Supreme Court paves way for virtual currencies

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The Supreme Court of India, in Internet and Mobile Association of India v Reserve Bank of India, on 4 March 2020, set aside the Reserve Bank of India (RBI) circular on virtual currencies, dated 6 April 2018.

The circular was issued in exercise of the powers conferred by the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, and the Payment and Settlement Systems Act, 2007. It directed RBI-regulated entities, including banks to: (1) neither deal in virtual currencies nor provide services for facilitating any person or entity in dealing with or settling virtual currencies; and (2) exit the relationship with such persons or entities if they were already providing such services to them.

The court found that the circular was a disproportionate restriction on fundamental rights, since, among other reasons: (1) the RBI had not shown that virtual currency trading was harming its regulated entities; (2) virtual currency trading is an activity not banned under any law; and (3) there was no finding of any defect in the manner that virtual currency exchanges operate.

It was further noted by the court that, while virtual currencies were not banned, the functioning of virtual currency exchanges was sent comatose by the circular by disconnecting their lifeline, namely, the interface with the regular banking sector. After the judgment, banks are no longer prohibited from facilitating virtual currency transactions, subject to existing due diligence norms.

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