No Ban on Cryptocurrencies in India – Supreme Court of India
In a major and significant ruling, the Supreme Court of India has struck down the RBI circular which had restricted dealing in crypto currencies in India.
In the matter of Internet and Mobile Association of India vs Reserve Bank of India, Writ Petition (Civil) No.528 & 373 of 2018, the Supreme Court has delivered a 180 paged judgement wherein it has dealt with the issue in an in-depth manner.
Caution by RBI on Cryptocurrency
The RBI has by a circular dated 6th April,2018 cautioned for not dealing in Cryptocurrencies
Prohibition on dealing in Virtual Currencies (VCs) Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs.
3. Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.
4. These instructions are issued in exercise of powers conferred by section 35A read with section 36(1)(a) of 5 Banking Regulation Act, 1949, section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949, section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.
Report on Cryptocurrency as Virtual Currencies
The Court referred a report as to “what is Cryptocurrency” and observed that;
Thereafter, a report titled “Virtual Currencies – Key Definitions and Potential AML/CFT Risks” was issued in June 2014 by FATF, highlighting, both legitimate uses and potential risks associated with virtual currencies. What is of great significance about this FATF report is that it defined 2 important words. The FATF report defined ‘Virtual currency’ as a digital representation of value that can be traded digitally and functioning as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but not having a legal tender status. The FATF report also defined ‘Cryptocurrency’ to mean a math-based, decentralised convertible virtual currency protected by cryptography by relying on public and private keys to transfer 8 value from one person to another and signed cryptographically each time it is transferred.
The Court interestingly referred to the concept of “Neti Neti” to define a virtual currency;
3.2. Any attempt to define what a virtual currency is, it appears, should follow the Vedic analysis of negation namely “neti, neti”. Avadhuta Gita of Dattatreya says, “by such sentences as ‘that thou are’, our own self or that which is untrue and composed of the 5 elements, is affirmed, but the sruti says ‘not this not that’.”4 The concept of Neti Neti is an expression of something inexpressible, but which seeks to capture the essence of that to which no other definition applies. This conundrum will squarely apply to crypto currencies and hence this flashback, into its genesis, so that its DNA is sequenced.
4* tattvamasyādivākyena svātmā hi pratipāditaḥ neti neti śrutirbrūyād anṛtaṁ pāñcabhautikam
VCs under the ambit of RBI
The Court after referring to various legislations of different countries, FEMA ,Income Tax provisions of India and certain rulings made up their mind that ;
6.87. Once we are clear about the above confusion, and 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.
The Court classified the three types of persons having activities in VCs as under;
6.147. In order to test the validity of the impugned action on the touchstone of Article 19(1)(g), we may have to 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.
The Court also went on to conclude that those class of persons who were entering into buying and selling of VCs as a hobby cannot have any right and remedy under Article 19(1) (g) as their activity was not meant for business.
6.148. 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), straightaway go out of the challenge under Article 19(1)(g).
Second and third class of persons under the writ and whose businesses were totally impacted in fact were within the realm of Article 19(1)(g) of Constitution of India;
6.156. 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).
Ban and Extreme Step
The Court concluded that the three significant factors cannot be brushed aside;
6.167. But at the same time we cannot lose sight of 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 04-09-2019 is that RBI has not prohibited VCs in the country and (iii) that even the Inter-Ministerial Committee constituted on 02-11-2017, 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.
Crypto-token Regulation Bill, 2018
The Court also took the cognisance of the Crypto-token Regulation Bill, 2018 wherein the inter ministerial committee’s observation was recorded, as under;
6.169. 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. Paragraph 13 (iii) & (vii) of the ‘Note-precursor to the report’ reads as follows: 13. Key aspects are summarised below: (i)… (ii)… (iii) The sale and purchase of digital crypto asset shall only be permitted at recognised exchanges. (iv)… (v)… (vi)… (vii) The registry of all holdings and transactions on the recognised exchanges shall be maintained at recognised depositories.
6.170. 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, 176 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.
VCs are not banned
The Court held that the act being Virtual Currencies are not banned but then too there is an ultimate restriction of its dealing;
6.171. 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.
No Loss to RBI
The Court had also observed that there was no apparent loss or impact of VCs in any manner.
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 177 exchanges had with any of them. As held by this court in State of Maharashtra v. Indian Hotel and Restaurants Association, 115 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.
Violative of Article 19(1) (g)
The Court while referring to approach of other countries regarding to VCs 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. 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 Court also observed that it has been contended;
….through reasonable restrictions imposed under a law made in the interests of the general public is saved by Article 19(6) of the Constitution, a total prohibition, especially through a subordinate legislation such as a directive from RBI, of an activity not declared by law to be unlawful, is violative of Article 19(1)(g).
Test of Proportionality
The Court though reiterated that RBI has power but held that it should be exercised in a manner where it passes the test of proportionality ;
6.173. 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 we have recognized elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, 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 115 (2013) 8 SCC 519 178 not possible for us to hold that the impugned measure is proportionate.
The Circular having failed the test of Proportionality was struck down with the final conclusive findings as below:
…….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 115 (2013) 8 SCC 519 178 not possible for us to hold that the impugned measure is proportionate.
7.1. Therefore, in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality.