No research backing RBI's move to ban cryptocurrencies

The Reserve Bank of India’s decision to stop banks and other regulated entities from dealing with virtual currencies (VC) such as bitcoins was not backed by public consultation or independent research, a right to information response from the banking regulator has showed.

In a response to the RTI application filed by a startup consultant, Varun Sethi, on April 9, the central bank said it does not have an internal committee that looks into VCs. However, the RBI is part of two different committees that have been constituted under the Ministry of Finance to study virtual currencies in India. The RBI responded saying “No” to questions related to formation of a committee within the regulator to understand the working of VCs. ET has seen the RTI response.

“The RBI specifically mentions that it conducted no research or consultation before the implementation of restriction in April. The RBI also responded that no committee was ever formed for analysing the concept of blockchain before the decision,” said Sethi, a lawyer and founder of blockchainlawyer.in.

A mail to RBI seeking comment remained unanswered till press time on Tuesday.

On April 6, the RBI through its notice titled ‘Prohibition on dealing in Virtual Currencies’, mandated banks, e-wallets, and payment gateway providers to withdraw support for cryptocurrency exchanges and other businesses dealing with VCs in India.

Banks in turn forced exchanges and traders to stop using their accounts for trading in VCs. This led them to approach the Supreme Court against the regulator’s move. The case is scheduled for hearing on July 20. The lack of proper stakeholder consultation and the absence of reasonable grounds to restrict any business are the primary provisions under which the RBI notice is challenged in the SC.

“This RBI response has cemented our case ahead of the hearing in SC. The grounds on which our writ petition has been filed is that the RBI has not done enough research to ban a business completely,” said Rashmi Deshpande, associate partner at Khaitan & Co.

The law firm represents one of the petitioners in the Supreme Court.

Experts say petitioners will likely attempt to use the response to show how the RBI’s decision did not rely on credible or neutral evidence of harm. This may affect the constitutionality of the RBI’s guidance.

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