BANKING LAW

EVALUATION
BATCH- 2020-2025

SUBMITTED BY- Himank sharma

IVth YEAR BA.LLB
URN NO.- 2020-B-13092001
DIVISION- B
SEMESTER- VIIIth
SUBMITTED TO – Dr. Rajlakshmi Wagh
SCHOOL OF LAW
INTERNET AND MOBILE ASSOCIATION OF INDIA

…. PETITIONER

VERSUS

RESERVE BANK OF INDIA …. RESPONDENT

Court: The Supreme Court of India

Citation: W.P (CIVIL) No. 528/2018

Qurom: Justices Rohinton Fali Nariman, Aniruddha Bose, V.

Ramasubramanian
INTRODUCTION

In 2018, a Directive of the European Parliament and the council defined the term virtual
currency as a digital representation of value that is not issued or guaranteed by the central
bank and public authority, is not necessarily attached to a legally established currency but
is accepted by a natural or legal person as a medium of exchange and which can be
transferred, stored and traded electronically.

In India, RBI is the central banking institution that regulates the currency in order to
secure monetary stability in India and it was nationalized on 1st July 1949.

In June 2013, through the report of Financial Action Task Forces, an intergovernmental
organization founded in the initiative of G7, RBI caught on to the growth of virtual
currencies because of the excessive use of online mobile technology.

On 24th December 2013 press release issued by RBI clarified that the creation, trading,
and usage of Virtual Currencies as a medium of exchange is not authorized by the Central
Bank or monetary authority.

On 27th December 2013, the enforcement directorate raid on 2 bitcoin trading firms in
Ahemdabad namely bitcoin and buysellbitco.in. Thereafter reports were issued in 2014

and 2015 by FATF (Financial Action Task Force) highlighting the risk of trading Virtual
Currencies.

BRIEF FACTS OF THE CASE

1. The Reserve Bank of India (RBI) issued a Circular on April 6, 2018 titled “Statement
on Development and Regulatory Policies”.
2. Which prohibiting banks and other regulated businesses from dealing in Virtual
Currencies (VC), or Cryptocurrencies, and providing services to any individual or
entity dealing with or settling VCs.
3. The prohibition had the effect of prohibiting Virtual Currencies exchanges from
maintaining and operating bank accounts, effectively ending the business of VC
trading that needed conversion from fiat currency via regulated banking channels.
4. There was no statutory ban on the usage and trading of VCs in India at the time the
Circular was released, and VCs were ring-fenced from the official economy by the
RBI's prohibition.
5. The RBI was concerned that VCs could be hacked; that there could be speculation due
to the lack of an underlying asset, and that the resulting volatility could result in
severe losses; and that VCs could be used for money laundering (ML) and terrorist
financing (TF).
6. Before issuing the Circular, the RBI had only issued precautionary press statements
since 2013, expressing the same concerns. The RBI did not mention any additional
risks when the Circular was released.
7. This action on part of the RBI, was challenged by the Internet and Mobile Association
of India (IAMAI), which is a not-for-profit organisation, aiming to protect the
interests and rights of online and mobile value added services industry.
8. The petition challenging the action was based on the grounds that RBI lacks authority
to take such a measure, rendering the circular ineffective and unenforceable.
9. The petitioners also raised the issue that such prohibition on cryptocurrency trade is
violative of Article 19(1)(g) of the Indian constitution which provides for the right to
carry out any trade or business freely.

ISSUES

The issues raised were-

1. Does the Reserve Bank of India have the authority to issue such directive?

2. Is the directive of the Reserve Bank of India against the spirit of the Fundamental
Right of practicing trade and commerce freely as mentioned in the Constitution.

JUDGEMENT

In a 180-page judgement, the bench ruled in favour of the petitioners. The court
maintained a holistic approach to understand the technicalities of cryptocurrencies and
their workings. Definitions and reports issued by various international organisations were
observed and recognised. Positions of numerous jurisdictions in the global arena with
respect to VCs were also considered. While addressing the first issue, the Supreme Court
was hesitant to accept RBIs contention that Cryptocurrency can be regarded as equal to
fiat currency. Nonetheless, RBI being the supreme regulator of the country’s financial
system, coupled with the statutory powers that have been endowed upon it, which include
ensuring financial stability and operating the currency and credit system to its advantage,
RBI is well within its rights to regulate and take appropriate actions with respect to
Cryptocurrencies. With regards to the second issue, the Supreme Court was of the view
that complete prohibition of Cryptocurrency trade and subsequent but indirect elimination
of VC exchanges from the country’s industrial set up was not a proportionate measure. It
had exceeded the bounds of reasonableness. The Supreme Court had relied on State of
Maharashtra v. Indian Hotel and Restaurant Association, and held that in order for the
RBI to take such an extraordinary measure, there must exist some damage suffered by the
regulated entities which must be proven by providing some empirical data regarding the
loss and that loss should have been caused by the operation of Virtual Currency
exchanges. However, it has been observed that since the last five years, there has been no
significant damage caused to the regulated entities.

SUGGESTIONS AND WAY FORWARD

There needs to be a retrospective analysis by the government on the findings of two of its
committees with one (Crypto Regulation bill, 2018) seeking to regulate VCs and the other
(Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019)
seeking to ban it. The government rather than banning it to curb the mischief of money
laundering, KYC process, and other related issues should instead calibrate growth,
innovation and risk involved to avoid the creation of underground channels and provide
regulatory mechanisms for the same. In this regard, the following suggestions are made:

1. The government should place VCs under the exclusive umbrella of RBI to ensure that
there is clarity in provisions for the regulation of VC.
2. The government should set up an advisory council consisting of lawmakers,
regulators, service providers, national and international crypto operators who would
formulate policies and advise
3. The Income-tax department must issue guidelines on how to tax VCs differently
based on the function exercised by the user.
4. The government should set up a government-backed VC exchange. This would also
ensure the necessary KYC process compliance by the regulator to its required
standard and give the users the concurrence of privacy of their transactions.
5. Like China is planning to launch a sovereign cryptocurrency- the Digital Currency
Electronic Payment (DCEP) as an alternative to the US dollar as a reserve currency.
6. Capital gain and loss on liquidation of VCs need to be assessed by the authorities.
7. New act on VCs should be legislated.
8. The jurisdiction in case of cross country disputes needs to be ascertained because
presently all the VCs are being developed by companies like Facebook, JP Morgan,
etc that are global in nature.
9. Provisions need to be made to assess the impact of the valuation of VCs globally on
the domestic crypto industry.
10. The legislature should delve into the possibility of VCs being transacted as shares.
11. The Personal Data Protection Bill, 2019 needs to take into its ambit the data of the
users stored by VC exchanges or on the public ledger. Laws to be legislated for data
processors and social media intermediaries should also apply to VC exchanges
registered in India.
12. The applicability of the existing inheritance laws in India on the VC stock held by
individuals also needs to be taken into consideration by the policymakers.