AN ANALYSIS OF SUPREME COURT JUDGMENT ON CRYPROCURRENCY: A

VICTORY OR DEFEAT FOR CRYPTOCURRENCY AND ITS FUTURE?

Recently, a three-judge bench of the Supreme Court of India in the case of Internet and
Mobile Association of India v. Reserve Bank of India pronounced the judgment on the
legality of an RBI statement and circular that had effectively stopped all RBI-regulated
entities to deal in Virtual Currencies or provide services for facilitating any person or entity
in dealing with or settling Virtual Currencies. RBI had also asked those already providing
such services to exit the relationship within three months of the date (April 06, 2018) on
which it issued the circular. The 180-page judgment authored by Justice V.
Ramasubramanian seems to suggest initially for around 170 pages that the Supreme Court
is likely to uphold the banning of Cryptocurrencies but in the last few pages, the Court sets
aside the RBI Circular on the ground of proportionality. For the sake of simplicity, the terms
“Virtual Currencies” and “Cryptocurrencies” have been used interchangeably in this analysis.

Virtual Currencies were introduced as an alternative to the conventional currency system. A

bank or a company or the government is required to issue and keep track of the money in the
existing system of conventional currencies. The developers of Virtual Currencies believed
that such central regulating authorities could not be trusted, as they have breached the trust
several times. Virtual Currencies were developed dreaming a financial system void of any
central regulating authority and fully peer-to-peer with no trusted third party. They wanted an
anonymous, low transaction cost and transferable unit of exchange. Cryptocurrencies could
also solve the problem of financial exclusion because a huge population in the world even
today does not have access to formal financial institutions, for example, banks. The
cryptocurrency was also supposed to be global as compared to conventional currencies that
are local in nature.

The petitioners contended that RBI lacks power to deal with, regulate or ban Virtual
Currencies, as they are not money or other legal tender but only goods/commodities falling
outside the power of RBI. The Court held that RBI has a statutory obligation to address all
issues that are perceived as potential risks to the monetary, currency, payment, credit and
financial systems of the nation. It additionally held that the users and traders of Virtual
Currencies carry on an activity that falls squarely within the purview of the Reserve Bank of
India and therefore, RBI has statutory powers to address the concerns arising from Virtual
Currencies. Virtual Currencies have the potential to interfere with the matters that RBI has
the power to restrict or regulate. Thus, the Circular was held not to be ultra vires.

The petitioners additionally contended that even if RBI has the power to regulate, it does not
have power to prohibit any dealing in Virtual Currencies. The Court relying on other
judgments held that the word “regulate” has a very broad meaning and that includes the
power to prohibit. It was also contended that the power to prohibit something as res extra
commercium (a thing outside commerce) is always a legislative policy and not an executive
one but the Court held that the Circular did not lead to a total prohibition of Virtual
Currencies. It is only the entities regulated by RBI who have been asked to stop dealing in
such currencies. The Circular has not stopped trading in Virtual Currencies. The Court held
that if people trading in such currencies do not wish to convert these currencies into fiat
currency through banking channels, the impugned Circular does not affect them.

The petitioners additionally contended that even if it is assumed that RBI has the requisite
power to issue the Circular, an essential condition for that is “satisfaction”, i.e., RBI should
take decisions based on analyzing facts and certain other parameters. The Court held that RBI
has been looking into and cautioning the users, holders, and traders of Cryptocurrencies since
2013. In such a situation, RBI cannot be held guilty of non-application of mind and omitting
relevant considerations. Therefore, the Court did not accept the present contention.

The next contention was that the Circular in question is a colourable exercise of power and
tainted by malice in law because it achieves an object (closing the accounts of Virtual
Currency Exchanges) completely different from the one for which the power is entrusted and
therefore, the Circular was arbitrary. The Court held that RBI has enough power to issue
directions to its regulated entities in the interest of depositors, in the interest of banking
policy or in the interest of the banking company or in the public interest. It was held that if
the exercise of power by RBI to achieve one of its objectives incidentally causes collateral
damage to one of the several activities of an entity that does not come within the purview of
the statutory authority, the same cannot be held as a colourable exercise of power or being
vitiated by malice in law.

It was also argued that other stakeholders (like ED, Department of Economic Affairs, SEBI,
CBDT, etc.) except RBI did not see any grave threat and thus, RBI was at fault for not
adopting a similar approach to theirs. This argument was not accepted because other
stakeholders had different functions to perform and they were entitled to have different
approaches depending upon the way they looked at the issue. The argument that very few
countries have imposed a ban on Cryptocurrencies was also advanced. The Court rejected this
argument and held that the judicial decisions of India cannot be impacted by the actions of
other countries. Additionally, it pointed out that the Indian economic condition cannot be
placed at par with some of the developed economies as they can absorb greater shocks that
India cannot. The petitioners contended that certain best practices were already put in place
and all the issues raised by RBI were addressed but the Court found some practices not
fulfilling the concerns of the RBI. Anyway, the Court did not get into much detail to decide
whether the issues raised by RBI were being addressed by the best practices. It was then
argued that Virtual Currencies are of different types (for example anonymous and pseudo-
anonymous) and they require different treatments. For example, RBI could ban only
anonymous Virtual Currencies. The Court held that this has to be decided by experts and not
the Court. The Court also remarked the stand of RBI that they have not banned Virtual
Currencies and so, such a question of differential treatment to different Virtual Currencies by
RBI does not arise. It was then argued that the acceptance of Distributed Ledger Technology
(DLT) and the rejection of Virtual Currencies is a contradiction in terms. The Court rejected
this argument and held that there is nothing irrational about the acceptance of a technological
advancement/innovation and the rejection of a by-product of such innovation.

