06 March 2020

Virtual currencies – RBI Circular restricting functioning of VC exchanges set aside

The Larger Bench of the Supreme Court of India has set aside the Circular dated 6-4-2016 issued by the Reserve Bank of India, directing the entities regulated by RBI to not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and to exit the relationship, if they already have one, with such individuals/ business entities dealing with or settling virtual currencies.

The RBI Circular was held as not correct on the grounds of ‘proportionality’ as in Article 19 of the Constitution of India. The Apex Court in this regard noted that though virtual currencies were not banned, but the trading in VCs and the functioning of VC exchanges were sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector

The Court observed that that RBI had not found that the activities of VC exchanges had actually adversely impacted the way the entities regulated by RBI function, that the consistent stand taken by RBI was that it had not prohibited VCs in the country and that even the Inter-Ministerial Committee was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures. It noted that the Inter-Ministerial Committee, through Crypto-token Regulation Bill, 2018, was fine with the idea of allowing the sale and purchase of digital crypto asset at recognized exchanges.

It may be noted that the Court in its judgement dated 4th of March, 2020 in the case of Internet and Mobile Association of India v. Reserve Bank of India also observed that despite the fact that the users and traders of virtual currencies were also prevented by the impugned Circular from accessing the banking services, the impugned Circular had not paralyzed many of the other ways in which crypto currencies can still find their way to or through the market.

The Circular was however held as not vitiated by malice in law. Observing that repeated warnings through press releases from December 2013 onwards indicated a genuine attempt on the part of RBI to safeguard the interests of the public, it was held that the Circular cannot be held a colorable exercise of power.

The Court noted that though 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 by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. Definition of virtual currency as provided by different regulators like IMF, Financial Action Task Force, European Central Bank and under statutory enactments and non-statutory directives of various Governments, was considered by the Court in this regard.

RBI can regulate activity by users and traders of virtual currencies

However, observing that 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, the Court was of the view that while each of these descriptions is true, none of these constitute the whole truth. The Court hence rejected the contention of the Petitioner-Appellant that VCs are just goods/commodities and can never be regarded as real money or legal tender, and hence RBI has no role in regulating/banning the same.

The Court concluded that the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the Reserve Bank of India. It was held that 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. It was also held that 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 Court in this regard also rejected the contention that RBI if at all has only the power to regulate and not prohibit.

The Court was also of the view that in the overall scheme of the Payment and Settlement Systems Act, 2007, it is not possible 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.

RBI not just any other statutory authority

The Apex Court also held that RBI is not just any other statutory authority. The Court in this regard observed that the difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive and that the power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. It was observed that, however, 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 Court hence did not accept the argument that a policy decision taken by RBI does not warrant any deference.

RBI is not guilty of non-application of mind

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. 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.

Validity under Article 19(1)(g) of Constitution

The Court though observed that the moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, it was of the view that 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).

Browse articles