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Proposed Ban on Crypto currency- Right Direction?

Abstract
Math based decentralized crypto currencies have turned out to be the face of a future payment
system packaged with more freedom and lesser interventions sponsored by the state through
its various agencies. It has been unanimously agreed upon; among experts that such a system
is foolproof and obnoxiously complex enough for any manipulations or counterfeiters. The
circular of RBI was questioned in the writ petition filed by a tech company “Internet and
Mobile Association of India”1 seeking recourse against the said circular as the direction to the
respondent Bank to not restrict the entities it regulates from facilitating the services as before
the circular surfaced. Followed by the decision of the Apex Court, the legislature now
proposes to ban the Crypto currency in the Nation. However, the proposed ban on the crypto
currency could curb a developing step of an economy.

Introduction
In 1997, when a British Cypherpunk by name Adam Back released a plan called hashcash,
subsequently many other cypherpunks like Adam surfaced proposing several other names and
platforms which claimed to have solved some of the problems that stalled the digital cash
project until 2008 when a paper with the title : “A peer to peer Electronic cash
system”popped up on a grid published by a single or group of pseudonymous developer(s) by
the name of Satoshi Nakamoto. This was the first pitching of an organized ledger keeping
platform which uses a complex chain of ledger entries called ‘Blockchain’ also proposed a
currency called ‘Bitcoin’. The first actual sale of an item using Bitcoin took place a year later
with a user swapping 10,000 Bitcoin for two pizzas in 2010, which attached a cash value to
the cryptocurrency for the first time. By 2011 other cryptocurrencies began to emerge, with
Litecoin, Namecoin and Swiftcoin all making their debut. Meanwhile, Bitcoin the
cryptocurrency that started it all started getting criticised after claims emerged that it was
being used on the so-called “dark web”, particularly on sites such as Silk Road as a means of
payment for illegal transactions. The principal idea behind this was to create a super secured
payment gateway which is simple enough to compute yet complex to be manipulated.
However in india the first ever case appeared was in the year 2018 as a reaction towards the
circular passed by the Reserve Bank of India on 06-04-2018, when a tech company goes by
the name “Internet and Mobile Association of India'' filed a writ petition challenging the said
1 Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018.
.

circular and seeking a direction to the respondents not to restrict or restrain banks and
financial institutions regulated by RBI, from providing access to the banking services, to
those engaged in transactions in crypto assets, the petitioners have come up with these writ
petitions. The circular came up with restriction upon all the entities regulated by the RBI
regarding dealing and facilitating the transactions in Virtual Currencies and to exit the
relationship with such persons or entities, if they were already providing such services to
them.
How does it work?
The Cryptocurrency incorporates principles of cryptography to implement a distributed,
decentralised, secure information economy. Cryptocurrency adopts public and private keys to
transfer value from one person (individual or entity) to another, and must be
cryptographically signed each time it is transferred. The safety, integrity and balance of
cryptocurrency ledgers also called as “proof of payment” is verified by a nexus of mutually
anonymous parties in such an structure which attributes a chain of such ledger in such a way
that any manipulation disengages the entry made which is also called Blockchain. The
transaction is approved by the individuals in that chain also are referred to as miners who
bulwark the network in exchange for the opportunity to obtain an arbitrarily distributed fee in
Bitcoin called the “block reward” and in some cases, withal transaction fees paid by users as
a incentive for miners to include their transactions in the next block. As far as the popularity
and acceptance is concerned, cryptocurrencies steadily gained traction with increased number
of transactions and the price of Bitcoin, the most popular cryptocurrency shot up from around
5$ in the beginning of 2012 to almost 1000 $ by the end of 2017 2. Also it was not at all
concerned to address decentralized convertible virtual currencies, such as Bitcoin. The 2013
Guidance also notes that ‘given the developing nature of alternate online currencies, the
FATF may consider further work in this area in the future’3. A short-term typologies project
on this basis was initiated with the following objectives:
‘This typologies project may lead to policy work by the FATF, e.g. the issuance of
supplemental guidance for applying a risk-based approach to virtual currencies that would
incorporate the proposed vocabulary and risk-matrix developed by the typologies project and
explain how specific FATF Recommendations apply in the context of virtual currency.’4
2 Kharbanda Vipul, Cryptocurrency Regulation in India – A brief history THE CENTRE FOR INTERNET
AND SOCIETY (last visited Dec. 28, 2020), https://cis-india.org/internet-governance/blog/cryptocurrency-
regulation-in-india-2013-a-brief-history#:~:text=The%20story%20of%20cryptocurrencies%20started,place
%20only%20in%20January%202009.
3 2013 NPPS Guidance, p. 11, para. 29.
4 FATF REPORT Virtual Currencies Key Definitions aPotential AML/CFT Risks, June 2014.
.

