The Supreme Court of India (hereinafter referred to as the ‘Court’) recently vide a 180 page long judgment quashed and set aside a circular issued by the Central Bank i.e. Reserve Bank of India (hereinafter referred to as the ‘RBI’) in April 2018 banning domestic banks and other financial institutions from providing banking services and facilitating cryptocurrency related transactions.
Holding the RBI circular (hereinafter referred to as the ‘Circular’) unconstitutional on the ground of proportionality, the Court did not delve into the question of legality of the use of cryptocurrency and restricted its judgment on the limited point of legality of the circular.
The RBI issued a Circular dated April 6, 2018 which in unequivocal terms prohibited all the entities regulated by RBI from dealing in virtual currencies and asked them to cease its services with immediate effect for facilitating any person or entity in dealing with or settling virtual currencies. It also directed them to egress all the existing relationship with such persons or entities, if they were already providing such services to them. It is important to note that before issuing the Circular in 2018, the RBI in the year 2013 and 2017 released a press release in which it cautioned the people about the risks associated with the cryptocurrency transactions.
Pertinently, the underlying rationale of the RBI behind the Circular was the fact that Virtual currencies are capable of being used for illegal activities due to their pseudo-anonymity and there are lots of potential financial, operational and security related risks associated with such transactions.
Aggrieved by this Circular, Internet and Mobile Association of India (IMAI), few other companies who were engaged in the business of crypto exchanges along with some cryptocurrency traders filed different petitions in the Supreme Court challenging the vires of the Circular seeking a direction to the RBI not to restrict financial institutions regulated by RBI, from facilitating any person or entity in dealing with or settling virtual currencies. It is important to note that as on date there is no statute or legislation banning and regulating the use of cryptocurrencies in India.
The Circular was challenged on two major grounds:
1. Virtual Currencies are not legal tender but tradable commodities and therefore they do not fall within the regulatory framework of the RBI Act, 1934, and thus RBI is dehors of any power to regulate the activity of trading in virtual currencies.
2. Assuming, RBI has the power to regulate the virtual currency, the circular anyway disproportionately violates the rights of the petitioners.
Findings and Observations
Power of RBI to regulate cryptocurrency
The petitioners argued that since Virtual currencies do not fulfil all the characteristics to be acknowledged as money or any other legal tender, they cannot be termed as money or other legal tender. Therefore, they are merely termed as goods/commodities. Having said that, RBI does not enjoy any statutory control over them and thus it cannot issue such Circular regulating Virtual currencies since it falls outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007. RBI, countered that even though Virtual currencies cannot be acknowledged as money or other legal tender, they were still capable of being used for making payments for the purchase of goods and services and for which banking services were required by those institutions facilitating the payments. Therefore, it was sufficient to bring the currencies within the regulatory power of the RBI.
The Court adopted a two phased approach to answer this question. In the first phase, it explored various powers and roles entrusted to the RBI under various statutes and regulations by analysing different laws such as The Banking Regulation Act, 1949, RBI Act, 1934 and Payment and Settlement Systems Act, 2007 and their historical origins.
In engaging this analysis, the Court conducted a meticulous examination of literature and legislations concerning RBI, after which, it came to the conclusion that RBI is vested with following powers and functions:
1. Operation of currency and credit system of the country to its advantage,
2. Regulating the financial system of the country to its advantage,
3. Regulating and supervising the payment systems,
4. Issuance of directions to a payment system or a system participant
which is, in RBI’s opinion, engaging in any act that is likely affect the
payment system, the monetary policy or the credit policy of the
In the second phase of its analysis, the Court addressed the issue of identification of the Virtual Currencies. While addressing this phase, the Court examined as to how the Virtual Currencies are being identified and treated by regulators in different jurisdictions and by the governments and other statutory authorities of various nations. The Court also thoroughly analysed judgments of various courts in different jurisdictions to identify their approach towards treating these currencies.
At the end of this second phase of analysis, the Court reached to the conclusion that in most jurisdictions across the globe, although Virtual Currencies have not acquired the status of a legal tender but still, they are capable of being used as real money or at least as a medium of exchange. The Supreme Court took the view that Virtual Currencies are not capable of performing one of the essential functions of money i.e. final discharge of debt and standard of deferred payment.
The Court also analysed the definition of the term ‘currency’ and observed that the only Act which defines the term is FEMA (Foreign Exchange Management Act). The Court navigated through the definition as given in Section 2(h) of FEMA, 1999 which defines ‘currency’ to mean: “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.
