The Supreme Court has refused to grant interim relief on an RBI order banning all regulated entities including banks from dealing in virtual currencies, proving to be a setback for cryptocurrency exchanges and investors alike.

On April 6, a circular by the central bank prohibited entities regulated by the RBI from “providing any service in relation to virtual currencies, including those of transfer or receipt of money in accounts relating to purchase or sale of virtual currencies”. While the central bank stopped short of banning cryptocurrencies entirely, the move severely restricted consumers’ ability to either purchase or sell cryptocurrencies like Bitcoins.

Towards the end of June, Zebpay, the largest cryptocurrency exchange in India, warned its users that they may soon be unable to cash in on their earnings and the exchange “may not be able to honour withdrawal requests.”

“While our industry is challenging this [ban] legally, the outcome is beyond our control,” the exchange warned in a banner on its website.

Back in May, the SC had ruled that all cryptocurrency-related cases be clubbed together and fixed July 20, 2018, as the date for the hearing. But the case was brought forward as an industry body said the RBI ban will come into effect by July 6. The SC had then set the hearing for July 3.

No consultation or committee

In June, an RTI response from the RBI showed that the ban was not backed by public consultation or independent research. Filed by a startup consultant, Varun Sethi, on April 9, the central bank in its response said it does not have an internal committee that looks into virtual currencies. “The RBI specifically mentions that it conducted no research or consultation before the implementation of restriction in April. The RBI also responded that no committee was ever formed for analysing the concept of blockchain before the decision,” said Sethi, who is a lawyer and founder of blockchainlawyer.in.

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 affected them all.

According to TRA Law’s Nehaa Chaudhari, the ban will compel “crypto-traders 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.