The Supreme Court quashed a circular published by the Reserve Bank of India which authorized a ban on the use of virtual currency for trading in India. This decision came out of a judgement made on 4th March 2020 in the case of Internet and mobile association vs Reserve Bank of India. The supreme court found
JUDGES: Justice Rohinton Nriman, Anirudhha Bose and V. Ramasubramanion
Background of the case:
On 5th of April 2018 RBI issued a circular prohibiting the use of virtual currency for trading in view of the supposed risks in dealing with them. These risks included the possibility of hacking of the currency, money laundering and even terrorist activities. Any entity regulated by RBI was not to deal with virtual currency or provide services of any nature to anyone, associated with dealing or trading in virtual currency. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral and so on. Entities already providing such services were to withdraw the same within three months of the issue of the circular. The circular was intended to provide various developmental and regulatory policy measures for strengthening regulation, promoting financial inclusion and facilitating data management. The circular was statutory in character enforced by the powers conferred by the RBI act 1934, the Banking Regulation Act 1949 and the payment settlement systems act 2007. Subsequently two writ petitions were filed against this circular.
The first writ petition was filed by the internet and mobile association of India which represents the interests of the online and digital services industry. The petitioners in the second writ petition consisted of a few companies which run online crypto assets exchange platforms, the shareholders/founders of these companies and a few individual crypto assets traders.
Issues:
Petitioner:
Petitioner argued that RBI did not hold power to ban or prohibit trading in virtual currency. The reasons for it were that virtual currency was not a legal tender but digital commodities that can be traded, thus it does not fall under the regulatory framework of the RBI act 1934 nor the Banking regulatory act 1949. Virtual currency does not even fall under the credit system of the country so RBI could not operate the currency or the credit system for its own purposes as mandated by the Preamble to the RBI act 1934. Section 10(2) of the Payment and Settlement Systems Act, 2007 also is not applicable as the services provided by VC do not fall within the definition of the expression “payment system” under Section 2(1)(i) of the said Act.
The petitioner argued that even if RBI had the relevant jurisdiction the mode of exercise of such jurisdiction could be tested on certain parameters such as, application of mind/ satisfaction/relevant and irrelevant considerations, Malice in law/colourable exercise of power, Calibration or Proportionality
Various other major bodies within the country such as the Department of Economic Affairs, SEBI, Central Board of Direct Taxes and so on have recognized the merits of VC as digital Assets. While they recommended only for a regulatory regime, RBI has taken a completely opposite position without any rational basis. The petitioner also mentioned the precautions taken by them such as avoiding cash transactions, compliance with KYC norms, permitting peer-to-peer transactions only within the country.
Many foreign economies of the world as well as multinational and international bodies and the courts of various countries could not find any issues with cryptocurrencies. RBI also failed to recognise that all crypto currencies are not anonymous. Thus if anonymity in VC transactions was the issue then prohibition of just the anonymous VCs should have been enough.
In the second writ petition, the respective petitioners contested that the circular would gravely harm the relationship between the virtual currency market and the formal Indian economy without a legislative ban, thus promoting cash and black-market transactions. They also stated that RBI had failed to recognize different types of virtual currency schemes. Also as VCs were not a medium of exchange or unit of account nor a store of value it did not hold the distinction of being called ‘money’, so RBI cannot regulate it.
Respondent:
The Reserve bank of India put forward various contentions such as VC not being a legitimate form of currency. It could also be used for illegal activities due to its anonymity or pseudo-anonymity. Also an increased use of VC would erode the monetary stability of the Indian currency and credit system.
RBI claimed that their decision was legislative in character and comes under the powers of RBI under the various regulations and acts. Also the KYC norms for VCEs were inadequate and were also ineffective against the anonymity of VCs.
They also highlighted the possibility of virtual currency transactions to become a parallel system of payment.
RBI rejected the notion of the impugned decisions being excessive or confiscatory as they provided three months to the concerned parties to end their existing relationships of the concerned nature with the banks.
COURT ANALYSIS
The court analysed the points of contentions made by both sides and put forward their response as follows:
Firstly, the jurisdiction of the RBI had to be justified in order to make the decisions made by them valid. The court established the role of RBI as a central bank to determine its powers with regards to its circular
II] Secondly, the argument made by the petitioner that VC is neither money nor legal tender puts VC outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007. RBI derived its power to release the circular from these very acts thus the validity of the petitioner’s argument would determine the judgement of the case. The court stated that even though VCs are not legal tender it can still be used as a medium of exchange. Referencing the case of Keshavlal Khemchand & sons Pvt. Ltd. Vs. Union of India (2015) 4 SCC 770 in which the judgement given stated that “the Reserve bank of India is an expert body to which the responsibility of monitoring the economic system of the country is entrusted” the court said that RBI does hold the power to regulate and restrict the matter concerning VC and anything that imposes threat to the economy of the country.
III] The court declared the legitimacy of the mode of exercise of power by RBI saying that Taking actions for a period of 5 years disproves that there was no application of mind from the part of RBI in its decisions. They found no malice involved in the actions of the respondent
IV] The court declared that the MG test will not apply where there is a larger public interest. Also during the pendency of this case, this court passed an interim order on 21-08- 2019 directing RBI to give a point-wise reply to the detailed representation made by the writ petitioners. Pursuant to the said order, RBI gave detailed responses on 04-09-2019 and 18-09-2019.Therefore, the argument based on MS Gill test, according to the court lost its potency.
V] The court did not accept the argument that other stakeholders were not concerned about VCs in the same way as RBI. Every stakeholder having their own functions and responsibilities might approach various issues differently. Also as RBI is not just a statutory body but also a legislative one, it can make certain decisions without the interference of the central government.
VI] The court quashed the argument regarding the approach of other countries and foreign organizations towards VC. It stated that the countries where a similar ban has taken place shares some similarity. Also most neighbouring countries have taken a similar approach. Irrespective of these facts the decisions made by other countries hold no importance over the judgement made in India.
VII] The court also observed that the circular did not prohibit the trading of VC it only addressed the entities regulated by RBI directing them to not provide any service to entities dealing with virtual currency.
VIII] It was argued by the court that it was for an expert to decide whether a ban only on anonymous VC is a viable option as contended by the petitioner.
IX] With regards to the issue of proportionality the contention of the petitioners that access to banking was necessary for the survival of enterprises and trade was seen to be valid by the court. As no harm was found to be inflicted to the entities under RBI, a lack of proportionality was seen. Thus the court observed the provisions of article 19(1)g and the doctrine of proportionality.
JUDGEMENT:
The Supreme court after analysing all the raised issues declared the circular released by RBI as unenforceable and unlawful on the ground of proportionality as the respondent failed to show any damage incurred to the entities regulated by RBI.
CONCLUSION:
In accordance with the judgement the circular was declared unenforceable and the trading and use of virtual currency was able to take place. But in this decision the supreme court did not pass any judgement about the legality of virtual currency in India, it simply quashed the particular circular in question.
CITATION:
[1] V. Ramasubramanian 2020, IndianKanoon 1,
[2] https://indiankanoon.org/doc/12397485/
This article is written by Aman Francis Victor of St. Stephen's College.