Case Title: Internet and Mobile Association of India V. Reserve Bank of India
The Reserve Bank of India's restrictions on regulated organisations like banks and NBFCs engaging with virtual currencies and offering services to cryptocurrency firms have been overturned by the Supreme Court in a key decision.
The Court determined that the RBI's circular, which forbade regulated companies from aiding in or conducting VC trading, was susceptible to being overturned on the “basis of proportionality”.
“It is not possible for us to hold that the impugned measure is proportionate when the consistent position of RBI is that they have not banned VCs and when the Government of India is unable to make a decision despite several committees coming up with several proposals, including two draught bills, both of which advocated exactly opposite positions,” the Court noted.
The Court also relied on judgement delivered in the case of Udai Singh Dagar v. Union of India, in which it was held that.."a legislative Act must be read with the regulations framed. A subordinate legislation, as is well known, when validly framed, becomes a part of the Act. 6.99. Law is well settled that when RBI exercises the powers conferred upon it, both to frame a policy and to issue directions for its enforcement, such directions become supplemental to the Act itself."
In April 2018, the RBI published a circular prohibiting regulated financial institutions from offering services to cryptocurrency firms. Three months after the prohibition was put into place, banks froze the accounts of cryptocurrency exchanges.
April 6, 2018, circular sent to firms under RBI regulation stated to:
Refrain from dealing in virtual currencies and from offering services to help others deal with or settle virtual currencies.
End their association with those people or organisations if they had previously been doing so.
Internet and Mobile Association of India and a few other interested parties challenged this in front of the Supreme Court. The Association was made up of a few businesses that provide platforms for the trading of digital assets online, their owners and founders, and a few individual traders. The Court noted three things when it invalidated the circular:
Since at least five years ago, RBI has not discovered any negative effects of virtual currency exchange activities on the operations of the firms it regulates.
Up until and including their response dated 04-09-2019, the RBI always maintained that virtual currencies are not outlawed in the nation.
A ban was an excessive approach, and the same goals were reached by regulatory measures, according to the Inter-Ministerial Committee, which was established on November 2, 2017, and which first suggested the development of a new law called the Crypto-token Regulation Bill 2018.
The Court noted:
"The position as of date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned".
IAMI was represented by attorney Ashim Sood, who argued that the Reserve Bank of India lacked the authority to prohibit cryptocurrency transactions. Sood said that the assumption behind the broad prohibition was that it was hard to govern cryptocurrency. Additionally, it was suggested that cryptocurrencies may be classified as a store of value or a medium of exchange rather than "money" in the traditional sense.
In opposition, senior attorney Shyam Divan for the RBI asserted that it was a kind of digital payment that the RBI had the authority to regulate. Divan said that the RBI believed that under the Payments and Settlement Systems Act, VC transactions could only be classified as peer-to-peer transactions that did not include a system provider, which is why the impugned determinations were necessary. Even yet, VC transactions have the potential to grow into a distinct payment system.