Illogical ban

Monitoring of cryptocurrency is a much better option

The Supreme Court ruled on Wednesday that the Reserve Bank of India’s (RBI’s) ban on banks dealing with the accounts of cryptocurrency traders and exchanges was unconstitutional. The ban, which came into force in April 2018, has crippled the Indian cryptocurrency industry. It was challenged by the Internet & Mobile Association of India (IAMA), and struck down by a three-member Bench. The IAMA pleaded that dealing and trading in cryptocurrency was a legitimate business activity and that the RBI did not have jurisdiction over it as these assets could be classified as commodities rather than currency. This judgment offers relief to the industry since banks can facilitate cryptocurrency trading but there is a cloud on the horizon. The government is said to be drafting legislation to criminalise all cryptocurrency transactions, as recommended by a panel in July 2019.

 

The apex court judgment should, however, be welcomed for several reasons. It is argued that cryptocurrencies should not be banned as a class, though central banks are divided on this issue. Japan, South Korea, and several other countries recognise specific cryptocurrencies as legitimate and lay down stringent rules on transactions involving these. Cryptocurrencies can considerably ease cross-border transactions, for example. Blockchain technology, underpinning many cryptocurrencies, is also versatile and innovative. It creates electronic ledgers, where every transaction is recorded, and is open to verification by many persons, while maintaining confidentiality. It quickly detects fakes, and disallows duplicate transactions. Blockchain, which was conceptualised for the verification of anonymous peer-to-peer transactions in bitcoin, has since been adapted for many other purposes, including “trustless” contract enforcement between anonymous parties, the verification of municipal works, and the authentication of luxury goods such as artwork, designer clothes, and vintage wine.

 

Blockchain has also been adopted by many financial service providers and investment banks for use in internal audits since they raise the bar against employees committing fraud. Shutting down cryptocurrency has also meant shutting down innovation in this area. In addition, several cryptocurrencies such as bitcoin, ethereum, and ripple have value as alternative investments. These currencies enabled savvy traders to hedge global volatility during the financial turmoil of 2012-13, and also in the last six months. In late 2017-18, Indian exchanges were signing up 300,000 new traders every month, and India was consistently logging high trading volumes. The ban prevented Indians from taking advantage of these instruments and forced Indian exchanges to close down, triggering the loss of employment and investments.

 

Certainly, cryptocurrencies are volatile and a lack of understanding can lead to heavy losses for traders. But that is true for most financial assets. Traders and investors must learn to live with those risks. Rather than impose bans, it would be more pragmatic to institute awareness campaigns to alert investors to specific risks, and to monitor trades for fraud and scams. Local cryptocurrency exchanges could be asked to adhere to the KYC norms followed by stock exchanges. The data would also be easily available to regulators if it is stored on local servers. Hence, there should not be fears about tax evasion and money-laundering. A vibrant cryptocurrency segment could add value to India’s financial sector.