The Reserve Bank of India (“RBI”) vide Circular – Prohibition on dealing in Virtual Currencies (“VCs“) dated April 6, 2018 (“RBI Circular“) has prohibited its regulated entities from dealing with VCs or providing services for facilitating any person or entity in dealing with or settling VCs. Prior to the RBI Circular, RBI had issued advisories on December 24, 2013, February 1, 2017, and December 5, 2017, highlighting the legal and financial risks posed by cryptocurrencies.
Supreme Court on Cryptocurrency Ban
The Supreme Court of India (“SC“) in the matter titled Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India WP(Civil) 528 of 2018 passed judgment on March 4, 2020, lifting the ban imposed by the RBI vide the RBI Circular. Petitions challenging the validity of the RBI Circular were initially filed across few High Courts which were later transferred to Supreme Court.
Bitcoin Ban – Grounds of challenge
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The RBI Circular was challenged by the Petitioners before the SC on various grounds, including that the RBI has no power to prohibit the activity of trading in VCs since inter-alia:
- VCs are not legal tenders but tradable commodities and
- VCs do not even fall within the credit system of the country so as to enable RBI to regulate them.
- Section 35A(1)(a) and Section 36(1)(a) of the Banking Regulation Act, 1949 do not extend to the issue of blanket directions in public interest.
- VCs are not “payment systems” under Section 2(1)(i) Payment System and Settlements Act, 2007 (“PSS Act“)
2. The manner in which the RBI exercised its power with respect to the ban did not satisfy the established parameters that:
- there was no application of mind/satisfaction/relevant and irrelevant considerations
- Malice in law/colorable exercise of power
- M.S. Gill reasoning
The RBI’s response and arguments:
In response to the submission of the Petitioners, the RBI argued that:
- VCs do not satisfy the criteria such as a store of value, a medium of payment and a unit of account, required for being acknowledged as currency.
- VCs are capable of being used for illegal activities due to anonymity/pseudo-anonymity.
- The use of VCs would impact the monetary stability of the country.
- The RBI Circular is an economic policy decision warranting no interference from the Court.
- The RBI Circular is within the wide powers conferred upon the RBI.
- No one has unfettered access to fundamental right to do business on the network of the entities regulated by RBI and the ban is not in violation of Articles 14, 19 and 21 of the Constitution of India
- There was an 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.
- 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.
- KYC norms are ineffective, as the inherent characteristic of anonymity of VCs does not get remedied
Supreme Court Judgement of Bitcoin Ban:
The SC after considering the factual matrix and the contentions of the parties, held as under:
- RBI has the power to prohibit or regulate: As some institutions accept VCs as valid payments for the 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 VCs have the potential of creating a parallel monetary system that is perceived as 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 obligation or payment instruction, if not a payment system.
- Application of Mind: 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.
- Colorable Exercise: To constitute a colorable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and wilfully without reasonable or probable cause. The RBI Circular does not fall under the category of either of them.
- Precautionary steps taken by petitioners: Enhanced KYC norms may remove the anonymity of the customer, but not that of the VC.
- Acceptance of Distributed Ledger Technology and rejection of VCs: There is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation.
- RBI’s decisions do not qualify for Judicial deference: RBI is a creature, created with a mandate to get liberated even from its creator. To place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the RBI Act. The argument that a policy decision taken by RBI does not warrant any deference was not accepted.
- Article 19(1)(g) challenge & Proportionality: The restriction imposed by the RBI Circular should pass the test of reasonableness. RBI has consistently taken a stand that there is no ban on VCs. The RBI Circular has, however, cut the lifeline of the VC exchanges in the view of restriction on cash transactions despite RBI not finding anything wrong about the way in which these exchanges function and despite the fact that VCs are not banned. Therefore, on the ground of proportionality, the SC held that the RBI Circular is liable to be set aside on the ground of proportionality.
The Apex Court’s decision comes as a short respite to the VC exchange industry in the backdrop of impending Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (“Bill“) that seeks, among other things, to prohibit the use, issuance, transfer, mining, generation, disposal or sale of cryptocurrencies in the territory of India. The Bill is currently under the consideration of the relevant stakeholders in the Government and has not yet given a cabinet nod for placing before the Parliament.
The Supreme Court has also recognized the RBI powers to regulate cryptocurrencies in form of preventive and curative measures which will give offer further legitimacy to any actions by RBI to regulate VCs in the coming days.
Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies