Supreme Court Strikes Down RBI Ban on Cryptocurrency Trading: Internet and Mobile Association of India vs. Reserve Bank of India (2020) INSC 248 (4 March 2020)

Date of the Judgment: 4 March 2020
Citation: (2020) INSC 248
Judges: Rohinton Fali Nariman, Aniruddha Bose, V. Ramasubramanian
Can a central bank impose a blanket ban on cryptocurrency trading? The Supreme Court of India recently addressed this crucial question in a landmark judgment. The court struck down the Reserve Bank of India’s (RBI) ban on banks providing services to cryptocurrency exchanges, stating it was disproportionate and violated the right to carry on trade or business. This case, brought by the Internet and Mobile Association of India and others, challenges the RBI’s power to regulate digital assets. The judgment was delivered by a three-judge bench comprising Justices Rohinton Fali Nariman, Aniruddha Bose, and V. Ramasubramanian. Justice V. Ramasubramanian authored the majority opinion.

Table of Contents

Case Background

The case originated from a series of actions by the Reserve Bank of India (RBI) concerning virtual currencies (VCs), also known as cryptocurrencies or crypto assets. On April 5, 2018, the RBI issued a “Statement on Developmental and Regulatory Policies,” directing regulated entities not to deal with individuals or businesses involved in virtual currencies. This was followed by a formal circular on April 6, 2018, prohibiting regulated entities from providing services to those dealing in VCs, citing concerns about consumer protection, market integrity, and money laundering.

The petitioners, including the Internet and Mobile Association of India (IAMAI) and various cryptocurrency exchanges and traders, challenged these actions, arguing that the RBI’s measures were excessive and beyond its statutory powers. They sought a direction to allow banks and financial institutions to provide access to banking services for those engaged in crypto-asset transactions.

Timeline

Date	Event
June 2013	RBI notes technology risks in changing business environment, specifically virtual currencies.
June 2013	Financial Action Task Force (FATF) issues guidance on new payment products and services, but does not define virtual currencies.
24 December 2013	RBI issues a press release cautioning users, holders, and traders of virtual currencies about potential risks.
27 December 2013	Enforcement Directorate conducts raids on two Bitcoin trading firms in Ahmedabad.
June 2014	FATF issues a report defining ‘virtual currency’ and ‘cryptocurrency’.
June 2015	FATF issues guidance for a risk-based approach to virtual currencies.
October 2015	FATF submits a report on “Emerging Terrorist Financing Risks,” noting the use of virtual currencies.
November 2015	Bank of International Settlements (BIS) submits a report on Digital Currencies.
December 2015	RBI’s Financial Stability Report discusses challenges posed by virtual currency schemes.
December 2016	RBI’s Financial Stability Report notes rapid developments in FinTech, including virtual currencies.
January 2017	Institute for Development and Research in Banking Technology (IDRBT) submits a whitepaper on blockchain technology.
1 February 2017	RBI issues another press release cautioning users, holders, and traders of virtual currencies.
April 2017	Government of India constitutes an Inter-Disciplinary Committee to examine virtual currencies.
25 July 2017	Inter-Disciplinary Committee submits its report with recommendations against crypto-currencies.
August 2017	Securities and Exchange Board of India (SEBI) establishes an advisory panel to examine global fintech developments.
2 November 2017	Government of India constitutes an Inter-Ministerial Committee to propose specific actions on virtual currencies.
November 2017	Inter-Regulatory Working Group on Fintech and Digital Banking submits a report on Digital Currencies.
5 December 2017	RBI issues another press release reiterating concerns about virtual currencies.
29 December 2017	Government of India issues a statement cautioning users, holders, and traders of virtual currencies.
1 February 2018	Minister of Finance states the government does not consider cryptocurrencies as legal tender.
5 March 2018	Central Board of Direct Taxes (CBDT) submits a draft scheme proposing a ban on cryptocurrencies.
13 March 2018	Financial Stability Board (FSB) sends out a communication on crypto assets.
19-20 March 2018	G-20 Finance Ministers and Central Bank Governors acknowledge the potential of crypto assets but also raise concerns.
2 April 2018	RBI sends an email to the Government, enclosing a note on regulating crypto assets.
5 April 2018	RBI issues a “Statement on Developmental and Regulatory Policies” directing regulated entities not to deal with virtual currencies.
6 April 2018	RBI issues a circular prohibiting regulated entities from dealing in or providing services for virtual currencies.
28 February 2019	Inter-Ministerial Committee submits a report recommending a complete ban on private cryptocurrencies.
22 July 2019	Report of the Inter-Ministerial Committee, recommending a ban, along with the draft of the Bill “Banning of Crypto currency and Regulation of Official Digital Currency Bill 2019”, was hosted in the website of the Department of Economic Affairs.
21 August 2019	Supreme Court directs RBI to give a detailed point-wise reply to representations.
4 September 2019	RBI provides a detailed point-wise reply to representations.
18 September 2019	RBI provides a detailed point-wise reply to representations.
4 March 2020	Supreme Court strikes down the RBI circular.

Course of Proceedings

Initially, the petitioners challenged the RBI’s statement and circular directly in the Supreme Court through writ petitions. Simultaneously, other similar petitions were filed in various High Courts. The Supreme Court, recognizing the national importance of the issue, transferred all cases to itself and restrained High Courts from entertaining further petitions. The Court also issued interim directions to the RBI to address the concerns raised by the petitioners.

Legal Framework

The RBI’s actions were based on the powers granted under several key statutes:

✓ The Reserve Bank of India Act, 1934: Specifically, Section 45JA, which empowers the RBI to determine policy and issue directions to regulate the financial system, and Section 45L, which allows the RBI to regulate the credit system of the country.
✓ The Banking Regulation Act, 1949: Section 35A, which grants the RBI the power to issue directions to banking companies in the public interest or to prevent actions detrimental to depositors, and Section 36(1)(a), which allows the RBI to caution or prohibit banking companies from entering into particular transactions.
✓ The Payment and Settlement Systems Act, 2007: Section 10(2), which empowers the RBI to issue guidelines for the proper and efficient management of payment systems, and Section 18, which allows the RBI to lay down policies for the regulation of payment systems.

The Court examined these provisions to determine if the RBI’s actions were within its statutory mandate. It also considered the constitutional implications of the ban, particularly Article 19(1)(g), which guarantees the right to practice any profession, or to carry on any occupation, trade, or business.

Arguments

Petitioners’ Arguments:

✓ The RBI’s actions were beyond its statutory powers, as virtual currencies are neither legal tender nor part of the financial or credit system that the RBI is mandated to regulate.
✓ The RBI’s powers under the Banking Regulation Act and the RBI Act do not extend to prohibiting access to banking services for virtual currency exchanges, as these are not within the purview of the financial system.
✓ The RBI’s actions were disproportionate and arbitrary, failing to consider the positive aspects of cryptocurrencies and the precautions taken by exchanges.
✓ The RBI should have adopted a less invasive option, such as prohibiting only anonymous virtual currencies.
✓ The RBI’s actions were not based on any study or expertise, thus lacking a rational basis.
✓ The ban was a total prohibition, violating Article 19(1)(g) of the Constitution, rather than a reasonable restriction.
✓ The circular failed to distinguish between various types of virtual currency schemes, unreasonably targeting bidirectional flow schemes.

RBI’s Arguments:

✓ Virtual currencies do not meet the criteria to be acknowledged as currency.
✓ Virtual currency exchanges lack a formal mechanism for handling consumer disputes.
✓ Virtual currencies are prone to being used for illegal activities due to anonymity.
✓ Increased use of virtual currencies would erode monetary stability.
✓ The RBI’s decision was a policy decision within its wide statutory powers, warranting judicial deference.
✓ The decision was in public interest to protect consumers and the financial system.
✓ The RBI has the power to regulate, which includes the power to prohibit.
✓ The RBI’s actions were based on extensive material and repeated cautions issued over five years.
✓ Virtual currency transactions are not a payment system but peer-to-peer transactions, posing a potential risk to the regulated payment system.

