The Supreme Court in a recent judgment set aside the ban imposed by the Reserve Bank of India (RBI), through its circular dated 6 April 2018, which prohibited its regulated entities (i.e., financial institutions like banks) from dealing in or facilitating banking transactions relating to virtual currencies (VCs).
In Internet and Mobile Association of India (IAMAI) v Reserve Bank of India, the RBI had issued several cautionary advisories in the form of press releases to users, holders, investors, traders and similar parties that deal in VCs, highlighting the potential financial, operational, legal, customer protection and security related risks associated with dealing in these currencies.
Thereafter, the RBI issued the circular, which was challenged, through a writ petition filed before the Supreme Court, by IAMAI, a not-for-profit organization that represents the interests of the online and digital services industry, shareholders/founders of crypto-assets exchange platforms and individual crypto-asset traders (petitioners).
It was contended that the RBI has no power to prohibit the activity of trading in VCs since: (1) VCs are not legal tender and thus not regulated by the RBI; and (2) services rendered by VC exchanges do not qualify to be a “payment system”, so are not entities that are regulated by the RBI under the Payment Settlement and Systems Act, 2007 (PSS Act).
It was also contended that the manner in which the RBI exercised its power with respect to the ban did not satisfy established parameters, as there was no application of mind by the RBI, and the ban was issued in bad faith without the objective of protecting the regulated entities, or the public in general.
The RBI circular was said to violate the fundamental right to practise any profession, or to carry on any occupation, trade or business, as it does not pass the test of reasonableness/proportionality vis-à-vis the blanket prohibition imposed on the regulated entities.
In response to the submissions of the petitioners, the RBI argued that the circular was within the wide powers conferred on it. Further, there had been an application of mind, which was evident from the reports of the committees to which the RBI was a party, and the cautionary advisories repeatedly issued by the RBI over a period of five years. There cannot be an unfettered fundamental right to do business on the network of entities regulated by the RBI, and so the circular did not violate any fundamental right.
The circular was necessitated in the public interest to protect the interest of consumers, the interest of the payment and settlement systems of the country, and for protection of regulated entities against exposure to the high volatility of VCs. The RBI is empowered, and duty bound to take such pre-emptive measures in the public interest, and the power to regulate includes the power to prohibit.
After hearing the arguments in detail, the Supreme Court held that, as some institutions accept VCs as valid payments for purchases of goods and services, there is no escape from the conclusion that the users and traders of VCs carry on an activity that falls squarely within the purview of the RBI.
The Supreme Court held that VCs have the potential to create a parallel monetary system, which is a perceived threat to the existence of a central authority regulatory monetary system. Thus, the RBI has the requisite power to regulate or prohibit any activity of this nature.
The court further observed that the RBI circular is primarily addressed to banks who are “system participants” regulated by the RBI under the PSS Act. It is impossible to say that the 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.
In relation to the alleged violation of the fundamental right of the petitioners, the Supreme Court held that any restriction to the freedom guaranteed in article 19(1)(g) of the Constitution of India should pass the test of reasonableness.
The petitioners contended that, since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade that is not prohibited by law is not a reasonable restriction, and is extremely disproportionate.
The Supreme Court, while agreeing with the submissions of the petitioners, held that the RBI circular is not reasonable
or proportionate, as in the past five years or more, the RBI has not found any adverse impact on the activities of VC exchanges on the way the regulated entities (such as banks) function. Further, the RBI has taken the stand that it has not banned VCs in the country. Therefore, in light of the above, the Supreme Court held that the circular is liable to be set aside on the ground of proportionality.
The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at firstname.lastname@example.org. Readers should not act on the basis of this information without seeking professional legal advice.