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RBI Ban on Cryptocurrencies not backed by any data or statistics

In March 2020, the Supreme Court of India quashed the RBI order passed in 2018 that banned financial services firms from trading in virtual currency or cryptocurrency. Keeping this policy window in mind, the Centre for Internet & Society will be releasing a series of blog posts and policy briefs on cryptocurrency regulation in India

 

On April 6, 2018 the RBI issued a circular preventing all Commercial and Co-operative Banks, Payments Banks, Small Finance Banks, NBFCs, and Payment System Providers not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies. The RBI had issued a Press Release cautioning the public against dealing in virtual currencies including Bitcoin in 2013. However, the growing popularity of cryptocurrencies and its adoption by large numbers of Indian users, may have been the reason which forced the RBI to issue another Press Release in February 2017 reiterating its earlier concerns regarding cryptocurrencies raised in its earlier circular of 2013. In December 2017 both the RBI as well as the Ministry of Finance issued Press Releases cautioning the general public about the dangers and risks associated with cryptocurrencies, finally culminating in the circular dated April 6, 2018 banning financial institutions from dealing with cryptocurrency traders. As a result of this circular the operations of cryptocurrency exchanges took a severe hit and the number of transactions on these exchanges reduced substantially. The cryptocurrency market in India all but disappeared with only a few extremely determined enthusiasts still dealing in cryptocurrencies, at the risk of potentially depriving themselves of banking services altogether.

The RBI circular was challenged in the Supreme Court by the Internet and Mobile Association of India; final arguments in the case were concluded only in the last week of January, 2020 with the judgment of the Supreme Court being awaited. Generally speaking, whenever such policy decisions of the executive branch are challenged in the courts, a well accepted defense for the executive authorities, specifically in highly complicated fields such as finance, etc. is that the decision was taken by an expert body using its expertise in the field. The basic rationale underlying this argument is that the authority has relied on verifiable data and used its expertise to analyse the same in order to arrive at its decision.

However, it appears from the response by the RBI to an RTI query by Centre for Internet and Society, that requested the RBI for a copy of all reports, papers, opinions and advice that was relied upon for issuing the April 6, 2018 circular, that the RBI has not relied upon any such data to come to a conclusion that banking services should be denied to all those entities dealing in cryptocurrencies. It appears from the response to the RTI query that it was the RBI’s own previous circulars and press releases which formed the basis for the April 6, 2018 circular. This response completely undermines the argument that the decision by the RBI was taken after an analysis of all the facts and statistics concerned with cryptocurrency trading.

Not only does the RTI response weaken the commonly accepted defense of an expert body making a well-reasoned decision, but it also strengthens another legal ground for challenging the decision of the RBI, viz. arbitrariness. One of the grounds on which executive decisions can be challenged is that the decision was made without taking into account relevant material and without the application of mind. The admission by the RBI in its RTI response that there is no material relied upon by the RBI, except its own previous Press Releases, only strengthens the argument that the decision was made in an arbitrary manner.

Such an admission by the RBI regarding the process followed before issuing the April 6, 2018 circular reduces the credibility of the decision itself. However it remains to be seen whether the Supreme Court of India agrees with the arguments of the petitioners challenging the April 6, 2018 circular, even though the petitioners may not have been able to produce this RTI response from the RBI to further bolster their case.

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