26 November 2018

Virtual Currency: State of pandemonium continues

By Neeraj Dubey
In 2017, the Reserve Bank of India (“RBI”), India’s central bank, published a “Working Group Report on FinTech and Digital Banking” that discussed the need to have a monitoring framework for new technologies, including blockchain technology. The Institute for Development and Research in Banking Technology (“IDRBT”) also published a White Paper on the applications of blockchain technology. Such initiations evidenced the recognition and validation of the use of blockchain technology. However, they did not touch upon the specific subject-matter of virtual currency (“VC”).
Despite the recognition of latest developments in blockchain technology and its use in India, since 2013, the RBI and Ministry of Finance continued to caution users of VCs against its risks stating that they are akin to Ponzi schemes. In RBI’s Press Release dated December 24, 2013, RBI cautioned users of VCs against potential financial, operational, legal, customer protection and security related risks. Vide its Press Release dated February 01, 2017, RBI advised on not having given any license or authorization to any entity/company to deal with bitcoins/ VCs. Further, on December 5, 2017, RBI reiterated previous concerns in the wake of increase of Initial Coin Offerings.

The Finance Ministry Press Release of December 29, 2017 stated that VCs are not government fiat and are not legal tender. Hence, they are not currencies and RBI has not authorised them as a medium of exchange. Finally, the RBI notification dated April 06, 2018 (“Notification”) on “Prohibition on dealing in VCs” clearly instructed the entities regulated by the RBI to not deal in VCs or provide services that facilitate any person/entity in dealing with or settling VCs.
The future of cryptocurrencies still remains a grey area with Indian authorities not taking a firm stand as to its regularization or prohibition. In the wake of such mixed signals from the Indian authorities, the Notification was challenged by a lot of stakeholders and affected parties in various cases. Many Indian companies dealing with or in crypto currencies aggrieved by the restrictions imposed by the Central Bank came before the High Court and Supreme Court. The subsequent paragraphs provide details of those cases.
A company, Kali Digital Eco-Systems Private Limited, which ran the exchange “CoinRecoil”, filed a writ before the High Court of Delhi claiming infringement of its right to equality [Article 14 of the Indian Constitution] and right to carry on trade [Article 19 (1) (g) the Indian Constitution].  Just after this, another company named Flinstone Technologies Private Limited, which runs the exchange “moneytradecoin.com”, approached the High Court of Delhi challenging the Notification. Considering the similarities of the above two cases of Kali Digital Eco-Systems Private Limited vs. RBI and Others & Flinstone Technologies Private Limited vs. RBI and Others, the Delhi High Court tagged the matters. Proceedings in these writ petitions were subsequently stayed by the Supreme Court of India (“SC”) on May 17, 2018.
Siddharth Dalmia and Dwaipayan Bhowmick were the first ones to bring crypto currency related cases before the Apex Court in 2017. The first Writ Petition was filed by Mr. Siddharth Dalmia and Mr. Vijay Pal Dalmia before the SC in which they sought a ban on the sale and purchase of cryptocurrency on the ground that it is used in anti-national, illegal and nefarious activities such as terrorism funding, illegal trade of arms and drugs, bribery, money laundering, tax evasion, payment of ransom, etc. The second Writ Petition, which was filed in public interest by Mr. Dwaipayan Bhowmick in which he sought a direction to regulate the flow of cryptocurrency and to ensure that the cryptocurrency be made accountable to the exchequer and to setup a panel to determine the framework of regulations on bitcoin and other cryptocurrencies in India.
Subsequently, in Rajdeep Singh vs. RBI, four exchanges in India – CoinDCX, Coindelta, Koinex and Throughbit along with two individuals Mr. Pramod Emjay and Mr. Aditya Ahluwalia petitioned in the SC for an interim relief, asking the government to allow the cryptocurrency businesses to run without any hindrance. In this case, the interim relief petition was tagged with the writ filed by Dwaipayan Bhowmick. Finally, the SC tagged both (Rajdeep and Dwaipayan) petitions with the main case of Siddharth Dalmia & Another vs. Union of India & Others. Interim relief was not granted by the SC. Later, the SC permitted the RBI to move all cases pending in High courts to the SC and directed that no High Court shall entertain any petition relating to the Notification.
The Internet and Mobile Association of India ("IAMAI"), an industry body representing the interests of online and mobile value-added service providers filed a writ petition in the SC demanding a stay on the Notification. In this case, IAMAI had petitioned the SC to declare illegal and ban all illegal VCs, cryptocurrencies or decentralised digital (currencies) such as, bitcoins, litecoins, bbqcoins, dogecoins and investigate, fix accountability and responsibility for the sale and purchase of such VCs, and prosecute the offenders. Additionally, it had also requested to declare illegal and ban all websites, web links and mobile applications, being used to buy, sell or deal in any manner whatsoever, VCs; and require the government to publicize the illegality of the sale, purchase and dealing of VCs by the public in India.

Noting the urgency of the matters raised in this Petition, the SC hearings were expedited while granting the petitioners permission to submit a representation to the RBI and also directed the RBI to dispose of any representations filed by the IAMAI within a week from the date of the Order, where the disposal of the representation shall contain reasons.
All petitions ranging from seeking clarification on the status of crypto currencies to seeking a complete ban have been clubbed into a single case by the SC. Petitions before the SC have been tagged with, Siddharth Dalmia & Anr. v. Union of India & Ors. This matter is yet to be finally decided by the SC.
The recent arrest of the founders of the start-up that had set-up a kiosk for VC in Bengaluru further stirred the issue and suggests that the authorities are inclined to have the understanding that VCs are illegal in India irrespective of the absence of any specific regulation suggesting the same. If the recent statement by an official in the Ministry of Finance is to be believed, it is said that a draft regulatory framework for crypto currencies is in queue, which would deal with the aspects of such businesses that should be banned and preserved. The current situation leaves the stakeholders in lurch until the Apex Court decides or the regulator comes up with a regulation.
[The author is a Partner in Corporate Advisory practice, Lakshmikumaran & Sridharan, Bangalore]

Browse articles