Cryptocurrency Trading: Finance Ministry Defends RBI’s Concerns In Supreme Court

In a counter affidavit to a two-judge Supreme Court bench hearing a batch of cases on the legitimacy of cryptocurrency in India, the finance ministry defended the Reserve Bank of India’s (RBI) ban on crypto entities from access to any banking services.

Representatives from the finance ministry submitted that the RBI circular as well as warnings issued by finance ministry on December 29, 2017 and by finance minister Arun Jaitley in his budget speech on February 1, 2018, are in line with the first inter-ministerial (interdisciplinary) committee’s recommendations on cryptocurrencies.

Another inter-ministerial committee, led by Department of Economic Affairs secretary Subhash Chandra Garg, is yet to draft its report.

The committee is scheduled for further meetings in December 2018 and January 2019, the finance ministry said.

Inc42 has viewed of the counter affidavit (dated November 19, 2018) to be submitted to the apex court by the finance ministry.

What Supreme Court Said In The October 25 Hearing

On October 25, 2018, hearing the batch of cryptocurrency cases clubbed with the Siddharth Dalmia case Writ Petition(s)(Civil)  No(s). 1071/2017, the two-judge bench of Rohinton Fali Nariman and Navin Sinha had directed the centre to file an affidavit on the status of the report to be filed by the interdisciplinary committee headed by Garg.

The bench had ordered, “The learned counsel appearing on behalf of the Union of India has informed us that a committee is deliberating on the very matter in issue in the writ petition. Let an affidavit be filed by the concerned officer within a period of two weeks from today giving us the stage at which the committee is deliberating the matter, including the estimated time within which the government will ultimately come out with its policy decision in the matter.”

What Were The First Committee’s Recommendations

Responding to the Supreme Court’s order, the finance ministry averred that, set up on March 15, 2017, the first interdisciplinary committee led by special secretary Dinesh Sharma (now retired) with members from CBDT, Ministry of Home Affairs, MeitY (Ministry of Electronics and Information Technology), RBI, NITI Aayog, and SBI, had submitted its report in July 2017 and had proffered to ban cryptocurrency across the country with immediate effect.

The committee in its report recommended that warnings should be issued to the effect that cryptocurrencies are neither coins nor currencies and consumers should stop trading in these currencies. It also recommended that enforcement agencies take action against such trades to protect consumers.

After examining the report, and apparently, unsatisfied with the report, finance minister, Arun Jaitley, on November 2, 2017, announced the formation of another committee pertaining to the cryptocurrency trading in India. Led by Garg, the second inter-ministerial committee has held two meetings on November 27, 2017 and February 27, 2018.

The committee has schedule two more meetings in December, this year and January, next year before finalising its draft regarding cryptocurrency regulation in India.

In its 11-page counter-affidavit, the finance ministry maintained that the government and RBI have acted in accordance with the report filed by the first inter-ministerial committee and will take further appropriate action once the new committee submits its report.

After-Report: The Indian Government Statement

While RBI has been issuing cryptocurrency or Bitcoin-related warnings since 2013, Ministry of Finance on December 29, 2017 had likened Bitcoin and other cryptocurrencies with Ponzi schemes.

The statement issued on December 29 read, “There has been a phenomenal increase in recent times in the price of ‘Virtual Currencies’ (VCs) including Bitcoin, in India and globally. These VCs don’t have any intrinsic value and are not backed by any kind of assets. The price of Bitcoin and other VCs, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices. There is a real and heightened risk of an investment bubble of the type seen in Ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money.”

Emphasising the risk and illegality involved in Bitcoin trading, the finance department said, “Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes. VCs are stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack etc. which may also result in permanent loss of money. As transactions of VCs are encrypted they are also likely being used to carry out illegal/subversive activities, such as, terror-funding, smuggling, drug trafficking and other money-laundering Acts.”

RBI’s Submission In Court

RBI in its submission to Supreme Court in September asserted that: “The impugned circular and the impugned statement neither violate the right to equality guaranteed under Article 14 or the right to trade and business guaranteed under Article 19 of the Constitution.”

The RBI response added that “there is no statutory right, much less an infringed one, available to the petitioner to open and maintain bank accounts to trade, invest or deal in virtual currencies (VCs).”

“The petitioner cannot seek to exercise the extraordinary jurisdiction of this Hon’ble Court to avail a right which they do not have,” it said.

The multiple petitions filed against the RBI circular alleged that the ban it has imposed on banks barring them to deal with cryptocurrency entities violates Articles 19 (1) (g) and 14 of the Indian Constitution and will lead to the closure of such companies.

The RBI maintained that the impugned circular and the impugned statement have been issued in a manner that is consistent with the powers conferred on the RBI by the law and the same are legal and valid.

In the aftermath of RBI circular, once India’s leading cryptocurrency exchange Zebpay and some other exchanges have shut down their business in India, meanwhile many crypto exchanges have preferred to stick to crypto-to-crypto trading until there is regulatory clarity in the matter. Some crypto enthusiasts and exchanges have also been actively campaigning in support of the cryptocurrency regulations.