The use of cryptocurrency has always been a point of contention with its legality being a mystery to the public. Bitcoins are a form of digital currency and are not considered to be legal tender. However, these are capable of functioning as a medium of exchange akin to money. The lack of a traditional government or bank-backed system to regulate its use makes cryptocurrencies the target of several concerns such as it being a conduit for black money or anonymously funding terrorism. Despite the odds, cryptocurrencies have gained popularity worldwide and the cryptocurrency market in India has also been slowly gathering momentum.
Since 2013, various warnings were issued by the RBI through its press releases regarding the potential risks of the use of cryptocurrencies to the financial system of the country. The Inter-ministerial Committee on February 28, 2019, had also released a report recommending certain measures in relation to cryptocurrencies, which included a complete ban on private cryptocurrencies. This committee had also prepared a draft bill known as Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018 (the fate of which is currently unknown). However, the use of cryptocurrency per se was never banned.
In April 2018, the RBI issued a circular banning regulated financial institutions from providing services to businesses dealing in exchange/trading of cryptocurrencies, which put the entire Indian cryptocurrency trading industry in turmoil. The validity of the circular was challenged before the Supreme Court in various writ petitions lead by crypto-trading entities. In its decision in the Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court deliberated on cryptocurrency and struck down the circular.
The Supreme Court analyzed the role of RBI in the economy as a central bank to manage currency, money supply and interest rates and recognized that the maintenance of price stability as an objective of RBI. The Supreme Court noted that cryptocurrency is capable of being accepted as valid payment for the purchase of goods and services, and payment systems can be regulated by the RBI.
The Supreme Court held that the RBI was within its rights to issue the circular in fulfillment of its objective under law to safeguard the “public interest, interests of depositors and interests of the banking policy”. The Supreme Court stated that “Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system.” As the circular was found to be issued in the interest of banking policy, the depositors and of the public at large, the Supreme Court rejected the contention that there had been excessive use of power by RBI.
The circular was also challenged on the grounds that denial of access to those who trade in cryptocurrency would tantamount to a denial of their constitutional right to carry on any trade or profession and thus would be violative of Article 19(1)(g). The Supreme Court upheld this contention by stating that “There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession.”
However, the Supreme Court drew a clear distinction between the three categories of persons who trade in cryptocurrency as a hobby as opposed to those who engage in trading in cryptocurrency as their business/occupation. The Supreme Court held that the first category who buys and sells cryptocurrency as a mere hobby cannot base their claim on Article 19(1)(g) as it only covers trade, occupation, profession or business.
The Supreme Court further held that the second category of citizens those who trade in cryptocurrency cannot also claim that the circular had the effect of completely shutting down their businesses, as they could still continue trading in “crypto-to-crypto” pairs or use the currencies stored in their wallets to make payments for the purchase of goods and services to those who are prepared to accept them, within India or abroad. Therefore, it is only the third category i.e., cryptocurrency exchanges that suffered due to the circular, as they had no other means of survival if they were disconnected from banking channels.
Though the RBI was held to be within its rights to issue the circular, the factor that led to the striking down of the circular was the lack of proof of the “proportional damage” suffered by RBI regulated entities in dealing with businesses operating in cryptocurrencies. The Supreme Court observed that the circular disconnected the banking sector from cryptocurrency exchanges despite the RBI not having found anything wrong with the functioning of these exchanges. It was also noted that before issuing the circular, the RBI did not explore the availability of alternative and less intrusive measures such as regulating cryptocurrency trading and cryptocurrency exchanges.
Though the judgment has provided temporary relief, there is currently an absence of definitive regulation on the cryptocurrency market. In light of such a vacuum, it is unlikely that financial institutions and the banking sector would be inclined towards investing in virtual currencies.
The wide-scale use of cryptocurrency also seems to be questionable, as the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” has been proposed with the aim to ban all private cryptocurrencies. Though the Indian Parliament is yet to approve this bill, it would be interesting to think through the role of digital currencies in the post-COVID-19 economy.
-Sawant Singh is Partner at Phoenix Legal. Neha Naik is a Senior Associate at Phoneix Legal. Madhavi Doshi is an Associate at Phoneix Legal. The views expressed are personal.