[Updated] SC Quashes RBI Ban On Banking Services To Cryptocurrency Dealers [Read Judgment]

(Updated with judgment)

In a significant judgment, the Supreme Court on Wednesday lifted the curbs imposed by the Reserve Bank of India on regulated entities such as banks and NBFCs from dealing with virtual currencies and from providing services to crypto businesses.

The Court held that the RBI's circular, which prevented regulated entities from providing banking services to those engaged in the trading or facilitating the trading in VCs, was liable to be set aside on the "ground of proportionality".

"When the consistent stand of RBI is that they have not banned VCs and when the Government of India 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 Court observed.

The case (Internet and Mobile Association of India vs Reserve Bank of India) was heard by a three judge bench comprising Justices R F Nariman, Aniruddha Bose and V Ramasubramanian.

The RBI issued a circular in April 2018 banning regulated financial institutions from providing services to crypto businesses. The ban went into effect three months later and banks subsequently closed the accounts of crypto exchanges.

The circular issued on April 6 , 2018 directed 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.

This was challenged in the Supreme Court by Internet and Mobile Association of India and few other stake holders. The Association consisted of a few companies which run online crypto assets exchange platforms, the shareholders/founders of these companies and a few individual crypto assets traders.

While striking down the circular, the Court took note of three factors :

1. RBI has not so far found, in the past 5 years or more, the activities of Virtual Currency exchanges to have actually impacted adversely, the way the entities regulated by RBI function.
2. The consistent stand taken by RBI up to and including in their reply dated 04-09-2019 is that RBI has not prohibited Virtual Currencies in the country and
3. Even the Inter-Ministerial Committee constituted on 02-11-2017, 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.

The Court observed :

"The position as on 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".

Advocate Ashim Sood, appearing for IAMI, submitted that Reserve Bank of India lacked jurisdiction to forbid dealings in cryptocurrencies. The blanket ban was based on an erroneous understanding that it was impossible to regulate cryptocurrencies, Sood submitted.

It was also argued that cryptocurrencies were not "currency" in the strict sense, and that they could be termed as a medium of exchange or a store of value.

Senior Advocate Shyam Divan, appearing for RBI, disagreed and said that it was a mode of digital payment, which the RBI had the power to control. Divan submitted that the the impugned decisions were necessitated because in the opinion of RBI, 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. Despite this, VC transactions have the potential to develop as a parallel system of payment.

It was also submitted that VCs could be used for illegal activities due to their anonymity.

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