Supreme Court’s judgment on virtual currencies

A. Introduction

The Supreme Court of India (“SC“) in the matter titled ‘Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India’ passed a judgment on March 4, 2020, lifting the ban imposed by the Reserve Bank of India (“RBI“) through its circular dated April 6, 2018 (“RBI Circular“), which prohibited its regulated entities (i.e. financial institutions like banks) from dealing in, or facilitating banking transactions, relating to virtual currencies (“VCs“).

B. Brief history

The RBI issued several cautionary advisories in the form of press releases (on December 24, 2013, February 1, 2017 and December 5, 2017) to users, holders, investors, traders and similar parties that deal in VCs, highlighting the potential financial, operational, legal, customer protection and security-related risks associated with dealing in VCs.

Thereafter, the RBI issued the RBI Circular, which was challenged through the writ petitions filed before the SC, by inter-alia, IAMAI (a not-for-profit organisation, which represents the interests of online and digital services industry), shareholders / founders of crypto-assets exchange platforms and individual crypto-asset traders (“Petitioners“).

C. Grounds of challenge

The RBI Circular was challenged by the Petitioners before the SC on various grounds, including:

(i)  that the RBI has no power to prohibit the activity of trading in VCs since inter-alia: (a) VCs are not legal tenders and thus not regulated by the RBI, and (b) services rendered by VC exchanges do not qualify to be a ‘payment system’, thus, are not entities that are regulated by the RBI under Payment Settlement and Systems Act, 2007 (“PSS Act“).

(ii)  the manner in which the RBI exercised its power with respect to the ban did not satisfy the established parameters. In this regard, the Petitioners argued that:

– there was no application of mind by the RBI while passing the RBI Circular.

– the RBI Circular was tainted by malice in law as it was issued in bad faith without the object of protecting the regulated entities or the public in general.

– the RBI Circular violated the fundamental right to practise any profession, or to carry on any occupation, trade or business (Article 19(1) (g) of the Constitution of India), as it does not pass the test of reasonableness / proportionality vis-à-vis the blanket prohibition imposed on the regulated entities.

D. The RBI’s response

In response to the submission of the Petitioners, the RBI argued that:

(i)  the RBI Circular is within the wide powers conferred upon the RBI.

(ii)  there was application of mind in passing the RBI Circular, which was evident from the reports of the committees to which RBI was a party and the cautionary advisories repeatedly issued by the RBI over a period of 5 years.

(iii)  there cannot be an unfettered fundamental right to do business on the network of entities regulated by the RBI, and thus the RBI Circular is not violative of any fundamental right.

(iv)  the RBI Circular was necessitated in public interest to protect the interest of consumers, the interest of the payment and settlement systems of the country and for protection of regulated entities against exposure to high volatility of the VCs. The RBI is empowered, and duty bound to take such pre-emptive measures in public interest and the power to regulate includes the power to prohibit.

E. SC judgment

The SC after considering the factual matrix and the contentions of the parties, held as under:

(i) As some institutions accept VCs as valid payments for purchase of goods and services, there is no escape from the conclusion that the users and traders of VCs carry on an activity that falls squarely within the purview of the RBI. The SC held that VC has the potential of creating a parallel monetary system which is perceived a threat to the existence of a central authority regulatory monetary system. Thus, the RBI has the requisite power to regulate or prohibit any activity of this nature.

(ii) The RBI Circular is primarily addressed to banks who are “system participants” regulated by the RBI under the PSS Act. It is impossible to say that the RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system.

(iii) The SC accepted the contentions of the RBI with regard to the application of mind as the RBI had taken a series of steps over a period of about 5 years which disclose in detail the reason for the actions taken.

(iv) In relation to the alleged violation of the fundamental right of the Petitioners, the SC held that any restriction to the freedom guaranteed in the Article 19 (1) (g) of the Constitution of India should pass the test of reasonableness. The Petitioners contended that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade that is not prohibited by law, it is not a reasonable restriction and it is extremely disproportionate.

(v) Accordingly, the SC, while agreeing with the submissions of the Petitioners, held that the RBI circular is not reasonable or proportionate as:

– in the past 5 years or more, RBI has not found any adverse impact of the activities of VC exchanges on the way the regulated entities (such as banks) function.

– the RBI has taken the stand that it has not banned VCs in the country.

(vi) Therefore, in light of the above, the SC held that the RBI Circular is liable to be set aside on the ground of proportionality.

F. Concluding remarks

While the judgment of the SC is a respite for the VC / cryptocurrency industry, which was indirectly impacted by the prohibition imposed by the RBI on its regulated entities (from dealing in transactions involving VCs), it is pertinent to note that the SC (in this judgment) has not adjudicated on the legality of VCs / cryptocurrencies, which remain unregulated under Indian law (in absence of any specific legislation or regulation).

The VC / cryptocurrency industry still faces hurdles as a Government panel has recently submitted a draft bill, titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019”, along with a report to the Government, which seeks, among other things, to prohibit the use, issuance, transfer, mining, generation, disposal or sale of cryptocurrencies in the territory of India. This Bill is currently under the consideration of the relevant stakeholders in the Government and has not yet been tabled before the Parliament. If and when the said Bill is passed, it is likely to reinforce the stance taken by the Government regarding the legality of VCs / cryptocurrencies in India.

Authors:
Shagun Badhwar, Senior Associate
Shubham Parkhi, Associate

Date: March 6, 2020