The Supreme Court’s order lifting the ban on cryptocurrency is expected to open floodgates for trading in virtual currencies such as Bitcoin, amid concerns over consumer protection and money laundering in the absence of a proper regulatory mechanism.
The apex court on Wednesday (March 4) quashed the ban imposed by the Reserve Bank of India (RBI) on trading in virtual currencies.
The central bank’s circular, issued on April 6, 2018, had restricted banks from providing services to businesses dealing with cryptocurrencies. This was ostensibly aimed at “ring-fencing” the country’s financial system from the private virtual currencies, deemed illegal by the government.
However, the Supreme Court’s verdict has now come as a boost for the cryptocurrency industry which has been arguing that the blockchain technology, which forms the backbone of these virtual currencies, was not disputed and that the RBI’s ban was “arbitrary, unfair and unconstitutional.”
The top court’s order followed a plea by the Internet and Mobile Association of India (IAMAI) objecting to the RBI ban. The industry body, whose members carried out cryptocurrency exchanges among each other, had claimed the move effectively banned legitimate business activity via virtual currencies.
Bitcoin is the largest and most popular cryptocurrency.
The industry body has argued that that trading in cryptocurrencies was a legitimate business activity under the Constitution. However, the RBI defended its order, saying it had been consistent in its opposition to allowing any other payments systems and undermining the integrity of the banking system.
While there is no formal ban on cryptocurrencies under any existing laws in India, the central bank has been warning all those dealing with virtual currencies of the risks inherent in them.
Since the RBI’s 2018 order, the cryptocurrency trading platforms in India have been eagerly awaiting a step in the favour of cryptocurrencies from the government.
While virtual currency, led by Bitcoin, gained immense popularity in a short duration, its underlying assets have been highly volatile with price movements swinging wildly. Thus, the RBI has repeatedly cautioned users, holders and traders about various risks associated in dealing with digital money.
There have been concerns over the safety of investors’ money as several incidents have been reported where accounts of investors were hacked and investors’ entire wealth was stolen. Since currently there is no way to retrieve the money lost to hackers, the government is worried about promoting its use and has advised caution.
Cryptocurrency transaction are untraceable which further raises the question of misusing the platform for facilitating crime such as drug trafficking, prostitution, terrorism, money laundering, tax evasion, and other illegal and subversive activity.
Due to these concerns, globally, there has been a move to clamp down on crypto trading. Countries such as South Korea have banned anonymous trade in such currencies.
How does Bitcoin work?
Bitcoin is a virtual currency, or cryptocurrency, that is controlled by a decentralized network of users and is not directly subject to the regulations of the central banking authorities or national governments. Though there are hundreds of cryptocurrencies in active use today, Bitcoin is by far the most popular and widely used – the closest cryptocurrency equivalent to traditional, state-minted currencies.
Bitcoin can be used to purchase goods that accept Bitcoin payments. It can be exchanged with other private users as consideration for the services performed or to settle outstanding debts. It can be swapped for other currencies, both traditional and virtual, on electronic exchanges that function similar to forex exchanges.
However, on the flip side, it can also be used to facilitate illicit activity, such as the purchase of illegal drugs on dark web marketplaces.
Bitcoin remains a niche currency that is subject to wild value fluctuations. Despite the strong arguments in its favour, it is certainly not a legitimate investment or trading vehicle, as is the case with stable national currencies.
The security risks around Bitcoin are the currency’s single greatest drawback. Bitcoin exchanges allow users to exchange Bitcoin units for fiat currencies, such as the U.S. dollar and euro, at variable exchange rates. The open source Bitcoin P2P network creates the bitcoins and manages all the bitcoin transactions.
The fact that Bitcoin units are virtually impossible to duplicate does not mean that Bitcoin users are immune to theft or fraud. The Bitcoin system has some imperfections and weak points that can be exploited by sophisticated hackers looking to steal Bitcoin for their own use.
At present, India’s digital currency ecosystem is unregulated and the investors don’t have a grievance redressal authority to approach during distress. This has resulted in a spate of frauds.
The most prominent scam involving digital currencies in the country surfaced in 2017 after investors complained against Amit Bhardwaj, founder of cryptocurrency firm GainBitcoin. The company had allegedly duped 8,000 investors of Rs2,000 crore.
In the initial days when cryptocurrencies caught on in India, the frauds were limited to phishing and hacking. Then, came the multi-level marketing schemes.
In the case of GainBitcoin, Bharadwaj had promised investors a 10% monthly return on cryptocurrency investments for 18 months under multi-level marketing (MLM) schemes such as the Bitcoin Growth Fund.
In another case, investors in OneCoin, another firm that launched a digital coin-led investment scheme, realised that the firm didn’t even have a registered office address or a bank account. Nearly 400 people were cheated by the promise of high returns.
Ban hurts new technology
However, the supporters of cryptocurrency ecosystem argue that a ban on the virtual currency would hurt blockchain technology developers.
“An arbitrary decision to criminalize investing in digital tokens could destabilize existing businesses which have been operating legitimately, eroding the wealth of millions,” says Nischal Shetty, founder and CEO of the crypto exchange WazirX.
He warns that the government’s mistrust of digital tokens could set the country back in its quest to adopt applications based on distributed ledger technology.
Switzerland allows its citizens to pay utility bills in crypto while the Monetary Authority of Singapore (MAS) has an interbank system based on Blockchain. The U.K.’s Department of Work and Pensions disburses payments to pensioners through a Blockchain-enabled mobile app.
The public sector in India has, in comparison, been wary of Blockchain technology, with innovation being mostly driven by startups.
With corporations and governments around the world moving some essential services to the Blockchain, India risks ceding ground to countries that have coopted cryptocurrencies instead of outlawing them, it is argued.
One of the main reasons cited by the RBI for its crackdown is to protect investors and banks from frauds. However, a spokesman of IAMAI argues that ban is not the way to deal with this.
“Instead, they need to regulate the exchanges and lay down guidelines that can help prevent these frauds,” he says.
Another reason cited by the central bank is the anonymity of the transactions and, therefore, the difficulty in tracking the source of money.
The cryptocurrency exchanges have refuted this, claiming that strict adherence to ‘know-your-customer’ norms was the solution to prevent money-laundering. Besides, all transactions are usually carried out via bank account transfers to keep a tab on the money trail.