Prachi Sharma, Lloyd Law College
Parul Agarwal, GNLU
Riya Chadha, FIMT, IPU
Meghaa G., TNNLU
CITATION: 2020 (2) CTC 528
DATE OF JUDGEMENT: 4 March 2020
BENCH: Rohinton Fali Nariman, Aniruddha Bose and V. Ramasubramanian, JJ.
AREA OF STUDY: Cryptocurrency/Virtual Currency & Crypto-Assets
On April 5, 2018, RBI released a press release claiming that virtual currencies (Hereafter VCs), known as cryptocurrencies and crypto-assets, pose questions about consumer security, market integrity and money laundering.
Cryptocurrencies are systems that allow secure online payments to be denominated as virtual "tokens," represented by internal system ledger entries. 'Crypto' refers to the various encryption algorithms and cryptographic methods that secure these entries, such as elliptical curve encryption, public-private key pairs and hashing functions.
On March 4, 2020, the Supreme Court terminated a 2018 ban on banks dealing in virtual currencies such as cryptocurrencies including bitcoins. The Reserve Bank of India notification released in April 2018 that implemented the restriction was quashed by a three-judge bench headed by Justice Rohinton Nariman. The background and reasoning behind this judgment will be dealt in detail in this article.
1. On April 5, 2018, RBI has issued a “Statement on Developmental and Regulatory Policies”, of which paragraph 13 directed the entities regulated by RBI-
(i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and
(ii) To exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).
2. Following the said Statement, on April 6, 2018, RBI also issued a circular in the exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 (Hereafter The BR Act) and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (Hereafter The RBI Act) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007 (Hereafter The PSS Act), directing the entities regulated by RBI -
(i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and
(ii) to exit the relationship with such persons or entities, if they were already providing such services to them.
3. Petitioners had challenged the said Statement and circular of RBI and also seeks a direction to the respondents not to restrict banks and financial institutions regulated by RBI, from providing access to the banking services to those engaged in transactions in crypto assets & cryptocurrency, the petitioners have come up with these writ petitions.
1. Article 19(1)(g) of The Constitution of India 1949-
“To practise any profession, or to carry on any occupation, trade or business.”
2. Article 19(6) of The Constitution Of India 1949-
“Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause, and, in particular, nothing in the said sub clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to:
i. the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or
ii. the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.”
1. Whether the ban on cryptocurrency or crypto-assets are reasonable and proportionate?
2. Whether the RBI had the jurisdiction to pass the order?
ARGUMENTS BY BOTH SIDES:
The petitioner challenged the RBI circular on various grounds –
1. RBI has no authority and power to act in the current matter as VC’s are not legal tender but rather tradable commodities/digital goods, which do not come under the purview of the regulatory framework of The RBI Act, 1934 or The BR Act, 1949.
2. The RBI Circular places an unconstitutional restriction on legitimate business activity. Unless there is a ‘legislative’ prohibition on Cryptocurrencies declaring them res extra commercium (a thing outside commerce), trading in Cryptocurrencies is a valid and lawful business activity protected under article 19(1)(g).
3. The ban by the circular is irrational, disproportionate, and founded on a flawed understanding that it is not possible to regulate Cryptocurrencies and Crypto Assets.
4. RBI has failed to apply its mind while passing the circular as no prior studies were conducted to judge its effect on the economy.
RBI argued the following in its defence-
1. VC’s do not satisfy certain criteria such as a store of value, medium of payment and unit of account, required for being acknowledged as currency.
2. RBI has the authority to regulate VC’s as the circular pertains to banning banking activity with relation to VC’s and RBI has the right to regulate banking Activities as it thinks fit.
3. Increased reliance on VC’s has the potential of corroding the monetary firmness of the Indian currency and the credit system.
4. There cannot be an unrestrained fundamental right to do business on the network of entities regulated by RBI.
5. The circular was required in the public interest to safeguard the interest of the consumers, the interest of the payment and settlement systems of the country and for the protection of regulated entities against exposure to high instability of the VC’s.
The Court while determining the matter, observed the draft bill introduced by the legislature, namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. The Court came to an inference that the viewpoint of the government cannot be discovered from this Bill as it on one side, levied criminal charges on the users and traders of cryptocurrencies and forbade actions like mining, holding, selling, trade, issuance, disposal or use of cryptocurrency and on the other side, it led the legislature to present its digital currency, 'Digital Rupee,' by the Central Bank.
Therefore, the Court proceeded to analyse the notification of the RBI without a proper stand of the legislature and the RBI on banning of the Cryptocurrency. The Court analysed the present issue of cryptocurrency on the following points-
1. Cryptocurrencies –
The SC observed that though Cryptocurrencies/VC’s are not legal tender, they can operate as a medium of exchange, a unit of account or a store of value.