One interesting aspect of the fast-growing cryptocurrency market is the fluidity of the terms
used to describe the different products and services in these markets. While the various
classifications and nomenclatures of what are broadly known as “cryptocurrencies” are on
same page when it comes to the working principles as all of these are primarily based on the
same type of decentralized technology known as blockchain with inherent encryption,

Definitions
As far as the nomenclatures refer to these sorts of currencies the terminology varies greatly
from one jurisdiction to another. Some of the terms used by countries to reference
cryptocurrency include: digital currency (Argentina, Thailand, and Australia), virtual
commodity (Canada, China, Taiwan), crypto-token (Germany), payment token (Switzerland),
cyber currency (Italy and Lebanon), electronic currency (Colombia and Lebanon), and virtual
asset (Honduras and Mexico).
As per the impugned Banning of Cryptocurrency & Regulation of Official Digital Currency
Bill, 2019, the Cryptocurrency is defined as any information, code, or token which has digital
representation of value and has utility in a business activity, or acts as a store of value, or a
unit of account and is generated through cryptographic means, or otherwise. 5 This definition
may be too broad and include various forms of digital tokens which have not been generated
through cryptography. Virtual currency is a digital representation of value that can be digitally
traded and functions as (1) A medium of exchange; (2) A unit of account; (3) A store of
value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and
legal offer of payment) in any jurisdiction.6 As far as the definition of FATF’s report
definition; it refers to cryptocurrency as decentralized,open-source, math-based peer-to-peer
virtual currencies that have no central administering authority, protected by cryptography, and
no central monitoring or oversight. Moreover, Securities and Bitcoin has been described as a
‘decentralized, Exchange peer-to-peer virtual currency that is used like Guidance on Crypto
Assets.’7 Article 3(18) of European Union Directive8 defines Virtual Currencies as ‘digital
representation of value that is not issued or guaranteed by a central bank or a public
authority, is not necessarily attached to the legally established currency and does not possess

5 Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 PRS LEGISLATIVE
(last visited jan. 01, 2021), https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-
digital-currency-bill-2019.
6 Ibid
7 Guidance on Crypto Assets, Feedback and Final Guidance to CP 19/3, Policy Statement, FINANCIAL
CONDUCT AUTHORITY
8 European Union Directive 2018/843 of 30 May 2018 (5th Anti Money Laundering Directive).
.

the legal standard but is used by the legal and natural person as a means of exchanges and
which can be transferred, stored and traded electronically’.
Background
The matter attracted much hype when the FATF rolled out its report in 2013 and 2014. While
the Financial Action Task Force’s (FATF) 2013 NPPS Guidance broadly addressed internet-
based payment services, it lacked on defining “Digital currency,” “Virtual currency,” or
“Electronic money.”Moreover it did misses focus on virtual currencies, as distinct from
internet-based payment systems that facilitate transactions denominated in real money (fiat or
national currency). However the missing parts were covered by subsequent reports.
Following which RBI rolled out its circular dated 24 Dec. 2013 titled " RBI cautions users of
Virtual Currencies against Risks" in which it laid down some of the potential risks faced by
traders/consumers while dealing with the VCs. The cautions were mainly concerned about
the regulations and management of cryptocurrency. It was argued that, since the transactions
usually take place low profile, it is often preferred to take place over such platforms which
are unclear about their legal status, and thus the user might be putting themselves to legal and
financial risks.
Further the situation stirred up with another such circular passed on 6th April 2018 in
exercise of the powers allocated under Section 35A read with Section 36(1)(a) of the Banking
Regulation Act, 1949 along with Section 56; and Section 45JA and 45L of the Reserve Bank
of India Act, 1934; and Section 10(2) read with Section 18 of the Payment and Settlement
Systems Act, 2007, the Reserve Bank of India issued “Statement on Developmental and
Regulatory Policies” on April 5, 2018 which banned the transaction with the Virtual
Currencies. The entities regulated by RBI shall not deal with or provide services to any
individual or business entities dealing with or settling VCs. Moreover, the regulated entities
which already provide such services shall exit the relationship within a specified time.
The circular was questioned in the writ petition filed by a tech company “Internet and Mobile
Association of India”9 seeking a recourse against the said circular as the direction to the
respondent Bank to not restrict the entities it regulates from facilitating the services as before
the circular surfaced. The court sustained the remedy sought by the petitioner company and
observed that
“Once we are clear about the above confusion, and once it is accepted that some
institutions accept virtual currencies as valid payments for the purchase of goods and
services, there is no escape from the conclusion that the users and traders of virtual
9 Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018.
.

