NO PROHIBITION ON VIRTUAL CURRENCY TRADING UNLESS DAMAGES DEMONSTRATED RULES SUPREME COURT OF INDIA: RBI’S CIRCULAR DIRECTING CLAMP DOWN ON CRYPTOCURRENCY TRADING QUASHEDBackground
In exercise of the powers conferred on it under the Reserve Bank of India Act, 1934 and the Payment and Settlement Systems Act, 2007, the Reserve Bank of India (“RBI”) had issued a Circular dated April 06, 2018. As per the Circular, entities regulated by the RBI were directed not to deal in virtual currencies (“VCs”), not to provide services for facilitating any person or entity in dealing with VCs and to exit the relationship with such persons or entities if they were already providing such services to them. This effectively clamped down upon any trading in VCs whether over the internet or any other manner as the monetary pipeline was shunted.
Consequently, writ petitions were filed before the Hon’ble Supreme Court of India for quashing of the RBI Circular. The Hon’ble Supreme Court in its Judgment dated March 4, 2020, has quashed this Circular effectively paving the way for banks and financial institutions to reconnect with the VC trading markets, platforms and persons trading in virtual currency.Arguments/Basis against the RBI Circular
There were 9 distinct arguments leveled against the RBI for issuing the Circular:
- That the Circular is ultra vires the RBI’s authority;
- The mode of exercise of power was illegal;
- RBI should have adopted a “Wait and watch approach” of the other stakeholders;
- RBI should have adopted “Light-touch approach” of the other countries;
- Non appreciation of precautionary steps taken by petitioners;
- That different types of VCs require different treatments;
- Acceptance of Distribution Ledger Technology (DLT) and rejection of VCs is a paradox;
- RBI’s decisions do not qualify for Judicial deference;
- Article 19(1)(g) Challenge & Proportionality under the Constitution.
In a detailed 180-page judgment, the Hon’ble Supreme Court rejected the contentions raised under Sr. Nos. (i) to (viii) and ruled that the RBI was not found to be foul on those grounds. However, with regard to the allegation leveled under Sr. No. (ix) Article 19(1)(g) Challenge & Proportionality, the Hon’ble Supreme Court ruled in favour of the Petitioners holding that the RBI’s action was disproportionate. The Hon’ble Supreme Court observed that in the period preceding five (5) years from the date of the Circular, the RBI had not found the activities of VC exchanges to have been actually impacted adversely, given the manner in which the entities regulated by RBI function. The Hon’ble Supreme Court also observed that in its Reply dated September 4, 2019 the RBI had consistently taken a stand that it has not prohibited VCs in the country. The Hon’ble Supreme Court also observed that the Government itself had been contemplating a special legal framework based on recommendations of an Inter-Ministerial Committee constituted on November 2, 2017, which first recommended the introduction of a new law namely, the “Crypto-token Regulation Bill 2018”. But within a year the same Committee in February 2019 recommended the imposition of a total ban on private crypto currencies through a legislation to be known as “Banning of Crypto-currency and Regulation of Official Digital Currency Act, 2019”. The Court was critical of the fact that whilst the RBI enjoys the power to take preemptive action it failed in the proportionality of measures due to the fact that the RBI had not shown any semblance of any damage suffered by its regulated entities. The Hon’ble Supreme Court also observed that in addition to the RBI having consistently stated that it has not banned VCs, the Government of India itself was unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions. Hence, the Hon’ble Court held that it was not possible to hold the measure of disconnecting banking services from the online platforms running VC exchanges as proportionate. The Court even directed the RBI to direct the Central Bank of India, Worli, Mumbai which had frozen the account of Discidium Internet Labs. Pvt. Ltd. holding over Rs. 12 crores to be released to the company along with interest at applicable rates.Conclusion
By its Judgment of March 04, 2020, the Hon’ble Supreme Court has thus laid down a very important precedent against speculative clamp down by a regulatory authority. At least for now, it is expected that VC traders are free to trade in VCs through banking channels.