RBI Circular dated 6-4-2018 which directed banks and entities regulated by RBI to not to deal in Virtual Currencies (VC) or to provide banking services facilitating any person or entity dealing with or settling VCs, was quashed

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RBI Circular dated 6-4-2018 which directed banks and entities regulated by RBI to not to deal in Virtual Currencies (VC) or to provide banking services facilitating any person or entity dealing with or settling VCs, was quashed

Case details: Internet and Mobile Association of India v. Reserve Bank of India - [2020] 115 taxmann.com 53 (SC)

Judiciary and Counsel Details

    • Rohinton Fali Nariman, Aniruddha Bose & V. Ramasubramanian | JJ.
    • Ashim Sood,Jaideep Reddy, Alipak Banerjee, Pradhuman Gohil, Advs.,  Taruna Singh Gohil, AOR, Ms. Ranu Purohit, Ms. Sweta Sahu, Ms. Tanya Srivastava, Upendra Sai, Brijesh Ujjainwal, Advs., Nakul Dewan, Sr. Adv., Rohan A. Naik, Ms. Tanya Sadana, Advs. and Avinash Menon, AOR for the Petitioner.
    • Shyam Divan, Sr. Adv.,P. Singh, Ms. Sayobani Basu, Raghav Seth, Bharat Makkar, Shivam, Advs., Haspreet Singh Ajmani and Mrs. Anil Katiyar, AORs for the Respondent.

Executive Summary

Section 35A, read with sections 36 and 56 of the Banking Regulation Act, 1949, sections 45JA and 45L of the Reserve Bank of India Act, 1934, section 2(h) of the Foreign Exchange Management Act, 1999 and section 18 of the Payment and Settlement Systems Act, 2007 – Power of Reserve Bank to give directions – Virtual Currencies (VC) has a history of about 12 years – RBI had not found that activities of VC Exchanges (VCEs) had any adverse impact on entities regulated by RBI – RBI had not prohibited VCs in country and Inter- Ministerial Committee had opined to regulate same and not to ban – RBI Circular dated 6-4-2018 directed banks and entities regulated by RBI to not to deal in Virtual Currencies or to provide banking services facilitating any person or entity dealing with or settling VCs – Whether since trading in VCs and functioning of VCEs were sent to comatose by impugned Circular by disconnecting their lifeline, namely, interface with regular banking sector and Government of India was so far 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 was not possible to hold that impugned measure was proportionate – Held, yes – Whether impugned Circular was liable to be set aside on ground of proportionality – Held, yes [Paras 6.171 to 6.173 and 7.1]

Circulars and Notifications: RBI Circular DBR, BP.BC.104/08.13/02/2017-18, dated 6-4-2018

Facts of the Case

Virtual currencies (VC) has a history of about 12 years. RBI had not found that activities of VC Exchanges had any adverse impact on entities regulated by RBI. Thus, RBI had not prohibited VCs in country and the Inter- Ministerial Committee had opined to regulate and not to ban them.

However, RBI Circular dated 6-4-2018 was issued directing the entities regulated by RBI not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

Challenging the relevant Statement and the impugned 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 have come up with these writ petitions. The petitioners were (i) specialized industry body representing the interests of online and digital services industry, (ii) companies which run online crypto assets exchange platforms, (iii) the shareholders/founders of these companies and (iv) a few individual crypto assets traders.

Out of several grounds, the main ground of attack revolved around the power of RBI to deal with, regulate or even ban Virtual Currencies (VCs) and Virtual Currency Exchanges (VCEs). The entire foundation of this contention rested on the stand taken by the petitioners that VCs are not money or other legal tender, but only goods/commodities, falling outside the purview of the RBI Act, 1934, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007. In fact, the impugned Circular of RBI dated 6-4-2018 was issued in exercise of the powers conferred upon RBI by all these three enactments. Therefore, if virtual currencies do not fall within subject matter covered by any or all of these three enactments and over which RBI has a statutory control, then the Circular was ultra vires.

Supreme Court Held

Role assigned to, functions entrusted to and powers conferred upon RBI as a Central Bank

The Reserve Bank of India was established under Act 2 of 1934 for the purpose of (i) regulating the issue of bank notes, (ii) keeping of reserves with a view to securing monetary stability in the country and (iii) operating the currency and credit system of the country to its advantage. The role of a central bank such as the Reserve Bank in an economy is to manage (i) the currency (ii) the money supply and (iii) interest rates. The unique feature of a central bank is the monopoly that it has on increasing the monetary base in the state and the control it has in the printing of the national currency. The central bank virtually functions as ‘a lender of last resort’ to banks suffering a liquidity crisis. [Para 6.4]

As the Preamble of the RBI Act suggests, the object of constitution of RBI was threefold namely (i) regulating the issue of bank notes (ii) keeping of reserves with a view to securing monetary stability in the country and (iii) operating the currency and credit system of the country to its advantage. [Para 6.13]

It may be observed from the newly substituted paragraphs 2 and 3 by Act 28 of 2016 that RBI is now vested with the obligation to operate the monetary policy framework in India. An indication of the primary objective of the monetary policy is provided in paragraph 3 which says that the maintenance of price stability is the prime objective even while the objective of growth is to be kept in mind. Paragraph 2 recognizes the necessity to have a modern monetary policy framework to meet the challenge of an increasingly complex economy. [Para 6.15]

Therefore, it is clear that after the amendment under Act 28 of 2016, the very task of operating the monetary policy framework has been conferred exclusively upon RBI. [Para 6.16]

Though the expression ‘monetary policy’ is not defined in the RBI Act, an entire chapter under the title ‘Monetary Policy’ containing sections 45Z to 45ZO was inserted as Chapter IIIF. The provisions of this chapter are given overriding effect upon the other provisions of the Act, under section 45Z. Under section 45ZA(1), the Central Government is empowered to determine the inflation target in terms of the consumer price index, once in every 5 years, in consultation with RBI. The policy rate required to achieve the inflation target is to be determined by a Monetary Policy Committee, constituted under section 45ZB. [Para 6.17]

A careful scan of the RBI Act, 1934 in its entirety would show that the operation/regulation of the credit/financial system of the country to its advantage, is a thread that connects all the provisions which confer powers upon RBI, both to determine policy and to issue directions. [Para 6.30]

RBI Act, 1934 is not the only Act from which RBI derives its powers. The Banking Regulation Act, 1949 is also a source of power for RBI to do certain things. This can be seen from the Statement of Objects and Reasons for the Banking Regulation Act, 1949. One of the main features of the Bill as indicated in the Statement of Objects and Reasons was ‘widening the powers of RBI so as to enable it to come to the aid of the banking companies in times of emergency’. [Para 6.31]

For a long time, RBI drew its powers only from RBI Act, 1934 and the Banking Regulation Act, 1949. But with the passage of time, as the industrial economy grew and several banking companies came into existence and a need to fast track paper-based cheque processing increased, the banks came together to set up clearing houses. The clearing houses developed the procedure of netting (arriving at the multilateral net settlement). But with the advent of technology, new payment systems such as MICR clearing, Electronic Funds Transfer Systems, cash-based payment systems, RTGS (real time gross settlement) etc. became popular. The development of multiple payment systems, which operated only in the realm of contracts among various stakeholders, did not have a legislative sanction. Therefore, an Act known as the Payment and Settlement Systems Act, 2007 was enacted with the object of providing for the regulation and supervision of payment systems in India and to designate RBI as the authority for that purpose. [Para 6.41]

It is seen from the Statement of Objects and Reasons of the Bill that RBI is empowered to regulate and supervise various payment and settlement systems in India including those operated by non-banks, card companies, other payment system providers and the proposed umbrella organization for retail payments. The Act further empowers RBI to (i) lay down the procedure for authorization of payment systems (ii) lay down the operation and technical standards for payment systems (iii) issue directions and guidelines to system providers (iv) call for information and furnish returns and documents from the service providers (v) audit and inspect the systems and premises of the system providers (vi) lay down the duties of the system providers and (vii) make regulations for carrying out the provisions of the Act. [Para 6.42]

Under section 3 of the Payment and Settlement Systems Act, 2007 RBI is the designated authority for the regulation and supervision of payment systems under the Act. [Para 6.44]

Thus, the RBI Act, 1934, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 cumulatively recognize and also confer very wide powers upon RBI (i) to operate the currency and credit system of the country to its advantage (ii) to take over the management of the currency from Central Government (iii) to have the sole right to make and issue bank notes that would constitute legal tender at any place in India (iv) regulate the financial system of the country to its advantage (v) to have a say in the determination of inflation target in terms of the consumer price index (vi) to have complete control over banking companies (vii) to regulate and supervise the payment systems (viii) to prescribe standards and guidelines for the proper and efficient management of the payment systems (ix) to issue directions to a payment system or a system participant which in RBI’s opinion is engaging in any act that is likely to result in systemic risk being inadequately controlled or is likely to affect the payment system, the monetary policy or the credit policy of the country and (x) to issue directions to system providers or the system participants or any other person generally, to regulate the payment systems or in the interest of management or operation of any of the payment systems or in public interest. [Para 6.50]

Fixing identity of VCs

The exact identity of virtual currencies eludes precision. Some call it an exchange of value, some call it a stock and some call it a good/commodity. There may be no difficulty in accepting the divergence of views, if those views are not driven by fear of regulation. But if someone presents it as currency to a regulator of stock market and presents it as a commodity to a regulator of money market and so on and so forth, the definition will not merely elude a proper molecular structure but also elude regulation. This is where the problem of law lies. George Friedman, the founder and Chairman of Geopolitical Futures LLC, an online publication, aptly summarized this dilemma as follows: ‘Bitcoin is neither fish nor fowl…But both pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seem problematic. The problem is not that it is not issued by the Government nor that it is unregulated. The problem is that it is hard to see what it is.’ [Para 6.52]

It is now universally accepted that Satoshi envisioned a digital analog to old-fashioned gold, a new kind of universal money that could be owned by everyone and spent anywhere. It was designed to live with a cleverly constructed decentralized network without central authority. Satoshi himself defined it as ‘a new electronic cash system that’s fully peer-to-peer, with no trusted third party.’ [Para 6.53]

It is true that though, at its birth, it was conceived of only as an alternative to money, crypto currencies assumed different shapes, different shades and different utility values over the past decade and more. Several international monetary agencies/watchdogs are dabbling to find out what these are and they are also divided in their opinion. For instance, in a report submitted on 22-1-2019 to the International Monetary Fund (IMF), by Jeffrey Franks, Director of its Europe Office, under the title ‘Crypto currencies and Monetary Policy’, it is pointed out as follows. [Para 6.54]

According to the said report, there are four factors which lie behind the rise of crypto currencies. They are: (1) the development of blockchain technology (2) concerns about conventional money and banking, that arose out of the sub-prime mortgage crisis in 2008 and the unconventional monetary policies/quantitative easing (3) privacy concerns and (4) political views about the role of the Government. [Para 6.55]

The IMF report says that crypto currencies perform poorly in terms of the three basic functions of currencies. While the store of value increased 2000 per cent from January, 2017 to December, 2017, there was also a fall during the year 2018. As means of payment, the acceptance of crypto currencies, according to the IMF report is very low and a few companies such as Microsoft, Dish network etc. have begun to accept crypto currencies for limited transactions. As a unit of account, so far, no goods or services are priced in crypto currencies. [Para 6.56]

On its potential impact on the monetary policies of Governments, the IMF report says the that but in the future, large crypto currencies holdings could complicate monetary policy management

Eventually the conclusions reached in the report are as follows:—- Crypto currencies today do not do a good job at fulfilling the main functions of money.- They may be favoured by some for ideological, technological or monetary policy reasons.- The blockchain technology they use does have some important advantages in controlling fraud and maintaining privacy.- But they also open up avenues for tax evasion and criminal activity. [Para 6.57]

The petitioners claim that today virtual currency is not money or other legal tender, but good/tradable commodity and hence RBI has no role in regulating/banning the same. RBI has also taken a stand that VCs are not recognized as legal tender, but they seek to justify the impugned decisions, on the ground that VCs are capable of being used as a medium of exchange. Therefore, it is necessary to see how VCs were defined (i) by regulators in different jurisdictions and (ii) by the Governments and other statutory authorities of various countries, through statutory instruments and non-statutory directives and (iii) by courts of different jurisdictions. [Para 6.58]

There is unanimity of opinion among all the regulators and the Governments of various countries that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and that they are capable of functioning as (i) a medium of exchange and/or (ii) a unit of account and/or (iii) a store of value. The IMF, the FATF, the European Central Bank, the Financial Conduct Authority of the United Kingdom, the Internal Revenue Service of the United States, Department of Treasury and the Canadian Revenue Authority treat virtual currencies as digital representations of value. The European Central Bank went a step further by describing a virtual currency as a type of unregulated digital money. The Internal Revenue Service of the United States, Department of Treasury has recognized that a virtual currency can function in the same manner as a country’s traditional currency. The Securities and Exchange Commission, USA also recognizes that virtual currencies are intended to perform many of the same functions as long-established currencies such as US dollar, Euro or Japanese Yen. Yet another wing of the United States Department of Treasury namely Financial Crimes Enforcement Network calls virtual currency as a medium of exchange that operates like a currency in some environments, though it may not have all the attributes of a real currency. [Para 6.59]

The Bank of International Settlements, as pointed out in part 2 of this judgment, got a sub-group within the Committee on Payments and Market Infrastructure (CPMI) to undertake an analysis of digital currencies. In a report submitted by them in November, 2015, this sub-group recognized that though the use of private digital currencies was too low at that time for certain risks to materialize, the widespread substitution of bank notes over a period of time, with digital currencies, could lead to a decline in non-interest paying liabilities of central banks and that the conduct of the monetary policy could be affected. [Para 6.60]

Similarly, the state of Liechtenstein considers virtual currencies as digital monetary units which can be exchanged for legal tender and also be used to purchase goods or services, thereby assuming the character of a legal tender. The German Federal Financial Supervisory Authority treats virtual currencies as units of account and consequently as financial instruments. Luxembourg has taken an official position that crypto currencies are actual currencies. Some of the states in the United States of America have passed laws recognizing virtual currencies as electronic medium of exchange. [Para 6.61]

It is clear from the above that the Governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as much true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency. [Para 6.62]

The word ‘currency’ is defined in section 2(h) of the Foreign Exchange Management Act, 1999 to include ‘all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.’ The expression ‘currency notes’ is also defined in section 2(i) of FEMA to mean and include cash in the form of coins and bank notes. Again, FEMA defines ‘Indian currency’ under section 2(q) to mean currency which is expressed or drawn in Indian rupees, but which would not include special bank notes and special one rupee notes issued under section 28A of the RBI Act. But RBI has taken a stand in paragraph 24 of its counter-affidavit that VCs do not fit into the definition of the expression ‘currency’ under section 2(h) of FEMA, despite the fact that FATF, in its report on June, 2014 on ‘Virtual Currencies: Key Definitions and Potential AML/CFT Risks’ defined virtual currency to mean ‘digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status.’ According to the report, legal tender status is acquired only when it is accepted as a valid and legal offer of payment when tendered to a creditor. [Para 6.63]

Traditionally ‘money’ has always been defined in terms of the 3 functions or services that it provides namely (1) a medium of exchange (2) a unit of account and (3) a store of value. But in course of time, a fourth function namely that of being a final discharge of debt or standard of deferred payment was also added. This fourth function is acquired by money through the conferment of the legal tender status by a Government/central authority. [Para 6.64]

RBI’s role and power does not come into play only if something has actually acquired the status of a legal tender. It cannot be said that for RBI to invoke its power, something should have all the four characteristics or functions of money. [Para 6.65]

Neither the RBI Act, 1934 nor the Banking Regulation Act, 1949 nor the Payment and Settlement Systems Act, 2007 nor the Coinage Act, 2011 define the words ‘currency’ or ‘money’. But FEMA defines the words ‘currency’, ‘currency notes’, ‘Indian currency’ and ‘Foreign currency’. Interestingly, section 2(b) of Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defines money to include a cheque, postal order, demand draft, telegraphic transfer or money order. Clause (33) of section 65B of the Finance Act, 1994, inserted by way of Finance Act, 2012 defines ‘money’ to mean “legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other similar instrument, but shall not include any currency that is held for its numismatic value”. This definition is important, for it identifies many instruments other than legal tender, which could come within the definition of money. [Para 6.67]

The Sale of Goods Act, 1930 does not define ‘money’ or ‘currency’ but excludes money from the definition of the word ‘goods’. The Central Goods and Services Tax Act, 2017 defines ‘money’ under section 2(75) to mean “the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other instrument recognised by RBI, when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.” [Para 6.68]

Just as the very concept of ‘money’ or ‘currency’ has changed over the years, and different jurisdictions and different statutes have adopted different definitions of ‘money’ and ‘currency’, depending upon the issue sought to be addressed, the concept of VCs have also undergone a sea of change, with different regulators and statutory authorities adopting different definitions, leading to diametrically opposite views emerging from courts across the spectrum. [Para 6.71]

Depending upon (i) the text of the statute involved in the case and (ii) the context, various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds. While each of these descriptions is true, none of these constitute the whole truth. Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism, (According to this doctrine, truth and reality are perceived differently from different points of view and no single point is the complete truth) (theory of non-absolutism that encourages acceptance of relativism and pluralism) who attempt to describe an elephant, but end up describing only one physical feature of the elephant. [Para 6.85]

RBI was also caught in this dilemma. Nothing prevented RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in section 2(h) of FEMA, 1999 which defines ‘currency’ to mean “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as maybe notified by the Reserve Bank.” After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are just goods/commodities and can never be regarded as real money. [Para 6.86]

Once it is accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, there is no escape from the conclusion that the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the Reserve Bank of India. The statutory obligation that RBI has, as a central bank, (i) to operate the currency and credit system, (ii) to regulate the financial system and (iii) to ensure the payment system of the country to be on track, would compel them naturally to address all issues that are perceived as potential risks to the monetary, currency, payment, credit and financial systems of the country. If an intangible property can act under certain circumstances as money (even without faking a currency) then RBI can definitely take note of it and deal with it. Hence, it is not possible to accept the contention of the petitioners that they are carrying on an activity over which RBI has no power statutorily. [Para 6.87]

Therefore, (i) in the teeth of the statutory scheme of these enactments (ii) from the way different courts and regulators of different jurisdictions have treated VCs and (iii) from the very characteristics of VCs, it is clear that they have the potential to interfere with the matters that RBI has the power to restrict or regulate. Hence, it could not be contended that the impugned decision is ultra vires. [Para 6.88]

RBI is the sole repository of power for the management of the currency, under section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes under section 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index. Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. The expression “management of the currency” appearing in section 3(1) need not necessarily be confined to the management of what is recognized in law to be currency but would also include what is capable of faking or playing the role of a currency. [Para 6.90]

It is ironical that virtual currencies which took avatar (according to its creator Satoshi) to kill the demon of a central authority (such as RBI), seek from the very same central authority, access to banking services so that the purpose of the avatar is accomplished. The very creation of digital currency/Bitcoin was to liberate the monetary system from being a slave to the central authority and from being operated in a manner prejudicial to private interests. Therefore, the ultra vires argument cannot be accepted when the provision of access to banking services without any interference from the central authority over a long period of time is perceived as a threat to the very existence of the central authority. Hence, RBI has the requisite power to regulate or prohibit an activity of this nature. [Para 6.91]

If at all, RBI’s power is only to regulate, not prohibit

In any case, the projection of the impugned decisions of RBI as a total prohibition of an activity altogether, may not be correct. The impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs. Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly empowers RBI to caution or prohibit banking companies against entering into certain types of transactions or class of transactions. The prohibition is not per se against the trading in VCs. It is against banking companies, with respect to a class of transactions. The fact that the functioning of VCEs automatically gets paralyzed or crippled because of the impugned Circular, is no ground to hold that it tantamount to total prohibition. So long as those trading in VCs do not wish to convert them into fiat currency in India and so long as the VCEs do not seek to collect their service charges or commission in fiat currency through banking channels, they will not be affected by this Circular. Admittedly, peer-to-peer transactions are still taking place, without the involvement of the banking channel. In fact, those actually buying and selling VCs without seeking to convert fiat currency into VCs or vice versa, are not affected by this Circular. It is only the online platforms which provide a space or medium for the traders to buy and sell VCs, that are seriously affected by the Circular, since the commission that they earn by facilitating the trade is required to be converted into fiat currency. Interestingly, the petitioners argue on the one hand that there is total prohibition and argue on the other hand that the Circular does not achieve its original object of curtailing the actual trading, though it cripples the exchanges. If the first part of this submission is right, the latter cannot be and if the latter part is right, the former cannot be. [Para 6.94]

Unlike the Registration Act, section 36(1)(a) of the Banking Regulation Act, 1949 empowers RBI to specifically target transactions. Moreover, RBI’s role in the economy of the country is not akin to the power of any other delegate. [Para 6.96]

Law is well settled that when RBI exercises the powers conferred upon it, both to frame a policy and to issue directions for its enforcement, such directions become supplemental to the BR Act itself. Rules made under a statute must be treated as if they were contained in the BR Act and that therefore they must be governed by the same principles as the statute itself. [Para 6.99]