The Court observed that nothing stops the RBI from categorising Virtual Currencies under the head of “other similar instruments” as mentioned in the aforementioned Section. Further, it observed that there are instances of some institutions accepting virtual currencies as valid payments for the purchase of goods and services.
After a conjoint analysis of the two phased approach and relying on the findings of the Court in the case of Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of India, the Court held that Virtual Currencies have the potential to interfere with the matters that RBI has the power to restrict or regulate. Therefore, it negated the contention of the Petitioners that trading of Virtual Currencies does not fall within the statutory scheme of the RBI.
The Circular was not issued in a manner prescribed by law i.e. violating the fundamental rights of the Petitioners
The second ground raised by the Petitioners was that even assuming that RBI had the power to regulate Virtual Currencies, RBI’s circular was violative of their fundamental rights because it did not meet the four pronged test of proportionality as laid down in the case of Modern Dental College and Research Centre v. State of Madhya Pradesh. It was contended that the restrictions imposed by the Circular do not pass the test of reasonableness in terms of Article 19(6) and are thus, unconstitutional. The Respondent contended that the corporate bodies who have filed the instant petition are not entitled to maintain a challenge under Article 19(1)(g) because they are not ‘citizens’. Further, they contended that Virtual Currencies are capable of promoting transactions in terms of ‘black money’, thereby, putting the economy at risk.
The Court carefully travelled through the arguments of the parties and the evidence placed by them while substantiating their claims. The bench was not impressed with the ‘black money’ argument of the RBI and observed while relying on the ratio laid down in the case of Bank Mellat v. HM Treasury (No. 2), that a simple bewitchment of the fact that a thing might lead to promotion of “money laundering” or “black money” does not satisfy the first test of proportionality i.e. the measure is designated for a proper purpose. The Court accepted the fact that the outright ban on the banking transaction was implemented by issuing the impugned Circular without considering the availability of alternatives. The Court took note of the fact that even the Crypto-token Regulation Bill 2018 (as recommended by the Inter-Ministerial Committee) was never of the opinion that an outright ban is an effective way to regulate Virtual Currencies. Rather, the committee opined that a ban might be an extreme tool and other alternatives in terms of regulatory measures could have been explored to achieve the stated objective.
Taking note of the ratio laid down in the case of State of Maharashtra v. Indian Hotel and Restaurants Association, the Court also observed that RBI failed to produce any credible evidence or data on record to show that RBI or the banking companies suffered any amount of harm because of Virtual Currencies. In light of these findings, the Court accepted the contention of the Petitioners that the impugned Circular was disproportionate and thus it is liable to be set aside on the grounds of proportionality.
Dissecting the Judgment
Undoubtedly, this judgment is a historical verdict for the nation’s crypto currency industry. But the question is: whether a legal victory is enough to propagate the future of cryptocurrencies in India? Would this victory be helpful to the individual users of cryptocurrencies? A conscious analysis of the judgment would result in exhibiting several red flags in the judgment questioning the future of cryptocurrency in India.
Without prejudice to the judgment, it is clear that the Supreme Court has not talked about legalising cryptocurrencies. Instead, it has restricted its judgment only towards the constitutionality of the Circular because that was the only challenge altogether. Further, the only ground on which the Supreme Court held that the circular fails the test of proportionality is that RBI failed to produce any credible evidence on record to show that RBI or the banking companies suffered any amount of harm because of Virtual Currencies.
Further, it should also be kept in mind that this judgment is meant to provide relief to only those companies or regulated entities which are running Virtual Currency exchanges and not to individual users of Virtual Currencies, mainly because the impugned Circular affected the Virtual Currency Exchanges and not the actual trading of Virtual Currencies. Lastly, the Court makes a very pertinent observation that since there is no existing ‘law’ regulating Virtual Currencies in India, RBI could not have issued such a Circular restricting the banking operations of those who were dealing in these currencies. Does it mean that the Circular could have stood the ground had there been a law in place?
This promontory judgment of the Supreme Court does not provide any clarity to the future of cryptocurrency in India. With several red flags being raised against in the judgment itself, the future is still dark for such currencies, at least in India. To put it simply, this small act of setting aside the circular will not help in reviving the crypto business in India. There is a need for the government and the RBI to revisit the relevant legislations and come up with a more varied form of law without being sceptical of Cryptocurrencies in India. It must be noted that even after this verdict, banks have their own concerns regarding the usage of cryptocurrency which have not been not been addressed by the Court. There is an immediate need for a law regarding the regulation of cryptocurrencies in India.
(Ankit Tripathi is a practising advocate before the Supreme Court of India and the Delhi High Court)