Until 2018, when RBI released a circular asking all payment companies to halt business with all virtual currency exchanges, virtual currencies were doing a brisk business. The exchanges had registered over 3 lakh traders on the platform and trade worth $50-60 million in volumes per day. Lakhs of people were trading and dealing in virtual currencies. Although the RBI circular was mute about virtual currencies, asking payment companies to halt business with exchanges meant, people could no longer buy or trade currencies via these platforms. With the SC now quashing the RBI circular, it is expected that trade in virtual currencies would pick up again, but this shall also depend on what stand the government takes and how easy RBI makes it for these platforms to set up shop.

What are virtual currency exchanges?
Virtual currency exchanges work like any stock exchange. Instead of stocks, these exchanges deal in virtual currencies or cryptocurrencies. The concept is simple; all trading in crypto coins happens on these exchanges. There is a limitation, though, unlike stock exchanges, not all currencies will be listed on currency exchange. This means one currency exchange may have a larger basket than others. The fees of exchanges also matter a lot.

Were they regulated by RBI?
While cryptocurrency exchanges were under RBIs radar for long, in the initial years the central bank did not initiate any enquiry or action against them. However, it did issue advisories time and again. As currency exchanges did keep on incorporating more checks and balances—they allowed Aadhaar seeding of cryptocurrency accounts and introduced checks—they were able to satiate the regulator. RBI’s research arm IDRBT in a paper released in 2017 did acknowledge the speed, ease of transactions and safety of such currencies, but in 2018 RBI issued a circular asking all payment systems to pull out from crypto-businesses.

Why did RBI impose restrictions?

RBI’s order was not against crypto-exchanges but entities dealing with such exchanges. So, say a Razorpay or a PayTM could not allow its payment gateway to be used to purchase coins. This virtually meant drying up of business on these exchanges, but that did not mean exchanges had to stop trading. Only that people could not convert their virtual currencies into money. And, new players could not purchase cryptocurrencies unless they were dealing in foreign currency or cash. Some entities, like Kolonial cafe in Mumbai, did allow payment in cryptocurrencies. A significant reason for RBI imposing this limit was that it was uncertain if this money was being used for illegal purposes, and two, if the users even though Aadhaar verified, were traceable, it was difficult to determine the identity of sellers. Even if people from India were Aadhaar-verified, that would not mean other countries would follow similar protocol.

What does the Court order say?
IAMAI and a few currency exchanges filed a case against RBI, challenging its circular and its authority in regulating exchanges. The court did side with RBI over regulation; it also quashed the circular on account of proportionality. The primary contention by the bench was that if RBI did not consider virtual currencies to be a problem, why were exchanges an issue. Besides, by doing this, RBI was curtailing their right to business, as there was no law restricting usage of cryptocurrencies.

Does this mean that exchanges will be back to functioning?
While exchanges will undoubtedly be online again, we do not know how long they will be able to function. The government has dilly-dallied on the issue of cryptocurrencies. In one bill, the inter-ministerial group debated regulating them, but in the 2019 bill, it stipulated that virtual currencies should be banned altogether.

How do virtual currency exchanges relate to blockchain?
The technology behind cryptocurrencies is blockchain, which is a distributed ledger system. Although there is no direct connection between blockchain and cryptocurrency development, it is usually observed that countries that have liberal currency policy have done better on blockchain start-ups, which is considered a technology for the future. China, for instance, has double the number of blockchain start-ups than India. Estonia has as many as India and has been using blockchain for the digitisation of records. Australia has adopted blockchain in a big way, and its bourses or run on the technology. With India looking at digitisation of land records using technology, it can certainly benefit from the crypto revolution.

Techsplained@FE features weekly on Mondays. If you wish to send in queries that you want explained, mail us at ishaan.gera@expressindia.com