What to make of latest Crypto vs RBI hearing in India?

Day 1 proceedings:

The Supreme Court of India resumed hearing the Crypto vs. RBI case on Tuesday, August 20. Amit Sood, counsel for the Internet and Mobile Association of India (IAMAI), continued his arguments, saying that the Reserve Bank of India’s (RBI) circular barring banks from dealing in cryptocurrencies was against the “doctrine of proportionality” as well as there was no “study whatsoever,” according to Crypto Kanoon.

Sood provided examples of the countries and the states in the U.S where the authorities had brought in regulations and not banned virtual currencies. He explained the law framed by Wyoming, a state in the U.S, to regulate crypto assets as well as the licensing requirements in the NY statue. Moreover, he told the court about the U.S Securities and Exchange Commission (SEC) guidelines on the Howey Test, which is a test conducted to determine whether certain transactions qualify as investment contracts or not. Sood explained the Howey test while talking about the security token.

In support of his arguments, the counsel for IAMAI also mentioned the European Union’s directive and the regulations formulated by most of the G20 countries. Sood stated that most of these countries intend to regulate crypto and not treat the industry players as criminals.

Sood agreed that crypto could be used for criminal activities but also pointed out that countries were bringing in preventive provisions to deal with them. He mentioned that the FAFT guidelines offer suggestions on how to deal with crypto’s illegal side.

The U.K. too had concerns similar to India, Sood told the court, adding that the regulators there had “exercised their powers intelligently and they studied the technology.” He pointed out that in India, the RBI did not apply its mind, and its circular failed to reveal any purpose. Sood stated that it made no sense that something should be banned because of the risks involved.

Sood mentioned that several documents suggest that RBI did not conduct any study, and the regulatory authority also failed to tell which market’s integrity was at risk and how due to virtual currencies. As there had been no application of mind, RBI’s decision had failed the test of proportionality, he told the court.

He also argued that there were laws in India that could be made applicable to crypto as well, to deal with concerns such as protection, volatility, use of digital coins in criminal activities.

“RBI circular is void on the ground of vagueness. It gives no definition of crypto and seeks to crack down on all indiscriminately,” Sood said.

In his arguments, Nakul Dewan, the senior advocate who represents the exchanges’ petition, discussed RBI’s concerns and tried to prove that they were unfounded. He said that like crypto, digital banking too was susceptible to hacking; not only crypto, stocks were also volatile; and fiat too did not have any inherent value. He also pointed out that consumer protection laws, KYC, AML, and others could be made applicable to crypto to deal with consumer protection issues and criminal activities.

Moreover, Dewan explained different types of cryptocurrencies and described how utility tokens could be used. He also mentioned the advantages of using the blockchain technology in the financial sector.

Dewan told the court about the self-regulatory measures that were implemented by India’s crypto business. He stated that the industry knew about the volatility of the crypto rates and they still chose to invest in them, adding that they should be allowed to do that in their right.

“There is no prohibition on Crypto except RBI banking ban, and the same must be struck down,” he said.

Arguing in favor of RBI, senior advocate Shyam Divan stated that crypto directly impacted monetary and payment system. He said, “RBI has issued notifications to discourage this, but when it did not work, RBI took this action.”

Divan mentioned the cross-border transaction ability of cryptocurrencies, adding that it was a problem. Also, the other major concern, besides the criminal activities, was the use of crypto as a means of payment, Dewan told the court.

He described Bitcoin and Crypto as “ponzi schemes, price bubble, and huge environmental disaster.”

Divan would continue his arguments in favor of RBI’s ban on Wednesday, August 21.

Day 2 proceedings:

Crypto vs. RBI

Day 2 Proceedings

Shyam Divan, the senior advocate representing Reserve Bank of India (RBI), continued his arguments in support of RBI’s circular barring banks from dealing in virtual currencies on Wednesday, August 21. He began by mentioning the 2018 European Union directive that discussed concerns regarding crypto and where anonymity was a major concern, according to Crypto Kanoon.

The senior advocate read out the RBI’s counter-affidavit that was filed in reply to the petition submitted by the Internet and Mobile Association of India (IAMAI). He read out examples of several exchanges, across the world, where hacking took place. After reading out the publications of hacking incidents, he also read out the comments by various prominent personalities who were opposed to Bitcoin and crypto.

Divan also read out a document that contains discussion before the enactment of Payment and Settlement Systems Act (PSS Act), and pointed out that the document mentioned the necessity and concerns of enacting PSS Act, 2007. One of the concerns was the unauthorized alternate of payments, he stated in the court.

