The Deadlock: Bitcoins vs Indian Regulators

How the rise of Bitcoins has not gone friendly with the Indian Currency Regulator Reserve bank of India.

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When Satoshi Nakamoto first released and published his paper at metzdowd’s cryptocurrency mailing list, little did he know that his designed invention would be a potential game-changer and one day would be in a position to redefine the rules in the way the global monetary system works?

This has also been a dilemma which has sparked the debate of innovation vs control and has left a lot of regulators around the world to choose their side whether to regulate or to prohibit. Indian regulators, too, have been asked to pick a side which till date has been not much in favor of cryptos. Here is a timeline of events that have unfolded in India with respect to cryptos.

Dec 24, 2013- As Bitcoin entered its 4th year and slowly started making its presence felt across the globe, India’s money regulator, The Reserve Bank of India (RBI) issued its first warning. The press release that was titled as RBI cautions users of Virtual Currencies against Risks, the central bank of the country ‘cautioned the users, holders and traders of Virtual currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to’. The warning also mentioned that the Reserve Bank is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

Feb 01, 2017- There was a break of 4 years before the second warning came in, In this while Bitcoin had grown swiftly to become a more common name than it was in 2013. This prompted RBI to release the second warning which reiterated the 2013 warning and further stating that ‘it has not given any license/authorization to any entity/company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk’.

April 2017- While the RBI kept its birds-eye view on crypto, the then Finance Minister Arun Jaitley announced the formation of an interdisciplinary committee under the chairmanship of Dinesh Sharma, Special Secretary, Department of Economic Affairs (DEA) to look into cryptocurrency legitimacy. While the announcement came in it is believed the panel has submitted its report but the government did not make its recommendations public.

November 2017- With changing times, the Government of India constituted a second committee which included 10 members and was chaired by finance secretary Subhash Chandra Garg to draft regulations for cryptocurrencies. The 10 members were picked up from A number of government departments including the Department of Economic Affairs (DEA), Central Board of Direct Taxes (CBDT), Central Board of Indirect Taxes and Customs (CBIC) and the Investor Education and Protection Fund Authority (IEPFA).

Dec 05, 2017- The crypto bull market was at its peak by the end of 2017 and a lot of Indians now seem to be holding cryptos. This period also saw a lot of companies and exchanges popping up to help Indians in transacting cryptos. Referencing back to its two previous warnings, the RBI issued a third warning where it pointed out that in the wake of significant spurt in the valuation of many VCs and rapid growth in Initial Coin Offerings (ICOs), it would like to caution Indian citizens  regarding the risk of virtual currencies including Bitcoins.

Feb 01, 2018– While there were contemplations and few media reports around the committee and its findings, a major downfall in sentiment for cryptos came in when, Arun Jaitley, the then finance minister, in his annual union budget speech mentioned that cryptocurrency is not legal tender in India but the govt will explore blockchain to usher in the digital economy.

Apr 05, 2018-  As Indian crypto community was deciphering Arun Jaitley’s words, RBI finally hit the first nail in the coffin. In its press release titled Statement on Developmental and Regulatory Policies, RBI finally Ring-fenced regulated entities from virtual currencies (Section 13). It stated that cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity, and money laundering, among others and hence it has decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. It also stated that Regulated entities which already provide such services shall exit the relationship within a specified time.

Apr 06, 2018- Following its previous regulation, RBI separately issued a notification for Prohibition on dealing in Virtual Currencies.  In this notification, RBI gave a three-month window for Regulated entities which already provide services to crypto businesses should exit the same.

May 22, 2018 – Indian crypto businesses move to Supreme court against the RBI circular issued on April 2018. Supreme Court previously had prohibited all high courts to avoid taking crypto-related cases and decided to hear all cases against RBI ban on virtual currency. The date of hearing was slated on July 20, 2018, which was 14 days after the three-month window which RBI had provided.

July 3, 2018– Supreme court denies interim relief against RBI fiat ban. This petition was put forward by the Internet and Mobile Association of India (IAMAI) whose members include major crypto exchanges in the country such as Unocoin, Zebpay, and Wazirx.

July 5, 2018- The window that was provided with the circular of April 6, banning all financial institutions under its control from servicing cryptocurrency companies, comes to an end and a ban takes effect and all eyes move to Supreme Court for July 20.

July 20, 2018– The hearing is adjourned to September 11, 2018.

Sept 11, 2018-  RBI files an affidavit in the Supreme court against cryptocurrency and says that it can’t recognize bitcoins under the current legal regime as virtual currencies are neither money nor currency, can’t even be considered as a valid payment system.

Sep 28, 2018- The RBI ban causes the first calamity as Zebpay, India’s largest cryptocurrency exchange shuts down. The company’s blog stated that “Lakhs of Indians took their first step into the world of Bitcoin using the Zebpay app. However, the recent past has been extremely difficult. The curb on bank accounts has crippled our, and our customer’s, ability to transact business meaningfully. At this point,we are unable to find a reasonable way to conduct the cryptocurrency exchange business”

Feb 04, 2019-  Media reports state, that the committee, led by Subhash Chandra Garg is believed to be in a tangle over the impact that digital coins have on the India rupee and may destabilize the sovereign fiat of India.

Feb 25, 2019- After a couple of adjournments, Indian Apex Court finally asks the Indian government to come up with cryptocurrency regulation in four weeks. If the Indian government does not provide a crypto regulatory framework in four weeks, the Supreme Court would be set to release its own judgment, the article states.

Mar 30, 2019- Giving one more and the last opportunity to the Union of India to bring in a cryptocurrency policy in place, The Apex court further adjourned the crypto hearing again, this time to July 2019.  With adjournment in place, the Court refused to hear the other side who were demanding the removal of the RBI circular.

Mar 31, 2019-  Indian cryptocurrency exchange Coindelta abruptly announced the termination of its services over the weekend, suspending trades and cancelling all open orders on March 30. The team explained that “Running the exchange is very expensive in such [an] unfavourable environment.”

May 10, 2019– Under crypto exchange bows down to the RBI pressure and this time it is Coinome which decides to halt operations. Although it is unclear whether the company would be exiting the business or not.

Jun 8, 2019- Media reports again feature that “The Banning of Cryptocurrency Regulation of Official Digital Currency Bill 2019” draft has proposed a 10-year prison sentence for persons who “mine, generate, hold, sell, transfer, dispose of, issue or deal” in cryptocurrencies. The bill further plans to make all cryptos illegal and makes holding cryptos a non-bailable offence.

Jun 27, 2019- In yet another casualty in Indian government’s war on cryptocurrency, Mumbai-based multi-cryptocurrency exchange and trading platform, Koinex has shut down its operations.

July 23, 2019- The Inter-Ministerial Committee on Virtual Currencies submits its Report to the Government along with the Draft Bill ‘Banning of Crypto-currency & Regulation of Official Digital Currency Bill, 2019’.The Group’s Report, along with a Draft Bill has been received by the Government. This Report and Draft Bill will now be examined in consultation with all the concerned Departments and Regulatory Authorities before the Government takes a final decision.

The Group has highlighted the positive aspect of distributed-ledger technology (DLT) and suggested various applications, especially in financial services, for use of DLT in India. As virtual currencies and its underlying technology are still evolving, the Group has proposed that the Government may establish a Standing Committee to revisit the issues addressed in the report as and when required.

India might have a late start, but we will start nonetheless.