Facebook’s plans to set up Libra, a cross-border digital currency was stalled as central banks around the world began pushing back against the idea. In India, the Reserve Bank of India had already banned all dealings in virtual or cryptocurrencies by regulated entities and so, the question of Libra did not even arise. This changed Wednesday. In a widely awaited judgment, a three-judge bench of the Supreme Court of India struck down the RBI prohibition on cryptocurrency trading on the ground that it violated the principle of proportionality.
In doing so, the judgment goes into the scope and extent of the RBI’s powers under the existing legal framework to address all issues that may impact monetary, currency, payment, credit, and financial systems in India. The Supreme Court said unequivocally that the RBI enjoys broad powers (including pre-emptive and curative) under the statutory framework to regulate and even ban cryptocurrencies with the rider that any such measure must clearly demonstrate the harm being addressed.
But the Supreme Court’s judgment is more than just a lifting of a ban or an exposition of the scope of the RBI’s powers. It is an important step forward and an opportunity for the RBI and Narendra Modi government to cautiously move to fix things in one of the world’s largest payments markets.
RBI’s excessive response
The court said that the RBI had failed to provide any evidence of damage to regulated entities (banks and payments institutions) arising from the activities of virtual currency exchanges and that the ban was an excessive response. The court notes that the ban had effectively wiped out all exchange-related activity by disconnecting them from the banking sector.
The judgment establishes that while cryptocurrencies are not recognised as legal tender, they are capable of performing some or most functions of currency, including being a means of payment.
The court did admit that cryptocurrencies have the potential to interfere with the matters that the RBI has the power to regulate, but added the central bank still has the power to regulate such activity. It is, in fact, the manner in which the RBI exercised the power that led to the Supreme Court striking down the ban.
Time for a policy response
Now that the ban has been lifted, the ball is in the RBI’s court to determine the appropriate policy response that will shape the future of cryptocurrencies in India. Given the potential harm posed by cryptocurrencies, it is critical for the regulator to now act in a timely and in a demonstrably proportional manner in regulating them – a task that is easier said than done. The regulator must clearly identify the policy objectives (consumer protection, prevention of money laundering and financial stability) of the regulatory response and establish a nexus of such objectives with the proposed policy action. Since the Supreme Court emphasised empirical evidence to assess the proportionality of the ban, the regulator may consider conducting impact assessments or cost-benefit analyses of such policy action.
In the last two years, while India’s cryptocurrency market faced a lull in activity, big tech launched its plans to monetise the solutions that they have offered to global demands. Initiatives such as Facebook’s Libra clearly demonstrate an underserved demand for cheaper and faster global payments service. While the RBI must necessarily engage with the (un)desirability of Libra being introduced in India, it is also critical that the central bank accelerates its research on payments methods to serve the underlying demand that initiatives such as Libra represent.
Shehnaz is a Senior Resident Fellow and Krittika is a Project Fellow at Vidhi Centre for Legal Policy. Views are personal.