The next contention was that the decisions of RBI do not qualify for judicial deference
(Judicial deference is the condition of a court yielding or submitting its judgment to that of
another legitimate party such as the legislature or the executive) as RBI is just a statutory
body and the decisions by statutory bodies may not even be entitled to any judicial deference.
The Court held that RBI is not like any other statutory body but it has been created with a
mandate to get liberated even from its creator. RBI has been given very wide powers. It
cannot be equated to any other statutory body that merely serves its master. Its decisions
cannot be put on a lower pedestal to that of even an executive decision. It is not like a stream
that cannot be greater than the source. The difference between other statutory bodies and RBI
is that what other statutory bodies can do, could as well be done by the executive. Therefore,
the argument that a policy decision taken by RBI does not warrant any judicial deference was
rejected.

The last ground of challenge by the petitioners which led the Court to set aside the Circular
was the violation of Fundamental Rights under Article 19(1)(g) (All citizens shall have the
right to practise any profession, or to carry on any occupation, trade or business) and the
doctrine of proportionality (This doctrine means that the punishment should not be
disproportionate to the offence committed or the means that are used by the administration to
obtain a particular objective or result should not be more restrictive than that are required to
achieve it). The Court held that banking channels provide the lifeline of any business, trade or
profession and the moment a person is deprived of the facility of operating a bank account,
the lifeline of trade or business is severed, resulting in the trade or business getting
automatically shut down. Hence, the burden lied on RBI to prove that the larger public
interest required the impugned Circular. The Court also held that the RBI Circular should
pass the test of proportionality. The majority opinion in Modern Dental College and
Research Centre v. State of Madhya Pradesh summed up the four-pronged test to decide the
validity of the Doctrine of Proportionality. The four tests are: 1) The measure is designated
for a proper purpose. 2) The measures are rationally connected to the fulfilment of the
purpose. 3) There are no alternative less invasive measures and 4) There is a proper relation
between the importance of achieving the aim and the importance of limiting the right. The
Court after analysing the July 2018 report of the European Union Parliament titled
Cryptocurrencies and Blockchain where it was recommended not to go for a total ban of the
interaction between Cryptocurrency business and the formal financial sector as a whole held
that RBI did not consider the availability of alternatives before issuing the Circular. The
Court specifically pointed out that RBI has not so far found the activities of Virtual Currency
exchanges to have actually impacted adversely, the way the RBI-regulated entities (for
example, nationalized banks, scheduled commercial banks, cooperative banks, NBFCs)
function and even the Inter-Ministerial Committee constituted in 2017 opined initially that a
ban might be an extreme tool and that the same objectives can be achieved through regulatory
measures. The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-
Ministerial Committee seems to suggest that the Committee was fine with the idea of
allowing the sale and purchase of a digital crypto asset at recognized exchanges but within a
year there was a complete U-turn and the final report of the very same Inter-Ministerial
Committee, submitted in February 2019 recommended the imposition of a total ban on
private Cryptocurrencies through a legislation to be known as “Banning of Cryptocurrency
and Regulation of Official Digital Currency Bill, 2019”. Ironically and surprising if this
legislation (2019) had come through, there would have been an official digital currency, for
the creation and circulation of which, RBI or Central Government would have had a
monopoly.
It was concluded that RBI has very wide powers not only given its statutory scheme but also
because of the special place and the role that it has in the economy of the country but the
availability of power is different from the manner and extent to which it can be exercised.
The Court held that the Circular is not proportionate because RBI has not shown at least some
semblance of any damage suffered by its regulated entities in absence of this Circular. It held
that when the consistent stand of RBI is that they have not banned Virtual Currencies and
when the Government has not taken a call despite several committees coming up with several
proposals including two draft bills, both of which advocated exactly opposite positions, the
Court cannot hold the impugned decision of RBI proportionate and set aside the Circular on
the ground of proportionality.

Concluding as to what this judgment means for the future of Cryptocurrency, a part of this
judgment can be referred to where The Court pointed out an interesting but ironic situation.
Virtual Currencies were introduced to make a financial system that is free from any central
regulating authority such as banks. In the present situation, they were seeking from the same
authority (RBI) access to banking services, in effect, asking RBI to allow a system that would
destroy RBI itself in entirety. Therefore, if the users and traders of Virtual Currencies were
allowed access to banking services without any interference from RBI over a long period of
time, that could prove to be a threat to the very existence of RBI. Hence, RBI was held to
have the requisite power to regulate or prohibit any such activity. Thus, RBI has been given
very wide powers to not only regulate but also prohibit Cryptocurrencies. If the Court did not
uphold the banning of Cryptocurrencies, it was also because RBI did not provide some data
on the damage that its regulated entities would suffer in the absence of a ban on
Cryptocurrencies or because the government did not bring any legislation. If, for example,
any or both of them happen, we may see another ban on Cryptocurrencies. Let us say, they
are not banned but RBI has got enough power to regulate the Cryptocurrencies. The
regulation of Cryptocurrencies defeats the very purpose of why Cryptocurrencies came into
existence because the developers had introduced Cryptocurrencies imagining a financial
system that is free from any central regulating authority and that is visible in the way
Cryptocurrencies function. RBI is already planning to file a review appeal against the present
judgment. One thing is certain that we are going to see more petitions in the Court depending
upon the extent to which Cryptocurrencies are regulated.