After Divan had stated the various definitions included in the PSS Act, 2007, Justice Nariman commented that the payment meant that it had to be through legal tender always. Divan agreed and added that crypto was an alternative to that. Justice Nariman interrupted, pointing out to the senior advocate that it was immaterial as it was not the RBI’s case that PSS Act covered exchanges.

Replying to Justice Nariman’s observation, Divan said that “prima facie” they were not, but there was “potential threat to undermine the monetary policy.” He mentioned that Section 10 (2) of the PSS Act that gave RBI the power to issue guidelines on any payment system. Divan also pointed out that Section 18 of the PSS Act stated that RBI had the power to issue a policy to manage or operate its payment system and in public interest. Moreover, RBI had powers to regulate its entities if there was a threat to the payment system, the senior advocate told the court.

In support of his arguments, Divan also pointed out the RBI Act provisions in Section 45J and 45L; told the court that RBI had the power to decide banking ban. To support his claim, he read out the Section 36 1a that covers the scope of the banking ban circular and the RBI’s power to decide that.

Post-lunch-break, Divan read out from various judgments that ruled in favour of the RBI, including 2010 (10) SCC 1 — ICICI Bank v. Official Liquidator, Keshav Lal Khemchand v. Union of India i.e., 2015 (4) SCC 770, and more. He argued that RBI was well aware of the risks with crypto and took the decision as per the legislative powers it had been conferred with.

He also refuted the petitioner’s claim that the RBI’s circular was vague, pointing out that the central banking institution had “sufficiently” described crypto in various documents. Moreover, he said that the powers that RBI had was well-defined, and it could exercise them when there was a threat to monetary, fiscal, and financial policy.

Commenting on the regulations by other countries that were mentioned by the IAMAI’s counsel Ashim Sood during his arguments, Divan stated, “India will make laws as per its needs.”

Judge asked the petitioners that RBI was an expert body that had taken a decision based on a study, “who are we to interfere in their policy.” He added, “the question is not whether it is arbitrary or not, but whether they can legislate or not when they are ‘satisfied’ under 35A!”

Replying to that, the counsel representing petitioner Rajdeep singh & Ors. pointed out that the RBI had changed its stance from caution to prohibition only after Arun Jaitely’s, the former finance minister, budget speech in the parliament, where crypto was discussed for the first time. He argued that there was no empirical data that supported RBI’s stance that they were “satisfied,” adding that there was no data that suggested that crypto was a threat to the country’s monetary policy. He concluded by saying, “Argument of satisfaction is baseless.”

Sood once again stressed that RBI’s circular was “irrational” and it was a result of “no application of mind.” Justice Nariman interrupted and pointed out that the RBI was the expert body that monitored the position, and in the realm of economic policy and financial policy they had taken action. He asked, “what do you have to say on the point of satisfaction?”

Replying to Justice Nariman’s question, Sood said that the point of satisfaction could be considered when there was data to support that. He also said, “satisfaction of one authority cannot be allowed to be taken effect from the satisfaction of other authority.”

Sood pointed out that arguments such as Ponzi scheme and consumers were in trouble could

not be substantiated with data, and they were mere statements. He read out the ministry of finances advisory that had raised two concerns: crypto’s use as a payment system and its use in criminal activities. He added that the government had not recommended complete ban but only said the “vices should be eradicated and regulated.”

Justice Nariman asked Sood to point out representations that were filed by exchanges with RBI, and where they had stated that there was no need for a ban. Also, he asked him to read out RBI’s reply.

Sood told the court that the suggestions that the exchanges gave to the RBI include: Money Laundering Act could be made applicable to the exchanges; enjoining on the banks to make additional requirements for the exchanges. Sood said that the exchanges had addressed each of RBI’s concerns about crypto and had suggested ways to resolve them.

After hearing Sood’s arguments and consulting with other judges, Judge Nariman asked RBI why they had not given a proper reply to the representation. He was not happy with Divan’s response that they were forwarding to the government.

He pointed out that the exchanges were not asking the RBI to uplift the ban but were asking it to reconsider. “If you don’t give an answer to it, I will pass the judgment,” Justice Nariman said.

Justice Nariman directed the RBI to reply to the representation appropriately. He also offered to defer the case for two weeks as part-heard, adding “let the answer come on reconsideration of banking ban by RBI.” On behalf of the RBI, Divan agreed to that.

The court held the view that RBI had not given point by point answers to the exchanges’ detailed representations, in accordance with the court’s order on May 17, 2018; therefore it had asked RBI to reply within two weeks.

The Supreme Court would rehear the arguments on Sept. 25.