BACKGROUND OF THE CASE
In a circular[i] dated April 6, 2018, The Reserve Bank of India (RBI) imposed a ban on banks and other entities from dealing and facilitating transactions in virtual currency (VC), also referred to as cryptocurrencies. RBI had, since 2013, raised concerns about the potential financial, legal and security-related risks associated with it. However, the VC itself remained legal. The Internet Mobile Association (IMAI) along with other stakeholders who dealt in the online crypto exchange challenged[ii] this circular of RBI in the Supreme Court.
a) The learned counsel for the petitioner submitted that RBI did not have jurisdiction to regulate the dealings in VC’s and therefore it cannot forbid its trading. It was reasoned that VC does not come within the ambit of “currency” and it can only be termed as a tradable commodity and not a legal tender.
b) It was also argued that the ban on VC trading is an unreasonable restriction that hampers the fundamental right to practice trade under Article 19(1)(g) of the Indian Constitution. It highlighted that the measures adopted by RBI were not proportionate to the concerns.
c) The learned counsel for RBI contested that VC is a mode of digital payment and hence RBI has the power to regulate it. Furthermore, the anonymous nature of VC’s made it vulnerable to money laundering and its use adversely impacts the traditional economy and monetary stability.
The Supreme Court in determining the jurisdiction of RBI in regulating VC noted that ‘management of currency’ as mentioned in Section 3(1) of Reserve Bank of India Act, 1934 included not only the legally recognized currency but also such form of currency which has the capability to fake or play the role of currency. Therefore, even if it wasn’t equivalent to currency, it functioned as money under certain circumstances. Moreover, several economies have identified VC as a form of payment and Section 18 of The Payment and Settlement Act empowers the RBI to regulate payment systems affecting domestic transactions. Based on this study of legal frameworks and judicial precedents the Court ruled that RBI had the power to regulate VC’s.
In regards to the second issue of the unreasonableness of the circular, the court deployed the test of proportionality. The ‘doctrine of proportionality’ essentially signifies that measures taken by administrative bodies should be proportionate to its purpose. In the case of Modern Dental College vs. State of MP[iii] the constitution bench of SC laid down four checkpoints to decide the constitutionality of the limitation a fundamental right:
- The measure should be designated for a purpose.
- The measure should be rational for the fulfillment of purpose.
- There exist no lesser invasive measures other than the one undertaken.
- The existence of a proper relationship between the importance of fulfilling the aim and that of limiting the right.
The court held that RBI had failed to pass the above test and the restriction was not reasonable according to Article 19(6) of the Indian Constitution. The court also drew references from the July 2018 report by the European Union[iv], which recommended that a total ban on cryptocurrency was not necessary to regulate the financial sector. The Court mentioned that RBI did not consider lesser invasive alternatives prior to imposing a complete ban.
The court also relied upon the ruling in State of Maharashtra vs. Indian Hotel and Restaurants Association[v] and stated that RBI must produce objectively reliable empirical data in order to establish the harm suffered by the traditional economy on account of the VC’s trading in India. RBI failed to show that any of the entities regulated by it have suffered any loss or impacted adversely due to VC’s exchange. The SC held that a complete ban on trading was excessive and disproportionate. The court said that such administrative orders should be backed by rational and cannot be ambiguous. Therefore the court quashed the RBI circular while ruling that it offended the doctrine of proportionality and was in violation of Article 19(1)(g).
The judgment given by the Supreme Court marks the importance of judicial review vis-à-vis the economic policy decisions. Since the lifting of this ban, a significant spike[vi] in the trading of virtual currencies has been recorded in India. While this decision is a welcome move for cryptocurrencies and exchange technologies across the nation to flourish, persistent risks of consumer and investor protection, money laundering and terrorist financing cannot be ignored. It must be borne in mind that SC quashed the RBI circular on grounds of being disproportionate to its purpose. This, therefore, does not rule out the persistent risks associated with trading in VC’s, which still remain unregulated in India.
In regards to the potential economic and financial hazard associated with VC’s, the government should introduce a sound regulatory framework to govern such transactions. The establishment of distinct legal regulations will aid in instilling confidence amongst traders and it will lead to a trusted relationship between investors and service providers.
Prerna Mayea is a third-year student pursuing B.COM LLB (Hons.) from Institute of Law, Nirma University. You can follow her on LinkedIn
[i] Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), RBI/2017-18/154 (Issued on April 6, 2018).
[ii] Internet and Mobile Association of India vs. Reserve Bank of India, 2020 SCC Online SC 275.
[iii](2016) 7 SCC 353.
[iv]European Parliament, Virtual Currencies, Monetary Dialogue(July 2018), https://www.europarl.europa.eu/cmsdata/149902/KIEL_FINAL%20publication.pdf.
[v](2013) 8 SCC 519.
[vi] Kevin Helms, Nationwide Loackdown: Indian Cryptocurrency Exchanges See Signups and trade Volumes Increase, BITCOIN (April 3, 2020), https://news.bitcoin.com/nationwide-lockdown-india/.