Crypto is now legal in India but cos tread with caution as draft bill looms ahead

The March 4, 2020, ruling by India’s apex court changes a lot for Guarav Dahake, founder of Bitbns, a cryptocurrency exchange the IIT Kharagpur alumnus founded a little over two years ago.

“Apart from enabling direct bank deposit and withdrawal for the exchange, it implies that I’m running a business which isn’t illegal,” Dahake quips.

In its ruling, the three-judge bench of the Supreme Court, led by Justice Rohinton F Nariman overturned the Reserve Bank of India’s (RBI) circular dated April 2018, which prevented crypto traders and exchanges from using banking channels for the business. 

In its 180-page judgement, a copy of which has been reviewed by TechCircle, the apex court said that the RBI circular violated Article 19 (1) (G) of the constitution and found the measures taken by the central bank “disproportionate” to the risks it tried to address.

The Supreme Court ruling, however, is just the first hurdle before entrepreneurs such as Dahake.

In September last year, the department of economic affairs proposed a draft bill called ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’. The draft bill penalises anyone involved in direct or indirect mining, selling, dealing, disposal or issuance of cryptocurrency. The same was drafted based on the recommendations by an inter-ministerial committee formed in 2017 and chaired by former secretary of the department of economic affairs, Subhash Garg.

While RBI might choose to appeal the verdict within 30 days of the Supreme Court ruling, there is also a possibility of the introduction of the draft bill in parliament either during the budget session or in the monsoon session. 

“The legislation on the draft bill is still a red flag for investors in the space and they should wait it out for the timelines to be clear,” said Tanvi Ratna, CEO of Policy 4.0 which works as a policymaking and technology advisory. 

Players and stakeholders in the cryptocurrency space believe that regulating the sector rather than a complete ban is the way forward. 

"After the judgement, RBI is within rights to file a review petition. However the judgement indicates that the court is looking at cryptocurrency in a positive light. It will be prudent for the government to come up with regulations instead of banning cryptocurrencies outright,” said Rashmi Deshpande, partner at Khaitan & Co.

The RBI is well within its rights to regulate cryptocurrency as it has been equated to money as part of the recent judgement. “If cryptocurrency is classified as a security , it would come under the purview of SEBI and its regulations. RBI can get supervisory powers over cryptocurrency trading only if digital assets are recognized as a legal tender. Overall, the apex court's decision deserves to be lauded,” points out Sharat Chandra, blockchain evangelist at Government Blockchain Association, a global non-profit organisation.

Dahake of Bitbns says that it is on cryptocurrency exchanges to educate regulators and look at self-regulation to allay fears of money-laundering and use of cryptocurrency for illegal activities. He further added that exchanges in India were adopting KYC procedures for better transparency.

“Cryptocurrency exchanges in India are willing to provide a dashboard of transactions. Blocking it rather than regulation is not going to end activities in the cryptocurrency space and it is untraceable. It is like trying to block Torrent,” Dahake told TechCircle.

Companies operating in the space also hope that the government will conduct stakeholder consultation with the industry for a more up-to-date version of the draft bill.

“The government is lining up a national Strategy on Blockchain. Blockchain without an associated cryptocurrency is like deciding technology policy for intranet which is accessible only to members within the department. The real use case comes only when it can be accessed across -- which requires cryptocurrency because of the way it is built,” says Nischal Shetty, founder at cryptocurrency exchange WazirX.

He adds that the court ruling and a reworked draft bill will see new companies emerging in the blockchain and cryptocurrency space as well as venture capital firms backing blockchain technology companies in India on par with their investments outside.

Despite these hurdles, early investors and startups operating in the space have much reason to celebrate as the access to formal banking channels helps establish ease of tracing transactions in case of users. Further, it has also buoyed the interest from crypto exchanges outside India which have been looking at making an entry into the market.

“The verdict in the SC has given crypto startups a shot in the arm. Indian VCs have stopped looking at any investment in crypto space. There is a lot of innovation with underlying blockchain technology. There is a draft paper in circulation on National Blockchain Strategy. I wish India to take the lead in creating a proper legal infrastructure where the crypto and blockchain startups can thrive,” said Sanjay Mehta, founder and partner at 100X.VC and investor in cryptocurrency trading platform, CoinDCX. 

After global cryptocurrency exchange Binance made inroads to the Indian market through the acquisition of Mumbai-headquartered WazirX in November 2019, the current ruling by Supreme Court is being perceived as a positive for other strategics to enter the India market.

San Francisco, US headquartered Bitcoin exchange, Kraken in a blog post said that it will “grow its service in the region (India) through new features and offerings.” The post said that Kraken’s growth in India was limited by the RBI circular. Head of global business development at Kraken, Sunny Ray who was also a co-founder of India’s first regulated crypto exchange, called this “an emotional moment.”

In February, global cryptocurrency exchange OKEx entered into a strategic partnership with CoinDCX for launching new crypto futures product in India. Singapore headquartered cryptocurrency giant Huobi is also said to be looking at entering the India market, people aware of the company’s plans told TechCircle. 

Huobi which was founded in China had to relocate operations to Singapore after the Chinese government banned cryptocurrency exchanges in 2017.

India continues to be an attractive market for global cryptocurrency exchanges simply for the scope of the opportunity that it offers. 

“Countries that embrace public cryptocurrencies will attract talent and generate domestic technology advantages that will help them win the blockchain race. A recent example of this occurred in China, which partially relaxed regulations around cryptocurrency mining following President Xi’s speech announcing blockchain as a national priority,” said Garrick Hileman, head of research at Blockchain.com.