Summary of the Cryptocurrency Judgement by the Supreme Court of India.
On 4th March 2020, the Supreme Court had struck off the banking bank, imposed by the Reserve Bank of India’s (RBI) through the Circular dated 6th April 2018, which prohibited the banks from dealing in and facilitating banking transactions related to Crypto Currencies.
Before issuing the Circular, RBI had been issuing press releases from the year 2013, containing cautionary advice to the Crypto users, holders and traders about financial, legal, customer protection and security related risks involved in Crypto related activities. Eventually the impugned Circular was issued and the same was challenged inter alia, by Internet and Mobile Association of India (IAMAI) and other Crypto exchange owners and individual Crypto traders, as being violative of the fundamental right to carry on trade guaranteed under Article 19 (1) (g) of the Constitution.
Citation of the case: Internet & Mobile Association of India Vs. Reserve Bank of India [Writ Petition (Civil) no. 528 of 2018]
The RBI Circular was assailed on various grounds including the following:
(1) RBI has no power to prohibit the Crypto trading through Crypto Exchanges, inter alia, because:
i. Crypto Currencies are not legal tender and therefore outside the purview of RBI’s regulatory power.
ii. Crypto Currencies do not fall within the definition of Credit System of the Country and.
iii. Services rendered by Crypto exchanges do not qualify to be a Payment System and therefore are not governed by PSS Act, 2007.
(2) The way RBI exercised its power to ban Crypto trading on Crypto Exchanges, does not confirm to certain well-established parameters, due to the following:
i. There was no application mind by RBI before imposing the banking ban.
ii. The Circular was a result of malice in law as the RBI indirectly targeted Crypto Exchanges in the guise of ring fencing its regulated entities (Banks & Financial institutions) and protecting general public.
(3) The RBI Circular infringed the Petitioners’ fundamental right to carry on trade embodied under Article 19 (1) (g) as a complete denial of access to banking services for a particular trade (Which is not even prohibited by law) is extremely disproportionate and unreasonable.
Response of the RBI:
(1) RBI has acted within its powers conferred under Banking Regulation Act, RBI Act and Payment and Settlement Systems Act.
(2) RBI Circular was issued after proper application of mind and the same is evident from various reports of the committees to which RBI was a party and the cautions repeatedly issued by the RBI over a period of 5 years.
(3) There is no complete ban on Crypto Currencies, the circular merely ring-fenced RBI’s regulated entities from the potential risks posed by Crypto currencies.
(4) The Circular was necessitated because Crypto involves peer-peer transactions without any need of a service provider under PSS Act and therefore have a potential to develop a parallel system of payment.
(5) The Circular was necessitated in public interest to protect the interest of consumers, the interest of the payment and settlement systems of the country and for protection of regulated entities against exposure to high volatility of the Crypto currencies.
(6) The KYC norms followed by Crypto exchanges are ineffective such that inherent characteristic of anonymity of Crypto does not get remedied.
(7) Cross Border nature of the Crypto trading coupled with lack of accountability has the potential to impact the regulated payments system managed by RBI.
Findings/ Decision of the Court:
(1) RBI has the power to regulate or ban Crypto
i. Since there are institutions which accept Crypto Currencies as a valid payment for purchase of goods & services, there is no escape from the conclusion that Crypto trading activity falls squarely within the purview of RBI.
ii. Crypto Currency has the potential to interfere with the matters (Monetary System/ Payments System/ Credit System) that RBI has the power to regulate or restrict. Anything which has an impact on the financial system of the country, whether it is legal tender or not, can be regulated or prohibited by RBI.
(2) Court acknowledged importance of banking channel for a Business
Banking channels provide the lifeline of any business, trade or profession. In the digital age, cashless transactions require banking channels. The moment a person is deprived of the bank account, the lifeline is severed resulting into automatic shutdown of business. Hence, burden is heavier on the RBI to show larger public interest in imposing banking ban.
(3) Ban imposed by RBI is disproportionate, hence infringes Article 19(1) (g)
i. Crypto currencies are not banned but Crypto trading and functioning of Crypto exchanges got a severe blow by RBI Circular that disconnected lifeline namely banking.
ii. RBI could not show any empirical data about any harm suffered by its regulated entities on account of the provision of banking services to Crypto exchanges.
iii. What is worse is that RBI issued this Circular despite RBI not finding anything wrong about the way in which these exchanges function and even though Crypto Currencies are not banned by any law.
Some interesting observations by the Court:
Following are some interest opinions expressed by the judges in the Judgment, however these are accidental opinions which may not have any bearing on the decision:
1. Crypto side argued that the Govt’s. stance “Blockchain is good; Crypto is bad” is a contradiction in terms and lack of understanding about the concept and therefore RBI banking ban is irrational. But the Supreme Court rejected this argument and said “There is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation. There is nothing like a “take it or leave it” option.”
2. Court observed since many institutions are ready to accept Crypto for sale and purchase of goods and services, it cannot be accepted that Cryptocurrency is only commodity and cannot be regarded as real money even though it can exercise almost all functions of real money.
3. Court observed that even the Inter-Ministerial Committee constituted on 02–11–2017 had recommended the introduction of a new law namely “Crypto-token Regulation Bill 2018” and was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures. The Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of digital crypto asset at recognized exchanges. But within a year, the final report of the very same Inter-Ministerial Committee, recommended the imposition of a total ban on private crypto currencies through a legislation to be known as “Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019”.
Any query related to this explainer can be directed to Advocate M. Danish at firstname.lastname@example.org.