Cryptocurrency Exchanges: An Investment Opportunity?

Brief History

The advent of cryptocurrency as an asset class was swift and it attained global popularity within a relatively short period of time. While the idea of a digital currency was not new, it really found wings with the publication of the white paper on ‘Bitcoin’ by Satoshi Nakamoto (an alias; the author’s real name remains anonymous till date). The objective was to create a currency which could be issued and tracked without being dependent on a central bank or a company. It would be tracked and recorded by the computers of people using the digital currency on a communally maintained database known as ‘Blockchain’. While Bitcoin may be the more popular of the cryptocurrencies, the space soon started witnessing the launch of multiple cryptocurrencies vying for space. Even though India was a little late to join the crypto party compared to some other developed countries like USA, Singapore etc., cryptocurrencies quickly garnered a lot of support in India from beginners to seasoned investors. This was mostly because of it being seen as a lucrative investment opportunity with the exciting possibility of huge returns in a relatively short period of time.

This further led to the launch of a new business model; the cryptocurrency exchange (CE). Simply put, a CE is a platform that allows customers to trade various cryptocurrencies in the virtual market. A CE gets a commission (fixed %) on each trade that is executed on its portal. During the period between 2013 to 2017, India had seen various start-ups setting up CEs which had led to a lot of interest and funding from multiple venture capital firms. In this article, we will discuss the sudden disruption to this potentially lucrative business model due to regulatory reasons and the prospects of its possible revival.

Regulator’s Stance

Regulators all over the world, including in India, watched the cryptocurrency market grow, with a cautious approach. Due to this, cryptocurrencies had long been operating in a legal vacuum with lack of clarity on the applicable regulations or the regulator. To address this issue, the Government of India (GoI) / Reserve Bank of India (RBI) had set up multiple committees during the period from 2016 to 2019, proposed two different draft bills etc. Unfortunately, the GoI had still not taken any conclusive measures towards regulating cryptocurrencies.

On April 6, 2018, the RBI released a notification prohibiting all banks and other financial entities regulated by it, from dealing in virtual currencies and providing services like maintaining accounts, trading, settling etc. in relation to virtual currencies. It also instructed them to stop providing banking services, within 3 months, to all CEs that were their then customers.

Impact of RBI’s Notification

The RBI’s notification created immediate confusion and uncertainty amongst the users, CEs and investors regarding the legality of trading cryptocurrencies in India. CEs lost a large part of their userbase and cryptocurrency rates in India plunged. The CE’s business operations in India were severely hit by this notification. This caused several CEs to either shift overseas, completely shut down their business or pivot towards a P2P trading model.

Supreme Court of India’s Intervention

A writ petition challenging the constitutionality of RBI’s decision was filed on April 17, 2018, by Internet and Mobile Association of India (IAMAI) on behalf of shareholders / founders of crypto exchanges and few individual crypto traders in the Supreme Court of India (SC).

On March 04, 2020, SC decided the case in favour of IAMAI, declaring the RBI notification to be unconstitutional! While the SC recognized the power of RBI to regulate financial institutions, protect the interest of financial markets etc., it held that the restriction introduced by RBI’s notification was disproportionate to the objective that was sought to be achieved. It consequently declared the RBI’s notification to be set aside and restored the original position prior to the notification. This judgment by the SC came as a beacon of hope for CEs and cryptocurrency traders operating in India. The judgement has also garnered a lot of interest from venture capital firms looking to invest in the Indian crypto space. However, this positive judgement raises a couple of pertinent questions, which may be prudent for any future investor to consider before investing in the Indian crypto space:

1) Are dealing in cryptocurrencies an offence / illegal in India?

As on date, cryptocurrencies are not recognized as legal tender in India. However, a person is free to buy, sell, hold and exchange them in the market. Cryptocurrencies are still in their early phase and operate without specific regulations or restrictions. Therefore, it would be incorrect to state that a person dealing in cryptocurrencies is engaging in an illegal activity.

2) Is the RBI going to challenge the decision of SC by a review petition? What are the chances of RBI succeeding? Should potential investors be worried?

Under applicable laws, review petitions can be filed only under certain circumstances such as discovery of some new crucial evidence, error apparent on the face of the record and any other sufficient reason which is equivalent to the other two grounds. Even after getting the review petition admitted, the new set of facts or errors claimed by RBI have to be substantial enough to convince the SC to reverse its decision. Hence, it appears unlikely that RBI may succeed in getting the decision reversed.

Further, it is noteworthy that on May 22, 2020, the RBI gave a seemingly positive reply to query under an application filed by Mr. B.V. Harish, co-founder of Unocoin (a CE) under Right to Information Act, 2005. He had enquired if there was any prohibition on banks from opening a bank account for CEs or crypto traders after the SC decision. RBI replied that, “As on date, no such prohibition exists”!


While the CE business model is not free from uncertainties, the judgement of the SC can at least be considered as a positive step taken by the highest judicial court in India in favor of the Indian cryptocurrency market. It may also lead to the RBI and the GoI to view the entire cryptocurrency sector with less suspicion. Even the recent response by RBI to the RTI application can be considered as a favorable approach adopted by the RBI towards the cryptocurrency market. Further, the GoI / RBI may still formulate regulations for the sector; but there appears to be a low possibility of an outright prohibition. However, it will be interesting to see the final approach taken by the GoI in relation to the Indian crypto space. Until the GoI brings out fresh legislation and clarifies the status of cryptocurrencies under other applicable laws, we would advise investors, founders and market participants to adopt a ‘wait and watch’ approach. A safer approach would be to set up operations in a jurisdiction such as Singapore, Switzerland etc., which has recognized the cryptocurrency model and has already put in place an appropriate regulatory framework. The Indian operations could be managed under the holding structure from such a jurisdiction. Such foreign holding company and operating Indian company structures are often used for other internet-based business models and can be explored for the CE sector as well.

Ajay Joseph | Partner, Veyrah Law; Anshul Pandey | Associate, Veyrah Law

Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.


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