Based on a directive circulated by the Reserve Bank of India (RBI), cryptocurrency has long been considered banned in India. Well, not anymore.
In a surprising turn of events, on Day 2 of the hearing, the central bank responded to a writ petition filed by the Internet and Mobile Association of India (IAMAI) by admitting that it does not have the power to ‘absolutely prohibit’ crypto activities in India.
RBI further clarified that while crypto was not banned in the country, it ringfenced; meaning, it was segregated from financial institutions like banks so as to protect them from risks associated with the trading of digital currencies.
According to RBI, these risks involved reputational, financial, legal, and operational threats such as those stemming from acts of terror financing and money laundering carried out through the use of cryptocurrencies like Bitcoin.
In an affidavit submitted to the Supreme Court, RBI added that: “Any possible avenues which facilitate anonymous cross-border fund transfer have to be acted upon swiftly and stringently dealt with. It is an admitted fact that VCs [Virtual Currencies] have been used to purchase illegal and illicit goods ranging from guns and ammunition to drugs.”
As the court case enters its third day of litigation, Counsel for both RBI and IAMAI have resumed intense arguments regarding the feasibility and merits of digital currencies as well as the need for a regulation governing the space.
Legal counsel for IAMAI, Advocate Ashim Sood, opened arguments by stating that while risks existed, proportionate measures could be implemented to mitigate them. Sood provided a comparison of cryptocurrencies and air mile schemes, reasoning that crypto acts similar to air miles, which can be redeemed in exchange for goods and services (e.g., hotel stays and vacations). Although crypto can be encashed – unlike air miles – both follow similar economic principles and can be purchased against legal tender.
Sood further contended that with the rapidly changing world of finance, exchange businesses that are entirely dependent on banking channels available would suffer if crypto activity in the country was banned or discouraged.
Sood argued that as a medium of exchange, cryptocurrencies could only be regulated through government legislation. Although RBI could prohibit transactions under Sections 6(1) A – 6(1) O, it had no authority to encourage or discourage certain forms of economic activity, let alone to ban particular banking channels entirely.
RBI Counsel, Advocate Shyam Dewan, began arguments defending the agency’s actions by reiterating that RBI’s mandate was to maintain financial stability in the country and ensure that the domestic economic needs were being met. Any act taken under this purview would, therefore, be deemed perfectly within its domain.
Furthermore, RBI stated that its decision to prevent banking entities from engaging in Crypto related economic activities was taken after extensive deliberations. It sought inputs from its’ internal Inter-Regulatory Committee as well as the governmental Inter-Disciplinary Committee and the Inter-Ministerial Committee (IMC).
As evidenced by the IMC meeting reports, cryptocurrencies were viewed as highly volatile entities that hold the potential to destabilize markets and thereby jeopardize the ecosystem of formally regulated payment structures as well as cross border transactions.
Dewan added that RBI continued to view Crypto as a digitized system of payment rather than a technology or goods as opposing Counsel had suggested earlier. He contended that Cryptocurrencies were not considered equivalent to legal tender anywhere in the world. Since they are backed by peer-to-peer trust and consensus-based algorithms rather than the government, they could not be compared to fiat currencies either.
Therefore, RBI counsel concluded that effective regulatory legislative measures were essential to control Cryptocurrencies. He pointed to inter-governmental groups studying Crypto and stated that laws governing crypto activity were already in the works.
The Court adjourned after a discussion of possible threats posed by cryptocurrency, particularly in the spheres of terrorist financing and money laundering. Dewan will continue arguments on behalf of RBI when the trial resumes tomorrow morning.
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