The constitutional path is still a hung jury – lessons from those who have failed.
by Edmund Yong
[Continued from Part 1]
Even though the Universal Declaration of Human Rights by the United Nations does not enshrine the access to financial services, many other aspects of basic dignified living are. For instance: every person has the right to work with free choice of employment and protection against unemployment (Article 23), to rest with reasonable limit to working hours and paid holidays (Article 24), to acquire an adequate standard of living which includes food, shelter and clothing (Article 25), and to own property and not be arbitrarily deprived of it (Article 17).
But no, having access to basic financial services like a bank account is not on the list – though it is unsure how anyone can go about these economic activities above without it! You can blame banks all you want, but they will claim that they already pay hefty taxes that go to public health and education.
Our discussion on point takes us halfway round the world to the South American republic of Chile.
Chile has had a spirited constitutional building process since it broke free from Spanish rule in the 1800s and formed an independent government, then through its period of military rule in the 1900s, and up until recent democratic reforms in this century. Its constitution provides for a familiar structure of government with three branches: executive, legislative, and judiciary.
Equality Before the Law
In Mar 2018, BancoEstado (the only government-owned bank in Chile) notified the Orionx cryptocurrency exchange that it would close the latter’s account, along with those belonging to two other exchanges Buda and Crypto Mkt. The bank did not want to “operate with companies that are dedicated to the issuance or creation, brokerage, intermediation or serve as a platform for the so-called cryptocurrencies” and cited the lack of “regulatory recognition of crypto trading” as justification for its decision.
Orionx filed a challenge in court on Apr 2018. This reached the Fourth Chamber of the Court of Appeals of Santiago which ruled on Jul 2018 that the bank’s action constitutes “an arbitrary and illegal action, which constitutes a deprivation of the right protected by Article 19 No. 2 of the Political Constitution of the Republic, that is, the right to equality before the law”.
As a result, the court forced the bank to reinstate Orionx’s account. Article 20 provides for a ‘remedy of protection’, which states that a person violated by Article 19:2 “may have recourse … to the relevant appeal court, which shall immediately take such steps as it deems necessary to re-establish the rule of law and ensure due protection for the person affected”.
Pause on this for a moment. Article 19:2 (based on imperfect translation) states that the law in Chile shall respect all persons as equal, men or women, slave or free, privileged or not. Maybe we can now boldly add: crypto or fiat!
Even so, ‘equality before the law’ seems like an outspread and motherhood statute to build a case on. One of the past defining cases on Article 19:2 involved medical professionals who were banned from providing consultation inside establishments that sell eyeglasses based on a health ministry order, Código Sanitario. In other words, optometrists were not opticians and were not allowed to practice or provide services at optical dispenser shops. Petitions were filed to court. It decided that the order violated Article 19:2 which prohibits public authorities from establishing arbitrary differences.
Legal Right to Refuse Service
Orionx would have been a landmark ruling if only it wasn’t so short-lived. Not long after, the Supreme Court (the highest court in Chile) overruled the lower court in Dec 2018.
The final decision noted that the bank’s closure of Orionx’s account was neither arbitrary nor illegal. It was not decided on constitutional grounds, as the country’s banking institutions had “legal rights not to provide services to crypto exchanges” given that crypto did not lie under the purview of any existing national laws.
The court reasoned that cryptocurrencies are not physically manifested, do not possess intrinsic value, and are not backed by any government – hence the bank could not fully know about Orionx’s financial activities limiting the bank’s ability to ensure compliance, and to prevent the possible exploitation of the bank as a conduit for MLTF activities. The judgment concluded: “It is precisely this impossibility of knowledge and of fulfilling the duties that weigh on the bank, which gives support to the decision to close the bank account of the plaintiff.”
Equality as it appears, was superseded by other considerations in law. A similar struggle had played out in neighboring Brazil where its High Court ruled back in Oct 2018 that banks have right to close crypto-related accounts without providing any reason (Mercado Bitcoin v. Banco Itau)! It also placed onus on the exchange to prove that constitutional norms have been breached and to escalate the matter to the Supreme Court. This did not happen, so it remains hypothetical. But don’t write this off yet as the epic constitutional battle shapes up in India (see Part 3).
Thankfully, the hearings turned out positively for Mercado Bitcoin in its later case against Banco Sicoob in Feb 2019. This time, the Court of Justice of Rio de Janeiro found that the bank violated Circular No. 2,025/93 of Banco Central do Brasil (Bacen) which states that a financial institution should clearly define the reason for account closure. Furthermore under Bacen’s Circular No. 3,788/16 the notice to terminate a contract should have express reference to the motives, which the bank was not specific on.
Free Competition and Antitrust
In a brilliant twist, the local exchange community did not take it sitting down and formed a consortium to file a lawsuit against the 10 major banks with the Tribunal de Defensa de la Libre Competencia (TDLC) or Tribunal for the Defense of Free Competition (a.k.a. Anti-Monopoly Court), and accused them of abusing their dominant market position by shutting down the bank accounts. A trending social media campaign #ChileQuiereCryptos or “Chile wants crypto”, was drummed up all over Twitter.
Come Jan 2019, barely a month after the Supreme Court ruling, the TDLC by a majority opinion ordered banks to reopen accounts of the exchanges and keep them open for the duration of the legal proceedings. As reported by Diario Financiero news: “TDLC noted in its resolution that the ruling of the country’s highest court ‘does not constitute a new precedent that will change the resolution’.” One lawyer explained: “The issuance of judgments such as that of the Supreme Court should not have legal relevance on the decisions that the TDLC makes on the subject of free competition”. Whoa!
The only way out of this judicial standoff is to regulate the crypto sector to provide legislative certainty and legitimacy, which the Chilean government is doing. More importantly, its executive branch has started to collect taxes on crypto earnings from Apr 2019 onwards which is a good thing as it normalizes exchanges as an economically productive taxpaying industry.
Now now, all the above is moot if the central bank itself decides to impose a hard ban on banking services for crypto businesses, as with the case of India. If you like more colors to this thread and be brought up to speed, read on.
[Click here for Part 3]
General news articles, mostly from Finance Magnates and Bitcoin News. Court rulings are in public domain. The Chilean Constitution can be found at https://en.wikisource.org/wiki/Constitution_of_Chile and the UN Declaration of Human Rights at https://www.un.org/en/universal-declaration-human-rights/.