Satyaroop Kar
Outreach Executive, Legal WIND
Date of Judgment: on 4th March 2020
Bench: Justice Rohinton Fali Nariman, Justice Aniruddha Bose, Justice V. Ramasubramanian
Court: Supreme Court of India
Citation: [(2020) SCC online SC 275]
A brief overview of the case: This case deals with the circular issued by the Reserve Bank of India (RBI) that directed banks not to deal with the transactions involving the trading of virtual currencies also called cryptocurrencies.
2. Facts of the case:
The case of Internet and Mobile Association of India v. the Reserve Bank of India, also known as the cryptocurrency case deals with the prohibition of banks and other entities from trading in virtual currencies via a circular issued by the RBI on 6th April 2018.[1]Moreover, the circular also barred the banks from providing any services to any individual or entity dealing with virtual currencies. The reasoning behind the circular was that they were concerned about the security of transactions and hacking of the virtual currencies, which could lead to various problems in the economy such as-
● Loss to the economy.
● Money laundering.
● Promoting terrorist activities.
The matter was challenged by the Internet and Mobile Association of India.[2] The Supreme court of India allowed the petition on the ground of proportionality. The appellant argued RBI does not have the legislative power to prohibit the trading of virtual currency beside it also violates article 19(1)(g) in The Constitution Of India which gives the right to practice any profession or to carry on any occupation, trade or business.
3. Issues Raised:
A. Whether the Reserve Bank of India had the jurisdiction to disallow the trade of virtual currency?
B. Whether the Respondent had the powers to regulate virtual currency as they were not equivalent to money or legal tender?
C. Whether the circular which was issued by the RBI was proportional to supposed risks?
4. Arguments Raised:
1. Arguments of Appellant:
1. The appellant contended that the Reserve Bank of India does lack the jurisdictions to disallow the trade of virtual currency (cryptocurrency) moreover the ban imposed by RBI is based on the misunderstanding of RBI.
2. RBI does not have the power to prohibit the trading of virtual currency as virtual currency is not a legal tender but a commodity that does not come under the realm of the Reserve bank of India Act, 1934 or the Banking Regulation Act, 1949. The petitioner added that, since the virtual currency does not constitute the credit system of the country, the RBI has no authority to regulate it to its advantage. The Appellant also contended that Virtual currency or cryptocurrencies are not a kind of currency note or coin but a medium of exchange or a store of value.
3. Further, the appellant stated that many national and international economies of the world had tested cryptocurrency and have found none concerning issue.
4. The appellant also contended that the RBI’s circular was not reasonable or proportional to the threat and also the circular violated Article 19(1)(g) of the Indian Constitution which provides the right to practice any profession, or to carry on any occupation, trade or business and nor does it pass the test of reasonableness/ proportionality vis-à-vis the blanket prohibition imposed on the regulated entities.
2.Arguments raised by the Respondent:
1. The respondents disagreed with the fact that it does not have jurisdictions, moreover said that cryptocurrency is a mode of digital payment which RBI does holds the power to have control.
2. The respondent also contended that cryptocurrency is a stainless digital currency that is used for trading. They (RBI) further contended that since cryptocurrency operates independently and is immune to the government’s interference.
3. The RBI also said that there cannot be an unfettered fundamental right to do business on the network of entities regulated by the RBI. The respondent also said that the circular was issued in the public interest to protect the consumers against the exposure of high volatility of virtual currencies.
Provisions Applied:
Article 19(1)(g) of the Constitution of India- the right to practice any profession, or to carry on any occupation, trade, or business.
Section 2 of the Banking and Regulation Act, 1949- Application of other laws not barred.—The provisions of this Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of the Companies Act, 1956 (1 of 1956), and any other law for the time being in force.
Section 18 of the Banking and Regulation Act, 1949
Section 45(l) of the Banking and Regulation Act, 1949- Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution or amalgamation.
Section 22(1) of the Banking and Regulation Act, 1949- Save as hereinafter provided, no company shall carry on banking business in India unless it holds a license issued on that behalf by the Reserve Bank, and any such license may be issued subject to such conditions as the Reserve Bank may think fit to impose.
Section 36(1)(a) of the Banking and Regulation Act, 1949- caution or prohibit banking companies or any banking company in particular against entering into any particular transaction or class of transactions, and generally give advice to any banking company.
Section 18 of the Payment of Wages Act,1936
5. Observations of the court:
After listening to both the parties the Court observed that the history of the role of the RBI and after discussing the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, and the Payment and Settlement Act,2007, observed that RBI is vested with the power to regulate the the the monetary framework of the country.[3] The Court said the RBI derives its power from the RBI Act, 1934, and sources from the Banking Regulation Act, 1949. The Court observed that though virtual currency does not acquire the status of a legal tender, it can still be used as real money. The Court opined RBI can invoke its power irrespective of the fact that if something is a legal tender or has the four characteristics of being an actual currency. In different jurisdictions, the virtual currency was identified in terms of property, funds, commodities, and money. Therefore, if the property can act as money to some extent, the contention that RBI has no jurisdiction to deal with the same is nullified.
The Court also observed that the impugned circular did not prohibit the use or trading of virtual currency altogether. The circular was only limited to the entities regulated by RBI and directed them not to deal or provide service to individuals and entities dealing with virtual currency. In the last contention the court observed that regarding proportionality, RBI could not showcase the injury or losses suffered by its entities. In addition, RBI could have adopted other alternative measures that were less damaging.[4]
6. Judgment:
The Hon’ble Supreme Court after considering the factual matrix and the contentions of the parties held as under:
The circular issued by RBI is unenforceable and unlawful on the ground of proportionality. The Court also ordered RBI to direct the Central Bank of India not to freeze the accounts and to repay the prize with the interest to the petitioner.
The Court also stated that RBI must produce objectively reliable empirical data to establish the harm suffered by the traditional economy on account of the Virtual Currency’s trading in India.[5] RBI failed to show that any of the entities regulated by it have suffered any loss or impacted adversely due to Virtual Currency’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 rationality 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).
7. Case Analysis:
After considering all the arguments presented by the appellant and respondent, it can be said that a step in the right direction was taken by the Supreme Court of India, in the judgment of Internet and Mobile Association v. RBI. Even though RBI has the authority to regulate the functioning of currencies, it has to practice reasonableness and proportionality while imposing restrictions to not impinge on the rights granted by the Constitution of India. Since the lifting of this ban, a significant spike 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 virtual currencies, which remain unregulated in India. Therefore, 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 protect the interest of both the economy and the traders.
8. Conclusion
Based on the matrix of facts, arguments, and observations it can be safely said that the judgment of the Court was reasonable and just as it was pronounced keeping in view the empirical data, and findings. According to the Court, RBI's contention regarding proportionality was unjust and the circular unenforceable. Due to the judgment, the businesses can rejoin the industry and hence can trade in Virtual Currencies (cryptocurrency). However, it is important to know that the Supreme Court in its judgment has only stuck down the circular issued by the RBI, but has not declared the virtual currencies as legal or illegal, moreover, since there is no legislation regarding the same therefore Virtual Currencies remain unregulated in India.
[1] Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), RBI/2017-18/154 [2] Internet and Mobile Association of India vs. Reserve Bank of India, 2020 SCC Online SC 275. [3] Keshavlal khemchand & sons Pvt. Ltd. Vs. Union of India (2015) 4 SCC 770 [4] Modern Dental College vs. State of MP (2016) 7 SCC 353. [5] State of Maharashtra vs. Indian Hotel and Restaurants Association 2013) 8 SCC 51
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