Home » Between The Lines » RBI’s circular banning cryptocurrency set aside on the grounds of proportionality under Article 19(1)(g) of the Constitution of India

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The Supreme Court of India in the case of Internet and Mobile Association of India v. Reserve Bank of India (decided as per order dated March 04, 2020) has held that the Reserve Bank of India (“RBI”) circular dated April 06, 2018, virtually banning cryptocurrencies and their trade in India, is violative of Article 19(1)(g) of the Constitution of India, 1950 (“Constitution of India”)


Cryptocurrencies and Blockchain technologies are one of the most profound and intelligible innovations of the 21st century, which in the long term have a potential to allow economies to detach themselves from governments, and herald an era of “trust-less” money. Cryptocurrencies although often seen from the myopic standpoint of Bitcoin as a currency or an alternative to money, is in reality a dyson sphere of possibilities. Take for example, Ethereum, another cryptocurrency with the highest market capital after Bitcoin, is a decentralized software platform that enables Smart Contracts and Decentralized Applications (DApps) to be built and run without any downtime, fraud, control, or interference from a third party. The applications on Ethereum are run on its platformspecific cryptographic token, ether. Essentially, the cryptocurrency Ethereum may one day allow a trader sitting in China to automatically purchase a certain amount of goods at price X, when the given price hits the limit price. What separates cryptocurrency from any other market allowing for such trade is that there is no central governing authority whatsoever, thereby eliminating the middleman.

Technology and innovation are major changes that often face opposition and ostracization from the incumbents, which in this case came in the form of RBI circulars dated April 05, 2018 and April 06, 2018 in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (“RBI Act”) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies; and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

The RBI took its first anti-cryptocurrency stance in the year 2013, when they issued a press release cautioning the public about the potential threats of cryptocurrency because of it lacking any authorisation from a central bank or monetary authority. Over the years, RBI and its research divisions had held via various reports that although in its nascent stage, cryptocurrency poses a major threat in terms of risk, volatility, and difficulty in tracking transactions thereby, paving the way for money laundering and illegal activities.

On February 01, 2017, RBI again issued a press release cautioning users, holders and traders of virtual currencies. This was followed by a carte blanche ban via the impugned circulars.


  • Whether the RBI circulars dated April 05, 2018 and April 06, 2018 are within the statutory mandate of the RBI.
  • Whether the exercise of powers by the RBI amounts to malice and non-application of mind.
  • Whether the exercise of powers by the RBI amounts to colourable legislation.
  • Whether the RBI circulars dated April 05, 2018 and April 06, 2018 are in violation of Article 19(1)(g) of the
    Constitution of India.

Arguments of the Petitioner

The arguments of the Petitioner can be summarized as follows:

  • Virtual currencies are not legal tender but tradable commodities/digital goods, not falling within the regulatory framework of the RBI Act or the Banking Regulation Act, 1949.
  • The powers of the RBI cannot be exercised in “public interest” to such an extent as to ban access to cryptocurrencies and exchanges.
  • Powers of RBI under the Payments and Settlement Systems Act, 2007 does not apply to cryptocurrency exchanges as their services do not fall within the definition of “payment system” under the said Act.
  • Assuming cryptocurrencies were amenable to regulation by the RBI, the circular nonetheless disproportionately impinged on the petitioners’ rights.
  • Many of the developed and developing economies of the world, multinational and international bodies and the courts of various countries have scanned crypto currencies but found nothing pernicious about them.
  • Not all cryptocurrencies are anonymous, and if the problem sought to be addressed is anonymity of transactions, the same could have been achieved by resorting to the least invasive option of prohibiting only anonymous cryptocurrencies.
  • No study was undertaken by RBI before the impugned measure was taken and hence, the impugned decisions are not even based upon knowledge or expertise.
  • A total prohibition, especially through a subordinate legislation such as a directive from RBI, of an activity not declared by law to be unlawful, is violative of Article 19(1)(g) of the Constitution of India.
  • Cryptocurrencies do not qualify as money, as they do not fulfill the four characteristics of money namely medium of exchange, unit of account, store of value and constituting a final discharge of debt and since RBI has accepted this position, they have no power to regulate it.
  • The impugned circular is manifestly arbitrary, based on non-reasonable classification and it imposes disproportionate restrictions.
  • A decision to prohibit an article as res extra commercium is a matter of legislative policy and must arise out of an act of legislature and not by a notification issued by an executive authority.

