The case Internet and Mobile Association of India v. Reserve Bank of India deal with the prohibited banks and other entities regulated by it from dealing both in Virtual Currency (VC). The effect of the prohibition was that exchanges through VCs were traded could no longer maintain and operate a bank account, thereby putting an end to the business of VC trading that required conversion from fiat currencies using formal banking channels. The Circular was based on the RBI’s concerns that VCs were prone to hacking; that there could be speculation on account of there being no underlying asset and the resultant volatility could lead to significant losses, and the VCs could potentially lead to money laundering and the terrorist financing.
Reserve Bank of India had issued a Circular on 6th of April 2018, that prohibited banks and other entities which regulated by it from dealing both in VCs, furthermore as from providing services to someone or entity managing or settling VCs. The effect of the prohibition was that exchanges through VCs were traded could not maintain and operate a bank account, thereby putting an end to the business of VC trading that required conversion from fiat currencies using formal banking channels. The Circular has supported the RBI’s concerns that VCs were susceptible to hacking; that there can be speculation on account of there being no underlying asset and therefore the resultant volatility could lead to significant losses, and the VCs could potentially result in money laundering and the terrorist financing.
Background of the Case
Reserve Bank of India had issued a Circular on 6th of April 2018, that prohibited banks and other entities which regulated by it from dealing both in VCs, as well as from providing services to someone or entity dealing with or settling VCs. The effect of the prohibition was that exchanges through VCs. The effect of the prohibition was that exchanges through VCs were traded could no longer maintain and operate a bank account, thereby putting an end to the business of VC trading that required conversion from fiat currencies using formal banking channels. Pertinently, at the time when Circular was issued, there was no legislative ban on the use and trading of VCs in India, and by the RBI’s proscription, VCs were ring-fenced from the formal economy.
The Circular has supported the RBI’s concerns that VCs were prone to hacking; that there may be speculation on account of there being no underlying asset and also the resultant volatility may lead to significant losses, and the VCs could potentially lead to money laundering and the terrorist financing. Interestingly, before issuing the Circular, the RBI had, since 2013, only issued cautionary press note setting out the same concerns. At the time the Circular was issued, the RBI did not highlight any new risk.
1. Reserve Bank of India (hereinafter, “RBI”) issued a “Statement on Developmental and Regulatory Policies” directed the entities regulated by RBI (i) not to deal with or provide services to any somebody or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they have already got one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).
2. Following the said Statement, RBI also issued a circular, in the exercise of the powers conferred by directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any individual or entity in dealing with or settling virtual currencies and (ii) to exit the connection with such persons or entities, if they were already providing such services to them.
3. Challenging the said Statement and Circular and seeking a direction to the respondents 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 petitioners came up with the two writ petitions. The petitioner within the first writ petition was a specialized industry body referred to as the ‘Internet and Mobile Association of India’ which represents the interests of the online and digital services industry.
4. The petitioners within the second writ petition comprised some companies which run online crypto assets exchange platforms, the shareholders/founders of these companies, and some individuals, crypto-assets traders.
5. The Statement and therefore the Circular of RBI, impugned within the two writ petitions, were a culmination of a flurry of activities by different stakeholders, nationally and globally, over about 5 years. This included a variety of reports by RBI and Financial Action Task Force (FATF) including the 2015 report “Guidance for a Risk-Based Approach to Virtual Currencies” which warned about the risks and gave an image of the proliferation of virtual currencies, Report by “Committee on Payments and Market Infrastructure” (CPMI) of Bank of International Settlements (BIS) on the risks within the market of digital currency, 2015 and 2016 Financial Stability reports by RBI on the same and so on.