It must be pointed out that the power of RBI is not merely curative but also preventive. This is acknowledged by this court in Ganesh Bank of Kurunwad Ltd v. Union of India [2006] 71 SCL 167 where it was held that RBI has a right to take pre-emptive action taking into account the totality of the circumstances. [Para 6.103]

The impugned Circular is intended to prohibit banking companies from entering into certain territories. The Circular is actually addressed to entities regulated by RBI and not to those who do not come within the purview of RBI’s net. But the exercise of such a power by RBI, over the entities regulated by it, has caused a collateral damage to some establishments like the petitioners’, who do not come within the reach of RBI’s net. [Para 6.104]

The power of a statutory authority to do something has to be tested normally with reference to the persons/entities qua whom the power is exercised. The question to be addressed in such cases is whether the authority had the power to do that act or issue such a directive, qua the person to whom it is addressed. While persons who suffer a collateral damage can certainly challenge the action, such challenge will be a very weak challenge qua the availability of power. [Para 6.105]

Apart from the provisions of the RBI Act, 1934 and the Banking Regulation Act, 1949, the impugned Circular also refers to the power under section 18 of the Payment and Settlement Systems Act, 2007. In order to buttress their contention regarding the availability of power to regulate, the petitioners refer to the definition of the expression “payment system” under section 2(1)(i) of the said Act and contend that VCEs do not operate any payment system and that since the power to issue directions under section 18 is only to regulate the payment systems, the invocation of the said power to something that does not fall within the purview of payment system, is arbitrary. [Para 6.106]

But section 18 of the Payment and Settlement Systems Act indicates (i) what RBI can do, (ii) the persons qua whom it can be done, and (iii) the object for which it can be done. In other words, section 18 empowers RBI (i) to lay down policies relating to the regulation of payment systems including electronic, non-electronic, domestic and international payment systems affecting domestic transactions and (ii) to give such directions as it may consider necessary. These are what RBI can do under section 18. Coming to the second aspect, the persons qua whom the powers under section 18 can be exercised are (i) system providers (ii) system participants and (iii) any other person generally or any such agency. [Para 6.107]

It is true that the purposes for which the power under section 18 can be exercised, are also indicated in section 18. They are (i) regulation of the payment systems (ii) the interest of the management and operation of any payment system and (iii) public interest. [Para 6.108]

The impugned Circular is primarily addressed to banks who are “system participants” within the meaning of section 2(1)(p). The banks certainly have a system of payment to be effected between a payer and a beneficiary, falling thereby within the meaning of the expression payment system. [Para 6.109]

Therefore, in the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. [Para 6.111]

Satisfaction or Application of mind: Relevant and irrelevant considerations

Section 35A(1) of the Banking Regulation Act, 1949 as well as sections 45JA and 45L of the RBI Act, 1934 empower RBI to issue directions “if it is satisfied” about the existence of certain parameters. Satisfaction can be arrived at only by (i) gathering facts (ii) sifting relevant material from those which are irrelevant and (iii) forming an opinion about the cause and connection between relevant material and the decision proposed to be taken. [Para 6.112]

But in the facts of the present case, RBI could not be held guilty of non-application of mind. As a matter of fact, the issue as to how to deal with virtual currencies has been lingering with RBI from June 2013 onwards, when the Financial Stability Report took note of the challenges posed by virtual currencies in the form of regulatory, legal and operational risks. The Financial Stability Report of June 2013 led to a press release dated 24-12-2013 cautioning the users, holders and traders of virtual currencies about the potential financial, operational, legal and consumer protection and security related risks associated with virtual currencies. Then came the Financial Stability Report of December 2015 which raised concerns about excessive volatility in the value of VCs and their anonymous nature which went against global money laundering rules rendering their very existence questionable. The Financial Stability Report of December 2016 also took note of the risks associated with virtual currencies qua data security and consumer protection. The report also recorded concerns about far reaching potential impact of the effectiveness of monetary policy itself. Therefore, the report suggested RegTech to deal with FinTech. [Para 6.113]

IDRBT, established by RBI to work at the intersection of banking and technology submitted a white paper in January 2017, which enlisted the advantages as well as disadvantages of digital currencies. This white paper was taken note of by RBI in the Financial Stability Report of June 2017. In the meantime, RBI issued a press release on 1-02-2017 once again cautioning the users, holders and traders of virtual currencies. [Para 6.114]

The sub-committee of the Financial Stability and Development Council took a decision in April 2016, pursuant to which RBI set-up an Inter-Regulatory Working Group on FinTech and Digital Banking. This Working Group submitted a report in November 2017, after which RBI issued a third press release on 5-12-2017. Thereafter RBI also sent a mail on 2-04-2018 to the central government, enclosing a note on regulating crypto assets. To be fair to RBI, even this note examined the pros and cons of banning and regulating crypto currencies. [Para 6.115]

All the above sequence of events from June 2013 upto 2-04-2018 would show that RBI had been brooding over the issue for almost five years, without taking the extreme step. Therefore, RBI can hardly be held guilty of non-application of mind. If an issue had come-up again and again before a statutory authority and such an authority had also issued warnings to those who are likely to be impacted, it can hardly be said that there was no application of mind. For arriving at a “satisfaction” as required by section 35A(1) of Banking Regulation Act, 1949 and sections 45JA and 45L of RBI Act, 1934, it was not required of RBI either to write a thesis or to write a judgment. [Para 6.116]

In fact, RBI cannot even be accused of not taking note of relevant considerations or taking into account irrelevant considerations. RBI has taken into account only those considerations which multinational bodies and regulators of various countries such as FATF, BIS, etc., have taken into account. This can be seen even from the earliest press release dated 24-12-2013, which is more elaborate than the impugned Circular dated 6-04-2018. [Para 6.117]

When a series of steps taken by a statutory authority over a period of about five years disclose in detail what triggered their action, it is not possible to see the last of the orders in the series in isolation and conclude that the satisfaction arrived at by the authority is not reflected appropriately. In any case, pursuant to an order passed by this court on 21-08-2019, RBI has given a detailed point-wise reply to the representations of the petitioners. In these representations, the petitioners have highlighted all considerations that they thought as relevant. RBI has given its detailed responses on 4-09-2019 and 18-09-2019. Therefore, the contention that there was no application of mind and that relevant considerations were omitted to be taken note of, loses its vigour in view of the subsequent developments. [Para 6.118]

Malice in law/colourable exercise

The impugned Circular does not order either the freezing or the closing of any particular account of a particular customer. All that the impugned Circular says is that RBI regulated entities shall exit the relationship that they have with any person or entity dealing with or settling VCs, within three months of the date of the Circular. The regulated entities are directed not to provide services for facilitating any person or entity in dealing with or settling VCs. Some of the petitioners herein are individuals and companies who run virtual currency exchanges. In case they have other businesses, the impugned Circular does not order the closure of their bank accounts relating to other businesses. The prohibition under paragraph 2 of the impugned Circular is with respect to the provision of services for facilitating any person or entity in dealing with or settling VCs. This prohibition does not extend either to the closing or the freezing of the accounts of the petitioners in relation to their other ventures. [Para 6.120]

There can be no quarrel with the proposition that RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company or in public interest. If the exercise of power by RBI with a view to achieve one of these objectives incidentally causes a collateral damage to one of the several activities of an entity which does not come within the purview of the statutory authority, the same cannot be assailed as a colourable exercise of power or being vitiated by malice in law. To constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and wilfully without reasonable or probable cause. The impugned Circular does not fall under the category of either of them. [Para 6.122]

The argument that the invocation by RBI, of ‘public interest’ as a weapon, purportedly for the benefit of users, consumers or traders of virtual currencies is a colourable exercise of power also does not hold water. Once it is conceded that RBI has powers to issue directions in public interest, it is impossible to exclude users, consumers or traders of virtual currencies from the coverage. In fact, the repeated press releases issued by RBI from 2013 onwards indicate that RBI did not want the members of the public, which include users, consumers and traders of VCs, even to remotely think that virtual currencies have a legal tender status or are backed by a central authority. Irrespective of what VCs actually do or do not do, it is an accepted fact that they are capable of performing some of the functions of real currencies. Therefore, if RBI takes steps to prevent the gullible public from having an illusion as though VCs may constitute a valid legal tender, the steps so taken, are actually taken in good faith. The repeated warnings through press releases from December 2013 onwards indicate a genuine attempt on the part of RBI to safeguard the interests of the public. Therefore, the contention that the impugned Circular is vitiated by malice in law and that it is a colourable exercise of power, cannot be sustained. [Para 6.123]

The power under section 35A to issue directions is to be exercised under four contingencies namely (i) public interest (ii) interest of banking policy (iii) interest of the depositors and (iv) interest of the banking company. The expression “banking policy” is defined in section 5(ca) to mean any policy specified by RBI (i) in the interest of the banking system (ii) in the interest of monetary stability and (iii) sound economic growth. Public interest permeates all these three areas. This is why section 35A(1)(a) is invoked in the impugned Circular. Therefore, the argument that the impugned decision is a colourable exercise of power and it is vitiated by malice in law, is to be rejected. [Para 6.125]

M.S. Gill Reasoning [M.S. Gill v. The Chief Election Commissioner [1978] 1 SCC 405]

Though there is no broad proposition that MS Gill (Supra) test will not apply where larger public interest is involved, subsequent materials in the form of facts that have taken place after the order in question is passed, can always be looked at in the larger public interest, in order to support an administrative order. The second reason why the weapon of MS Gill will get blunted in this case, is that during the pendency of this case, this court passed an interim order on 21-08- 2019 directing RBI to give a point-wise reply to the detailed representation made by the writ petitioners. Pursuant to the said order, RBI gave detailed responses on 4-09-2019 and 18-09-2019. Therefore, the argument based on MS Gill test has lost its potency. [Para 6.126]

Wait and watch approach of other stakeholders

The argument that other stakeholders such as the Enforcement Directorate which is concerned with money laundering, the Department of Economic Affairs which is concerned with the economic policies of the State, SEBI which is concerned with security contracts and CBDT which is concerned with the tax regime relating to goods and services, did not see any grave threat and that therefore RBI’s reaction is knee-jerk, is not acceptable. Enforcement Directorate can step in only when actual money laundering takes place, since the statutory scheme of Prevention of Money Laundering Act deals with a procedure which is quasi-criminal. SEBI can step in only when the transactions involve securities within the meaning of section 2(h) of the Securities Contracts (Regulation) Act, 1956. CBDT will come into the picture only when the transaction related to the sale and purchase of taxable goods/commodities. Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others. [Para 6.128]

Light-touch approach of the other countries

The list of countries where a ban similar to the one on hand and much more has been imposed discloses a commonality. Almost all countries in the neighbourhood of India have adopted the same or similar approach (in essence India is ring fenced). In any case, our judicial decision cannot be coloured by what other countries have done or not done. Comparative perspective helps only in relation to principles of judicial decision making and not for testing the validity of an action taken based on the existing statutory scheme. [Para 6.129]

There can also be no comparison with the approach adopted by countries such as UK, US, Japan, Singapore, Australia, New Zealand, Canada etc., as they have developed economies capable of absorbing greater shocks. Indian economic conditions cannot be placed on par. Therefore, the correctness of the measure taken by RBI should not be tested on the basis of the approach adopted by other countries, though for better understanding of the complexities of the issues involved, undertaken a survey of how the regulators and courts of other countries have treated VCs. [Para 6.130]

Precautionary steps taken by petitioners

The fact of the matter is that enhanced KYC norms may remove anonymity of the customer, but not that of the VC. Even the European Parliament, accepts that the adequacy of mandatory registration of users (as a less invasive measure), whether or not of fully anonymous or pseudo anonymous crypto currencies depends on the users’ compliance with the registration requirement. After pointing out that compliance will partly depend on an adequate sanctioning toolbox in the event of breach, the report wonders whether it is at all possible outside of the context of randomly bumping into it, at least when fully anonymous VCs are concerned. [Para 6.131]

Different types of VCs require different treatments

According to the report of October 2012 of the European Central Bank on “Virtual Currency Schemes”, Virtual Currency schemes can be classified into three types, depending upon their interaction with traditional real money and real economy. They are (i) closed virtual currency schemes basically used in an online game (ii) virtual currency schemes having a unidirectional flow (usually an inflow), with a conversion rate for purchasing the virtual currency which can subsequently be used to buy virtual goods and services, but exceptionally also to buy real goods and services and (iii) virtual currency schemes having a bidirectional flow, where they act like any other convertible currency with two exchange rates (buy and sell) which can subsequently be used to buy virtual goods and services as well as real goods and services. [Para 6.132]

In the October 2012 Report of the European Central Bank, it is accepted that virtual currencies (i) resemble money and (ii) necessarily come with their own dedicated retail payment systems. These two aspects are indicated in the Report to be covered by the term “Virtual Currency Scheme”. [Para 6.133]

The examples provided in the October 2012 Report of the European Central Bank show that there are VC Schemes set up by entities such as Nintendo, in which consumers can purchase points online by using a credit card or in retail stores by purchasing a Nintendo points card which cannot be converted back to real money. The Report also shows that one VC by name Linden Dollars is issued in a virtual world called “Second life”, where users create avatars (digital characters), which can be customized. Second life has its own economy where users can buy and sell goods and services from and to each other. But they first need to purchase Linden dollars using fiat currency. Later they can also sell Linden dollars in return for fiat currency. Therefore, it is clear that the very same virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the entities come up. Moreover, the question whether anonymous VCs alone could have been banned leaving the pseudo-anonymous, is for experts and not for this Court to decide. In any case, the stand taken by RBI is that they have not banned VCs. Hence, the question whether RBI should have adopted different approaches towards different VCs does not arise. [Para 6.135]

Acceptance of DLT and rejection of VCs is a paradox

It was argued that the acceptance of the Distributed Ledger Technology and the rejection of VCs is actually a contradiction in terms. This argument is based upon the various reports, both of RBI and of the Inter-Ministerial Group, to the effect that DLT is part of FinTech. [Para 6.136]

The above contention, in legal terms, is about the irrationality of the impugned decision. But 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. [Para 6.137]

RBI’s decisions do not qualify for Judicial deference

RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get liberated even from its creator. This is why it is given a mandate – (i) under the Preamble of the RBI Act 1934, to operate the currency and credit system of the country to its advantage and to operate the monetary policy framework in the country (ii) under section 3(1), to take over the management of the currency from the central government (iii) under section 20, to undertake to accept monies for account of the central government, to make payments upto the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union (iv) under section 21(1), to have all the money, remittance, exchange and banking transactions in India of the central government entrusted with it (v) under section 22(1), to have the sole right to issue bank notes in India and (vi) under section 38, to get rupees into circulation only through it, to the exclusion of the central government. Therefore, RBI cannot be equated to any other statutory body that merely serves its master. It is specifically empowered to do certain things to the exclusion of even the central government. Therefore, to place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the Act. [Para 6.139]

But RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But the power conferred upon RBI under section 3(1) of the RBI Act, 1934 to take over the management of the currency from the central government, cannot be taken away. The sole right to issue bank notes in India, conferred by section 22(1) cannot also be taken away and conferred upon any other bank or authority. RBI by virtue of its authority, is a member of the Bank of International Settlements, which position cannot be taken over by the central government and conferred upon any other authority. Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act. In fact, all countries have central banks/authorities, which, technically have independence from the government of the country. To ensure such independence, a fixed tenure is granted to the Board of Governors, so that they are not bogged down by political expediencies. Worldwide, central authorities/banks are ensured an independence, but unfortunately section 8(4) of the RBI Act, 1934 gives a tenure not exceeding five years, as the central government may fix at the time of appointment. Though the shorter tenure and the choice given to the central government to fix the tenure, to some extent, undermines the ability of the incumbents of office to be absolutely independent, the statutory scheme nevertheless provides for independence to the institution as such. Therefore, the argument that a policy decision taken by RBI does not warrant any deference, cannot be accepted. [Para 6.141]

Article 19(1)(g) challenge & Proportionality

Any restriction to the freedom guaranteed under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6). [Para 6.142]

While testing the validity of a law imposing a restriction on the carrying on of a business or a profession, the court must, attempt an evaluation of (i) its direct and immediate impact upon the fundamental rights of the citizens affected thereby (ii) the larger public interest sought to be ensured in the light of the object sought to be achieved (iii) the necessity to restrict the citizens’ freedom (iv) the inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public and (v) the possibility of achieving the same object by imposing a less drastic restraint. [Para 6.143]

There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession. This is especially so in the light of the restrictions on cash transactions contained in sections 269SS and 269T of the Income-tax Act, 1961. When currency itself has undergone a metamorphosis over the centuries, from stone to metal to paper to paperless and we have ushered into the digital age, cashless transactions (not penniless transactions) require banking channels. Therefore, the moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, resulting in the trade or business getting automatically shut down. Hence, the burden of showing that larger public interest warranted such a serious restriction bordering on prohibition, is heavily on RBI. [Para 6.144]

Corporate bodies/entities being not ‘citizens’, under Article 19(1)(g)

This objection may hold good in respect of the writ petition filed by Internet and Mobile Association of India, which is described by them as a not-for-profit association of corporate entities who are in the trade. But this objection may not hold good in respect of the other writ petition, as the companies running VC exchanges have not come up alone. The shareholders and promoters have come up with the second writ petition along with those entities and hence the challenge under Article 19(1)(g) cannot be said to be not maintainable. [Para 6.145]

Fundamental right to purchase, sell, transact and/or invest in VCs and invoking Article 19(1)(g)

Contention denying right to purchase etc of is liable to be rejected outright for two reasons namely, (i) that at least some of the petitioners are not claiming any right to purchase, sell or transact in VCs, but claiming a right to provide a platform for facilitating an activity (of trading in VCs between individuals/entities who want to buy and sell VCs) which is not yet prohibited by law and (ii) that in any case the impugned Circular does not per se prohibit the purchase or sale of VCs. This is why it is contended by the learned Counsel for the petitioners, that what is hit by the impugned Circular is not the actual target. The actual target of the impugned Circular, as seen from various communications and committee reports that preceded the same, is the trade in VCs. The object of hitting at trading in VCs, is to ensure (i) consumer protection (ii) prevention of violation of money laundering laws (iii) curbing the menace of financing of terrorism and (iv) safeguarding of the existing monetary/payment/credit system from being polluted. But hitting the target directly, is not within the domain of RBI and hence the impugned Circular purportedly seeks to protect only the regulated entities, by ring-fencing them. In the process, it has hit VC Exchanges and not the actual trading of VCs, though as a consequence, the volume of transactions in VCs (perhaps through VCEs alone) is stated to have come down. People who wish to buy and sell VCs can still do so merrily, without using the medium of a VC Exchange and without seeking to convert the virtual currencies into fiat currency. It is in this context that the contention revolving around Article 19(1)(g) has to be examined. [Para 6.146]

In order to test the validity of the impugned action on the touchstone of Article 19(1)(g), one should understand the fundamental distinction between (i) the purchase and sale of virtual currencies by and between two individuals or entities and (ii) the business of online exchanges that provide certain services such as the facility of buying and selling of virtual currencies, the storing or securing of the virtual currencies in what are known as wallets and the conversion of virtual currencies into fiat currency and vice versa. The buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business. The distinction between the two is that there may or may not exist a profit motive in the former, while it would, in the latter. [Para 6.147]

Persons who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Article 19(1)(g), for what is covered therein are only profession, occupation, trade or business. Therefore hobbyists, who are one among the three categories of citizens (hobbyists, traders in VCs and VC Exchanges), straight away go out of the challenge under Article 19(1)(g). [Para 6.148]

The second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the basis of Article 19(1)(g). Technically speaking, the second category of citizens cannot claim that the impugned decision of RBI has the effect of completely shutting down their trade or occupation. Citizens who have taken up the trade of buying and selling virtual currencies are not prohibited by the impugned Circular (i) either from trading in crypto-to-crypto pairs (ii) or in using the currencies stored in their wallets, to make payments for purchase of goods and services to those who are prepared to accept them, within India or abroad. As a matter of fact, reports/articles in online journals suggest (i) that a few eateries were accepting payments in virtual currencies (Mumbai and Chennai eateries are now closed and the one in Bangalore has stopped accepting) and (ii) that there are few intermediaries which accept payments in Bitcoins for gift cards which in turn facilitate online shopping from popular sites. [Para 6.149]

An important aspect to be taken note of is that virtual currencies cannot be stored anywhere, in the real sense of the term, as they do not exist in any physical shape or form. What is actually stored is the private keys, which can be used to access the public address and transaction signatures. [Para 6.150]

The software program in which the private and public keys of those who own virtual currencies is stored, is called a digital wallet. There are different types of wallets namely (i) paper wallet which is essentially a document that contains a public address for receiving the currency and a private key which allows the owner to spend or transfer the virtual currencies stored in the address (ii) mobile wallet, which is a tool which runs as an app on the smartphone, where the private keys are stored, enabling the owner to make payments in crypto currencies directly from the phone (iii) web wallet, in which the private keys are stored on a server which is constantly online (iv) desktop wallet, in which private keys are stored in the hard drive and (v) hardware wallet, where the private keys are stored in a hardware device such as pendrive. [Para 6.151]

All the above types of wallets except the desktop wallet allow a great degree of flexibility, in that they can be accessed from anywhere in the world. For instance, paper wallets are printed in the form of QR codes that can be scanned, and a transaction completed by using the private keys. Similarly, mobile wallets run as an app on the smartphone and hence they allow a person to use the crypto currency stored in the wallet for buying anything, even while travelling abroad, provided the vendor accepts payments in crypto currencies. Paper wallets and mobile wallets can also be used to draw fiat currency from virtual currency ATMs available in countries like USA, Canada, Switzerland, etc. [Para 6.152]

In other words, most of the wallets except perhaps desktop wallet, have great mobility and have transcended borders. Therefore, despite the fact that the users and traders of virtual currencies are also prevented by the impugned Circular from accessing the banking services, the impugned Circular has not paralyzed many of the other ways in which crypto currencies can still find their way to or through the market. [Para 6.153]

Persons who have suffered a deadly blow from the impugned Circular are only those running VC exchanges and not even those who are trading in VCs. Persons trading in VCs, even now have different options, some of which have been discussed above (wizards may have many more options). But the VC exchanges do not appear to have found out any other means of survival (at least as of now) if they are disconnected from the banking channels. [Para 6.154]

In all cases where legislative/executive action infringing the right guaranteed under Article 19(1)(g) were set at naught by this court, this court was concerned with a ban/prohibition of an activity. The question of the prohibited/banned activities having the potential to destabilize an existing system, did not arise in those cases. The pleadings contained in the first writ petition filed by the Association, would show that three companies who are members of the Internet and Mobile Association of India, had a combined total of approximately 17 lakh verified users throughout India. These companies held a combined total of approximately Rs. 1365 crore of user funds in trust. The approximate monthly transaction volume of just these three companies was around Rs. 5000 crore. Even according to the petitioner, the crypto asset industry is estimated to have a market capitalization of approximately 430 billion US dollars globally. India is estimated to contribute between 2 and 10% based on varied estimates. It is admitted in WP (C) No. 373 of 2018 that the total number of investors in Indian crypto market was approximately 20 lakh and the average daily trade volume was at least Rs. 150 crore, at the time when the writ petition was filed. Therefore, if a central authority like RBI, on a conspectus of various factors perceive the trend as the growth of a parallel economy and severs the umbilical cord that virtual currency has with fiat currency, the same cannot be very lightly nullified as offending Article 19(1)(g). [Para 6.155]

But nevertheless, the measure taken by RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g). On the question of proportionality, the petitioners relies upon the four-pronged test summed up in the opinion of the majority in Modern Dental College and Research Centre v. State of Madhya Pradesh [2016] 7 SCC 353. These four tests are (i) that the measure is designated for a proper purpose (ii) that the measures are rationally connected to the fulfilment of the purpose (iii) that there are no alternative less invasive measures and (iv) that there is a proper relation between the importance of achieving the aim and the importance of limiting the right. The court in the said case held that a mere ritualistic incantation of “money laundering” or “black money” does not satisfy the first test and that alternative methods should have been explored. [Para 6.156]

The ultimate recommendation made by the European Union Parliament is not to go for a total ban of the interaction between crypto currency business and the formal financial sector as a whole. Obviously, RBI did not consider the availability of alternatives before issuing the impugned circular. But by an interim direction, issued on 21-08-2019 this court directed RBI to give a detailed point-wise reply to the representations of the petitioners. Pursuant to the said order, RBI gave a reply dated 4-09-2019. In the reply, RBI has dealt with every one of the contentions of the petitioners. [Para 6.164]

In Annexure B to their second response dated 18-09- 2019, RBI has also dealt with every one of the additional safeguards proposed by one of the writ petitioners viz. (i) Development of a dashboard and central repository (ii) Formulation of a self-regulatory organization and Restricting trade of crypto-assets to while listed addressee (iii) Adoption of Aadhar based electronic KYC (iv) Mandatory capitalisation requirement (v) Insurance of crypto-assets (vi) Formulation of an investor protection and education fund. [Para 6.166]

Three important aspects namely, (i) that RBI has not so far found, in the past 5 years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function (ii) that the consistent stand taken by RBI up to and including in their reply dated 4-09-2019 is that RBI has not prohibited VCs in the country and (iii) that even the Inter-Ministerial Committee constituted on 2-11-2017, which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures. Paragraph 7 of the ‘Note- precursor to report’ throws light on the same. [Para 6.167]

The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-Ministerial Committee contained a proposal (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted. [Para 6.168]

The key aspects of the Crypto-token Regulation Bill, 2018, found in paragraph 13 of the ‘Note-precursor to report’ shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of digital crypto asset at recognized exchanges. [Para 6.169]

But within a year, there was a volte-face and the final report of the very same Inter-Ministerial Committee, submitted in February 2019 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”. The draft of the bill contained a proposal to ban the mining, generation, holding, selling, dealing in, issuing, transferring, disposing of or using crypto currency in the territory of India. At the same time, the bill contemplated (i) the creation of a digital rupee as a legal tender, by the central government in consultation with RBI and (ii) the recognition of any official foreign digital currency, as foreign currency in India. [Para 6.170]

In case the said enactment (2019) had come through, there would have been an official digital currency, for the creation and circulation of which, RBI/Central Government would have had a monopoly. But that situation had not arisen. The position as on date is that VCs 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. [Para 6.171]

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. As held by this court in State of Maharashtra v. Indian Hotel and Restaurants Association [2013] 8 SCC 519 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). It is not the 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. [Para 6.172]

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 the power of RBI to take a pre-emptive action is to be recognised, proportionality of such measure is to be tested, 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 to hold that the impugned measure is proportionate. [Para 6.173]


Therefore, in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular dated 6-04-2018 is liable to be set aside on the ground of proportionality. Accordingly, the writ petitions are allowed and the Circular dated 06- 04-2018 is set aside. The Statement dated 5-04-2018, though challenged in one writ petition, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise. [Para 7]

Case Review

    • State of Rajasthan Basant Nahata [2005] 12 SCC 77 (para 6.96) distinguished.

