Why India’s Supreme Court verdict won’t change the fate of cryptocurrencies decisively
India’s blockchain story has been dramatic — rapidly growing startups, a sudden prohibition on the Indian banking system and legal action taken by the industry against the central bank.
After over a year of petitions and hearings between the central bank and industry players, the Indian Supreme Court is to now give its verdict on whether the prohibition of cryptocurrencies will hold or be reversed in the country.
What is playing out in India is unprecedented in the story of blockchain regulation globally. In no country has the central bank been taken to court, possibly because few countries are deliberating a ban.
In this post, I examine the outcomes from two possible verdicts and what they would mean for the future of cryptocurrencies in India.
WHAT HAS HAPPENED?
April 6, 2018 was a pivotal date in India’s blockchain story. On this date the Indian Central Bank, the Reserve Bank of India (RBI), issued a landmark circular prohibiting all entities regulated by it, in effect the entire Indian banking system, from dealing with virtual currencies.
The growing blockchain ecosystem in India soon saw its fortunes reversed, with mass migration of talent and startups out of India and a climate of regulatory uncertainty amongst enterprises. After exhausting avenues for consultation, an industry body moved the Supreme Court of India against the RBI circular.
The first petitions were filed in 2017 (regarding the nature and treatment of cryptocurrencies) and after the release of the RBI circular, more petitions were filed by industry players against the circular. In August 2018, the hearing of final arguments commenced, and after many postponements and a change in the judge bench, the hearings concluded in January 2020.
In essence, the debates in court ranged over a few core questions :
- Did the action by the RBI violate Article 19(1)(g) of the Indian constitution and impact the right to work for petitioners who had businesses engaged in cryptocurrency?
- In doing so, did the RBI overstep its authority as a central bank and monetary policymaker?
- Was there justification for such an action or did the RBI act arbitrarily?
- What is the nature of cryptocurrencies and does their use necessarily imply criminal activity?
At this stage, I would not comment on the efficacy of arguments. The community has eagerly followed the arguments presented by both sides, and the Supreme Court will weigh in and present its verdict very soon.
HOW WOULD BOTH VERDICTS PLAY OUT?
On the petitions against the RBI circular, the Supreme Court could uphold the legality of the circular (the prohibition on Indian banks dealing with cryptocurrencies stays and the RBI wins the case) or reject the legality of the circular (the prohibition gets lifted and the industry wins the case).
If the RBI wins the Supreme Court case, this would give a boost to the government position of closing off the economy from cryptocurrency exposure. The Draft Bill on banning cryptocurrencies, released by the Finance Ministry in 2019, will likely get tabled in Parliament and we can assume it will be passed without much obstruction, since both policy position and the Supreme Court verdict are in alignment.
If the industry wins the case, the RBI bank circular would get rolled back. The actions that happen subsequently on the policy level then are not, however, straightforward.
WE COULD SEE SHORT TERM RESPITE..
If the industry wins the RBI case, the circular would cease to hold. Indian banks could then resume service to customers dealing with cryptocurrencies.
What this would mean for the ecosystem is a resurgence of liquidity and resumption of activity with exchanges and other startups. It would indeed, be a big victory, for an ecosystem of innovators long striving for survival.
However, this could still remain only a short-term respite because the verdict against the RBI does not directly impact actions on the policy level.
BUT THERE WOULD STILL BE LONG-TERM VULNERABILITY
What is important to note, is that all petitions are filed against the RBI, and not the Finance Ministry report or draft ban bill.
The verdict of the Supreme Court will, hence, only address the RBI circular. The Supreme Court is highly unlikely to issue any directive against the Finance Ministry, and impact their position on the issue.
What is logical to conclude is that if the verdict goes against the actions of the central bank, there might be re-thinking on the issue within our financial policymakers. There is no guarantee this will happen though, especially if the verdict only address the question of regulatory overreach of the RBI, and leaves sufficient leeway for policymakers to decide upon the treatment of cryptocurrencies.
In other words, the draft cryptocurrency ban bill could be still be tabled and passed in the Indian parliament, despite the verdict from the Supreme Court.
The overall takeaway from this analysis is that the Supreme Court verdict may not decidedly reverse the fortunes of cryptocurrency businesses in the country. That hinges far more on the policy process than the legal one. Despite the RBI circular being rolled back, the ban bill could be passed and activity in the sector stemmed again.
The policy process is complex and in subsequent posts I will share more details about how this works in India and what actions can be taken.
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