The Supreme Court of India (hereinafter referred to as “the Court”) in a landmark judgment on 04th March, 2020 in the matter of Internet and Mobile Association of India v Reserve Bank of India and others [W.P(C) no. 373 of 2018], quashed the Reserve Bank of India’s (hereinafter referred to as “RBI”) Circular RBI/2017-18/154, DBR.No.BP.BC.104 /08.13.102/2017-18, dated April 6, 2018 titled “Prohibition on dealing in Virtual Currencies” (hereinafter referred to as “the Circular”) banning provision of banking services to cryptocurrency dealers. The decision was passed by a bench of Hon’ble Justices R F Nariman, Aniruddha Bose and V Ramasubramanian.
The RBI on April 5, 2018, issued a “Statement on Developmental and Regulatory Policies” (hereinafter referred to as “the Statement”), paragraph 13 of which 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.
Following the said Statement, RBI also issued the Circular, in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (hereinafter, “RBI Act, 1934”) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI with regard to the two above mentioned issues highlighted in the Statement.
Subsequently, two writ petitions were filed challenging the said Statement and Circular and seeking a direction the RBI not to restrict or restrain banks and financial institutions regulated by RBI, from providing access to the banking services, to those engaged in transactions in crypto assets. The petitioner in the first writ petition is a specialized industry body known as ‘Internet and Mobile Association of India’ which represents the interests of online and digital services industry.
The Statement dated 05-04-2018 issued by RBI, impugned in these writ petitions, sets out various developmental and regulatory policy measures for the purpose of (i) strengthening regulation and supervision (ii) broadening and deepening financial markets (iii) improving currency management (iv) promoting financial inclusion and literacy and (v) facilitating data management. Paragraph 13 of the said statement which falls under the caption “currency management” deals directly with virtual currencies and the same constitutes the offending portion of the impugned Statement.
“13. Ring-fencing regulated entities from virtual currencies Technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others. Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately.”
The Circular dated 06-04-2018 deals entirely with virtual currencies and the prohibition on dealing with the same. This Circular is statutory in character, issued in exercise of the powers conferred by (i) the Reserve Bank of India Act, 1934 (ii) the Banking Regulation Act, 1949 and
(iii) the Payment Settlement Systems Act, 2007. This Circular in its entirety is reproduced as follows:
1. Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs.
3. Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.
4. These instructions are issued in exercise of powers conferred by section 35A read with section 36(1)(a) of Banking Regulation Act, 1949, section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949, section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.
The Court decision upholds the principle of fairness and equal opportunity and rejected the argument that VCs were just goods/commodities which cannot be regarded as real money.
While the Court acknowledged the power of RBI to regulate cryptocurrencies, it quashed the circular banning banking services to crypto businesses on the ground of “proportionality”, it held that the measure taken by RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g)”.The verdict also raises questions on how our regulators understand themselves and their role and jurisdiction.
RBI Act gives it powers to form regulations but RBI regulations cannot, therefore, supersede the rights and freedoms given to citizens and corporations under the Constitution. The right to create something that does not violate any existing law is an unsaid fundamental law (like the right to privacy – which was formally recognised as law after the Supreme Court judgement in the Puttaswamy Case, but was an unsaid right before that). When combined with the fundamental right to trade, it is not constitutional for the regulators to shut down industries, when they do not violate anything fundamental or are not fraud and it is this void in understanding that the SC verdict lifts the veil on via interpretation.
Further by extension the SC verdict also lays down that regulation is not an absolute right or power, it’s a duty as well and that the regulator also does not and must not have an absolute choice of killing an industry. Reluctance on part of the regulator to regulate cannot be the reason enough to stifle or kill a full industry.
Hence, the verdict removes the arbitrariness of regulatory actions without disregarding the power of RBI to regulate.