Table of Submissions:

Main Submission	Sub-Submissions (Petitioners)	Sub-Submissions (RBI)
RBI’s Power	VCs are not legal tender or part of the financial system. RBI’s powers do not extend to VCEs. RBI’s actions are a blanket ban, not regulation.	VCs do not satisfy criteria for currency. RBI has wide powers under various acts. Actions are within public interest and to protect financial stability.
Mode of Exercise of Power	RBI did not apply its mind. RBI’s actions were a colorable exercise of power. RBI did not consider relevant factors.	RBI acted after five years of deliberation. RBI considered all relevant reports and recommendations. RBI’s actions were preventive and not arbitrary.
Proportionality and Article 19(1)(g)	RBI’s actions are a total prohibition, violating Article 19(1)(g). RBI should have used a less restrictive measure. RBI’s actions are disproportionate.	RBI’s actions were necessary to protect the financial system. RBI’s actions were not a complete ban, but a restriction on services. RBI’s actions were pre-emptive and in public interest.
Other Stakeholders & Global Practices	Other stakeholders did not see the same level of threat. Many countries have adopted a light-touch regulatory approach.	RBI’s role is different from other stakeholders. India’s economic conditions are different and require a more cautious approach.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

Whether the RBI had the power to prohibit trading in virtual currencies through virtual currency exchanges.
Whether the RBI’s actions were a reasonable restriction under Article 19(6) of the Constitution.
Whether the RBI’s actions were proportionate to the objectives sought.

Treatment of the Issue by the Court

Issue	Court’s Decision & Reasoning
RBI’s Power	The Court held that RBI has the power to regulate or prohibit activities that pose a threat to the financial system, including those related to virtual currencies.
Reasonableness of Restriction	The Court found that the RBI’s actions were not a reasonable restriction, as they amounted to a total prohibition rather than a regulation.
Proportionality	The Court concluded that the RBI’s actions were disproportionate, as they did not consider less intrusive measures and had a severe impact on virtual currency exchanges without a corresponding benefit to the financial system.

Authorities

The Supreme Court considered various authorities, including:

Cases:

