The Supreme Court on Wednesday set aside an RBI circular that imposed a blanket ban on banks and financial institutions from providing services to any individual or business dealing in digital currencies. As the SC had earlier refused to stay the circular issued in April 2018, the banks and bourses dealing with cryptocurrencies, including bitcoins, had closed down operations since July 6, 2018. The RBI circular had declared that cryptocurrency related businesses like virtual currencies, crypto assets, etc, are illegal and had also mandated banks, e-wallets, and payment gateway providers to withdraw support for such exchanges and other businesses dealing with virtual currencies in India.
Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds, operating independently of a central bank. According to an industry executive, Indians traded roughly 2,500 bitcoins per day before the ban. With the lifting of the curbs, the number may substantially go up, he added.
A three-judge bench comprising justices RF Nariman Aniruddha Bose and V Ramasubramanian quashed the RBI circular on the ground of “proportionality”. “When the consistent stand of RBI is that they have not banned VCs and when the government 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 bench said.
The apex court said that there is no doubt that RBI has wide powers and can be exercised both as “preventive” as well as “curative” measures. “But the availability of power is different from the manner and extent to which it can be exercised. While we have recognized.. the power of RBI to take a pre-emptive action, we are testing…the proportionality of such measure for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none,” Justice Ramasubramanian, writing the judgment for the bench, said in its 180-page verdict.
Till date,the RBI has not come out with a stand that any of the entities regulated by it – the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs – has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them, it said.
The SC noted that the inter-ministerial committee had in February 2019 recommended total ban on private crypto currencies through a legislation “Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019” and also asked the government to consider launching its own digital money.
“In case the enactment (2019) had come through, there would have been an official digital currency, for the creation and circulation of which, RBI/central government would have had a monopoly. But that situation had not arisen… What is worse is that this has been done despite RBI not finding anything wrong about the way in which these exchanges function and despite the fact that VCs are not banned,” the SC stated.
Following the ban, petitions by representatives from various crypto-related businesses like cryptocurrency exchanges, their shareholders and traders and industry-led petitions were filed. A petition by Internet and Mobile Association of India (IMAI) argued that the RBI had banned cryptocurrency on “moral grounds” without any prior studies to analyse its effect on the economy. However, RBI told the Supreme Court that it was necessary to regulate Bitcoin and other cryptocurrency in India as it encouraged “illegal transactions” and impacted international flow of funds.
The petitions also said that RBI lacked the authority to classify crypto asset as legal or illegal assets, but is seeking indirect, colourable means to outlaw crypto assets, which as per the Finance Ministry do not qualify as ‘legal tender’ in India.