You need to Respond to IAMAI Point by Point: Supreme Court Directs RBI, gives two weeks

Update: Supreme Court has Quashed the RBI circular on March 04. 2020, deeming it unconstitutional.

In the latest hearing for Crypto vs RBI, the supreme court has directed RBI to respond to representation made by IAMAI back in May 2018, point by point. The court noted that RBI had simply forwarded the representation to the inter ministerial committee instead of addressing the points raised by IAMAI. The next hearing date is set to September 25, 2019.

It is very hard for visitors to be able to hear the court arguments clearly, we sit in the back. The first row of people facing the judges is the team of lawyers representing the petitioners and defendants, followed by 10 rows of Supreme court lawyers. We cannot enter this space unless we are lawyers wearing the robes.

In the civilian area, we cannot even take our phones. So it was me and the co-founder of Unocoin, also the co-petitioner with IAMAI, sitting in the back trying to hear what Shyam Divan was reading out to the judges.

The hearing on August 21, was the third consecutive day of hearing for Crypto vs RBI matter and when it seemed like this was the final hearing before court sets out a date for judgment, the honourable justices noticed that RBI had not adequately responded to IAMAI, and hence gave them 2 weeks to do so.

Throughout the hearing, it appeared as to the case could go in any direction. The judges questioned RBI, they also questioned IAMAI and the Crypto exchanges and I sat on the edge of my chair watching intently as the people around me began to leave realising this was going to be a long day.

Why is RBI Concerned about Consumer Protection?

The day began with RBI’s counsel Shyam Divan reading out certain paragraphs from the IMC report. Divan read the sections reporting the organisations involved in the preparation of the report first. He then continued to the section of Distributed ledger technology and the actions proposed to promote DLT.

Soon, the counsel was reading about FM Jaitely’s budget speech, the first meeting of the IMC which was held in November 2017 before moving to the topic of Virtual currencies.

Once the challenges of regulating Virtual currencies and the benefits of DLT were read, the judge asked who is Satoshi Nakamoto? Divan’s team explained the mystery behind it and also mentioned the latest “reveal” of Satoshi being a man from Pakistan. Once the awkward laughter from the counsels settled, the discussion moved to how Bitcoin protocol was created based on several existing protocols such as B-money, Bitgold, etc.

Divan read the report, No countries in the world allow Cryptocurrencies as Legal tender.

As Divan continued to read the concerns of these Non-official digital currencies, the judge asked, “How are you involved in Consumer Protection?”. Justice Nariman pointed out that the government being concerned is understandable, what has RBI to do with consumer protection.

Counsel Divan’s reply was inaudible but he then continued to read from the report.

Is Crypto Widely Used or Hardly Used asks the Judge.

The recommendations of the IMC report were read, the judge pointed out that the they were word-for-word the same as from the summary earlier. Divan also mentions that Mining of Cryptocurrencies is disastrous for the environment and the central banks cannot effectively implement monetary policy decisions on the Digital currencies as they are decentralised.

Judge asks the counsel that all the findings in the report say that Crypto is hardly used, while all the negatives are stated as if Crypto is widely used.

To which Counsel Divan said they agree with the Lords and they are saying that there is huge potential danger to the monetary stability if Crypto becomes mainstream and that is why they want to “nip it in the bud”.

The counsel then briefed the judges about suitability of a ban with and example of China. Counsel said that 90% of the worldwide Bitcoin transactions were done using RMB (Chinese currency), when they put a ban on trade, it was brought down to 1%.

Court Asks for Reports Mentioned in the Appendix of IMC Report

While reading the Draft Bill’s section of the third IMC meeting held, the judge noticed that several documents were mentioned in the report, but they were not available in court. The Solicitor General of India, Mr. Tushar Mehta was called in the court and asked to submit the three documents mentioned in the report plus the previous committee report on Virtual currencies.

Divan then read the FATF report of 2014 to highlight the risks of Crypto currencies. The counsel then shared several other reports of how digital currencies have in the past shown dangerous outcomes with examples of Liberty Reserve and Wester Express Cyber Crime Group that sold over 100000 Stolen credit cards taking payments in digital currencies like e-gold and webmoney.

Counsel Divan also took the example of Silk Route to portray the illicit activities that crypto can facilitate. Furthermore, counsel mentioned the hacks of cryptocurrency exchanges including that of Coinsecure in India.

FATF’s report of 2018 was read in the court, followed by the counter affidavit made by the RBI. Divan says several prominent politicians, central banks, financial leaders and businessmen have opposed cryptocurrencies.

The counter affidavit of the Ministry of finance was read in the court as well. Divan clarifies that a report by an inter disciplinary committee was prepared in 2017, following which the government created the inter ministerial committee.

RBI Stepped in to Bring Regulatory Intervention

The counsel then opens the IAMAI petition. He reads in the petition, that the crypto exchanges collectively makes INR 5000 Crore in monthly revenue and hence pays a significant amount of tax. He also refers to the market capitalisation of Cryptocurrencies mentioned to be $450 Billion of which 2-10% is held in India.

Shyam Divan submits to court that such amounts are sizeable and so RBI decided to step in and bring regulatory intervention.

The counsel then opens the petition of exchanges, under the Rajdeep Singh Vs RBI matter. He directs the attention to petitioner number 4, who is a trader. He reads that the action of RBI’s Banking ban can affect the potential of Cryptocurrencies such as reducing the costs of Cross Border Remittance.

Counsel argues that RBI is the primary regulator for all payments in India, even the cross border remittance. The judge says Payments are through legal tender, implying that Bitcoin is not one. Divan responds that Bitcoin is a parallel payment system, implying that it can affect the monetary functioning of the economy.

