Cryptocurrency in India: RBI’s circular and SC’s judgment

On 6 April 2018, the Reserve Bank of India (RBI) issued a circular which barred banks from dealing with cryptocurrency (or virtual currency) exchanges in India. This led to several petitions being filed in the Supreme Court of India by Internet and Mobile Association of India (IAMAI) and companies engaged in enabling cryptocurrency trading. On 4 March 2020, the Supreme Court struck down RBI’s circular, thereby providing relief to the companies and consumers holding cryptocurrencies in the country. So, what exactly happened?


Context

Broadly defined, a cryptocurrency is a virtual or digital currency which can be used to trade stuff online or hold it like an asset (think of gold). There are several advantages of using cryptocurrencies. Unlike regular fiat currencies (like INR or USD), cryptocurrencies are not regulated by a central bank. In fact, cryptocurrencies like Bitcoin are decentralised.

Although there are several other advantages for cryptocurrencies like anonymity, safety and security, central banks all over the world are concerned with the non-regulatory character of them. There is a huge apprehension that cryptocurrencies will fuel illegal trade and fund terrorists anonymously, among other concerns.

The RBI was closely watching the developments of the cryptocurrencies, specifically in the context of India. Although cryptocurrencies are not banned in India, RBI curtailed the ability of consumers to trade cryptocurrencies. They did this by barring the regular banks from providing or holding accounts of cryptocurrency exchanges, thereby cutting the flow of regular money required for trading.


RBI’s circular:

On 5 April 2018, the RBI issued the “Statement on Developmental and Regulatory Policies”. Paragraph 13, headlined as ‘Ring-fencing regulated entities from virtual currencies’, stated the following:

  • 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.

On 6 April 2018, the RBI released a circular titled “Prohibition on dealing in Virtual Currencies (VCs)”. The content of the circular is reproduced below:

  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.

Supreme Court’s judgment:

On 4 March 2020, A 3-judge bench of the Supreme Court, consisting of Justices Rohintan Fali Nariman, Aniruddha Bose, and V. Ramasubramanian, struck down the RBI’s circular on the ground of proportionality. Some of the reasons for setting aside RBI’s circular by the Supreme Court is reproduced from the judgment below:

  • The position as on date is that VCs [virtual currencies] are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned.
  • As we have pointed out earlier, the concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.
  • It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of the 3 enactments indicated earlier, but also in view of the special place and role that it has in the economy of the country. These powers can be exercised both in the form of preventive as well as curative measures. But the availability of power is different from the manner and extent to which it can be exercised. While we have recognized elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.