By Alipak Banerjee & Jaideep Reddy
Recently, in a landmark ruling, the Supreme Court set aside Reserve Bank of India (RBI) circular, which had banned trading in virtual currencies (VCs) through banks and other RBI regulated entities. On April 6, 2018, RBI had directed its regulated entities to neither deal in VCs nor provide services for facilitating any person or entity dealing with or settling VCs, and to exit the relationship if they were already extending such services.
The circular was challenged before SC on several grounds. For one, RBI did not have the power to prohibit trading in VCs through virtual currency exchanges (VCEs). Even assuming RBI had the power, such power was not properly exercised.
RBI, on the other hand, had contended that VCs do not satisfy the criteria—store of value, the medium of payment and unit of account—to br acknowledged as currency. VCs do not have any formal or structured mechanism for handing consumer disputes/grievances and are capable of being used for illegal activities due to their anonymity/pseudo-anonymity. It also said that increased use of VCs would eventually erode the monetary stability and the credit system. The circular had a legislative character and was in the realm of an economic policy decision taken by an expert body and RBI has broad powers.
After a review of the position in several countries and regulators across the world, SC observed that while VCs have not acquired the status of a legal tender, nevertheless, they constitute a digital representation of value.
While setting aside the circular, SC noted that VCs are not banned; RBI did not find anything wrong in the manner in which the VCEs function, none of the RBI-regulated entities ever complained that they suffered any loss or adverse effect directly or indirectly and that there is no empirical data to suggest otherwise. While noting that RBI has broad powers, SC struck down the circular that the damage could not be established.
Interestingly, SC rejected the argument that RBI had not applied their mind while issuing the circular and observed that since June 2013, RBI in its Financial Stability Report and other materials has been deliberating the issue and cautioning the users, holders and traders of virtual currencies about the potential financial, operational, legal and consumer protection and security related risks associated with virtual currencies.
SC also analysed the draft Crypto-token Regulation Bill, 2018 which had been deliberated upon by the Inter-Ministerial Committee, and observed that Inter-Ministerial Committee accepted the idea of allowing the sale and purchase of the digital crypto assets at recognised exchanges. However, the final report submitted by the Committee in February 2019 recommended imposition of a total ban on private cryptocurrencies via “Banning Cryptocurrency and Regulation of Official Digital Currency Act, 2019”. The draft contained provisions which sought to ban mining, generation, holding, selling, dealing in, issuing, transferring, disposing of or using cryptocurrency in the territory of India. The Bill made mining, holding, selling, transferring or use of cryptocurrency punishable with fine or imprisonment up to ten years, or both. The Bill made it mandatory to declare and dispose of cryptocurrency within ninety days from the commencement of the legislation.
Since trading in virtual currencies is a legal activity, and RBI showed no harm to its regulated entities as a result of such trading, and since no defects were pointed out by RBI in the functioning of VCEs, SC took the view that the circular was a disproportionate restriction on the fundamental right of VCEs to carry on their business.
The Bill, so far, has not been introduced in the Parliament, and it remains to be seen how the government reacts to SC’s decision. Vodafone’s case and the retrospective amendments to the Finance Act serve as reminders of the government’s power to sidestep decisions. Such a step would be regressive and once again subject to the test of proportionality. The VCEs and international bodies have consistently advocated regulation and not a blanket ban on trade in VCs; such regulation will bring more stability and the much-required clarity in the system.
Banerjee is leader, international dispute resolution and Reddy, leader, crypto asset and blockchain, Nishith Desai Associates