The Supreme Court has lifted the ban on trading in cryptocurrencies. How will the government create an effective regulatory framework to monitor digital currencies?
RBI imposed ban, the trigger
The Supreme court has overturned the Reserve Bank of India's (RBI) two-year ban on cryptocurrency trading in India. The RBI had banned cryptocurrency trading in April 2018, prohibiting banks and other financial institutions from trading in digital currencies. In its argument, the RBI had said that this was done to prevent cryptocurrency industry from affecting payment services in India.
The ban led to many cryptocurrencies to shut down their business. Before the ban, Indians traded approximately 2500 bitcoins per day. The ban had led to plummeting trade volumes and exchanges shutting their businesses.
Grounds for revoking the ban
The Supreme Court of India has dealt with two questions. First, is cryptocurrency a "commodity" or a "currency?" Second, can the trade in virtual currencies be made illegal even as the virtual currencies themselves remain legal?
The petitioner, Internet Mobile Association of India (IMAI) stated that cryptocurrency is like a commodity and is not a currency, as the name suggests. IMAI petitioned that cryptocurrencies must be treated akin to "casino chips" and therefore is a commodity. RBI ought to have considered the same before the ban.
With respect to trading, the RBI stated that it had only barred banks from "providing any service in relation to virtual currency."The IMAI argued that without a specific and explicit ban against cryptocurrency, any trade in the virtual currency was legal within the ambit of the Constitution of India under Article 19 (1) (g) (right to practise any profession or to carry out any occupation, trade or business). A ban of this nature had only removed cryptocurrency dealings from the formal economy and increased trade on the black market.
The RBI contended that there was no violation of Article 19 (1)(g) as there is no fundamental right which allows for trading in virtual currency. The Supreme court rejected this argument stating the petitioners only wanted a platform to transact, and the ban was disproportionate as the central bank had failed to prove any real damages to the economy.
Future hurdles for cryptocurrencies
The Supreme court order was considered "historic", but probably was too early to celebrate. The central government's draft law in parliament has proposed a ban on all private cryptocurrencies except a state-issued one. In July 2019, the government panel had also recommended jail of up to 10 years and hefty fines for anyone dealing in digital currencies. The government's concern is also fuelled by the anonymity afforded by cryptocurrencies that may be exploited to finance terrorist operations. This concern was also flagged internationally by the Financial Action Task Force.
The rising demand for Bitcoin
Bitcoin is traded at approximately $8335 today, and there are good reasons to believe that its value will only go up. First, the tensions between Iran and the United States, which resulted in investors withdrawing cash from traditional markets and depositing it in cryptocurrency. Second, the Coronavirus outbreak is also a significant factor for investors to invest in bitcoin.
Thirdly, the bitcoin shows a positive connection to gold, as both the commodities are a competing store of value. Both Bitcoin and gold are immune to the cycles that emerge from traditional markets.
The Indian Supreme Court must be lauded for deciding on the same lines, to clear the path for evolving fresh regulations which will enable the safe use of bitcoins. The U.S. Commodities Futures Trading Commission in 2015 declared BitCoins as a commodity. There have been no blanket bans on ownership of cryptocurrencies in any country despite concerns raised on the misuse of consumer data and its possible impact on financial systems.
With the ban, India has lost considerable hold over the global crypto-economy. The RBI must come up with new regulations surrounding digital currency systems that can address regulatory concerns as well as aid growth in the ecosystem. Central banks in other countries like Britain, Japan are also exploring the potential of digital currencies.
Cryptocurrencies are steadily picking up momentum across the world. Since it is a decentralised financial system, they are the ideal payment method when traditional economic structures have proved to be fallible in the time of crisis.