I. INTRODUCTION
Cryptocurrency (or Virtual Currency “VC”) is a global fintech phenomenon that has divided opinion among central banks and governments worldwide. At one end of the spectrum, the People’s Bank of China has completely banned VCs while on the other, Japan has passed a statute to recognize them as a legal mode of payment. Cryptocurrencies are digital currencies which are secured using cryptographic techniques. There is no trusted third party to maintain a record of transactions. Transactions are typically recorded on a distributed decentralized ledger called the Blockchain and replicated across a group of geographically spread systems that volunteer their resources to maintain the ledger. The process of grouping together transactions into a block and adding it to the blockchain is called mining. The addition of each new block results in the creation of new units of the VC which are awarded to the node responsible for adding that block. The decentralized architecture of VCs and blockchains clearly highlights the unique regulatory and legislative challenges before central banks today.
II. DEVELOPMENTS IN INDIA
The Reserve Bank of India (“RBI”)[1], along with the government of India[2], had issued multiple notifications cautioning the VC users and exchange providers against creating, using and trading with them. Eventually, vide notification RBI/2017-18/154 dated April 06, 2018[3], (“the Notification”) all commercial and co-operative banks, payments banks, small finance banks, NBFCs and payment system providers (“regulated entities”) were prohibited from dealing in and providing services to any person or entities in dealing with or settling VCs. RBI had directed the regulated entities to exit the relationship within 3 (three) months.
The reasons given for issuing the Notification included security reasons like hacking, lack of legal recourse for consumers, volatility of currency, lack of clarity on legal status and money laundering and financing terrorism among others, all of which have been analyzed in the following section.
However, in order to circumvent the notification, the VC exchanges are resorting to peer to peer services using escrow mechanism, wherein, the VC units proposed to be sold by a seller would be held in escrow by the exchange and only on double confirmation of direct transfer of money from both ends, would the exchange release the VCs to the buyer[4].
The Notification was challenged by various petitions before High Courts and Supreme Court which were all clubbed together into one petition which is pending before the Supreme Court[5]. An interim relief was sought by the petitioners to grants a stay on the Notification, however it was rejected by the Supreme Court[6]. The petitioners are still optimistic about the pending judgement.
However, interestingly, in a report[7] submitted by the Law Commission of India to the Apex Court, bearing no. 276, in the light of the case of Board of Control for Cricket in India vs Cricket Association of Bihar & Ors.[8], while studying feasibility of sports betting, stated “Gambling transactions should be made cashless, making use of electronic means of payment such as credit cards, debit cards, net-banking, Virtual Currencies (VC – also known as Cryptocurrency), etc.” VCs were clubbed together or placed alongside other legally valid and accepted modes of payment. It is the first time that a government appointed body has recognized VCs as an electronic means of payment in India.
Further, the annual report published by RBI for the year 2017-18[9], while taking a stance against VCs stated its concerns over not being able to keep a close watch on cash or the dark pool transactions taking place through peer to peer mechanism and tax evasion issues arising because of exchanges moving to offshore locations. RBI must understand that the best method to address these concerns is by regulating them and not putting a blanket ban on transactions. The ban is only going to increase the scope for Ponzi schemes and money laundering.
Recently, Securities Exchange Board of India (“SEBI”) published in its annual report[10] that it has organized tours to regulators in Japan, Switzerland and UK to study VCs and Initial Coin Offerings. This suggests that while SEBI and Law Commission see potential in VCs, it is only RBI which seems to be in favour of prohibition.
III. POWERS OF THE RBI TO BAN
The Notification aims to use its legislative powers to throttle the financial ability of VC participants by restricting their relationships with the entities regulated by it. The Notification is issued by RBI in exercise of powers conferred by section 35A read with section 36(1)(a) of Banking Regulation Act, 1949 (“Banking Regulation Act”), section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, section 45JA and 45L of the RBI Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.
Under Banking Regulation Act, RBI has the authority to issue directions to banking companies completely prohibiting certain classes of transaction which must necessarily be complied with, in order to protect public interest. Non-Banking Financial Companies (“NBFCs”) and financial institutions are given direction under 45JA and 45L respectively under the broad scope of power vested with RBI.
However, it is pertinent to note that State Bank of Sikkim (“SBS”) is not a bank licensed under section 22 of Banking Regulation Act and therefore RBI cannot issue directions to SBS under the said Act. Sikkim became a part of India in 1975 and did not agree for RBI to be its central bank unlike other states and therefore SBS is the central bank to the State of Sikkim under State Bank of Sikkim Proclamation, 1968.
IV. CONCLUSION
Follow up the next post for analysis of the ban which in continuation of this background.
REFERENCES
[1]Press Release bearing no. 2013-2014/1261 dated December 24, 2013, access at
Press release bearing no. 2016-17/2054 dated February 1, 2017, access at
Press release bearing no. 2017-2018/1530 dated December 5, 2017, access at
[2]Ministry of Finance, Government Cautions People Against Risks in Investing in Virtual ‘Currencies’; Says VCs are like Ponzi Schemes, December 29, 2017, access at
Press Information Bureau, Use of Bitcoins, February 3, 2017, access at
[3] Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), April 6, 2018, access at:
[5] Internet and Mobile Association of India vs Reserve Bank of India Writ Petition (Civil) No. 528/2018
[7] Law Commission of India, Legal Framework: Gambling And Sports Betting Including In Cricket In India, July 2018, access at
[8] Board of Control for Cricket in India vs Cricket Association of Bihar & Ors. (2016) 8 SCC 535
[9] Report of the Reserve Bank of India for the year ended June 30, 2018 Act. Access at https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0ANREPORT201718077745EC9A874DB38C991F580ED14242.PDF
[10] Securities Exchange Board of India, Annual Report 2017-18, access at https://www.sebi.gov.in/reports/annual-reports/aug-2018/annual-report-2017-18_39868.html
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