In a major decision, on Wednesday the Supreme Court eliminated the curbs put on controlled institutions such as banks and NBFCs by the Reserve Bank of India from virtual currencies and from the provision of services for crypto companies. This Court held that the RBI circular, banning licensed institutions from giving banking services to traders or encouraging trading in VCs, could be set aside on the “ground of proportionality”.
When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate
The Court noted. A jury bench composed of Justices R F Nariman, Aniruddha Bose, and V Ramasubramanian, (The Web and the Wireless Association of India vs Reserve Bank of India) heard the case.
In April 2018, RBI released a circular banning regulated financial entities from supplying crypto companies with services. The prohibition came into force three months later and banks immediately locked crypto-exchange accounts.
The Circular released on 6 April 2018 instructed RBI-regulated agencies:
- Not to trade with virtual currencies or to provide services that would encourage the processing or settlement of virtual currencies by any person or entity; and
- Leave the partnership with those individuals or organizations if they have already been offering these services.
The Internet and Mobile Association of India and a few other stakeholders questioned this in the Supreme Court. The Association consisted of a few companies that run online crypto assets trading sites, certain companies ‘ shareholders/founders and a few individual crypto asset traders.
The Court noted three considerations when overruling the circular:
- RBI has not, in the past 5 years or more, found that the activities of Virtual Currency Exchanges have actually adversely affected the functioning of RBI-regulated entities
- The consistent position was taken by RBI, including in its answer dated 04-09-2019, is that RBI has not banned virtual currency in the country and
- Also, the Inter-Ministerial Committee formed on 02-11-2017, which originally recommended a special legal framework, including the introduction of a new law, namely the Crypto-token Regulation Bill 2018, were of the opinion that a ban could be an extreme tool and that regulatory measures can achieve the same objectives
The Court noted:
The position as on date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned
Advocate Ashim Sood, appearing for IAMI, argued that Reserve Bank of India had no jurisdiction to prohibit transactions in cryptocurrencies. The general ban was based on a misconception that it was impossible to regulate cryptocurrencies, Sood argued. It was also claimed that cryptocurrencies were not “currency” in the strict sense, and could be referred to as a medium of exchange or a store of value. Senior Advocate Shyam Divan, appearing for RBI, disagreed and said that it was a mode of digital payment that RBI had the power to control. Divan argued that the contested decisions were necessary because, in the opinion of RBI, VC transactions could not be referred to as a payment system, but only peer-to-peer transactions that do not involve a system provider under the Payments and Settlement Systems Act. Despite this, VC transactions have the potential to develop as a parallel payment system. It was also submitted that VCs could be used for illegal activities because of their anonymity.
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