Future of cryptocurrency in India continues to hang in the balance

Spotlight back on digital asset after RBI asks banks not to deny services to dealers

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The Reserve Bank of India (RBI) on May 31 asked banks not to cite its 2018 order as a reason to deny banking services to customers who dealt in cryptocurrencies. It stated that its 2018 order was set aside by the Supreme Court in March this year and that it would be inappropriate for banks to cite the order any longer.

However, the central bank asked banks to continue other due diligence procedures on cryptocurrency traders under rules linked to anti-money laundering and prevention of terrorism.

What did the RBI’s 2018 circular say?

In April 2018, the RBI issued a circular instructing banks to make sure customers dealing in cryptocurrencies were not allowed access to banking services. The circular came after years of suspicion among RBI officials about the legitimacy of virtual currencies issued by private parties.

The central bank has repeatedly warned about the supposed risks that these unregulated private currencies pose to investors and the financial system. The 2018 circular was seen by many as an attempt to discourage citizens from purchasing cryptocurrencies. By barring banks from facilitating transactions involving cryptocurrencies, the RBI effectively banned any significant rupee investment in cryptocurrencies.

Why did the SC overturn the RBI’s 2018 order to banks?

The Supreme Court in its judgment on Internet and Mobile Association of India vs. RBI in March overturned the RBI’s 2018 circular. The SC noted that in the absence of any legislative ban on the buying or selling of cryptocurrencies, the RBI cannot impose disproportionate restrictions on trading in these currencies. The court felt such restrictions would interfere with the fundamental right of citizens to carry out any trade that is deemed legitimate under the law.

Is this a stamp of approval for cryptocurrencies from the RBI and the Supreme Court?

No. The SC, while overturning the RBI order, simply stated that there is no legal basis at the moment to impose heavy restrictions on cryptocurrencies. The court may not hold this view in the future once a law is passed in Parliament banning the use of cryptocurrencies. The RBI, on the other hand, may have been compelled to issue the current clarification simply because certain banks recently cited its 2018 circular (which is now void) to stop customers from dealing in cryptocurrencies.

Banks have been reluctant to let their customers deal in cryptocurrencies due to the uncertainty surrounding the legality. Meanwhile, the Centre is considering a proposal to impose an outright ban on cryptocurrencies. In 2017, it is worth noting, an inter-disciplinary committee set up by the Centre had recommended a ban on the trading and possession of cryptocurrencies.

What is the future of cryptocurrencies in India?

Cryptocurrency sceptics say there is good reason to believe that governments around the world will eventually ban all cryptocurrencies. They argue that governments and their central banks will not allow the dilution of their monopoly power over money.

The Indian government has been giving conflicting signals on this matter. Finance Minister Nirmala Sitharaman in March said that there won’t be a total ban on the use of cryptocurrencies in the country. But the Centre soon plans to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is said to contain provisions completely banning the use of all cryptocurrencies. The future of cryptocurrencies in India, thus, still hangs in the balance.