by Nehaa Chaudhari
Starting 05 April 2018, the Reserve Bank of India (RBI) banned banks and other financial sector organizations that it regulates from extending services or dealings to individuals or businesses engaging in virtual currency related transactions. Existing services extended will need to be discontinued within a time period yet to be notified.
This will virtually shut down India’s burgeoning virtual currency industry. Close to 11% of bitcoin’s monthly global trade by volume reportedly comes from India. The bitcoin is a type of virtual currency; there are close to 1400 others, and the RBI’s measures will affect them all.
It’s hard to see the RBI’s logic in coming up with these measures at a time when there is a Ministry of Finance (MoF) committee that has been constituted to study the impact of crypto-currencies and make recommendations on their regulations. This is the second such committee to be constituted by the MoF in the past year. The first committee released its recommendations in August 2017, and these were never made public. The second committee was to make its recommendations at the end of the previous financial year, but this has reportedly been pushed to June this year.
Given that no decision has been taken on the legality of crypto-currencies and that crypto-trading has not been declared illegal by any Indian regulatory authority, the RBI’s decision is fundamentally problematic and discriminatory. It has effectively denied a certain class of people access to the country’s formal banking and financial systems.
Currently, there are various exchanges in the country that rely on formal banking channels and payment gateways and self-regulate, taking conscious efforts to minimize the risks associated with virtual currencies, including implementing mandatory bank-level KYC processes and adopting strong anti-money laundering policies. As a result of the RBI’s decision, crypto-trading will move away from these exchanges to the informal (cash) economy and over-the-counter exchanges, where any kind of enforcement or monitoring will be impossible.
The RBI’s decision is bad for crypto-traders and exchanges. It also does not help consumer interest or the market, both of which are stated goals in the policy. Crypto-traders will now either begin to trade using cash or look to liquidate their crypto-assets. The value of these assets has already plummeted and is likely to take a further hit if traders flood the market as they look to cash-out. For investors that might have been looking at crypto-assets for long-term investment, this is a sticky situation. Crypto-exchanges, on the other hand, are likely to face a liquidity crunch if a larger number of traders decide to cash-out all at once, and will also have to consider shifting their businesses off-shore.
This ban is only the latest in a series of events to have created an atmosphere of extreme regulatory uncertainty around virtual currencies in India. Regulatory flip-flops are particularly harmful for innovation and new-tech driven industries, the growth of which are oft-stated government aims.
The RBI and the MoF committee would both do well to learn from the Telecom Regulatory Authority of India and seek stakeholders’ inputs before issuing directions with far-ranging consequences. As we learn new things about blockchain and crypto-assets every other day, countries around the world are trying many different things to regulate such assets. Given this global scenario, stakeholders’ inputs and informed discussions are important. It’s also crucial that the reports of both MoF committees be released. We need transparent rulemaking — these rules have far-reaching consequences.
Nehaa Chaudhari, a Harvard-educated lawyer, heads the public policy practice at TRA Law, an award-winning policy and law firm focused on startups and technology.