e. banks and financial institutions) should not provide access to banking services to those engaged in transactions in crypto assets. The 2018 circular represented a culmination of the Reserve Bank’s thinking beginning 2013 when it raised concerns over the potential financial, operational, legal, and customer risks.
The 2018 circular of the Reserve Bank of India crippled the crypto-exchanges since they relied on normal banking channels for sending and receiving the money to and from their users (i.e. the users bought crypto-currencies through fiat money or encashed them and received fiat money in exchange) and even in cases where crypto-exchanges did not deal in fiat currency, they needed access to normal banking channels for their day to day business operations.
A three judge bench of the Supreme Court in Internet and Mobile Association v. Reserve Bank of India (2020 SCC Online SC 275) struck down the 2018 circular of the Reserve Bank of India on the doctrine of ‘proportionality’, i.e. the circular failed the reasonableness test under Article 19 (1)(g) of the Constitution of India which guarantees to all Indian citizens the right to carry on any occupation, trade or business. The main reasoning was that the ban on the right to access the banking system by the crypto-exchanges was disproportionate to the risk posed by crypto-exchanges. At the same time, however, the Supreme Court did not rule on whether there was a fundamental right to purchase, sell, transact and/or invest in crypto-currency, because this was not claimed by the persons who filed the writ petition who only claimed that they had a right to provide a platform for facilitating an activity (of trading in virtual currencies between individuals/ entities who want to buy and sell virtual currencies) which was not yet prohibited by law. This last part is important because had there been a law that prohibited the sale or trading of virtual currencies then perhaps a different conclusion would have been reached by the Supreme Court.
This brings us to the fact that the Department of Economic Affairs, Ministry of Finance, Government of India, had introduced a draft bill to ban cryptocurrency in India back in 2018, which was replaced with a fresh bill titled, ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’. The draft bill has not yet been tabled before the Parliament and it is not clear when if at all it will become law. The draft bill seeks to prohibit, mining, holding, selling trading, issuing, disposing, or using cryptocurrency in India, and makes it a criminal offence punishable with a maximum of 10 years imprisonment, which many argue is disproportionate. The draft bill does pave the way for an official digital currency of the country and permits the underlying technology (distributed ledger technology) but whether it will be enacted remains to be seen. Banning crypto-currency may not be the best regulatory policy, because users from India may find innovative ways to purchase and deal with them offshore in jurisdictions where they are permitted such as Singapore, United States among others.
In the meanwhile, taking advantage of the decision of the Supreme Court and the regulatory gap currently many crypto exchanges have recently come up in India with no real regulatory oversight. This raises serious concerns not only from a consumer protection perspective as it is yet not clear what if any remedy users/buyer of virtual currencies have against the exchanges but also from a prudential regulation perspective, as there are no rules or regulations that the crypto exchanges need to follow, which exchanges in the securities market or commodities market are subject to.
(The author is Partner, Chandhiok & Mahajan and the views expressed in the article are his own)