After the circular was issued, a high level inter-ministerial committee has proposed a Draft Bill for the Banning of Cryptocurrency & Regulation of Official Digital Currency.
By Arun Prabhu
On March 4, 2020, the Supreme Court, in Internet and Mobile Association of India v Reserve Bank of India, set aside the circular issued by RBI on April 6, 2018. The circular had restricted all entities regulated by RBI from dealing in, or providing services for facilitating ‘any person or entity dealing with, or settling’ virtual currencies.
Thus, while the circular didn’t expressly proscribe P2P trading in virtual currencies (VCs), it severely restricted the conversion of VC into fiat currencies, and impaired the ability of businesses dealing with VCs to access financial services.
Further, the circular also had an unintended adverse impact on entities using blockchain or distributed ledger technology.
The petitioners challenged a statement issued by RBI dated April 5, 2018, and the circular on various grounds, including ability of RBI to regulate VCs, to impose a blanket prohibition, and most importantly, the disproportionate restriction on their fundamental right to practice a profession or carry on trade, occupation or business as embodied under Article 19(1)(g).
In its judgment, the court noted that while RBI, as the statutory regulator of currency, credit, financial and payment systems in India, is empowered to issue the circular and obligated to address potential risks to such systems, its actions would have to satisfy the test of proportionality. The court relied on a well-established test for examining whether any action that curtails fundamental rights is proportional. It tested whether the circular was issued for a valid purpose which it would rationally fulfil, whether it was the least invasive means for achieving the said purpose, and whether, on balance, the restriction of the right in question was justified by the purpose at hand.
In applying the test, SC recorded the submission of RBI that there was no ban on VCs and the objective of the circular was to ringfence the regulated entities from potential systemic risks—to reduce or prevent cross-border terror financing and money laundering—and alternative means would not satisfy these requirements.
The court noted the absence of any empirical evidence of harm to regulated entities on account of providing banking services to entities operating virtual currency exchanges (VCEs).
RBI’s position was contrasted with a report of the inter-ministerial committee, which held, in the interim, that a ban would be an extreme tool whose objectives could be achieved using regulatory measures such as recognising, registering and regulating VCEs and brokers and maintaining registries of holding and transactions.
In absence of any effective ban, or empirical evidence suggesting adverse effects of cryptocurrency trading and the impact of the circular on operations of VCEs, the SC held that the restriction embodied in the circular was a disproportionate restriction and set aside the circular.
After the circular was issued, a high level inter-ministerial committee has proposed a Draft Bill for the Banning of Cryptocurrency & Regulation of Official Digital Currency. The draft Bill proposes to ban mining, trading, holding, issuance or disposal of VCs in India and imposes monetary as well as penal consequences for violation. However, the draft Bill proposes to exempt technology underlying cryptocurrencies for the purposes of experiment, research or teaching from this restriction.
The draft Bill also proposes to introduce an ‘official digital currency’ wherein RBI may issue the Indian Rupee in a digital format and recognise certain foreign digital currencies as well. Given that the court has acknowledged RBI’s ability to regulate VCs both through preventive as well as curative measures, it will be interesting to note if RBI and the government recalibrate their approach towards VCs. It will also be interesting to see if RBI issues any subsequent notifications proposing enhanced regulatory, verification or reporting measures for persons holding or dealing in VCs.
As such, regulated entities may take some time to enable transactions for entities dealing in VCs. Their caution may be warranted in view of the risks around money laundering and terror financing. A welcome impact of the judgment will be the dilution of the chilling effect on innovation.
The author is Partner, Cyril Amarchand Mangaldas. Views are personal