The Supreme Court in the matter titled “Internet and Mobile Association of India (IAMAI) Vs Reserve Bank of India on March 4, 2020 lifted the ban imposed by the RBI on April 6, 2018 which prohibited its regulated entities like banks from dealing in or facilitating banking transactions relating to virtual currencies (VCs).
A Brief History
The RBI had issued cautionary advisories in the form of press releases in December 2013, Feb 2017 and Dec 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 in dealing with VCs.
Thereafter, the RBI issued the circular which was challenged through writ petitions filed before the SC by IAMAI, shareholders/founders of crypto assets exchange platforms and individual crypto asset traders which were the petitioners.
The petitioners challenged the RBI circular before the SC on various grounds including:
(1) that the RBI has no power to prohibit the activity of trading in VCs since (A) VCs were 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 (PSST Act)
(2) 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
——-There was no application of mind by the RBI while passing the circular
——-The circular was tainted by malice in law as it was issued in bad faith without the object of protecting the regulated entities of the public in general
——-The circular violated the fundamental right to practice any profession o to carry on any occupation, trade or business (Article 19(1)of the Constitution) as it does not pass the test of reasonableness/proportionality vis a vis the blanket prohibition imposed on the regulated entities.
In response, the RBI argued that:
1) Its circular was within the wide powers conferred upon the RBI
2) There was application of mind in passing the circular which was evident from the reports of the committee to which RBI was a party and the cautionary advisories repeatedly issued by the RBI over a period of five years
3) That there cannot be unfettered fundamental right to do business on the network of entities regulated by the RBI and thus its circular was not violative of fundamental rights
4) The circular was necessitated in public interest to protect the interest of the consumers, the interest of the payment and settlement system of the and for protection of the 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.
The SC Judgement
The SC after considering the factual matrix and the contentions of the parties, held as under:
- 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.
- 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 obligations or payment instruction, if not a payment system.
- 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 the period of five years which disclose in detail the reason for the actions taken.
- 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 to 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 reasonable restriction and it is extremely disproportionate.
- 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.
- Therefore, in the light of the above, the SC held that the RBI Circular is liable to be set aside on the ground of proportionality.
While the judgment of the SC is a respite for the VC/cryptocurrency industry. Which was indirectly impacted by the prohibitions 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.
Shagun Badhwar is a Senior Associate with AZB & Partners and Shubham Parkhi is an Associate with the same firm.