Mumbai, INDIA – As hopeful as crypto-advocates in India’s burgeoning crypto-economy may have been, ultimately the several thousand-year old Raj of bureaucracy prevailed as India’s Supreme Court, the highest court in the land delivered a somewhat predictable blow to innovation in the country, by upholding the Indian central banks ban on cryptocurrencies. Some of the world’s greatest technology leaders, helming some of the biggest tech companies in the world hail from India. Satya Nadella, CEO of Microsoft and Sundar Pichai are just two examples of a relatively long list of Indians who are leaders in technology. But predictably, none of them heads up any Indian technology companies, precisely because of the glacial pace of change on the sub-continent and former British colony. To be sure, all of the ingredients for success are present in India. A large, young and educated population, with fluency in English and proficiency in mathematics and science – all key ingredients for success in technology. Yet despite all this immense potential, the decision handed down by the Indian Supreme Court to uphold the ban on cryptocurrencies should not only have been foreseen, it is par for the course in a country where a spanking new billion-dollar submarine can be laid to waste because a submariner forgot to close a hatch on its maiden voyage. But yesterday the hatch on fintech innovation was closed by the Indian Supreme Court, as it upheld the Reserve Bank of India’s (RBI) ban on banks’ dealings with crypto-related business. With almost one out of every five Indians unbanked, the supreme Court’s ruling would have been an opportunity to take India’s financial sector into the modern age, but for the Indian crypto-optimists, it was not to be.
The decision by the Indian Supreme Court was handed down by Chief Justice Dipak Misra which upheld RBI’s directive banning banks, financial institutions and other regulated financial services providers from providing any financial services related to cryptocurrencies or cryptocurrency-related firms. Because the circular issued by the RBI was dated April 6, the ban will go ahead on July 5. The hearing before the Supreme Court, which was originally scheduled for July 20, was brought forward specifically to consider the constitutionality of the ban. Akin to a class-action lawsuit, the action was filed by Dwaipayan Bhowmick, with the intention of seeking regulations on the use of cryptocurrencies. Bhowmick’s legal action was not the only matter brought before the Indian courts. Cryptocurrency exchanges such as Flintstone Technologies and Kali Digital Ecosystems had all appealed previously to various high courts and challenged the RBI’s ban on providing services to users, holders and traders of cryptocurrencies, but to no avail. But Bhowmick’s legal challenged to the RBI ban was the only action to make it all the way to the country’s top court. Lawyers for the RBI argued that Bitcoins and cryptocurrencies cannot be treated as currency under India’s existing laws that mandate coins be made of metal or exist in physical form and stamped by the government and although the Indian Supreme Court did direct the RBI to consider representations by cryptocurrency providers, ultimately ruled in RBI’s favor.
The RBI ban, while inconvenient, is not a death blow to India’s nascent crypto-economy. India’s finance ministry has yet to make a formal determination on the RBI’s ban. But recent volatility in the cryptocurrency markets means that conservatives among India’s lawmakers and regulators may foster a more skeptical approach towards the digital assets. According to Anand Bhushan, a partner at law firm Shardul Amarchand Mangaldas & Co.,
“Nobody is able to price the risk currently. The minute you have clarity on exchanges and whether digital currencies can be used as a medium of exchange or payment, or if it is a commodity, there will be less speculation and much more stability in pricing.”
In May, the Central Board of Indirect Taxes and Customs had considered a Goods and Services Tax on cryptocurrency trading, which would have gone some way to crystalizing cryptocurrencies as financial assets and legitimized their legal status. And India’s Ministry of Finance has also said that they expect to release a comprehensive draft of regulations to govern cryptocurrencies in July. But if all else fails, Indian cryptocurrency investors and traders can still depend on Indian ingenuity to save the day. According to Nischal Shetty, CEO of WazirX, a cryptocurrency exchange,
“If banking is something the exchanges are not allowed to do, then the solution is something that direct banking doesn’t come in.”
Up till now, cryptocurrency trading has occurred on exchanges through online banking channels where users could buy and sell cryptocurrencies with the exchange charging a modest transaction fee on every trade. But with the RBI’s ban set to be in force by July 5, cryptocurrency trading will need to be pushed to peer-to-peer or P2P exchanges. In a P2P cryptocurrency trading, the exchange acts merely as an escrow agent, while buyers and sellers deal directly with each other, with the exchange holding the cryptocurrencies in the interim to facilitate the transaction. Although many newer cryptocurrency traders have cashed out of the existing exchanges, seasoned traders and investors remain unfazed. According to Avinash Baboo, who has been trading cryptocurrencies for over three years,
“We must understand that only withdrawal (of rupees) will be stopped but other functions like buy and sell or sending and receiving crypto in Indian exchanges will work.”
Plus the entire cryptocurrency market may simply be driven to work off the grid. Already in India, property transactions are not declared at their genuine transaction value for the purposes of avoiding tax. Sellers typically under-declare the price that the buyer pays for the property so as not to pay capital gains tax or withholding tax, which was part of the reason that India was relatively unscathed during the 2008 Great Financial Crisis. But the drive to push cryptocurrencies underground is unfortunate, because India could have greatly benefited from the taxation of cryptocurrency trading and regulation of the industry. Unlike in other industries, there is a push for legal recognition and legitimacy by cryptocurrency service providers, who would prefer to operate under a taxation regime than to simply operate unlicensed. According to Raj Kumar, a programmer from Mumbai, who was considering setting up his own cryptocurrency exchange but is now looking to do so in another country,
“Taxes are legitimacy. We would pay the taxes, we just want certainty.”
India’s crackdown on cryptocurrencies is probably one of the heaviest compared to other countries. In neighboring China, although cryptocurrency exchanges and ICOs are banned, Beijing has looked the other way when it comes to cryptocurrency mining. Plus there are increasing signs that China intends to launch its own cryptocurrency. But India has made no such plans, nor has it invested in blockchain technology. Kumar adds,
“At least China has a plan. Here we have no plan. My plan is to leave the country.”
If New Delhi persists in its conservatism and fails to embrace innovation, India’s brightest and most talented individuals will continue to pursue their futures elsewhere, much to the loss of the Indian people.