6. RBI issued a Press Release cautioning users, holders, and traders of virtual currencies. Closely on the heels of the Press Release, the Government of India, Ministry of Finance, constituted, in April 2017, an Inter-Disciplinary Committee comprising of the Special Secretary (Economic Affairs) and representatives of the Departments of Economic Affairs, Financial Services, Revenue, Home Affairs, Electronics and Information Technology, RBI, NITI Aayog, and State Bank of India. The report recommended a variety of steps including warning the general public about the risks of cryptocurrency and steps by the government and making the dealing in such currencies illegal.
7. Following the setting up of an advisory committee by the govt., regarding the cryptocurrencies, a report by Inter- Regulatory Working Group on Fintech and Digital Banking, founded by RBI. RBI issued another Press Release reiterating the concerns expressed in earlier press releases. The Government of India, Ministry of Finance also stated on 29-12-2017 cautioning the users, holders, and traders of VCs that they are not recognized as legal tender and that the investors should avoid participating in them.
8. On 01-02-2018, the Minister of Finance, in his budget speech said that the Government did not consider cryptocurrencies as legal tender or coin and that all measures to eliminate the use of these currencies in financing illegitimate activities or as part of the payment system, were to be taken by the Government. However, he also said that the Government will explore the use of blockchain technology proactively for ushering in the digital economy.
9. However, Financial Stability Board (FSB) sent out a communication in the wake of G-20 meet, stating that as per the initial assessment of FSB, crypto-assets did not pose risks to global financial stability, as their combined global market value even at their peak, was less than 1% of global GDP. Although, it noted that the initial assessment was likely to change and that crypto-assets raised a host of issues around consumer and investor protection as well as their use to shield illicit activity and for money laundering and terrorist financing.
10. On 02-04-2018, RBI sent an e-mail to the Government, enclosing a note on regulating crypto-assets. It was concerning the record of discussions of the last meeting of the Inter-Ministerial Committee on virtual currency. That note examined the pros and cons of banning and regulating cryptocurrencies and suggested that it had to be done, backed by suitable legal provisions. Following which the impugned circular was issued by RBI and several writ petitions were filed out of which the two 528 and 373 came before the court for consideration in this case.
11. Accordingly, the writ petitions were allowed and the Circular was set aside on the ground of proportionality. The Statement dated 05-04-2018, though challenged in one writ petition, was not like a statutory direction and hence the question of setting aside the same did not arise.
12. Directions were given to the RBI to defreeze the account of the petitioner in petition no.373
1. RBI powers did nor encompass within its ambit the regulation of VCs since such currency was only a tradable commodity and legal tender?
2. Even assuming that VCs fell within the RBIs regulatory purview the Circular had disproportionately infringed the petitioner’s rights?
Section 35A of the Banking Regulation Act, 1949 vests power in the RBI to give directions to banks and can take action, “to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or a manner prejudicial to the interests of the banking company”
The bench of Supreme Court while striking down the notification of the RBI observed that:
- Though the RBI has very wide powers not only given the statutory scheme given the special place and role that it has in the economy of the country and these powers will be exercised both within the sort of preventive as well as curative measures.
- The power of RBI to take pre-emptive action to be proportional 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.
- 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 have suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.
- The case of State of Maharashtra v. Indian Hotel and Restaurants Association, where it was held earlier by the Supreme Court that, there must have been at least some empirical data about the degree of harm suffered by the regulated entities (after establishing that they were harmed). In the present case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exchanges are not proper according to law.
- 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, we can’t hold that the impugned measure is proportionate.
A cryptocurrency is a digital or virtual currency that’s secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks supported blockchain technology a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
The Court’s Judgement is relevant in ascertaining the role of judicial review concerning economic policy decisions. Without expanding the scope of its jurisdiction, the Court has, on a finding of fact, taken a view where it requires statutory authorities to not make policy decisions without objectively reliable empirical data.
-  On April 5, 2018
-  Dated April 6, 2018
-  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
-  Dated 05-04-2018
-  Dated 06-04-2018
-  On 01-02-2017
-  Dated 05- 12-2017
-  Dated 13-03-2018
-  Dated 06- 04-2018