2. Requisite power to regulate or prohibit trading in Virtual Currencies –
It held that the authorities given to the RBI under the above-mentioned Acts are extensive. It has been vested with the power to run the currency and credit system of the country and has the lone right to issue currencies. Furthermore, the RBI has ample control over the banking companies and payment system to even have a say in framing management of banking institutions. Additionally, RBI has the power to issue instructions to the payment systems if they are probable to involve in anything which can lead to a systematic risk or affect the payment systems of the country.
Therefore, it cannot be asserted that the RBI doesn’t possess the authority to regulate or even ban cryptocurrencies.
3. Colourable Exercise of Power –
The Petitioners contended that the invocation by RBI, of ‘public interest’ as a weapon, supposedly for the advantage of users, consumers or traders of VC’s is a colourable exercise of power.
However, about this, SC said that whilst acting in the public interest and the interest of depositors, banking companies or policies, if any collateral damage is faced by entities not governed by the RBI, the same cannot amount to colourable exercise of power or malice in law.
4. Application of Mind –
Concerning this, the SC said that the matter of dealing with VCs has been haunting with the RBI from June 2013, when the Financial Stability Reports (FSRs) acknowledged the challenges posed by VC’s being a technology-based innovation. The reports and other advisory circulars issued by RBI from June 2013 to April 2018 shows that RBI had been brooding over the matter for five years, without taking the extreme or the ultimate step. Therefore, it cannot be contented that RBI was guilty of non-application of mind.
5. Attack on Article 19(1)(g) and test of Proportionality –
Any restriction to the freedom guaranteed Under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6).
Relying on the decisions of the Supreme Court in the cases of Md. Yasin v. Town Area Committee and Bennett Coleman & Co. v. Union of India, the Petitioners contended that since access to banking is the equivalent of the supply of oxygen in the modern economy, the denial of the same to those who carry on a trade not prohibited by law, is by no means a reasonable restriction. Moreover, it is also tremendously disproportionate. SC in this regard observed that it is indeed not a reasonable restriction as people who have suffered a lethal blow from the disputed Circular are only those operating VC exchanges and not those who are trading in VCs. Persons trading in VCs, have different options, but the VC exchanges doesn’t have any other means of survival if they are detached from accessing the banking networks.
Additionally, SC observed that RBI did not introduce any convincing evidence of the probable harm that its circular aims to address. The activities of VC exchanges have not been seen to have adversely impacted any RBI regulated entity. Further, as held by this Court in State of Maharashtra v. Indian Hotel and Restaurants Association, there must be at least some empirical data about the degree of harm suffered by the regulated entities. In the absence of the above, the Court held the absolute ban on the trading of VCs and functioning of VC exchanges to be unreasonable and disproportionate.
At last, SC stated that the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality. The Statement dated 05-04-2018, was challenged in one of the writ petitions, and the same is not in the nature of a statutory direction and consequently, the issue of setting aside the same does not arise. The Court also stated that the lukewarm response of RBI in this regard is wholly unjustified. Further, RBI was bestowed with the obligation to direct the Central Bank of India to defreeze the accounts of one of the petitioner company and release the funds with interest at the rate applicable.
Hence, the judgement was passed in favour of the petitioners i.e., IMAI in the present case.
Virtual currencies have a much wider scope and opportunity to sidestep traditional banking and regulatory systems in the financial sector. Therefore, imposing a ban on VC’s is not a solution, instead, RBI & the Government should utilize their wide powers and can frame policies to tackle the VCs effect on the economy or the fiat currency. Accordingly, they may also form a new regulatory body lead by experts dealing with laws related to VC’s. Severe punishments or penalty on illegal uses should also be imposed. Also, the Government should have proper Regulation to keep a record of transactions & KYC of persons, to prevent illegal transactions & frauds through VCs. Therefore, to keep up with the pace of technology & innovation, VCs should be legalised.
 Murali Krishnan, Supreme Court ends RBI’s 2018 ban on banks dealing in cryptocurrency, HT (April 5, 2020),https://www.hindustantimes.com/india-news/supreme-court-ends-rbi-s-ban-on-banks-dealing-in-cryptocurrency/story-Q99whSgHNG01oGOX7FyTxN.html.  Jake Frankenfield, Cryptocurrency, Investopedia (May 5, 2020), https://www.investopedia.com/terms/c/cryptocurrency.asp.  INDIA CONST. art. 19, cl. (1)(g).  INDIA CONST. art. 19, cl. 6.  Reserve Bank of India Act, 1934, No. 2, Acts of Parliament, 1934 (India).  The Banking Regulation Act, 1949, No. 10, Acts of Parliament, 1949 (India).  The Payment and Settlement Systems Act, 2007, No. 51, Acts of Parliament, 2007 (India).  Reserve Bank of India Act, 1934, § 22(1), No. 2, Acts of Parliament, 1934 (India).  Financial Stability Reports, RBI, https://www.rbi.org.in/Scripts/FsReports.aspx.  AIR 1952 SC 115.  AIR 1973 SC 106.  (2013) 8 SCC 519