Internet and Mobile Association of India v. RBI – Case where the Supreme Court lifted the ban on trading cryptocurrencies 

BRIEF FACTS 

The Supreme Court lifted the Crypto Ban – The RBI issued several cautionary advisories in the form of press releases. (on December 24, 2013, February 1, 2017, and December 5, 2017) to users, holders, investors, traders, and other similar parties that deal in VCs, emphasizing the potential financial, operational, legal, customer protection, and security risks associated with such transactions. 

Following that, the RBI issued the RBI Circular, which was challenged in the Supreme Court by, among others, IAMAI (a not-for-profit organisation representing the interests of the online and digital services industry), shareholders / founders of cryptocurrency exchange platforms, and individual cryptocurrency traders (“Petitioners”). 

PETITIONER CONTENTIONS – The Supreme Court lifted the Crypto Ban

• RBI has no power to prohibit the activity of trading in virtual currencies through virtual currency exchanges since  

1. virtual currencies are not legal tender but tradable commodities or Digital goods which do not fall within the RBI Act, 1934 for Banking Regulation Act, 1949.  
2. Virtual currencies do not fall within the Credit System of the country  
3. According to Section 45(JA) and 45(L), virtual currencies are not so elastic as to cover goods that don’t fall a part of the financial or credit system of the country  

• According to Section 35A(1)(a) and Section 36(1)(a) of the Banking Regulation Act, 1949, these do not extend to virtual exchanges and Public Interest should take in its color from the context of the Statute.  

• Section 10(2) and 18 of the payment and settlement systems act 2007 are not applicable as virtual exchanges don’t fall within the payment system under Section 2(1)(i) of the said Act.  
• Arguendo if RBI has the power, the mode of exercise of such power can be tested on certain well established Param parameters.  
• SEBI, CBDT, DEA recognized the positive and beneficial aspects of Crypto as digital Assets and the distributed ledger technology from which these coins emanate and therefore recommended only a regulatory regime position  
• It is a paradox that blockchain technology is acceptable to the RBI but cryptocurrency is not.  
• The petitioner Association has taken necessary precautions including avoiding cash transactions ensuring compliance with KYC norms of their own accord and allowing p2p transactions only within the country.  

• The benefit of the rule of judicial deference to economic policies of the state is not available to the RBI. The impugned circular is an exercise of power by a statutory body corporate and is neither legislation nor an exercise of executive power. In any case, there is no difference in law to process but only to opinion emanating from the process. No study was undertaken and hence the important decisions are not even based on knowledge or expertise.  
• Total prohibition especially through a subordinate legislation such as an RBI circular is violative of article 19(1)(g). Whether a directive would tantamount to regulation of prohibition depends on the impact of the directive.  
• Characteristics of money are; there should be a medium of exchange, unit of account, store of value and discharge of debt. RBI accepted that virtual currencies don’t qualify as money then there is no power to regulate.  
• The decision to prohibit is rest extra commercium (outside commerce), therefore the decision to prohibit is a matter of Legislative policy and must arise out of an Act of Legislature and not by notification issued by an executive authority.  

RBI CONTENTIONS – 

• No formal or structured mechanism for handling consumer dispute of grievances  
• It is capable of being used for illegal activities due to their anonymity or pseudo anonymity  
• The rise in virtual currencies would erode Monetary stability of the Indian Rupee and credit system.  
• The prohibition decision is taken in the realm of an economic policy by an expert body warranting a hands-off approach from the court.  
• The power to issue the circular is within the wide range of RBI powers under the various legislations  

• Nobody has an unfettered fundamental right to do business on the network of entities regulated by RBI.  
• KYC norms of virtual currencies are far below what other participants in payment and monetary system follow  
• Cross border trade of virtual currencies and the lack of accountability impacts the regulated payment system managed by RBI  
• RBI or any other government authority would not be able to curtail, limit, regulate, or control the generation of virtual currencies and their transactions, resulting in the ever present and inevitable financial risks. 
• 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 

VERDICT – The Supreme Court lifted the Crypto Ban

• Because certain institutions accept VCs as legal payment for goods and services, it is obvious that users and merchants of VCs are engaging in RBI-regulated activities. The SC ruled that VC might create a rival monetary system, endangering the survival of a centrally regulated monetary system. Thus, the RBI has the authority to regulate or ban such activities. 
• The RBI Circular is aimed at banks that are “system participants” under the PSS Act. It is hard to deny that the RBI has the capacity to set rules and guide banks that are system participants in transactions that involve payment obligations or payment instructions, if not payment systems. 
• The SC accepted the RBI’s contentions on the application of mind since the RBI took a series of measures over a period of nearly 5 years that explain the actions taken. 
• To the extent that the Petitioners’ basic rights have been allegedly violated, the SC decided that any restriction on their freedom under Article 19(1)(g) of the Indian Constitution must be reasonable. The petitioners argued that denying access to banking to persons who do not violate the law is not a legitimate limitation and is unfair. 

• The SC agreed with the Petitioners that the RBI circular is not fair or proportionate because: 

1. The RBI has identified no negative impact of VC exchange activity on regulated firms (such as banks) in the last 5 years. 
2. The RBI claims it has not prohibited VCs in the nation. 

• In view of the foregoing, the SC ruled that the RBI Circular is void for lack of proportionality. 

CONCLUSION 

The Court’s ruling is crucial in determining judicial review’s role in economic policy choices. Without enlarging its jurisdiction, the Court has ruled that statutory bodies may not make policy judgments without objectively reliable empirical facts. 

However, it is crucial to note that the SC did not rule on the legality of cryptocurrency, but only on the RBI’s prohibition.

In India, VCs are unregulated due to a lack of law.

The Government recently presented a bill titled ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019′ but it has not yet been introduced in Parliament for consideration.

The bill forbids keeping, selling, disposing, or using cryptocurrencies in India, and its passage determines the legality of VCs. 

Edited by – Khushi Thakur

Published by – Mohd Faizan