After lifting the central bank ban, India's crypto industry is still surrounded by three major risks

Source: Xiaocong Blockchain, author: Yin Yaoping

introduction

Two weeks ago, India’s Supreme Court lifted the Reserve Bank of India’s (RBI) ban on cryptocurrencies.

The lifting of the ban means that local Indian crypto companies can finally regain access to banking services, and exchanges that were previously forced to close due to limited financial service channels can also reopen and continue to provide cryptocurrency services to the Indian market of 1 billion people.

Many practitioners see this as one of the biggest positives for the cryptocurrency industry since 2020, and the global crypto market will benefit from the lifting of the ban.

But it turns out that the lifting of the RBI ban has not had a positive impact on the crypto market, and there are signs that the future development of India’s crypto industry is still fraught with danger.

Xiaocong published an article last week analyzing the "legal tug-of-war" between the Indian crypto industry and the Reserve Bank of India. From this, we can see that the Indian Supreme Court's ruling is merely a ruling on multiple appeals against the RBI ban, and does not represent the attitude of the entire Indian regulatory authorities towards cryptocurrencies.

India's regulatory bill on cryptocurrencies has not yet been introduced, and the legal status of cryptocurrencies in India is still unclear. The Reserve Bank of India still essentially restricts banks and other financial institutions under its supervision from providing service support to the crypto industry, and intends to submit a request for review of this judgment. This interim result obtained after 23 months of bargaining is not solid.

The ban is gone, but the influence of the Indian central bank remains: major banking institutions have not yet resumed crypto services

As we all know, the ban issued by the Reserve Bank of India on April 5, 2018 has brought a major obstacle to the development of the crypto industry. India's leading exchanges are prohibited from processing deposits and withdrawals with user bank accounts. Users cannot transfer Indian rupees from their bank accounts to exchanges, and therefore cannot invest in cryptocurrencies.

The most direct expected result of the revocation of the RBI ban is that local Indian crypto companies can finally regain access to banking services, allowing more investors to invest and trade cryptocurrencies more smoothly.

But the reality is that India’s major banking institutions have not resumed support for crypto services, but continue to wait for the Reserve Bank of India to change its attitude.

• Shekhar Bhandari, president of global transaction banking at Kotak Mahindra Bank, said: "We will follow the directions of the RBI on the issue and once the situation becomes clear, we will take appropriate action."

• According to Cointelegraph on March 13, some banks in India still refuse to process crypto-related transactions. On March 12, Mohammed Danish, a fintech industry lawyer, submitted a complaint to the central bank, opposing the "arbitrary refusal" of certain domestic banks to provide services that support the sale or purchase of crypto assets.

• Danish, co-founder of Crypto Kanoon, an Indian crypto regulatory news and analysis platform, said there have been several cases reported where banks continue to refuse to process crypto-related transactions — including HDFC and IndusInd Bank. “In most cases, the banks have not given any written communication but have verbally informed the customers that they are awaiting notification from the RBI in this regard,” Danish wrote.

This shows that even if the RBI ban is completely rejected by the Supreme Court, the major financial institutions regulated by the Reserve Bank of India will still act according to the attitude of the Reserve Bank of India, and the Reserve Bank of India will still play a substantial restraining role on these financial institutions.

It is also worth mentioning that India is facing a serious banking crisis. On March 6, the Reserve Bank of India announced that Yes Bank, India's fourth largest bank, was taken over by the Reserve Bank of India due to insolvency.

The Reserve Bank of India has placed Yes Bank's board of directors under interim supervision for 30 days and appointed former State Bank of India chief financial officer Kumar as interim head of Yes Bank.

To prevent bank runs, the Reserve Bank of India temporarily capped the total amount of cash that depositors can withdraw in the next 30 days at 50,000 rupees (about $678). At the same time, Yes Bank is a partner bank for India's two largest payment providers (Razorpay and Cash Free), and online payments and transfers in India have also been greatly affected.

Bloomberg published an article two days ago saying that the Indian government should consider official cryptocurrency to eliminate the need for trusted intermediaries, because public confidence in India's financial system has been declining, and it might as well use official cryptocurrency to save market confidence.

The Reserve Bank of India has always insisted that the outbreak of cryptocurrency trading will put the banking system and financial institutions at risk. In this environment, the Reserve Bank of India may take more stringent regulatory measures on the financial industry.

The role game among all parties has not stopped: the "new life" of the crypto industry may be "reversed" again

Xiaocong’s previous article “Survival of the Indian Crypto Industry | 23 Months to Break the Indian Central Bank Ban” mentioned that the Indian Supreme Court’s review of the RBI ban was also a long game process among all parties. The whole process involved several key roles, including the Indian Central Bank, Indian crypto industry practitioners, the Indian central government, and the Indian Supreme Court.

The issuer of the ban (the Reserve Bank of India) and the opponents (Indian crypto industry practitioners) are the two parties in direct competition. This round of game ended with the latter's partial victory, but the "tug of war" over the legitimacy of the crypto industry has not ended. All parties are still making their own efforts to promote new changes that are beneficial to their own interests.

1) The Reserve Bank of India is still struggling to maintain the ban.

From the beginning to the end, the Reserve Bank of India has believed that the cryptocurrency industry should be strictly regulated, believing that cryptocurrency will lead to illegal activities such as terrorist financing, money laundering and tax evasion, and will bring unpredictable risks to the majority of users and financial institutions such as banks.

A day after the Indian Supreme Court lifted the Reserve Bank of India's ban on cryptocurrencies, Reserve Bank of India Governor Shaktikanta Das said the RBI is studying the Supreme Court's order on cryptocurrencies.

In addition, according to a report by Economic Times on March 6, people familiar with the matter said that the Reserve Bank of India plans to file a review petition with the Supreme Court of India to oppose the Supreme Court of India’s decision to overturn the central bank’s crypto ban. Abhishek A Rastogi, partner at Khaitan & Co, said: “The Supreme Court of India may be considering the review petition of the Reserve Bank of India, but for now, cryptocurrency platforms can operate in India.”

2) The Indian government’s regulatory bill on cryptocurrencies may become a new obstacle to India’s crypto industry.

Like many other countries, the Indian government has always treated blockchain and cryptocurrency differently. Although it has vigorously supported blockchain companies, it has been very cautious in regulating cryptocurrencies. In 2017, an inter-ministerial committee was established to study and make recommendations on crypto regulation.

• In 2018, the government's draft cryptocurrency regulations that "completely ban the buying, selling and issuance of all types of cryptocurrencies and close all cryptocurrency exchanges" were leaked to the market, but after market opinion opposing this "one-size-fits-all" approach fermented, there was no follow-up.

• At the end of February 2019, the Indian government announced that a draft regulation banning and formally regulating cryptocurrencies had been completed and distributed to various departments for discussion. The inter-ministerial committee responsible for drafting the bill believed that the buying, selling and issuing of all types of cryptocurrencies should be completely banned; the Supreme Court also held a hearing on the matter, but no conclusion has been reached so far. At the end of 2019, the Indian government stated that it would postpone the introduction of the cryptocurrency bill.

Ultimately, the legal gaps in crypto regulation are the fundamental reason why the Indian crypto industry continues to be in an embarrassing situation. If there are relevant laws and regulations to follow, the legality of cases related to the RBI ban will be clearer.

• According to ANI News, in response to the Indian Supreme Court's lifting of the Reserve Bank of India's ban on cryptocurrencies, Indian Finance Minister Nirmala Sitharaman said on March 4 that the Indian central government will study the Indian Supreme Court's ruling to decide on the next course of action.

• Additionally, the Indian Parliament has yet to rule on the “Cryptocurrency Ban and Regulation of Official Digital Currency Bill” drafted in 2019, and this pending bill may still hinder the prosperity of cryptocurrencies in India, according to Business Insider on March 7. If the bill is passed, it will introduce a unique regulatory framework for virtual currencies, utility tokens, and commodity-backed tokens - likely creating a complex and exclusive legislative body for blockchain companies.

From the above, it can be seen that in order to maintain the stability of the domestic financial system, the Reserve Bank of India may request a review of the lifting of the RBI ban. The "Cryptocurrency Ban and Official Digital Currency Regulation Bill" drafted by the Indian government in 2019 may also be officially launched on the market at any time. Perhaps, the Indian crypto market will face a new reversal and game again.

The Supreme Court’s ruling leaves room for doubts about the legal status of India’s crypto industry

In addition to the above factors, if we go back to the judgment document of the RBI ban case itself, we will find that the legal basis for the judgment of this RBI ban case is far from what people in the cryptocurrency industry imagine.

On March 7, Tanvi Ratna, founder and CEO of Policy 4.0 and former head of blockchain business at EY India, wrote an article on CoinDesk about the "Indian Supreme Court overturning the central bank's cryptocurrency ban." Tanvi Ratna pointed out that the judgment was not final (Xiaocong Note: the central bank can still submit a review application), and there are multiple red flags in the text of the judgment.

After a detailed analysis of the 180-page Supreme Court judgment, Tanvi Ratna found that, in essence, the entire judgment hinged on whether the central bank had violated a fundamental right enshrined in Article 19 (1) (g) of the Indian Constitution, namely, "freedom to engage in any occupation."

Xiaocong Note: In April 2018, CoinRecoil, an Indian digital currency exchange, filed a petition against the RBI ban, stating that the RBI ban on banks providing services to digital currency trading platforms violated Articles 19(1)(g), 14 and 301 of the Constitution. Article 19(1)(g) of the Constitution provides that citizens have the right to engage in any profession, trade or business; Article 14 requires prohibition of discrimination; and Article 301 requires guaranteeing freedom of trade and commerce in India.

The Supreme Court concluded that the RBI’s measures violated Article 19 (1) (g) of the Indian Constitution by prohibiting cryptocurrency exchange service providers from exercising their profession freely and that the prohibition was disproportionate to the existing threat.

The ruling also concluded that the central bank had failed to produce experimental data or other credible alternative measures to substantiate the threat.

In addition, one of the important reasons why the Supreme Court made the decision to revoke the RBI ban is that "there is currently no law prohibiting cryptocurrencies." This means that once the Indian government introduces relevant laws, this decision will not stand.

As we mentioned above, on February 28, 2019, a draft law submitted by the Indian government to ban cryptocurrencies is likely to be passed by the Indian Parliament. It can be seen that the Indian government’s regulatory bill on cryptocurrencies is the key factor that ultimately determines the fate of India’s cryptocurrency industry.

summary

The lifting of the ban by the Indian central bank RBI did not significantly stimulate the market, and many banks and other financial institutions did not respond to reopen their arms to the crypto industry. In addition, if the Indian central bank appeals again, the Indian crypto industry may face a new long game.

Perhaps at this moment, only the Indian government's introduction of clear cryptocurrency regulatory laws can calm this volatile tug-of-war. However, it seems that public opinion is not on the side of crypto practitioners.

Just one week after the RBI ban was lifted, the Times of India published an article stating that "the Indian government should intervene and enact a law to prohibit the banking industry from providing services to the cryptocurrency industry within five years." The consideration is that by then, the Indian banking industry's non-performing asset crisis and fraud problems will be effectively improved, and better services will be provided to the crypto industry.

The entire crypto community is waiting for the Indian government to introduce a suitable crypto regulatory framework, perhaps, another new reversal.