The Reserve Bank of India (RBI) has admitted that it banned cryptocurrency without undertaking the required research. On April 5, 2018, the RBI directed all financial institutions to stop doing business with blockchain-related companies. This meant that cryptocurrency exchanges would have no access to finance as their bank accounts were closed. The Supreme Court of India refused an injunction which would oblige financial institutions to reopen exchange accounts while the legality of the ban is fought in court. Multiple trading platforms left the country following the ban.
And now, following a Right to Information Inquiry, the Reserve Bank of India has openly admitted that it did not perform any extensive research before announcing the ban. Mr. Varun Sethi, an Indian blockchain lawyer, is said to have filed the inquiry and asked the RBI several relevant questions. The RBI was asked if there was a committee established to determine the risks of trading in cryptocurrency, and what standards were put in place to assess these risks. But, bizarrely, no committee or working group was set up, and the RBI banned cryptocurrency trading because it was unsafe without doing any research to investigate if trading in cryptocurrency was safe or not. A Screenshot of the Right to Information Inquiry has been posted on Twitter by “Blockchainlaw91”. When asked if the RBI requested information from any other region or central bank in relation to the risks of cryptocurrencies, the reply was no.
Possible parallels may be drawn with India’s swift and unexpected ban on cash to prevent criminals from using cash to perform illicit transactions. The ban had enormous consequences for businesspeople and regular individuals as people flocked to ATMs due to the ensuing lack of liquidity. It now seems that India has banned cryptocurrency trading on top of certain cash denominations, which has led to added hardship for its citizens. Instead of doing the appropriate research, investigation, and regulatory implementation, the Reserve Bank of India has opted for a blanket ban.
To add insult to injury, there is a substantial case that the April 5th ban is illegal, as central banks do not have the authority to restrict commercial banks from trading unless the currency has been declared illegal. The government of India has issued no such declaration, and there seems to be a lack of due process. In other regions, such as Chile, the banks were ordered to reopen the exchange accounts while the suit was being heard by the court, but this is not the case in India. Financial services providers are expected to comply with the April 5th ban by July 5th, though it is now apparent that the ban is not based on any evidence or research.