On Sep 8, RBI filed a counter affidavit in Supreme court against IAMAI, one of the petitioners who approached the apex court for an intervention on RBI’s Banking Ban under which all the regulated entities such as banks and NBFCs have been asked to stop dealing with businesses and individuals trading cryptocurrency.
Usually, court documents such as Counter Affidavits are inaccessible to the general public. When CoinCrunch approached RBI’s counsel, they refused to share it as well. However, CryptoKanoon was able to acquire a copy of it and made a video sharing the most important counter arguments made by RBI.
In this article, I want to share the same points for two reasons. One – The video is in Hindi, you can consider this a written version in English. Two – Some of the points mentioned are not entirely new and have been published by RBI in the past.
Most Important Points from RBI’s Counter Affidavit
A person who is learning about the arguments made by RBI for the first time would like to believe that RBI has done its homework well. I would agree. But its not like the Reserve bank of India started studying cryptocurrencies a few weeks ago, RBI has been researching Crypto since 2013 and I would like to point out original sources for some arguments here.
1. Crypto is not a suitable Medium of Exchange or Store of Value and very volatile
RBI has pointed out that the digital currencies have no intrinsic value, there isn’t much adoption, due to its volatility it is not a suitable medium of exchange or a store of value and it does not share any attributes to be considered a currency.
Earlier Published in December 2013, November 2016 and January 2017
The Institute of Research in Banking Technology established by the Reserve Bank of India published a very comprehensive Whitepaper on how Blockchain can be implemented in the Banking sector in 2017.
In this paper, the above mentioned arguments were published as disadvantages of Cryptocurrency. Incidentally, this was one of the arguments also made by RBI in their response to IAMAI.
Before that, the first ever warning issued by RBI in December 2013 also in a broader sense said the same thing.
2. What Other countries are doing with Cryptocurrency
In the Counter affidavit, RBI has detailed a list of countries divided by those that have completely banned cryptocurrencies, those that have restricted and those that have put forth some regulations around it.
India is in the restricted list. The list includes rationale of each country behind the decision. It’s an Annexure not an argument though and RBI has not published such document in the past.
3. Supreme Court should not intervene in Monetary Policy Matters
The third point made by RBI as narrated by Kashif from CryptoKanoon is about RBI asking court to step aside. RBI’s argument is that Court isn’t an expert on economic and monetary policies and hence they cannot weigh the pros and cons appropriately. Thus, Court should not be involved in this.
Earlier Published in May 2018
4. No Consumer Protection
The apex bank argued that dealing in virtual currencies does not offer consumer protection. Exchanges are being hacked. Funds can be stolen. In such a case, the consumer is at risk without safety measures.
Earlier Published in December 2013 and March 2017
At the ‘Fintech Conference 2017’ RBI’s deputy governor Ram Subramaniam Gandhi dismissed the idea of virtual currency killing the actual currency. Gandhi went on to list the risks of cryptocurrencies, the same that have been repeated over months and months now regarding volatility, loss of passwords, loss of funds by hacking and so on.
Before that, the December 2013 warning says the exact same thing.
5. Annexure – History of Exchange Hacks
RBI has attached an Annexure detailing the hacks and loss of funds at exchanges around the world. It also mentions Coinsecure Exchange hack that took place earlier this year and the first ever hack of Mt. Gox exchange among all others.
Once again it’s an Annexure not an argument per se. But RBI is definitely hinting at “Cryptocurrency exchanges aren’t safe”.
6. Loss of funds can lead to Customers losing faith in entire Digital Payment system
RBI argues that since there is no grievance redressal in case of cryptocurrencies, there is no central authority so when someone would lose money they would lose faith in the entire digital payment ecosystem.
We haven’t heard this argument in the past. I just want to point out, if RBI is not going to let me buy anything with Bitcoin as it is not a legal tender, how will I lose faith in UPI or IMPS? It’s a matter of education. Some citizens have only recently understood that the cash they hold can also be kept in bank and spent using their mobile phones. If we do the right campaigning, we can spread awareness of cryptocurrency as well.
7. According to Coinage act and FEMA – Crypto is not a Currency
The central bank argues according to the two currency acts in India, coinage act and FEMA, Cryptocurrency cannot be considered a coin, a currency or even a foreign currency.
Although RBI has never truly published any pointers around this before, it was the Finance Minister Mr. Arun Jaitley who said Government does not recognise cryptocurrency as a coin or currency, during his budget speech.
8. Risks associated with Anonymity of Cryptocurrencies
RBI then argues that the first ever cryptocurrency created, Bitcoin, was created with one important feature – Anonymity. Due to their anonymous nature cryptocurrencies can be used for illegal activities such as terrorist funding, cyber attacks and so on.
It later also argues that while exchanges do KYC, how do they know where the funds are being transferred from the exchanges due to the anonymous nature of cryptocurrency transfers?
Earlier Published in December 2013 and pretty much all Press releases after that.
In the RBI warning against use of cryptocurrencies from 2013, the apex bank says
“The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.”RBI cautions users of Virtual Currencies against Risks, December 2013
9. Not against Innovation but Cannot curb the threat of Virtual currencies in present situation
RBI has always been pro-blockchain. Even in the counter affidavit they have clarified they will support innovation in the blockchain technology minus the virtual currencies in several of their arguments.
RBI has commissioned several researches on Blockchain and we have seen it implement as well.
10. There is no Complete Ban on Cryptocurrency
RBI has clarified that as a regulator they can only control the actions of entities regulated by them such as banks, NBFCs, etc. Hence, there is no complete ban on cryptocurrencies and RBI cannot ban cryptocurrencies.
Earlier Published in May 2018
RBI submitted a response in Supreme Court in May and clarified that RBI cannot unilaterally decide on legalising Cryptocurrency in India.
“In the instant case, the issue of legalising virtual currencies (VCs) like bitcoins or otherwise will have implications on the roles and responsibilities of other regulatory/ enforcement agencies. Therefore, the RBI cannot unilaterally decide for the government on the legality of bitcoins,”Q
11. Banks Have Closed Accounts Before RBI Circular
RBI argues that IAMAI hasn’t disclosed the fact that before the RBI circular, banks did close bank account of traders for trading in cryptocurrency.
What RBI however did not share, is that banks were sending warnings and closing accounts under the FEMA act for dealing in cryptocurrencies which does not apply in case of cryptocurrencies according to the RBI itself. So who will be taking the responsibility of those?
That was the gist of RBI’s response to IAMAI in Supreme Court as published by CryptoKanoon. You can watch the whole video in Hindi here: