Posted on January 21, 2021
Authored by Melita Tessy*
To many in the Fintech sector, the 2018 circular of the Reserve Bank of India (“RBI”), purportedly banning trade in virtual currencies would’ve come off as a rather unpleasant surprise. This is because, the RBI had published in 2015, the “Financial Stability Report” and the same included a chapter on “Financial Sector Regulation” which dealt with the challenges posed by Virtual Currency (“VC”) Schemes. This chapter noted that regulators and authorities’ needed to keep pace with developments, as many of the world’s largest banks had started supporting a joint effort for setting up of private blockchains and building an industry-wide platform for standardizing the use of VCs. Additionally, in 2016, the next Financial Stability Report of the RBI took note of the rapid developments taking place in FinTech globally and urged the regulators to gear up to adopt the technology.
Thus, when India’s central bank, the RBI issued a “Statement on Developmental and Regulatory Policies” on 5th April 2018, which directed that, “the entities regulated by the RBI shall
- not deal with or provide services to any individual or business entities dealing with or settling virtual currencies and
- exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (Virtual currency)”
it created confusion and a need for judicial intervention, especially since the Securities and Exchange Board of India (SEBI) had published a report in favour of the contrary in 2017. To add to this, the RBI also issued a circular dated 6th April 2018 directing “the entities regulated by the RBI (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.”
In view of the foregoing, it may be said that the excitement that surrounded cryptocurrencies until the end of 2016 waned in 2017. The governmental approach towards these currencies became extremely cautionary and dismissive and this led to the alleged ban in trading of cryptocurrencies through the RBI circular in 2018.
Following said circular, the matter came before the Supreme Court of India in the case of Internet and Mobile Association of India and Ors. v. Reserve Bank of India. It was observed by the Court that while there is reason for caution in this regard, the same only creates a need for regulation of trading in cryptocurrencies and not an outright ban which violates Article 19 of the Constitution. Therefore, the RBI ban was set aside. Despite this, however, it has been reported that the Indian government has proposed to ban trading in cryptocurrency once again and the same has opened up room for discussion and speculation.
The current article is written with the objective of retrospectively analyzing India’s plan to ban cryptocurrency by studying the various legal developments that have been taking place from 2018.
Analysis of the Supreme Court Judgement in Internet and Mobile Association of India (IAMAI) and Ors. v. Reserve Bank of India (RBI)
- Primary Issue and Order Sought by the Petitioner
The primary issue in this case was ‘Whether the impugned Circular dated 06.04.18 by the RBI is liable to be set aside on the ground of proportionality.’ The Petitioner had challenged the said Circular and had sought a direction to the Respondents not to restrain entities regulated by RBI, from providing access to banking services, to those engaged in transactions in crypto-assets.
- Lack of Cause for the Defendant’s Pre-emptive Action and Test of Proportionality
The Court observed that the RBI had not come out with a stand that any of the entities regulated by it have suffered any loss or adverse effect directly/indirectly, on account of the interface that the VC exchanges had with any of them. It further noted that as held by the Supreme Court earlier in State of Maharashtra v. Indian Hotel and Restaurants Association, there must be at least some empirical data about the degree of harm suffered by the regulated entities in order to allow for a pre-emptive action of the nature given in the circular.
The Court also examined whether the measure taken by the RBI was proportional, i.e., the proportionality of the measure taken by the RBI, for the determination of which, RBI had to show at least some semblance of damage suffered by its regulated entities, but there was none. Though the stand of the RBI was that they had not banned VCs, several proposals including two draft bills created by committees constituted by the RBI among others, advocated exactly the opposite. Hence, it wasn’t possible for the Court to hold that the impugned measure was proportionate.
- Observations on Trading of Cryptocurrency Globally:
The Court stated that the argument that the Petitioner’s argument that most of the countries, except very few like China, Vietnam, Pakistan, Nepal, Bangladesh, UAE, have not imposed a ban (total or partial) is not of much value as the list of countries where a similar ban has been imposed disclosed a commonality, i.e., almost all of them were India’s neighbours. However, the Court supported the view expressed in the July 2018 Report of the European Union which read, “We are not in favour of general bans on cryptocurrencies or barring the interaction between cryptocurrency business and the formal financial sector as a whole… As long as good safeguards are in place protecting the formal financial sector and general society as a whole… that should be sufficient.” The Court believed that there could also be no comparison with the approach adopted by countries such as the UK, US, Japan, Singapore, Australia, New Zealand, Canada etc. (where trading in cryptocurrency was legal), as they have developed economies capable of absorbing greater shocks than India.
- Article 19(1)(g) of the Indian Constitution
The Court held that any restriction to the freedom guaranteed under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6). RBI raised two fundamental objections in this regard. The first is that corporate bodies who have come up with the challenge are not ‘citizens’ and hence, not entitled to maintain a challenge under Article 19(1)(g). This objection held good in respect of the Internet and Mobile Association of India( IAMAI), which is a not-for-profit association, but did not hold good in respect of the companies running VC exchanges.
The second objection was that there is no fundamental right to purchase, sell, transact and/or invest in VCs and so, the Petitioners cannot invoke Article 19(1)(g). But this contention was rejected for two reasons: (i) some of the Petitioners are not claiming any right to purchase, sell or transact in VCs, but claiming a right to provide a platform for facilitating an activity (of trading in VCs between individuals/entities who want to buy and sell VCs) which is not yet prohibited by law, (ii) that in any case the impugned Circular does not per se prohibit the purchase/sale of VCs.
Accordingly, it was contended by the learned Counsel for the Petitioners, that what is hit by the impugned Circular is not the actual target. The actual target is the trade in VCs. The object of hitting at trading in VCs, is to ensure consumer protection, prevention of violation of money laundering laws, curbing the financing of terrorism, and safeguarding of the existing monetary/payment/credit system from being polluted. However, since hitting the ‘target’ directly is not within the RBI’s domain, it sought to protect only the regulated entities. In the process, the RBI hit VC Exchanges (VCEs) and not the actual trading of VCs. The Petitioner urged that it is in this context that the contention revolving around Article 19(1)(g) has to be examined.
The Court held that the category of citizens, namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the basis of Article 19(1)(g). It was further noted that those who have suffered a deadly blow from the impugned Circular are those running VCEs and not those who are trading in VCs. Persons trading in VCs had different options, but the people dealing in VCEs could not find any other means of survival if they were disconnected from the banking channels. Thus, both objections were dismissed.
Furthermore, as explained hereinabove, the Court also used the test of proportionality and determined that the impugned Circular did not pass the same. Therefore, the Court held that while regulation of a trade or business through reasonable restrictions imposed is saved under Article 19(6) of the Constitution, a total prohibition, especially through a subordinate legislation by from RBI, of an activity not declared by law to be unlawful, is violative of Article 19(1)(g).
Thus, the Petitioners succeeded, and the impugned Circular was set aside on the ground of proportionality. The Statement dated 05.04.18 though challenged in one writ petition, was not in the nature of a statutory direction and hence the question of setting aside the same did not arise.
Brief Analysis of the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 and its precursor, Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018
The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-Ministerial Committee contained two proposals:
- to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and
- to regulate VC exchanges and brokers where sale and purchase may be permitted.
The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 Bill, in terms of Section 3, imposes a general prohibition on mining, generating, holding, selling, dealing in, issuing, transferring, disposing of, or using Cryptocurrency by any person in the territory of India, other than (a) technology or processes underlying any Cryptocurrency for the purpose of experiment or research, including imparting of instructions to pupils provided that no cryptocurrency shall be used for making or receiving payment in such activity; and (b) use of Distributed Ledger Technology for creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment.
Section 6 further prohibits the use of cryptocurrency as a medium of exchange, a store of value, a unit of account, and as legal tender or currency at any place in India. Section 8 further lays out various offences punishable under the Bill.
The author opines that the judgement passed by the Indian Supreme Court in IAMAI v. RBI is an extremely well-written judgement that upholds the constitutional protection given to businesses in India under Article 19(1)(g) of the Constitution by setting aside delegated legislation that is unconstitutional. This provides hope for a vibrant virtual currency industry in India that has the potential to revolutionize banking and by extension, society. The Banning Cryptocurrency Bill is not a part of the Parliamentary Agenda that was decided for the 2020 Monsoon session and therefore does not pose an imminent danger to cryptocurrency trading. It is in the interest of India for it to continue to remain so.
*Melita Tessy is a third year law student at Christ University, with a keen interest in Technology and IP Law. She published her novel ‘Battle of the Spheres’ when she was 15 and is one of India’s youngest TEDx Speakers.
 Department of Communication – RBI, Circular, 6th April 2018, https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF
 Reserve Bank of India, Chapter III – Financial Sector Regulation: Financial Stability Report (December 2015), https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/07C3EDD1BD5ED04B4207A1782587D3F63BF9.PDF
 Reserve Bank of India, Financial Stability Report (December 2016), https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSR2316BB76DB39BF964542B9D1EBE2CBC273E7.PDF
 Department of Communication – RBI, Statement on Developmental and Regulatory Policies, 5th April 2018, https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR264270719E5CB28249D7BCE07C5B3196C904.PDF
 Department of Economic Affairs – SEBI, Report on Opportunities for the Indian Securities Market (August 2017), https://www.sebi.gov.in/reports/annual-reports/aug-2017/annual-report-2016-17_35618.html
 Supra 1
 RBI, Financial Stability Report (December 2017), https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSR201730210986ADDA44E2A946A3F6C4408581.PDF
 RBI, Press Release cautioning users, holders and traders of virtual currencies, 01.02.2017; The Government of India (GOI), Ministry of Finance, Statement, 29th December 2017.
 Internet and Mobile Association of India (IAMAI) and Ors. v. Reserve Bank of India (RBI), 2020 SCC OnLine SC 275 (India)
 Bloomberg, India plans to introduce law to ban cryptocurrency trading, 17th Sep 2020,
 Supra 9
 Maharashtra v. Indian Hotel and Restaurants Association, (2013) 8 SCC 519 (India)
 Infra 21, 22
 EU, Directive, 2018/843, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN
 Supra 9
 Kevin Helms, India’s Crypto Bill Omitted from Parliament Agenda While New Ban Report Appears, Bitcoin.com, Sep 16, 2020, https://news.bitcoin.com/india-crypto-bill-parliament-ban