The wilful ignorance of regulators can be bliss. Can they also use it as defence?
by Edmund Yong
[Continued from Part 2]
Here are three things to know before you strap yourself in for the epic showdown between India’s exchange industry and the central bank of the largest democracy in the world, top-billed as Crypto vs. Reserve Bank.
The hearings are scheduled next week on July 23rd of 2019 which is why we dropped this article series right before it. Anticipations are high because the High Court of Delhi called out RBI’s ban on cryptocurrency as “unconstitutional” and has now reached the final appellate destination, the Supreme Court. The plaintiff, CoinRecoil exchange had alleged that the RBI’s action violates the Indian Constitution, namely Articles 19 (1)(g) and 14, on citizens’ rights to practice any profession, trade or business with equality before the law and without discrimination.
According to Coinlaw reports, court dates have been moved no less than 6 times. The first time it was slated was actually a year ago in Jul 2018, but the foot-dragging process took its course: The Supreme Court asked the government to clarify its bank in two weeks (Oct 2018) and later gave it a four-week ultimatum to come up with regulations (Feb 2019) but nothing firm materialized. Meanwhile the industry kept filing writ petitions as more and more exchanges go out of business, the government comes under fire locally and abroad with no clear consensus among its departments; and the judiciary’s patience is exhausted and threatened to intervene if regulators can’t do their jobs – it intends to hear all the petitions on said date and has barred other courts from accepting new ones.
1. Ring-Fencing the Financial System
It all started with a press release issued in early Apr 2018 about “ring-fencing regulated entities from virtual currencies” (para 13). It was followed by a blanket prohibition by RBI the next day, with immediate effect, on banks to have no dealings whatsoever with crypto, building on its previous two public warnings in 2017 and one in 2013. All those who have existing relationships with crypto must exit them in 3 months. (Click on the footnotes to view documents.)
The reaction was swift, with shock and awe. Crypto was a contaminant on banks and consumers need to be protected at all cost. The subhead in the Economic Times of India read: “If you want to be like China, say it clearly”. The South China Morning Post reciprocated: “Tech experts criticized the prohibition decisions as very aggressive”. A signature campaign was raised by a prominent blockchain lawyer Varun Sethi based in New Delhi with 99% support, mostly by crypto activists and empathizers. While it failed to make any dent on policy, it set up the next plot twist.
2. Ignorance or Recklessness?
Around this time, Mr. Sethi filed a Right to Information (RTI) query to the RBI. He sought information on a slew of questions, but two in particular came back with a singular “no” answer (excerpt reproduced below). He then charmingly posted this on Twitter via his handle @BlockchainLaw91 in Jun 2018. Apparently, RBI didn’t do their homework, didn’t form an internal committee to evaluate the risks, and didn’t consult their foreign counterparts before imposing the ban.
This immediately got picked up by news desks and informed testy headlines like “RBI Admits Issuing Crypto Ban Without Research” (Bitcoin News, Jun 12, 2018), and “No Research Before Ban: Was RBI Reckless…?” (Business Today India, Jun 13, 2018). A reporter for Toshi Times wrote “The RBI has no prestige left for their ignorant act… and the crypto camp in India are smiling now thanks to RBI’s ignorance” as the disclosure got out before the case was scheduled to be heard in court.
|Has RBI got enquiries from counterpart Central Banks of other countries about virtual currencies?
Share the details of such formal enquiries and how have they been disposed of?
|Has RBI sent out communications to other counterpart Central Banks outside India, in relation to virtual currencies to understand the regulatory framework, if any, they are building in their country to enable RBI to understand if similar regulatory frameworks can be built in India as well by RBI?
3. Zero Tolerance Across Board
A few months ago, the Economic Times of India first reported that the government was planning a formal bill to ban cryptocurrencies (Apr 26, 2019). As details emerged in Bloomberg Quint (Jun 7, 2019), the draft “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” prescribes up to 10 years imprisonment for persons who “mine, generate, hold, sell, transfer, dispose, issue or deal in cryptocurrencies” [chapter 6, section 9(f)]. Those who solicit or induce participation of crypto usage will be handed up to 7 years.
Besides making it completely illegal, the bill also makes the holding of cryptos a non-bailable offence. Those who hold crypto will be given 90 days to declare and dispose of their crypto if the bill was signed into law.
Initially only the relevant page of the bill was leaked and circulated, then the full document was posted for public download on Scribd literally days before the court hearing, courtesy of Mr. Sethi above (Jul 14, 2019). He raised an RTI again to the RBI, this time asking about its role in in drafting the proposed bill. Interestingly RBI appears to have been excluded from the decision-making process. According to him: “RBI has actually stated that they have not received any communication from any department and they have also not given any communication to any government department pertaining to [the] drafting of this bill and this is very surprising!” (Bitcoin News, Jun 6, 2019).
By denying any involvement or knowledge of the bill, RBI will walk into the courtroom next week without vital information. A statement from the Ministry of Finance earlier this year referred to a committee “under the chairmanship of Secretary, Department of Economic Affairs, with representatives from concerned departments to study all aspects of cryptocurrencies and crypto-assets including bitcoin” such as the Ministry of Electronics and Information Technology, Securities and Exchange Board of India, Central Board of Direct Taxes, and Reserve Bank of India (Bitcoin News, Jan 1, 2019 & Jun 18, 2019).
Well as they say, ignorance is truly bliss.
Postscript: In what feels like a ‘shaggy dog’ plot, the court hearing has been delayed yet again (for the 7th time) to Aug 2, 2019. Meanwhile the Secretary of Department of Economic Affairs in charge of the ‘ban crypto’ bill resigned shortly after. On that weekend, The Hindu in its op-ed asked pithily, “Why would an outright ban be a superior choice to regulation, especially in a field driven by fast-paced technological innovations?” Nods.
RBI press release (Apr 5, 2018) and circular (Apr 6, 2018).
RTI by Varun Sethi is available on Twitter and Scribd.
The “Banning of Cryptocurrencies Bill 2019” is on Scribd.