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All’s Well For Cryptocurrency In India? – Finance and Banking – India – Mondaq News Alerts



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The Supreme Court, in a recent decision1 has held the Reserve Bank of
India’s (“RBI“) circular dated

April 06, 2018 (“Circular“), which
prohibited entities regulated by RBI from dealing with virtual
currency, as disproportionate and has accordingly revoked the said
prohibition.

In December 2013, RBI issued a press release highlighting the
risks associated with virtual currencies and cautioned users,
holders and traders of virtual currencies about potential
financial, operational, legal, customer protection and security
risks. This was followed by two press releases on a similar premise
in 2017.

Taking this one step ahead, in April 2018, RBI notified the
Circular that dealt with virtual currencies and prohibited
regulated entities from dealing with the same. As per the Circular,
all entities regulated by RBI were prohibited from:

(i) dealing with virtual currencies; and

(ii) providing services2 to
facilitate any person or entity in dealing with or settling virtual
currencies.

In short, while the RBI did not ban virtual currencies per se,
it only prohibited regulated entities from rendering services to
entities/persons dealing with virtual currencies. The Circular also
provided for a 3 (three) month period from the date of issuance of
the Circular within which, all regulated entities were directed to
put an end to all forms of engagement with entities dealing in
virtual currency.

By blocking the channel between fiat currency and virtual
currency, the Circular paralyzed the growth of cryptocurrency in
India. The Circular resulted in an immediate decline in wide range
of virtual currency-based activities in India. In fact, several
prominent and growing companies in this space began to shift their
base to other countries such as Singapore and Estonia.

The Internet and Mobile Accessories of India
(“Petitioner“) challenged this Circular
before the Supreme Court seeking a direction to the RBI to not
restrict or restrain banks and financial institutions, from
providing banking services to those engaged in the transaction of
crypto assets. In parallel, there were multiple writ petitions
filed before various High Courts on the same matter. Due to
multiplicity of cases emanating from the Circular, the Supreme
Court allowed the RBI to transfer all those cases from various High
Courts to the Supreme Court. The Supreme Court further directed
that no other High Court will entertain writ petitions in relation
to the impugned Circular.

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The Petitioner’s prime contention in this matter was that
the RBI has no power to prohibit the activity of trading in virtual
currencies through virtual exchanges as it is not an activity which
the RBI is mandated to regulate.

Assuming the RBI had the power to regulate such an activity, it
was contended that the RBI had not exercised prudence and the ban
failed the test of proportionality.

It was also pointed out that there are very few countries which
have put an absolute ban on dealing with virtual currencies.
Further, the Petitioner highlighted the fact that that even in
India other than the RBI, none of the other regulatory bodies such
as the Enforcement Directorate and Securities and Exchange Board of
India, shared the same view as RBI.

It was also contended that the ban went against the
Petitioner’s fundamental right to carry on trade or business.
Lastly, it was submitted that banning such activities should be a
legislative function and should not arise out of an executive
action.

RBI defended the Circular stating that the object of introducing
this prohibition was to ensure (i) consumer protection; (ii)
prevention of violation of money laundering laws; (iii) curbing
financing of terrorism; and (iv) safeguarding existing
monetary/payment/credit system from being polluted. These claims
were refuted, and it was stated that best practices have been
adopted, such as (i) avoidance of cash transactions; (ii) enhanced
know your customer norms; and (iii) confining their services only
to persons within India to resolve RBI’s concerns.

Supreme Court’s Findings and Decision

The submission that virtual currencies may not be regulated by
RBI was rejected by the Supreme Court. Given some institutions
accept virtual currencies as valid payments for purchase of goods
and services, the Supreme Court held that the activities carried on
by users and traders of virtual currencies falls within RBI’s
purview.

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The contention that prohibition in trading of virtual currency
should be by way of a legislation and not an executive action was
rejected by the Supreme Court. Relying on judicial precedents, the
Supreme Court held that what articles and goods should be allowed
to be produced, possessed, sold and consumed is to be left to the
judgment of the legislative and executive wisdom. Additionally, the
Supreme Court rejected the contention that the Circular prohibited
use or trading in virtual currencies and pointed out that it only
directed the entities regulated by RBI not to provide banking
services to those engaged in trading or facilitating the trading in
virtual currencies.

The Supreme Court was of the view that any restriction to the
freedom guaranteed under Article 19 (1)(g) of the Constitution of
India, should pass the test of reasonableness. The court observed
that virtual currency exchanges did not have any other means of
survival if they were disconnected from banking channels.
Therefore, while there was no direct ban on the business conducted
by virtual currency exchange entities, the action of prohibiting
regulated entities from dealing with these entities, indirectly
violated the Petitioner’s fundamental right. Further, the court
took into account the Petitioner’s reliance on the four-pronged
test to determine whether RBI’ action was proportionate. The
elements of the four pronged test include (i) whether measures were
designated for a proper purpose; (ii) that the measures are
rationally connected to fulfilment of such purpose; (iii) that
there are no alternative less invasive measures; and (iv) that
there is a proper relationship between importance of achieving the
aim and the importance of limiting the right. The Supreme Court
noted that the RBI failed to present any empirical evidence
demonstrating that the business of the Petitioner caused any harm
to the regulated entities and concluded that the RBI’s action
was disproportionate.

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For the reasons above, the court set aside the Circular on the
grounds of proportionality.

Conclusion

The judgment demonstrates the forward-looking attitude of the
apex court and positively evokes praise. While this judgment is
certainly a start, there are various challenges that the virtual
currency industry may have to face. The first challenge may be on
account of the RBI filing for a review of this judgment for further
scrutiny. The law in relation to virtual currency is still not
frozen and may undergo drastic changes in the near future. The
judgment merely held the Circular disproportionate and did not rule
on the legitimacy of virtual currencies. Virtual currencies may
very well be banned if the Parliament passes a law on this subject
prohibiting dealing in virtual currencies. The ‘Banning of
Cryptocurrency and Regulation of Official Digital Currency Bill,
2019’
, a bill on this subject matter prescribes usage of
virtual currencies and provides for disproportionate penalties such
as imprisonment of up to 10 years for activities such as mining,
holding and selling of cryptocurrencies. Players in the virtual
currency industry are in a wait and watch mode. The coming months
would be instrumental for such players. It would be interesting to
see if the legislature’s approach is whether to effectively
regulate virtual currencies, or simply ban it.

Footnotes

1 Internet and Mobile
Associations of India v. Reserve Bank of India [W.P. Civil No. 528
of 2018]

2 As per the Circular, services
included maintaining accounts, registering, trading, settling,
clearing, giving loans against virtual tokens, accepting them as
collateral, opening accounts of exchanges dealings with them and
transfer/receipt of money in accounts relating to purchase/sale of
virtual currencies.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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