currencies carry on an activity that falls squarely within the purview of the Reserve
Bank of India. Further, If an intangible property can act under certain circumstances
as money (even without faking a currency) then RBI can definitely take note of it and
deal with it. Hence it is not possible to accept the contention of the petitioners that
they are carrying on an activity over which RBI has no power statutorily”10.

The Proposed Ban on Crypto currency: A step in the right direction?

The proposed ban on the crypto currency is opposed to the step in the wrong direction. It may
be supported by several facts and contentions. Following are some contentions which may
prove that this proposed ban is not in the right direction towards the development and
innovation.
1. A step towards a modern approach
As the concept of mutual relationship grew with the growth of human civilisation, the
concept of exchange began resulting into the barter system. But the need for a "double
coincidence of wants"11 challenged the scope of barter systems, giving rise to the need for a
more flexible unit of exchange. This gave birth to the currency. But that currency used to be a
tangible one. Now, it is quite thrilling to accept that the transactions are now possible with
digital payment. And in today’s era, imagine a globally-accepted virtual currency able to
facilitate virtually12 costless transactions at near lightning speed. 13 Now imagine that this
currency is open-source and decentralized. 14 Then add an unalterable, tamperfree recording
feature to guarantee that every transaction is 100% secure, and throw in anonymity to boot. 15
Finally, eliminate the need to trust third parties by making this currency independent of
central banks or financial institutions.16 This is all the new form of currency which could
minimise the deformities in the traditional approach. This new virtual currency has emerged
as a novel and innovative technique. This situation could be at par with just ten years ago
when the people did not imagine that their money could be sent through that mobile phone
which they only used for the calls! Hence the government should welcome the new step

10Ibid at 29
11 Mike Moffatt, The Double Coincidence of Wants, THOUGHTCO. (last visited Jan. 13, 2021),
https://www.thoughtco.com/the-double-coincidence-of-wants-defintion-1 147998.
12 Jerry Brito and Andrea Castillo, Bitcoin: A primer for Policymakers 13 (2016)..
13 Felix Ktister, The War of Cryptocurrencies: Ripple vs. Ethereum vs. Bitcoin, CAPTAINALTCOrN.cOM
(last visited Dec. 28, 2020), https://captainaltcoin.com/ripple-vs-ethereum-vsbitcoin/.
14 BITCorN, https://bitcoin.org/en/ (last visited Dec. 26, 2020).
15 Bitcoin for Individuals, BITCOIN, (last visited Dec. 26, 2020), https://bitcoin.org/en/bitcoin-for-individuals.
16 Patrick Mansfield, A Bitcoin Guide: A Brief History, How to Buy, and the Latest Quote,
USCONSUMERFINANCE, (last visited Dec. 26, 2020) https://www.usconsumerfinance.com/bitcoin-
information.
.

towards development rather than prohibiting it. Since the Indian Economy is dynamic, the
dynamism should be adopted to maintain the equilibrium.

2. Laissez Faire Government theory

The state has now transformed from the police state to laissez faire state. Hence, it must allow
it citizen to grow and develop. Awareness could be a feature of such modern state, but it is
well versed fact that ban or prohibition has not curtailed the people from doing it. Though not
recorded on the paper, the act is done under the table. Excessive control leads to nothing.
Inference could be that of banning the pornographic sites. Data show India, the fastest-
growing smartphone market, registered a 20 per cent jump in consuming porn content even
before the official restrictions in light of coronavirus kicked in late March. 17 The other
examples may be liquor ban, hacking, smuggling and still counting. Cryptocurrency is itself
an example. WazirX, India’s largest cryptocurrency exchange, now reports a user base of
over 1 million, up from the 550,000 users it mentioned in a blogpost in June 2020. 18 Hence,
it could be inferred that the trust is more preferred over sanction. ‘Many thinkers have
emphasized the importance of trust for governance, for example, Sissela Bok argued that
social trust is essential for an ethically grounded society.’ 19 Hence, the state should function
according to the citizens rather than becoming tyrannical.

