The Supreme Court on Wednesday struck down a circular issued by the Central Bank, Reserve Bank of India (RBI) in April 2018 which had banned Banks and Financial institutions from trading in Crypto-currencies.
A petition filed in the apex court by the Internet Mobile Association of India against the RBI, contended that neither the constitution nor any specific piece of legislation bans the crypto-currencies and hence, this RBI circular was bad in law.
Let us understand everything about crypto-currencies and the implications of this verdict,
What are crypto-currencies and how do they operate?
The following features can be attributed to crypto-currencies:
1. They are digital or virtual currencies,
2. They are not regulated by any Central Bank,
3. They can be purchased online from dealers. It normally has a face value and for the purchase to happen, a buyer has to pay online for it.
For example, 1 crypto currency’s value could be equal to Rs 1000.
4. It is not fiat money (a legal tender which is backed by the Central bank of a nation). Like normal currencies are backed and issued by the Central bank of a nation.
5. There are many of these currencies. One such example is the Bitcoin.
6. Many nations such as Bhutan and Venezuela have their own state backed crypto-currencies.
7. In a set up such as India, where there is a lack of framework at the moment, there can be no legal claims over cyber fraud and other grievances.
How exactly do they operate?
Once purchased, the buyer can buy goods and services online by using crypto-currencies. This involves now, a bit of cryptography, the codes for which shall only be available with the buyer. So, at the time of payment, the buyer will have to operate these codes, before which a transaction can be considered successful.
Why did the RBI issue a circular banning trade in crypto-currencies?
The Reserve Bank of India in April 2018 issued a circular, in which Banks and other financial institutions were forbidden from dealing with crypto-currencies.
This was done in view of fears over utilization of these unregulated currencies for acts of crimes such as terrorism, tax evasion and money laundering.
In fact, it was observed separately that there was a spike in the number of purchases of crypto-currencies after Demonetization in November 2016.
It was these facts that brought the RBI to issue a circular.
However, the circular did not prevent individuals from trading in these virtual currencies, just that they were not recognized and no legal framework existed.
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What now?
According to an expert, now that the Supreme Court has lifted the ban on crypto-currencies, the following may follow:
1. Banks and other financial institutions may open legitimate accounts and deal with crypto-currencies. It can be mainstreamed,
2. The Government can declare it as a commodity and
3. The Security Exchanges Board of India (SEBI) will be in a position to regulate it.
However, there is a need for some clarity before it can hit the trade market. The above-mentioned concerns need to be addressed.