Divan says the writ petition does not mention what these people are using these cryptocurrencies for but it can potentially be used for activities that can undermine the monetary system.

Divan reads from the payments and settlements act to submit that RBI has full authority of issuing the banking ban.

Also refers to Section 18 of the PSS Act emphasizing that RBI has power to issue policy in order to manage or operate its payment system and in public interest etc. Points out that RBI has wide powers to regulate its entities is there is a threat to the payment system.

Read S.18 pic.twitter.com/NiOpSUFRCs

— Crypto Kanoon (@cryptokanoon) August 21, 2019

RBI Answers to Cheese Burger Argument

It became increasingly difficult to understand what was going on at the front of the court room after lunch. So we went to those who were live tweeting the news, Cryptokanoon. Based on the tweets from the court room, we can conclude that Divan read few more reports, few more judgments that prove that RBI has authority to issue such a Banking ban and then Counsel Divan answered some of the arguments raised by the petitioners in the previous hearings.

The first Argument – RBI circular is vague and does not define the scope of Crypto currencies and why it is a risk to the monetary policy.

Shyam Divan argues that the reserve bank has multiple times defined the risks of Cryptocurrencies in several other documents that led to the action taken by the RBI to restrict the banks.

The Second Argument – Ashim Sood, counsel for IAMAI had argued that RBI do not have legislative power to issue such a ban, what if they one day decide that Cheese Burgers are a threat of Monetary policy and hence put banking restrictions on businesses that sell Cheese Burgers.

Shyam Divan argued that RBI has the authority to intervene into anything that affects the monetary policy, and they chose to do it with Crypto has it is in direct proximity to fiat and has an immediate impact on monetary policy which risks like money laundering and cross border payments.

Genghis Khan and his Grand son

Divan submitted his arguments with an example of Genghis Khan (later corrected to Kublai Khan, his grandson) who is considered the first Fiat Currency maker. His decree stated that no one shall use gold or silver, only the government issues paper currency was to be used or else they shall face death.

The judge then shared an anecdote of Genghis Khan being the second biggest mass murderer in history and a story about how the dynasty invaded Japan.

Judge Asks Who are we to Interfere in RBI’s decision

After the counsel for RBI rested, Nakul Dewan, the counsel for the exchanges and other petitioners began his arguments.

As Nakul Dewan argues that RBI did not have enough information to take this decision, the judge says, the regulatory body such as RBI had done its studies and were ‘satisfied’ before taking this step. Justice Nariman asks counsel who are we (supreme court) to interfere in this?

Nakul Dewan says that the RBI’s stance did not change for 4 years since they issued the first notice in 2013 and issued a similar notice in 2017. The cautions are issued to individual users and not the monetary policy. After the Budget Speech, the RBI changed its stance from Caution to Prohibition.

Dewan closes by stating that RBI has no data to support the argument that Crypto is threat to monetary stability, so their satisfaction is baseless.

Ashim Sood Answers the Question of Satisfaction

As Ashim Sood, the counsel of IAMAI started his arguments, the judge says RBI is an expert body, they monitored the position, and took the decision in the realm of the economic and Financial policy. What does Sood have to say about their satisfaction.

Sood argues with two points. First, RBI does not have the data to substantiate their satisfaction that this is a threat to monetary policy. Second, Satisfaction of one authority (IMC) cannot be allowed to take effect in the decision of another body (RBI).

Sood reads the Financial Minister’s Budget speech where the FM mentions two concerns from cryptocurrencies. Its use as a payment system and its use for illicit activities. The government then had not advocated on a complete ban.

Now, the court room is full as it is already 15:30 and many lawyers are awaiting their turn for the “mentioning” that takes place usually before the court adjourns at 16:00. Earlier we could not hear the arguments, now it is even difficult to see what is happening in the front.

Court Asks RBI to take Two Weeks to Submit a Response to IAMAI

Back in May 2018, the court had asked IAMAI to submit a representation to RBI. The representation in this case is a detailed document on cryptocurrency, its uses and also how it can be regulated. IAMAI had filed such a representation to the RBI on May 29 and the latter had a week to respond. When the RBI did respond, it was not specific to the representation but a generic response, of which the court took notice in this hearing.

When the court asked Ashim Sood, to read out from their representation whether they mention regulations over ban, Sood promptly did. It is a point by point layout of recommendations for regulating Cryptocurrencies positively.

The judge then turned to RBI’s counsel and said that the RBI response to this representation is not appropriate. Justice Nariman angrily says that RBI simply flew their hands in the air and avoided responsibility by saying they have forwarded the representation to the Inter Ministerial committee.

At this point, I am standing and trying to see what is happening from the gap between two lawyers right in front of me. Justice Nariman says that the answer from RBI is not right, exchanges have asked to reconsider the banking ban, and RBI must respond to each and every point in the recommendation.

I held my notepad tightly as the Judge tells the RBI counsel if they do not want to answer to the recommendation, the judge will move the case to judgment. RBI counsel asks for time to reconsider, judge says have your answer by morning.

RBI counsel says they would like to respond to the Representation and needs time for that. The judge gives two weeks to RBI to respond to the Representation. I come out of the court, take my phone, tweet this immediately. I hand over my phone to the court guard, who is not happy, I tell him I will be back out in one minute and go back inside the court.

The new date of hearing is set to September 25, 2019. The case is set as “Part Heard” which means it will have priority of hearing on September 25.

This brings us back one year to when Supreme Court had directed RBI to respond to IAMAI’s representation in one week.

RBI must Respond in One Week Under Supreme Court’s Order