Is India Cryptocurrency Ready?

Crypto-currency is an online exchange system that utilizes cryptographic functions to carry out financial transactions. Cryptocurrencies utilize blockchain technology to gain decentralization, accountability, and immutability. It is a physical or simulated currency protected through cryptography, which makes it almost impossible to counterfeit or replicate.

Many cryptocurrencies are decentralized networks focused on blockchain technology — a global database supported by a dispersed network of computers. The distinguishing characteristic of cryptocurrencies is, commonly speaking, that they are not distributed by any central authority – rendering them immune from political intervention or manipulation.

In April 2018, the Reserve Bank of India placed a ban on cryptocurrency trading that barred banks and other financial institutions from facilitating ‘any transaction in relation to virtual currencies’. At the time, RBI argued that a step was required to curtail the’ ring-fencing’ of the country’s financial sector. It also claimed that Bitcoin and other cryptocurrencies could not be viewed as currencies because they are neither made of metal nor reside in actual form, or have been authorized by the government.

The 2018 warning from the central bank sent a scare to many local start-ups and firms providing cryptocurrency services. India’s virtual currency industry had come to a standstill following the April 2018 notification that prohibited use of banking channels for transactions of cryptocurrencies such as Bitcoin. Several exchanges shifted overseas or closed their business altogether in the last two years.[1]

The Supreme Court of India reversed the Indian Reserve Bank’s injunction on cryptocurrency trading in the region on the 6th of March 2020. Even as the apex court ruling has led many to anticipate direct investments to extend the cryptocurrency room in India, experts agree that the effect that this field will have goes beyond that. The essential question that needs to be raised here is,  “Is India Cryptocurrency Ready?”

Industry watchers celebrated on 6 March when the Supreme Court of India lifted the Indian Reserve Bank (RBI) prohibition on financial institutions offering banking services to cryptocurrency firms, in the case of Internet and Mobile Association Of India vs Reserve Bank of India (RBI). However, the verdict by the Supreme Court is not definitive and there are multiple red flags in the text of the 180-page judgement. In fact, the decision as a whole is focused on the infringement of one of the fundamental rights of the Indian constitution–Section 19(1)(g), which grants the freedom to pursue any profession.

The Supreme Court ruled that the measure of the RBI breached Article 19(1)(g) on virtual currency exchanges and that the level of prohibition was not proportionate to the hazard. The decision also found that the central bank did not justify the danger with empirical data or contemplated possible interventions in a reliable manner. One of the factors that the Supreme Court favored the business was that there was “not yet a law prohibiting virtual currencies,” which suggests that the decision would not have applied once such a law had been in effect.

Any restriction on the freedom guaranteed under Article 19(1)(g) should pass the test of reasonableness under Article 19(6). With that aim, the Court distinguished between three categories of cryptocurrency traders who are hobbyists, VC traders and VC Exchanges based on the existence of profit motives. The first category of hobbyists cannot claim any fundamental right as they are not covered by any profession, occupation, trade or business in accordance with Article 19(1)(g). The second category of traders who have made purchases and sales of VCs may entirely challenge under Art. 19(1)(g) as they are engaged in occupation or trade.

The court even referred to cryptocurrency as a “by-product” of blockchain technology and claimed that the government should separate the two. Recently a draft national strategy for Blockchain was issued by the federal IT ministry. This study looked at more sophisticated blockchain technologies, such as data monetization, and called for the creation of talent hubs for blockchain in India.

Many state-level governments have been actively trying to build blockchain ecosystems, especially those with a strong IT sector and startup footprints. Karnataka state, which is home to the Silicon Valley equivalent of India, Bangalore, has been actively looking to build pilots. The state of Telangana has named a whole region as its “blockchain city,” with technology tailored to start-ups in blockchain. Another state, Tamil Nadu, has unveiled an ambitious blockchain e-governance backbone, which will be one of the world’s biggest initiatives serving 10 million citizens.

In addition, uncertainties still hang over the prospect of cryptocurrency in the wake of the decision of the Supreme Court. However, true to the scale and political nature of India, a dynamic push and pull is going on between the various levels of policy-makers in the country, with views on both sides of the fence.

[1] https://m.economictimes.com/industry/banking/finance/banking/now-that-crypto-trade-is-legal-in-india-heres-what-happens-next/articleshow/74485025.cms


ABOUT THE AUTHOR

Hriti Parekh

Hriti Parekh

Hriti Parekh is a first-year undergraduate student of law at Hidayatullah National Law University, Raipur.

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