Arguments of the Respondent

  • Virtual currencies do not satisfy the criteria such as store of value, medium of payment and unit of account, required for being acknowledged as currency.
  • Virtual currency exchanges do not have any formal or structured mechanism for handling consumer disputes/grievances.
  • Virtual currencies are capable of being used for illegal activities due to their anonymity/pseudo-anonymity.
  • Increased use of virtual currencies would eventually erode the monetary stability of the Indian currency and the credit system.
  • The impugned decision is within the range of wide powers conferred upon RBI under the Banking Regulation Act, 1949, the RBI Actand the Payment and Settlement Systems Act, 2007.
  • The impugned decisions are not excessive, confiscatory or disproportionate in as much as RBI has given three months’ time to the affected parties to sever their relationships with the banks. This is apart from the repeated cautions issued to the stakeholders by RBI through press releases from the year 2013.
  • RBI considered various reports and research over a period of five years thereby evidencing the application of mind.
  • The impugned decisions were necessitated because in the opinion of RBI, Virtual Currency (“VC”) transactions cannot be termed as a payment system, but only peer-to-peer transactions which do not involve a system provider under the Payments and Settlement Systems Act, 2007.
  • KYC norms are ineffective, as the inherent characteristic of anonymity of VCs does not get remedied.

Observations of the Court
The Supreme Court’s inquiry into the validity of the circular revolved around two major questions:

  • First, to see the role historically assigned to a central bank such as RBI, the powers and functions conferred upon and entrusted to RBI and the statutory scheme of all the three enactments, namely, Banking Regulation Act, 1949, the RBI Act and the Payment and Settlement Systems Act, 2007; and
  • then to investigate what these virtual currencies really are.

The role of RBI
The Supreme Court observed that as the Preamble of the RBI Act suggests, the object of constitution of RBI was threefold namely (i) regulating the issue of bank notes; (ii) keeping of reserves with a view to securing monetary stability in the country; and (iii) operating the currency and credit system of the country to its advantage.

The object of establishment of RBI is also spelt out in Section 3(1) of the RBI Act. It says that “a bank to be called the Reserve Bank of India shall be constituted for the purpose of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of this Act”.

While examining the ambit of Section 45JA(1) of the RBI Act, the Supreme Court observed that the concerns sought to be addressed by Section 45JA(1) are: (i) public interest; (ii) financial system of the country; (iii) interests of the depositors; and (iv) interests of NBFCs.

A careful scan of the RBI Act in its entirety would show that the operation/regulation of the credit/financial system of the country to its advantage, is a thread that connects all the provisions which confer powers upon the RBI, both to determine policy and to issue directions.

Section 35A of Banking Regulation Act, 1949 empowers RBI to issue directions to banking companies. Such directions are binding on the banking companies. The directions under Section 35A may be issued (i) in public interest; (ii) in the interest of banking policy; (iii) to prevent the affairs of the banking company from being conducted in a manner prejudicial to the interests of the depositors or of the banking company itself; and (iv) to secure the proper management of the banking company.

On the issues of payment systems under the Payments and Settlement Systems Act, 2007 the Supreme Court observed that Section 17 empowers RBI to issue directions to a payment system or a system participant, which, in RBI’s opinion is engaging in any act that is likely to result in systemic risk being inadequately controlled or is likely to affect the payment system, the monetary policy or the credit policy of the country.

Finding the identity of Cryptocurrencies/ VCs
It was observed that the difficulty in regulating and defining VCs was that they neither completely fit in the definition of a commodity, nor widely accepted enough to be considered a currency. The Supreme Court dwelled in depth on the origins of cryptocurrency and its purpose. According to an International Monetary Fund Report, it was observed that there are four factors which lie behind the rise of crypto currencies, they are:

  • the development of block chain technology;
  • concerns about conventional money and banking, that arose out of the sub-prime mortgage crisis in 2008 and the unconventional monetary policies/quantitative easing;
  • privacy concerns; and
  • political views about the role of the Government.

The petitioner and RBI both agreed on one point, which is, VCs do not hold the status of legal tender, but RBI justified its decision of banning them on the grounds that VCs are capable of being used as a medium of exchange.

After examining the definitions given by various committees and countries all over the globe, the Supreme Court observed that there is unanimity of opinion among all the regulators and the governments of various countries that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and that they are capable of functioning as: (i) a medium of exchange and/ or; (ii) a unit of account and/or; (iii) a store of value.

An important observation made by the Supreme Court on this comparative analysis was that “It is clear from the above that the governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as much true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency.”

The Supreme Court opined that it is incorrect to state that RBI’s role and power can come into play only if something has actually acquired the status of a legal tender, and that for RBI to invoke its power, something should have all the four characteristics or functions of money.

In a landmark decision of the United States District Court of New York in the case of United States v. Ulbricht [31F. Supp. 3d 540 (2014)], it was held that “Bitcoins carry value-that is their purpose and function-and act as a medium of exchange. Bitcoins may be exchanged for legal tender, be it US dollars, euros or some other currency”.