✓ Moss v. Hancock (1899) 2 QB 111: Cited to discuss the definition of money.
✓ Wisconsin Central Ltd v. United States, 585 US ___ 2018, 138 S. Ct. 2067 (2018): Discussed the evolving definition of money.
✓ CIT v. Kasturi & Sons Ltd. (1999) 3 SCC 346: Discussed the interpretation of “money” under the Income Tax Act.
✓ Dhampur Sugar Mills Ltd. v. Commissioner of Trade Tax (2006) 5 SCC 624: Distinguished between “money” and “cash.”
✓ SEC v. Trendon Shavers, Case No. 4: 13 -Cv-416 (August 6, 2013): US Court held that Bitcoin can be used as money.
✓ United States v. Ulbricht, 31F. Supp. 3d 540 (2014): US Court held that Bitcoins carry value and act as a medium of exchange.
✓ United States v. Faiella, 39F. Supp. 3d 544 (2014): US Court held that Bitcoin qualifies as money or funds.
✓ In re Coinflip, Inc, CFTC Docket No. 15-29 dated 17-09-2015: CFTC held virtual currencies as commodities.
✓ In the matter of TeraExchange LLC, CFTC Docket No. 15-33 dated 24-09-2015: CFTC reiterated that Bitcoin is a commodity.
✓ In the matter of BFXNA Inc, d/b/a BITFINEX, CFTC Docket No. 16-19 dated 02-06-2016: CFTC recorded that Bitcoin and other virtual currencies are commodities.
✓ United States v. Murgio, 209 F. Supp. 3d 698 (2016): US Court held that Bitcoins are funds.
✓ Commodity Futures Trading Commission v. Patrick McDonnell, 18-Cv-361 dated 03-06-2018: US Court held that virtual currencies are commodities.
✓ Commodity Futures Trading Commission v. My Big Coin Pay, Inc. et al., 18-Cv-10077-RWZ dated 26-09-2018: US Court held that virtual currencies are commodities.
✓ State of Florida v. Michell Abner Espinoza, F 14-2923 decided on 22-07-2016: Florida Circuit Court held that Bitcoin is not money.
✓ State of Florida v. Michell Abner Espinoza, 264 So. 3d 1055 (2019): Florida Court of Appeal reversed the lower court’s decision and held that Bitcoin is a payment instrument.
✓ B2C2 Ltd. v. Quoine Pte Ltd., [2019] SGHC (I) 3: Singapore Court held that virtual currency can be considered as property.
✓ Quoine Pte Ltd v. B2C2 Ltd, [2020] SGCA (I) 02: Singapore Court of Appeal held that crypto currencies are capable of assimilation into the concepts of property.
✓ AA v. Persons Unknown & others Re Bitcoin, [2019] EWHC 3556 (Comm): English High Court ruled that Bitcoin is property.
✓ Skatteverket v. David Hedqvist, Case C-264/14 dated 22-10-2015: European Court of Justice ruled that Bitcoin transactions are exempt from VAT.
✓ Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of India, (2015) 4 SCC 770: Recognized RBI as an expert body for monitoring the economy.
✓ Star India Pvt. ltd. v. Dept. of Industrial Policy and Promotion and Ors., (2019) 2 SCC 104: Interpreted the word “regulate” to include the power to prohibit.
✓ K. Ramanathan v. State of Tamil Nadu, 1985 (2) SCC 116: Discussed the scope of the power to regulate.
✓ State of Punjab & Anr v. Gurdial Singh & Ors, (1980) 2 SCC 471: Discussed the concept of malice in law.
✓ Collector (District Magistrate) Allahabad & Anr v. Raja Ram Jaiswal, (1985) 3 SCC 1: Discussed the concept of malice in law.
✓ Kalabharati Advertising v. Hemant Vimalnath Narichania & Ors, (2010) 9 SCC 437: Discussed the concept of malice in law.
✓ State of Rajasthan v. Basant Nahata, (2005) 12 SCC 77: Addressed the limits of delegated legislation.
✓ Union of India & Anr v. Cynamide India ltd. & Anr, (1987) 2 SCC 720: Distinguished between legislative and administrative functions.
✓ St. Johns Teachers Training Institute v. Regional Director, NCTE, (2003) 3 SCC 321: Stated that regulations have the force of law.
✓ Udai Singh Dagar v. Union of India, (2007) 10 SCC 306: Stated that subordinate legislation becomes part of the Act.
✓ Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, (1992) 2 SCC 343: Held that RBI guidelines have statutory force.
✓ ICICI Bank Ltd v. Official Liquidator of APS Star Industries Ltd, (2010) 10 SCC 1: Stated that RBI’s “banking policy” cannot be ultra vires the Act.
✓ Ganesh Bank of Kurunwad Ltd. & Ors v. Union of India & Ors., (2006) 10 SCC 645: Recognized RBI’s right to take pre-emptive action.
✓ Md. Yasin v. Town Area Committee, (1952) SCR 572: Discussed the impact of measures on the right to carry on business.
✓ Bennett Coleman & Co. v. Union of India, (1972) 2 SCC 788: Stated that the impact of a measure determines the violation of fundamental rights.
✓ Md. Faruk v. State of Madhya Pradesh & Ors, (1969) 1 SCC 853: Discussed the burden of proving a total ban is necessary.
✓ Modern Dental College and Research Centre v. State of Madhya Pradesh, (2016) 7 SCC 353: Set out the four-pronged test for proportionality.
✓ Elloy de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing, [1999] 1 AC 69: Established a three-fold test for proportionality.
✓ Huang v. Secretary of State for the Home Department, [2007] UKHL 11: Added a fourth test to the proportionality analysis.
✓ Bank Mellat v. HM Treasury (No. 2), [2013] UKSC 39: Discussed proportionality in the context of financial regulations.
✓ State of Maharashtra v. Indian Hotel and Restaurants Association, (2013) 8 SCC 519: Held that there must be some empirical data for restrictions.