3. Established market of Cryptocurrency in India

Cryptocurrency has now been an established market across the globe since 2008. People are
now becoming familiar with this new technology. Since then, cryptocurrency has gone
mainstream. There are currently over 1500 different cryptocurrencies, ten of which currently
have market capitalizations above $1 billion. 20 The three largest cryptocurrencies, Bitcoin,
Etherium, and Ripple, account for approximately 2/3 of the overall market, with Bitcoin
alone amounting to 40% of the cryptocurrency market currently. 21 The below given chart
expressly shows the user percentage of the Cryptocurrency across the globe:

17 Saira Kanan Pornography gets a pandemic boost, India reports 95 per cent rise in viewing INDIA TODAY
(last visited Jan. 13. 2021), https://www.indiatoday.in/news-analysis/story/pornography-gets-a-pandemic-boost-
india-reports-95-per-cent-rise-in-viewing-1665940-2020-04-11.
18 Neil Borate, Indian crypto exchanges freeze suspicious accounts as bitcoin crosses $40,000, LIVEMINT
(last visited Jan 19, 2021), https://www.livemint.com/news/india/indian-crypto-exchanges-freeze-suspicious-
accounts-as-bitcoin-crosses-40000-11610084996856.html.
19 Sissela Bok, Lying: Moral Choice in Public and Private Life 27 (1978).
20 Stan Higgins, Below $200 Billion: Crypto Market Sinks to New 2018 Low, COINDESK (last visited Jan. 14,
2021), https:// www.coindesk.com/below-200-billion-crypto-market-sinks-to-new-2018-low/
21 Ibid
.

Source: Global Cryptocurrency Benchmarking Study22

The data is scrutinised as the Cryptocurrency user share by region which is based on
combined wallet and payment provider data. Asia-Pacific is the region having the largest
number of cryptocurrency users with 38% of total which is followed by Europe with 27% and
North America being 17%.
Asserting about India, the Cryptocurrency industry is on the surge.India is one of the fastest-
growing crypto markets, gradually catching up on cryptocurrency development, according to
a report published by Coinpaprika and Okex. 23
Okex’s visits from India saw the highest
increase, reaching 545.56%. and newly registered users from India rose 4100% during the
same period. 24
Moreover, one can not forget the surge of the Bitcoin industry in India. The
below graph shows a increasing figures in the Weekly Local Volume in Indian Rupees (INR):

22 Dr Garrick Hileman & Michel Rauchs, Global Cryptocurrency Benchmarking Study (2017).
23 India to Significantly Increase Crypto Market Share This Year: Report BITCOIN (last visited Jan. 19,
2021), https://news.bitcoin.com/india-significantly-increase-crypto-market-share/.

24 Ibid
.

Source: Coin.Dance

The graph clearly shows an increasing figure. Hence, to catch up with the global market, it is
quite significant to regulate the market rather than to prohibit it. The regulatory framework
could be substituted from the bill prohibiting an emerging industry to grow in the nation.
4. The myth of trustless currency
It is alleged that the Crypto currency is not trustworthy. However, a decade later, the so-
called ‘trustless’ nature of crypto currency is still a big selling point. 25 For example, the
cryptocurrency news site Coindesk offers a Bitcoin 101 which touted that: "You don't need to
trust anyone else.”26
In the Bitcoin White Paper, Satoshi Nakamoto mentioned that "the root problem with
conventional currency is all the trust that's required to make it work. The central bank must
be trusted not to debase the currency, but the history of fiat currencies is full of breaches of
that trust. Banks must be trusted to hold our money and transfer it electronically, but they
lend it out in waves of credit bubbles with barely a fraction in reserve.” 27 Echoing this
lament, cryptocurrency supporters like to claim that "the problem with regular fiat currency is
that governments can print as much of it as they like, and they frequently do."28 In this
context, it is perhaps not surprising to see the rise of cryptocurrency, which rejects the
relationship between currency, government and trust, and seeks to replace the roles filled by
25 Rebecca M. Bratspies, Cryptocurrency and the Myth of the Trustless Transaction, 25 MICH. TECH. L.
REV. 1 (2018).
26 Why Use Bitcoin?, CYBER SECURITY INTELLIGENCE (last visited Jan. 1, 2021), https://
www.cybersecurityintelligence.com/blog/why-use-bitcoin-323.html.
27 Satoshi Nakamoto, Bitcoin Open Source Implementation of P2P Currency, P2P FOUNDATION (last visited
Jan, 17, 2021), http://p2pfoundation.ning.com/forum/topics/ bitcoin-open-source.
28 Supra at 26
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both governments and trust with technology. 29 ‘What happens when the ledger keepers of fiat
currency can no longer be trusted? Supporters see cryptocurrency as the answer. They claim
that the immutability and irreversibility of cryptocurrency transactions offers protection from
data breaches, and from untoward government meddling.’ 30 It is pertinent to mention that
every cryptocurrency transaction is encrypted and recorded in the blockchain, and anyone can
see that ledger. 31
Supporters make sweeping claims for the blockchain, suggesting that the
technology will have "massive and cascading implications to the fundamentals of contract,
public records of transaction, securities regulation and digital identity.32
5.International Aspect
In this regard the International Monetary Fund proclaims that “At present, VCs do not
completely fulfill the three economic roles associated with money: high price volatility of
VCs limits their ability to serve as a reliable store of value; the current small size and limited
acceptance network of VCs significantly restricts their use as a medium of exchange; as of
now, there is little evidence that VCs are used as an independent unit of account”33.
As far as the developed economies are concerned like the U.S, It’s hard to find a consistent
legal approach to cryptocurrencies in the United States. Laws governing exchanges vary by
state, and federal authorities actually differ in their definition of the term ‘cryptocurrency’.
The Financial Crimes Enforcement Network (FinCEN) doesn’t consider cryptocurrencies to
be legal tender but since 2013 has considered exchanges as money transmitters (subject to
their jurisdiction) on the basis that tokens are “other value that substitutes for currency”. The
IRS, by contrast, regards crypto currencies as property – and has issued tax guidance
accordingly.34
As the European economies are concerned, they exhibit a liberal approach as in U.K While
crypto assets can be used as a means of exchange, although they are not considered to be a
currency or money, because of volatility as mere computer applications vulnerable to
potential risks of cyber attacks also as majority of the population is yet to accept it.

