In the wake of both public and industry-led petitions, the IAMAI brought a consolidated case against RBI’s imposition of a blanket ban on banks’ services to crypto businesses back in April 2018, which came into effect in July of that year.
The Supreme Court of India has this week listened to further hearings in the landmark case against the Reserve Bank of India’s ban on banks’ dealings with crypto-related businesses.
On Jan. 22 and Jan. 23, proceedings continued with arguments presented by Ashim Sood, the legal counsel for the Internet & Mobile Association of India (IAMAI).
This week, Sood appeared before court alongside Nakul Dewan, who is acting as legal counsel for domestic cryptocurrency platforms.
This article draws on the extensive live reporting of Indian crypto regulatory news and analysis platform Crypto Kanoon (CK) via Twitter, as well as private correspondence with CK co-founder Kashif Raza. Embedded quotations are drawn from CK’s live summary of the court proceedings and are therefore not verbatim.
Jan. 22: some key contentions
As reported last week, Sood had argued against a definition of cryptocurrencies as currencies sensu stricto, noting that they can oscillate between serving as a commodity or store of value and as a medium of exchange. This debate on classification was picked up again in proceedings on Jan. 22, with Dewan arguing that:
“There are 2 things that a Crypto does. Its creation is that of a ‘good’ by the work of validation. Another is the medium of exchange for the group of people who recognize value in it.”
India’s Sale of Goods Act defines a good as anything movable that is not an actionable claim or money, the counsel noted. In a global context, he referred to a judgement by the Singapore International Commercial Court on cryptocurrency, which has held it to be an intangible property.
Countering this, Shyam Diwan, counsel for RBI, said that the central bank deems cryptocurrency to be a digital means of payment, not a commodity or store of value, and has therefore resolved “to adopt a nip in the bud approach” to ensure that the country’s payments system is protected and that alternatives do not take root in the economy.
Diwan argued that the central bank is “empowered by law” in its intervention, which he claimed was in the interest of ensuring the effectiveness of monetary policy, upholding financial stability and overseeing cross-border capital flows.
Further arguments presented by the RBI counsel spanned concerns over operational risks, the lack of legal recourse and consumer protection for investors within peer-to-peer (p2p) systems of value transfer, and the difficulty of countering the use of cryptocurrencies for money laundering and terror financing.
Countering Sood’s arguments from last week that neither the government nor regulators had adequately collected and analyzed research material in support of their intervention, RBI’s counsel claimed that the central bank’s circular of April 2018 had been passed with “excellent understanding” of the risks posed by the new asset class.
Shyam Diwan opened proceedings on Jan. 23 with a renewed focus on p2p exchanges that allow Indian users to transfer funds in foreign wallets, this time referring not only the ostensible Anti-Money Laundering and Combating the Financing of Terrorism risks but also pointing to potential contraventions of India’s Foreign Exchange Management Act, 1999 (FEMA).
The Act holds that the central bank’s approval is required by those seeking to solicit foreign investment in India or to raise External Commercial Borrowings from banks abroad. This pertains not only to domestic operators, but equally to foreign corporations.
Focusing in the challenges posed by p2p models, the Judge questioned the counsel as to how the central bank circular and its restriction of banking services mitigates such risks at all:
“Your circular on stops banks to serve Crypto exchanges but is this circular is unable to stop trading between A and B?”
In response to this, the counsel conceded there remains a “loose end” insofar as the bank would be required to conduct further investigations to determine the source of transactions and mitigate risks, but claimed the circular itself serves to “discourage such transactions.”
The judge then turned to the exchanges’ counsel, observing that the trading of cryptocurrency remains active notwithstanding RBI’s action.
Diwan responded, noting the drawdown in volumes and the “sharp decline in the prices after the RBI circular”, yet the judge countered this with reference to the global bear market and the relative irrelevance of the RBI circular for cryptocurrency valuations – a point with which the counsel concurred.
In the next section of the hearing, the judge interceded with the observation that “being an honest contributor to the blockchain is more profitable than trying to tamper the chain.” In its live coverage of the proceedings, Crypto Kanoon remarked:
“It is a wonderful experience to witness a Supreme Court judge explaining facts about Blockchain and advocating its immutability. It is more exciting to see a Judge upholding Satoshi’s view.”
In private communication with Cointelegraph, Crypto Kanoon co-founder Kashif Raza singled out this moment as his highlight of the hearings so far.
Raza further noted that the judge had taken stock of the fact that several of the prestigious Indian Institutes of Technology – represented in the case by Diwan as counsel – are now actively engaged in the nascent blockchain and cryptocurrency industry.
The remainder of the hearing on the morning of Jan. 23 centered on determinations of RBI’s powers under various statutes of Indian laws, the documents it drew upon for its decision and the nature of the central bank’s remit for preemptive action.
After breaking for lunch, Sood resumed arguments, steering discussion back to questions of classification and to the absence of legal grounds for prohibiting the use of cryptocurrency as a medium of exchange.
Price volatility, the AIMAI counsel argued, tempers the use of cryptocurrency as a strict medium of exchange. He also provided further examples of international judgements on distinctions between goods and currency and underscored the wider potential of cryptocurrency as a technology, as with the Ethereum project. Sood argued:
“There is a cost which is required to maintain the efficiency of blockchain which is not possible without VCs virtual currencies. We don’t say that it is not possible to separate Crypto from Blockchain. But there is a valid and legitimate reason for both to go together. Crypto makes Blockchain viable for certain uses.”
Sood then presented a series of arguments centered on RBI’s statutory authority to take action, reiterating his arguments on the insufficiency of original research material as grounds for the central bank’s decision and the law’s inhibition of “capricious” and “arbitrary” interventions.
The central bank, he contended, has honed in on the illegitimate uses of cryptocurrency and turned a blind eye to its legitimate applications. Moreover, there is no evidence that the sector is adversely – or otherwise – impacting national payments systems, Sood said.
Citing a range of reports he judged may or may not have been studied by the central bank, he contended that “it is hard to believe that any reasonable person can reach to a conclusion about risks to market integrity” on their basis.
Instead, the counsel claimed, the circular appears to boil down to a consumer protection measure, and yet even as a preemptive action, it lacks a basis in a “clear, present and eminent danger” to the public interest or order.
The week ahead
Cointelegraph will continue to cover the hearings as they resume on Jan. 28.
On Jan. 27, two of the earliest petitions brought against RBI will also be heard by the Supreme Court, notwithstanding previous indications that the government would attempt to forestall them.