Legal Provisions:

✓ Section 45JA, Reserve Bank of India Act, 1934: Power of Bank to determine policy and issue directions.
✓ Section 45L, Reserve Bank of India Act, 1934: Power of Bank to call for information from financial institutions and to give directions.
✓ Section 35A, Banking Regulation Act, 1949: Power of the Reserve Bank to give directions.
✓ Section 36(1)(a), Banking Regulation Act, 1949: Further powers and functions of Reserve Bank.
✓ Section 10(2), Payment and Settlement Systems Act, 2007: Power to determine standards.
✓ Section 18, Payment and Settlement Systems Act, 2007: Power of Reserve Bank to give directions generally.
✓ Section 2(h), Foreign Exchange Management Act, 1999: Definition of currency.
✓ Article 19(1)(g), Constitution of India: Right to practice any profession, or to carry on any occupation, trade, or business.
✓ Article 19(6), Constitution of India: Reasonable restrictions on the right to practice any profession, or to carry on any occupation, trade, or business.

Judgment

How each submission made by the Parties was treated by the Court?

Submission	Court’s Treatment
RBI has no power to regulate VCs	Rejected. The Court held that RBI has the power to regulate activities that could impact the financial system, even if they are not legal tender.
RBI’s actions were a total prohibition	Partially accepted. The Court acknowledged that the RBI’s actions had the effect of a total prohibition on VCEs, not merely a regulation.
RBI did not apply its mind	Rejected. The Court noted that RBI had been deliberating on the issue for five years and had issued multiple warnings.
RBI’s actions were disproportionate	Accepted. The Court found that RBI’s actions were disproportionate, as they did not consider less intrusive measures.
RBI’s actions violated Article 19(1)(g)	Accepted. The Court held that the RBI’s actions violated the right to carry on trade or business under Article 19(1)(g) of the Constitution.

How each authority was viewed by the Court?

✓ The Court used Moss v. Hancock and Wisconsin Central Ltd v. United States to explore the evolving definition of money, noting that the traditional definition is not static.
✓ The Court cited various US court decisions, such as SEC v. Trendon Shavers, United States v. Ulbricht, and United States v. Faiella, to illustrate how different jurisdictions have viewed virtual currencies as money or funds, while also noting that In re Coinflip, Inc and other cases held that they are commodities.
✓ The Court referred to State of Florida v. Michell Abner Espinoza to highlight the debate on whether virtual currencies fit within the definition of money or payment instruments, ultimately siding with the view that they are payment instruments.
✓ The Court considered B2C2 Ltd. v. Quoine Pte Ltd., Quoine Pte Ltd v. B2C2 Ltd and AA v. Persons Unknown & others Re Bitcoin to acknowledge that virtual currencies can be considered as property.
✓ The Court analyzed Skatteverket v. David Hedqvist to understand the European Court of Justice’s view that Bitcoin transactions are exempt from VAT.
✓ The Court relied on Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of India to emphasize RBI’s role as an expert body.
✓ The Court used Star India Pvt. ltd. v. Dept. of Industrial Policy and Promotion and Ors and K. Ramanathan v. State of Tamil Nadu to discuss the scope of the power to regulate.
✓ The Court referred to State of Punjab & Anr v. Gurdial Singh & Ors, Collector (District Magistrate) Allahabad & Anr v. Raja Ram Jaiswal and Kalabharati Advertising v. Hemant Vimalnath Narichania & Ors to discuss the concept of malice in law.
✓ The Court used State ofRajasthan v. Basant Nahata, Union of India & Anr v. Cynamide India ltd. & Anr, St. Johns Teachers Training Institute v. Regional Director, NCTE, and Udai Singh Dagar v. Union of India to discuss the limits of delegated legislation and the force of regulations.
✓ The Court cited Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, ICICI Bank Ltd v. Official Liquidator of APS Star Industries Ltd and Ganesh Bank of Kurunwad Ltd. & Ors v. Union of India & Ors to understand the statutory force of RBI guidelines and its power to take pre-emptive actions.
✓ The Court referred to Md. Yasin v. Town Area Committee, Bennett Coleman & Co. v. Union of India and Md. Faruk v. State of Madhya Pradesh & Ors to discuss the impact of measures on the right to carry on business and the burden of proving a total ban is necessary.
✓ The Court used Modern Dental College and Research Centre v. State of Madhya Pradesh, Elloy de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing, Huang v. Secretary of State for the Home Department and Bank Mellat v. HM Treasury (No. 2) to set out the tests for proportionality.
✓ The Court considered State of Maharashtra v. Indian Hotel and Restaurants Association to emphasize the need for empirical data for restrictions.