29 Catherine Martin Christopher, The Bridging Model: Exploring the Roles of Trust and Enforcement in
Banking, Bitcoin and the Blockchain, 17 NEVADA L. J. 139, 172-75 (2016).
30 Jonathan Keane, Blockchain ID Schemes Could Kill the Data Breach, but How Soon?, COINDESK (last
visited Jan. 11, 2021), https://www.coindesk.com/blockchain-id-schemes-couldkill-the-data-breach-but-how-
soon/.
31 Ibid
32 Ed Sohn, alt.Legal: Amy Wan is Making the Blockchain a Safer Place for Contracts, ABOVE THE LAW
(last visited Jan. 19, 2021), https://abovethelaw.com/2018/01/alt-legalamy-wan-is-making-the-blockchain-a-
safer-place-for-contracts/.
33 Guidance for a Risk-Based Approach – Virtual Currencies, FATF.
34 Cryptocurrency Regulations In India, KNOWLEDGEBASE (last visited Jan 19, 2021),
https://complyadvantage.com/knowledgebase/crypto-regulations/cryptocurrency-regulations-india/.
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The crypto currencies have popped very recently and that is why the nations are sort of
cautious and don’t want to leave any stone unturned until they reach a foolproof framework.
The Internet is a complicated place to be dealt with, every millisecond costs lightning-fast
data transfer and without any sure and short plan, it’s nearly as a nightmare even to the
developed nations and superpowers trace any such transfer across the grid.
The Conclusion
It is clear from the above that the governments and money market regulators throughout the
world have come to terms with the reality that virtual currencies are capable of being used as
real money, but all of them have gone into the denial mode (like the proverbial cat closing its
eyes and thinking that there is complete darkness) by claiming that VCs do not have the
status of a legal tender, as they are not backed by a central authority.35
As we go through the judgment in this case 36 we will certainly observe that the apex court has
conferred a definition of property to the virtual currency and strongly supported the rights of
the petitioners and consequently upheld the remedies sought by the petitioners and taken
down the observation made under the circular of 2018 as referring it obsolete.
Whether it be right to privacy, or right to education, the supreme court has always laid down
the foundation of rational change and the observation made by the apex court indicates that
India in upcoming days might be looking towards a new horizon of virtual and decentralized
currency system which will be controlled by the user themselves and financial independence
will be at its peak. Prohibiting any such change will potentially restrict the dynamic nature of
the economy as the majority of the counterparts are looking forward to acquiring the peak
financial independence and materialize the laissez faire principals in its most accurate
manifestation. Hence restricting the operation of virtual currencies will put the dynamism of
the Indian economy at stall.

35Internet and Mobile Association v. RBI Writ Petition (Civil) No.528 of 2018
36Ibid