In another decision of the same court in the case of United States v. Faiella [39F. Supp. 3d 544 (2014)], it was held that “bitcoin clearly qualifies as money or funds under the plain meaning definitions. Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value and is used to conduct financial transactions.”

Interestingly, several matters before the Commodity Futures Trading Commission held VCs to be “commodities”, in relation to public administrative hearings to determine whether the defendant was engaged in violation of the provisions of Commodity Exchange Act.

In a completely different context, the Singapore International Commercial Court ruled in B2C2 Limited v. Quoine Pte Limited [(2019) SGHC (I) 3] that virtual currency can be considered as property which is capable of being held on trust.

Test of proportionality

With regards to the test of Article 19(1)(g) of the Constitution of India, the Supreme Court observed that in Modern Dental College and Research Centre v. State of Madhya Pradesh [(2016) 7 SCC 353)], four tests were laid down in respect of the test of proportionality: (i) that the measure is designated for a proper purpose; (ii) that the measures are rationally connected to the fulfillment of the purpose; (iii) that there are no alternative less invasive measures; and (iv) that there is a proper relation between the importance of achieving the aim and the importance of limiting the right.

The affected parties in this case are the VC exchanges that are unable to trade due to ban on banking services. The court heavily relied upon the European Union Parliament’s view that it is not necessary to impose a total ban on cryptocurrencies/ VCs related business and the formal finance sector, and regulatory methods can be relied on.

Finally, the Supreme Court observed the following points on the grounds of proportionality:

  • that RBI has not so far found, in the past 5 years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function;
  • that the consistent stand taken by RBI up to and including in their reply dated September 04, 2019 is that RBI has not prohibited VCs in the country; and
  • that even the Inter-Ministerial Committee constituted on November 02, 2017, which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill, 2018 was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures.

Decision of the Supreme Court

On the basis of analyzing the nature of powers conferred upon the RBI and the treatment of cryptocurrencies in various jurisdictions around the world, the Supreme Court held that if an intangible property can act under certain circumstances as money (even without faking a currency) then RBI can definitely regulate it. Hence, it is not possible to accept the contention of the petitioners that they are carrying on an activity over which RBI has no power statutorily.

The Supreme Court further went on to hold that the RBI has been correct in exercising its powers under the Payments and Settlement Systems Act, 2007 and did not find the RBI guilty of non-application of mind, as it had arrived at a “satisfaction” under Section 35A(1) of the Banking Regulation Act after years of consideration.

The expression “banking policy” is defined in Section 5(ca) to mean any policy specified by RBI: (i) in the interest of the banking system; (ii) in the interest of monetary stability; and (iii) sound economic growth. Public interest permeates all these three areas. Thus, the contention that the exercise of powers by RBI in respect of VCs is a colourable exercise of power and it is vitiated by malice in law was rejected by the Supreme Court.

The Supreme Court also rejected the contention that different VCs require different levels of regulation, as they fall under separate categories and have different levels of anonymity.

On the test of proportionality, the Supreme Court observed that although VCs are not banned till date, the functioning of VC exchanges has been crippled by the impugned circulars, especially when RBI did not find anything wrong with their functioning. Till date, no entity regulated by the RBI has faced any loss or adverse effect directly or indirectly on account of VC exchanges. The impugned circular dated April 06, 2018being the statutory direction was accordingly set aside on the grounds of proportionality.

Vaish Associates Advocates View

This judgement ushers a new era in the economic and financial domain of India. Cryptocurrencies are not a result of a science experiment gone wrong, or like the internet, was not setup for military purposes. The need for cryptocurrencies arose due to various central banking institutions and middlemen violating the trust of the masses since time immemorial.

The 2008 mortgage crisis is a stellar example of the misuse of trust reposed in the banking systems, the burden of which was borne by individuals all over the world. This crisis was also the tipping point, and fortunately the technology of our times allowed for the innovation of something so radical, without the limitations, its predecessors had in the past. Any sufficiently advanced technology is indistinguishable from magic. That is truly the case with cryptocurrencies, as the technology and its potential was not completely understood by the RBI, and like most cases in our country, banning was the easier option.

The Supreme Court although rejected most of the contentions of the petitioners, they were able to see through the conundrum of the RBI in banning exchanges but not the trade, without proof of any damage caused to institutions under the domain of the RBI.

The Supreme Court considered an exhaustive list of opinions made by committees of other jurisdictions, and held that there are various regulatory alternatives to banning, which could have been considered by the RBI.

For more information please write to Mr. Bomi Daruwala at [email protected]