This information is correct as of 10:00am on 3 April 2020 and will not be maintained.
The Supreme Court of India overturned a decision by the Reserve Bank of India (“RBI”) which prohibited banks from dealing with cryptocurrency exchanges. The Court found that a blanket ban was disproportionate and that virtual currencies had caused no visible damage to banks regulated by the RBI. The judgment offers clarity and hope for more balanced regulation in the future.
In 2018, RBI exercised its powers conferred by the Reserve Bank of India Act 1934 (“RBI Act 1934”) and the Payment Settlement Systems Act 2007 by issuing a circular to entities regulated by RBI. The circular directed the entities (i) 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. Hence, whilst not explicitly banning virtual currencies, it effectively put an end to their usage by cutting off the relationship between crypto-exchange providers and the economic market in India.
RBI cited concerns over “consumer protection, market integrity and money laundering, among others” in their reasoning for imposing the ban. This came following months of growing criticism from both regulators and the Indian government, which likened them to “Ponzi schemes” and threatened harsh regulation. As a result, RBI instructed banks to cut all ties with any entities that dealt in virtual currencies.
In support from both public and industry-led petitions, a case that combined all pleas against the ban was brought before the Supreme Court by the Internet & Mobile Association of India (the “IAMAI”), a not-for-profit industry body with the aim of representing the views of the digital services corporations.
IAMAI’s key submissions were that the circular was issued outside of RBI’s statutory scope and that the prohibition of any economic activity should fall within the purview of economic policy, not the regulator. Counsel for IAMAI submitted that even where cryptocurrency was subject to regulation by RBI, a pre-emptive ban disproportionately infringed on the fundamental rights of those who used and traded cryptocurrency, and those who facilitated its usage. The Court accepted that the ban was a restriction of the right to practice any profession, or to carry on any occupation, trade or business as contained in Article 19(1)(g) of the Indian Constitution, and considered whether this was sufficiently imposed in “the interest of the general public” under Article 19(6), which must adhere to the doctrine of proportionality.
In the judgment, the Court found that RBI had failed to take account of whether less intrusive measures were available before issuing the circular. It was the Court’s belief that RBI had not applied its mind to less invasive measures, for instance prohibiting anonymous only virtual currencies. As such, the Court held that the impugned circular was “manifestly arbitrary, based on non-reasonable classification and it imposes disproportionate restrictions”. It further found that a decision to prohibit an article as res extra commercium (i.e., not susceptible to being traded) is a matter of legislative policy and must arise from legislation, and not by a notice issued by an executive authority such as a regulator.
Importantly, the Court was prompted to examine the definition of cryptocurrencies. It was IAMAI’s position that virtual currencies could not be considered money, nor any other form of legal tender. Instead, they submitted that cryptocurrencies be treated as a good or commodity, thereby falling outside the scope of the legislation impugned.
The Court acknowledged that there was no unified definition, recognising that this uncertainty could easily lead to virtual currencies slipping out of all regulatory control. As such, it was the Court’s belief that they should consider the foundational objectives of cryptocurrencies. Citing numerous sources of case law across jurisdictions, virtual currencies were found to retain the fundamental elements of money and so should be treated as such. Broadly, this means that cryptocurrency serves as a store of value, a unit of account and a medium of exchange. IAMAI contended that a fourth element should be added; one that provides that money should serve as a means towards the final discharge of a debt or standard of deferred payment. The Supreme Court rejected this argument, arguing 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”. As a result, whilst a complete prohibition was considered disproportionate in this case, cryptocurrencies are still within the remit of RBI’s regulatory powers.
What does this mean for the future of cryptocurrency in India?
This outcome is undoubtedly a win for crypto-based entities, but this may only be a momentary relief. The Indian Government has previously sought to introduce punitive legislation for those using virtual currencies. In 2017, an inter-disciplinary committee set up by the Government released a report recommending legislative changes which would make the possession, trade and use of cryptocurrencies “expressly illegal and punishable”; though no legislation was actually introduced. It is hoped this new ruling will stand to influence the Government’s decision making towards more balanced regulation going forward.
Co-authored by James Highfield.