RBI cites investor protection to justify cryptocurrency ban in India

The central bank has been arguing there's a security risk because the wallets are stored electronically where the currencies are kept

Investor protection is an important consideration behind banning trade in cryptocurrencies such as bitcoin and ripple in India, said the Reserve Bank of India (RBI) in a two-page response to the Internet and Mobile Association of India (IAMAI) last week.

The RBI’s response came almost a week after the Supreme Court of India heard a writ petition challenging the central bank’s decision to cut the banking system’s ties with cryptocurrency exchanges.

In its order by a Bench comprising the Chief Justice of India, the Supreme Court had asked the central bank to respond to the petition within a week and give a view for disallowing cryptocurrency trades through regulated financial channels.

The RBI’s response, however, mainly raises the same points the bank’s earlier notifications pointed out, sources in the know said. 

“The bank has fallen back on investor protection as its central argument to say that cryptocurrency trading can be harmful for people who aren’t aware about the nuances and there is a possibility of large losses,” said a source.

This person added the RBI had also sought to “ring-fence” gullible consumers and investors from cryptocurrency-based scams, which have been reported internationally. 

Additionally, the central bank seems to have reiterated its stand that there’s no intrinsic value in cryptocurrencies and there’s a chance of illegal trading happening through them, as has been reported for a while now. 

The bank added volatility in the prices of cryptocurrencies could not be predicted because a very small fraction of these currencies were traded daily.

The central bank has also been arguing there’s a security risk because the wallets are stored electronically where the currencies are kept. This makes them vulnerable to hacking, passwords being stolen, malware attacks, etc.

The RBI’s earlier circulars cautioning people about virtual currency were similar.

“The Reserve Bank of India had cautioned the users, holders and traders of virtual currencies, including bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to,” the central bank said in February 2017. 

It repeated the same stand in December 2017 and April 2018, when it issued a circular directing all banks and regulated entities to cease ties with virtual currency exchanges in India.

However, the industry is holding out. The Supreme Court will hear petitions from the industry, including the IAMAI, on July 20. 

“We are in for the long haul,” said a virtual currency exchange chief executive. “The Reserve Bank (of India) has given its say but there are a lot of actors going to be affected, especially retail traders, who will trade in a regulatory dark zone, so it’s important we regulate instead of banning.”

Traders have kept up their hopes as seen from the stable trading volumes despite the ban. As Business Standard reported earlier, cryptocurrency traders lapped up more bitcoin after prices crashed on heavy selling.

For instance, cryptocurrency exchanges have found a way around the ban by introducing currency-to-currency trading platforms, which essentially bypass the regulator’s orders by allowing people to trade between different virtual currencies. These platforms are live on almost all big exchanges right now.

Some have even gone one step further to launch peer-to-peer trading platforms such as WazirX, which allows people to exchange cryptocurrencies for cash by bypassing the banking systems. 

The company locks the cryptocurrency the seller wants to sell and the buyer transfers it directly to the seller’s account. 

After the company confirms the receipt of money to the seller’s account, it releases the currency into the buyer’s account immediately. 

Nischal Shetty, founder of WazirX, told Business Standard even though the ban led to a drop in prices initially the market had recovered from the shock and offers like peer-to-peer (P2P) had ensured that investors stayed in the market.

“At WazirX the prices have been stable. The last price drop we saw in India was on the day when the RBI had announced the ban and provided banks three months to comply. Since then, a lot has happened, especially alternatives such as WazirX P2P that has restored investor confidence,” Shetty said.

THE OTHER SIDE OF THE COIN

Central bank maintains position on cryptocurrency ban

• RBI writes to Internet and Mobile Association of India (IAMAI) and cites investor protection as a concern
• Bank reiterates its stand of risks such as security, hacking, and scams
• Industry has pinned its hopes on Supreme Court (SC) hearing on July 20
• SC will hear five petitions along with that of IAMAI
• Exchanges have already bypassed regulations by allowing peer-to-peer trading
• Virtual currency volumes have not declined much despite the ban