List of Cases Referred to

    • Board of Trade of City of Chicago SEC 677 F.2d 1137 (para 6.58)
    • Moss Honcock [1899] 2 QB 11 (para 6.64)
    • Wisconsin Central Ltd. United State 585 US 2018 (para 6.64)
    • CIT Kasturi & Sons Ltd. [1999] 103 Taxman 342/237 ITR 24 (SC) (para 6.69)
    • Dhampur Sugar Mills Ltd. CTT 2008 taxmann.com 1111 (SC) (para 6.70)
    • SEC Trendon Sharers [Case No. 4: 13-Cv-416, dated 6-8-2013] (para 6.72)
    • United States Ulbricht 3IF Supp. 3d 540 (2014) (para 6.73)
    • United States Faiella 39 F. Supp.3d. 544 (2014) (para 6.74)
    • Inc, In re [CFTC Docket No. 15-29, dated 17-9-2015] (para 6.75)
    • Tera Exchange LLC [CFTC Docket No. 15-33, dated 24-9-2015] (para 6.76)
    • BFXNA Inc., d/b/a Bitfinex [CFTC Docket No. 16-19, dated 2-6-2016] (para 6.76)
    • United States Murgio 209 F. Supp.3d 698 (2016) (para 6.77)
    • Commodity Futures Trading Commission Patrick McDonnell [18-Cv-361, dated 3-6-2018] (para 6.78)
    • Commodity Futures Trading Commission My Big Coin Pay Inc. et al. [18-Cv-10077-RWZ, dated 26-9-2018] (para 6.79)
    • State of Florida Michell Abner Espinoza [14-2923, dated 22-7-2016] (para 6.80)
    • State of Floria Michell Abner Espinoza 264 So.3d 1055 (2019) (para 6.81)
    • B2C2 Ltd. Quoine Pte Ltd. [2019] SGHC (I) 3 (para 6.82)
    • National Provincial Bank Ainsworth [1965] IAC 1175 (para 6.82)
    • Quoine Pte Ltd. B2C2 Ltd. [2020] SGCA (I) 02 (para 6.82)
    • AA Persons Unknown & Others Re Bitcoin [2019] EWHC 3556 (Commission) (para 6.83)
    • Colonial Bank Whinney [1889] 30 ChD 261 (para 6.83)
    • Skatteverket David Hedquist [Case C-264/14, dated 22-10-2015] (para 6.84)
    • Keshavlal Khemchand & Sons (P.) Ltd. Union of India [2015] 53 taxmann.com 470/129 SCL 780 (SC) (para 6.88)
    • Star India (P.) Ltd. Dept of Industrial Policy and Promotion [2019] 20 SCC 104 (para 6.92)
    • Ramanathanv. State of Tamil Nadu [1985] 2 SCC 116 (para 6.92)
    • Godawat Pan Masala Products IP Ltd. Union of India [2004] 7 SCC 68 (para 6.93)
    • Khoday Distilleries Ltd. State of Karnataka [1995] 1 SCC 574 (para 6.93)
    • State of Rajasthan Basant Nahata [2005] 12 SCC 77 (para 6.95)
    • Union of India Cynamide India Ltd. [1987] 2 SCC 720 (para 6.97)
    • John Teachers Training Institutev. Regional Director, NCTE [2003] 3 SCC 321 (para 6.98)
    • Udai Singh Dagar Union of India [2007] 10 SCC 306 (para 6.98)
    • Peerless General Finance and Investment Co. Ltd. Reserve Bank of India [1992] 2 SCC 343 (para 6.99)
    • State of U.P. Babu Ram Upadhya AIR 1961 SC 751 (para 6.99)
    • K.V. Prasada Raov. Govt. of A.P. AIR 1984 AP 75 (para 6.99)
    • ICICI Bank Ltd. Official Liquidator of APS Star Industries Ltd. [2010] 7 taxmann.com 72/104 SCL 37 (SC) (para 6.99)
    • Jayantilal Amrit Lal Shodhan F.N. Rana AIR 1964 SC 648 (para 6.101)
    • Shri Sitaram Sugar Co. Ltd. Union of India [1990] 3 SCC 223 (para 6.102)
    • Ganesh Bank of Kurunwad Ltd. Union of India [2006] 71 SCL 167 (SC) (para 6.103)
    • State of Punjab Gurdial Sing [1980] 2 SCC 470 (para 6.121)
    • Collector (District Magistrate) Allahabad Raja Ram Jaiswal [1985] 3 SCC 1 (para 3.121)
    • Kalabharati Advertising Hemant Vimalnath Narichania [2010] 9 SCC 437 (para 6.121)
    • Meerut Development Authority Assistant Management Studies [2009] 6 SCC 171 (para 6.124)
    • Bihar Public Service Commission Saiyed Hussain Abbar Rizwi [2013] 35 taxmann.com 333/120 SCL 179 (SC) (para 6.124)
    • Utkal Contractors Joinery (P.) Ltd. State of Orissa [1987] 3 SCC 279 (para 6.124)
    • Empress Mills Municipal Committee Wardha 1985 SCR 1102 (para 6.124)
    • S. Gillv. Chief Election Commission [1978] 1 SCC 405 (para 6.126)
    • Chairman All India Railway Recruitment Board K. Shyam Kumar [2010] 6 SCC 614 (para 6.126)
    • PRP Exports Chief Secretary Government of Tamil Nadu [2014] 1 SCC 692 (para 6.126)
    • 63 Moons Technologies Ltd. Union of India [2014] 105 taxmann.com 6 (SC) (para 6.126)
    • K. Gargv. Union of India [1981] 4 SCC 675 (para 6.138)
    • Balco Employees Union (Regd.) Union of India [2002] 35 SCL 182 (SC) (para 6.138)
    • Swiss Ribbons Union of India [2019] 101 taxmann.com 389/152 SCL 365 (SC) (para 6.138)
    • State of Gujarat Shri Ambica Mills Ltd. [1974] 4 SCC 656 (para 6.140)
    • K. Krishnanv. Tamil Nadu [1975] 1 SCC 375 (para 6.140)
    • State of M.P. Nandlal Jaiswal [1986] 4 SCC 566 (para 6.140)
    • M. Ashwathanarayana Settyv. State of Karnataka [1989] Supp (1) SCC 696 (para 6.140)
    • Valayudhanv. Union of India [1993] 2 SCC 582 (para 6.140)
    • Delhi Science Forum Union of India [1996] 2 SCC 405 (para 6.140)
    • Bhavesh D. Parish Union of India [2000] 26 SCL 454 (SC) (para 6.140)
    • Ugar Sugar Works Ltd. Delhi Administration [2001] 3 SCC 635 (para 6.140)
    • of Andhra Pradeshv. P. Laxmi Devi [2008] 4 SCC 720 (para 6.140)
    • Villianur Iyarkkai Padu Kappa Maiyan Union of India [2009] 7 SCC 561 (para 6.140)
    • G. of Foreign Trade v.Kanak Exports [2015] 62 taxmann.com 328 (SC) (para 6.140)
    • State of J & K Trikuta Roller Flour Mills (P.) Ltd.[2017] 85 taxmann.com 287/64 GST 156 (SC) (para 6.140)
    • Pioneer Urban Land and Infrastructure Ltd. Union of India [2019] 108 taxmann.com 147/155 SCL 622 (SC) (para 6.140)
    • Yasinv. Town Area Committee 1952 SCR 572 (para 6.142)
    • Bennett Coleman & Co. Union of India [1972] 2 SCC 788 (para 6.142)
    • Farukv. State of Madhya Pradesh [1969] 1 SCC 853 (para 6.142)
    • Modern Dental College and Research Centre State of Madhya Pradesh [2016] 7 SCC 353 (para 6.156)
    • Elloyde Freital Permanent Secretary of Ministry of Agricultural Fisheries Land and Housing [1999] 1 AC 69 (para 6.157)
    • Huang Secretary of State for the Home Department [2007] UKHL 11 (para 6.157)
    • Bank Mellat HM Treasury (No. 2) [2013] UK SC 39 (para 6.157)
    • Illinois Elections Bd Socialist workers Party [1979] 440 US 173 (para 6.161)
    • State of Maharastra Indian Hotel and Restaurants Association [2013] 8 SCC 519 (para 6.172)

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