On April 5, 2018, Reserve Bank of India had issued a few advisory guidelines concerning cryptocurrency activities in India under a circular titled ‘Statement on Developmental and Regulatory Policies’.
Paragraph 13 of the circular asked entities governed by RBI not to deal with – or give services to – any person or business organizations dealing with or transacting in virtual currencies. Additionally, it also asked these entities to end such ties – if any. As per RBI, the circular was issued in the public interest.
This circular was challenged by the chief petitioner – Internet And Mobile Association Of India – in the court of law. On March 4, 2020, the Supreme Court of India delivered a historical judgment.
As per popular interpretation of the verdict, it signalled the legitimacy of virtual currencies in India; that is, the Supreme court had lifted the ban on virtual currencies, and thus, trading in virtual currencies was now legal. The petitioners had been entitled to supersede, and the challenged circular issued on April 6, 2018, was subject to be taken down, as per the Supreme Court.
Though the Supreme Court of India upheld the plea for striking down the applicability of the circular, the order pronounced by the bench consisting of Justice Rohinton Fali Nariman, Aniruddha Bose and V. Ramasubramanian, may need careful evaluation for better understanding of the judgement.
Supreme Court Affirmed That RBI Has All The Power To Regulate Cryptocurrencies
The arguments in support of petitioners were on Article 19(1) (g). The denial of banking access to a profession not prohibited under the Indian law was deemed a violation of Article 19(1) (g) of the Constitution of India (which provides the right to practice any legal profession).
The petitioners also argued that the power contained in the circular lied outside the powers of the RBI, but the Apex Court negated that argument. The Supreme Court held that anything that may act a threat to or have an impact on the financial system of India should be regulated or prohibited by RBI, despite the said activity not constituting part of the credit system or payment system of the country.
In its judgement, the court observed, “It is no doubt true that the Reserve Bank Of India has pervasive powers not only in view of the statutory design but also in view of the special status and role that it possesses in the economy of India. These powers can be applied both in the form of preventive as well as curative measures.”
“The court was convinced about wide powers of RBI and issuance of the circulars as preventive measures for the betterment of Indian financial scenario, but as the circular could not pass the test of proportionality, the circulars were smacked down. So, it should not be seen as the Supreme Court has lifted the ban on cryptocurrency in India, or that cryptocurrency trading is official in India as many of us are construing this decision,” said Advocate Dr Mahendra Limaye, who heads cyber law firm- Mahendra Limaye Associates.
Where Is The Mainstream Interpretation of The Verdict Wrong?
The Supreme court stated RBI did not show any empirical data highlighting the damage caused by cryptocurrency exchanges on the entities regulated by RBI, which is a significant reason that petitioners were able to win. Given that official ban on cryptocurrency still not exist India, RBI’s ban on banking support for crypto firms remained unjustified on the grounds of proportionality.
“The availability of power is distinct from the manner and extent to which it can be exercised by RBI. To test the proportionality of banking ban, it required RBI to present at least some semblance of any damage endured by its regulated entities. But there is none,” the Supreme Court stated.
So, the overturn of the circular does not mean cryptocurrencies are legal in India or that crypto exchanges will be permanently allowed to function, according to experts.
Given RBI will further challenge the verdict to prove the alleged risk that cryptocurrencies pose to the banking system, the banking ban could be reinstated later. Plus, we know that an Inter-Ministerial Committee proposed in February 2019 a blanket ban on cryptocurrencies.
Known as “Banning of Cryptocurrency and Regulation of Official Digital Currency Act”, the draft bill is yet to be presented in front of the legislature. If passed, it could make buying, selling, mining, and even holding of cryptocurrency a punishable offence. So, have we interpreted the recent verdict by the Supreme Court wrongly?
Dr Limaye says, “In my views, the mainstream interpretation of the verdict is wrong. The petitioners received the benefit of doubt and lassitude from government’s part also played an imperative role in tiling the balance in favour of petitioners. The Apex Court has accepted the powers of RBI to issue circulars in Public Interest. There was no blanket order banning Virtual Currency and diametrically opposite views by the Central government regarding virtual currencies, and it let down the populous move of RBI banning VC exchanges from banking exposures”.
“What is essential to note, is that all petitions are filed against the Reserve Bank Of India, and not the Finance Ministry draft ban bill. The verdict remains only short-term relief as the verdict against the RBI does not impact activities on the policy level,” also wrote Tanvi Ratna, a technology consultant and CEO of Policy 4.0 in her blog.
The verdict had been welcomed and celebrated by professionals in the crypto industry—multiple exchanges like Unocoin, Wazirx and CoinDCX started INR deposit services soon after.
The announcement also was followed by multiple investment announcements in cryptocurrency-related startups. This included Binance, Aeternity and HashCash investing in the country’s blockchain and cryptocurrency economy in 2020.
The cryptocurrency ecosystem in India saw a revival of fiat liquidity and resurgence of fiat-based trading at exchanges and as well as investments in startups. But, is this festive mood going to be a short-lived affair if “Banning of Cryptocurrency and Regulation of Official Digital Currency Act” is passed?
“The verdict of the Supreme Court solely addresses the Reserve Bank of India circular. The Supreme Court is very unlikely to issue any action against the Finance Ministry, and impact their view on the subject,” according to Tanvi Ratna.
Experts believe the Supreme Court seemingly gave a verdict in favour of the cryptocurrency industry as there is no such law yet in India which bans cutting banking support for exchanges. This means the judgment would not hold once there is such anti-crypto regulation is in place.
“In the entire judgement, the Supreme Court never uttered a single word about legitimacy or genuineness of virtual currencies or about exchanges trading such virtual currencies. But SC only decided that the activities of petitioner exchanges, trading in virtual currency were not declared unlawful. Hence, their bank accounts could not be debit frozen by the banks citing the challenged RBI Circular,” said Dr Mahendra Limaye.