Final Decision:

The Supreme Court ultimately struck down the RBI’s circular of April 6, 2018, holding that it was disproportionate and violated Article 19(1)(g) of the Constitution. The Court found that while the RBI has the power to regulate the financial system, its actions in this case amounted to a total prohibition, which was not a reasonable restriction under Article 19(6). The Court emphasized that the RBI should have considered less intrusive measures and that the ban had a severe impact on virtual currency exchanges without a corresponding benefit to the financial system. The Court did not delve into the merits of whether virtual currencies are legal tender or not.

Dissenting Opinion

There was no dissenting opinion in this case. The judgment was unanimous, with Justice V. Ramasubramanian authoring the opinion for the three-judge bench.

Impact of the Judgment

The Supreme Court’s judgment had several significant impacts:

✓ Immediate Revival of Cryptocurrency Trading: The judgment led to an immediate revival of cryptocurrency trading in India, as banks and financial institutions could once again provide services to cryptocurrency exchanges.
✓ Boost to the Cryptocurrency Industry: The decision was a major boost to the cryptocurrency industry in India, encouraging innovation and investment in the sector.
✓ Need for Regulatory Clarity: The judgment highlighted the need for a clear regulatory framework for cryptocurrencies in India. The Court did not rule on the legitimacy of cryptocurrencies but rather on the RBI’s powers.
✓ Importance of Proportionality: The judgment emphasized the importance of proportionality in regulatory actions, requiring authorities to consider less intrusive measures before imposing a total ban.
✓ Constitutional Rights: The decision reaffirmed the importance of fundamental rights, particularly the right to carry on trade or business under Article 19(1)(g) of the Constitution.
✓ Global Impact: The judgment was seen as a significant development in the global debate on cryptocurrency regulation, influencing discussions in other jurisdictions.

Subsequent Developments

Following the Supreme Court’s decision, the Indian government and the RBI have taken several steps:

✓ Government’s Stance: The government has continued to express concerns about the risks associated with cryptocurrencies, particularly their potential use for illicit activities. However, it has also indicated a willingness to explore the potential benefits of blockchain technology.
✓ RBI’s Approach: The RBI has shifted its focus from a complete ban to exploring the possibility of a central bank digital currency (CBDC). It has also issued warnings about the risks associated with private cryptocurrencies.
✓ Proposed Legislation: The government has considered various legislative options, including a bill to regulate cryptocurrencies. The proposed legislation has been a subject of much debate and discussion.
✓ Taxation of Cryptocurrencies: The government has introduced tax provisions for cryptocurrencies, treating them as assets rather than currency. This has brought some clarity to the taxation aspect of cryptocurrency transactions.
✓ International Cooperation: The Indian government and the RBI have been actively involved in international discussions on cryptocurrency regulation, seeking a coordinated global approach.

Conclusion

The Supreme Court’s decision in the case of Internet and Mobile Association of India vs. Reserve Bank of India (2020) INSC 248 (4 March 2020) was a landmark judgment that struck a balance between regulatory powers and individual rights. The Court recognized the RBI’s role in maintaining financial stability but emphasized that regulatory actions must be proportionate and not unduly infringe upon fundamental rights. The case highlighted the complexities of regulating new technologies and the need for a nuanced approach that considers both the potential benefits and the risks. The judgment has had a lasting impact on the cryptocurrency landscape in India, prompting a more cautious and considered approach to regulation. It has also served as a reminder of the importance of judicial review in safeguarding constitutional rights and ensuring that regulatory actions are fair and reasonable.

Source: Internet and Mobile Association of India vs. Reserve Bank of India

“`

“`html

“`