RBI's ban on virtual currency dealings harms consumers, the market and innovation, Technology News, ETtech

RBI's ban on virtual currency dealings harms consumers, the market and innovationBy Anirudh Rastogi and Nehaa Chaudhari, TRA

The Reserve Bank of India’s (RBI) decision to deny formal banking channels to businesses and individuals dealing in crypto-assets will kill Indian crypto-exchanges, harm innovation, destroy wealth created in India, and cause significant losses to legitimate investors.

While the explosion of the crypto asset market is recent, these assets have been in use and implemented since 2009 – when the Bitcoin was invented. The RBI has known about these developments for at least half a decade.

However, since 2013, the RBI has only cautioned users about risks associated with crypto assets, and done nothing else. Having thus allowed the industry to flourish for all these years and never having declared it to be illegal, now, all of a sudden, the RBI has dealt it a death blow.

The RBI’s broad-brush diktat seeks to ban crypto asset transactions without saying as much. It highlights concerns of “consumer protection, market integrity, and money-laundering” as reasons for the same.

However, instead of imposing a complete prohibition on all access to banking, the RBI could have chosen to mandate know-your-customer and anti-money-laundering procedures, and grievance redressal mechanisms for crypto-trading to address these concerns, just as it does for other transactions.

There is no reasonable nexus between the restrictions imposed and objectives sought to be achieved. The RBI’s actions leave one with the impression that it lacks a proper or studied understanding of the broader economic consequences of using, holding or trading in crypto assets.

Weak regulatory capacity is a given with rapidly evolving technology, but it can be addressed through broad-based expert committees and stakeholder engagement.

It was hoped that the inter-disciplinary committees set up in April 2017 and in December 2017 by the Ministry of Finance (MoF) would offer suggestions for a regulatory framework after consulting stakeholders.

However, no industry participation was invited. Except by way of news reports, it is not known if these committees have submitted reports. Right to information requests have also been shot down, citing vague concerns.

Considering the many competing public interests involved here, at the very least, committee reports, recommendations, and their rationale ought to have been made public. This would have allowed traders, exchanges, and others the time and the opportunity to assess the situation and take necessary steps to act in accordance with the government’s thinking and wherever necessary, petition for redress and clarity.

It is crucial to note that the RBI is but one member of the MoF’s committees. The RBI has not only acted prematurely, but has in effect rendered MoF’s committees redundant.

The RBI’s arbitrary action will essentially shut down crypto exchanges and trading, even as we wait for the MoF to reach a decision regulating crypto assets, including who should be the appropriate regulator.

The RBI’s reluctant approach is in sharp contrast with what is happening in other economies such as Germany, Singapore, Japan and South Korea. These countries have embraced crypto assets and preferred to engage with stakeholders, rather than painting everyone with the same brush of illegitimate funding or anti-national purposes.

Interestingly, the RBI’s decision coincides with a judgment of the Supreme Court of Israel that ordered against the closure of bank accounts of an individual engaged in crypto assets exchange, ruling that speculative concerns cannot be the reason to close accounts for persons engaged in transparent business activities.

Indian companies have set-up and developed world-class exchanges with low latency, high liquidity, intuitive user experience, and enhanced security.

The RBI’s denial of formal banking channels will either destroy all Indian innovation built in this field over years and with significant expenditure, or displace such innovative companies to other countries that provide favourable rules and regulations. Either way, India stands to lose.

(Anirudh Rastogi and Nehaa Chaudhari are Managing Partner and Public Policy Lead at TRA Law, a policy and law firm that represents several crypto-assets businesses. Views expressed above are their own)

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