In a significant judgement dated 4 March 2020, the Supreme Court of India in Internet and Mobile Association of India v Reserve Bank of India (2020 SCC Online SC 275), struck down a Reserve Bank of India (RBI) Circular that had effectively imposed a ban on virtual currency (VC) trading in India. The basis for the Court’s judgement was that the restrictions imposed by the Circular were disproportionate to the concerns raised by the RBI and therefore unsustainable.

Background

On 6 April 2018, the RBI had issued a Circular that prohibited banks and other entities regulated by it from both dealing in VCs, as well as from providing services to any individual or entity dealing with or settling VCs. The effect of the prohibition was that exchanges through which VCs were traded could no longer maintain and operate a bank account, thereby putting an end to the business of VC trading that required conversion from fiat currencies using formal banking channels. Pertinently, at the time the Circular was issued, there was no legislative ban on the use and trading of VCs in India, and by the RBI’s proscription, VCs were ring-fenced from the formal economy.

The Circular was based on the RBI’s concerns that VCs were prone to hacking; that there could be speculation on account of there being no underlying asset and the resultant volatility could lead to significant losses; and that VCs could potentially lead to money laundering and terrorist financing. Interestingly, prior to issuing the Circular, the RBI had, since 2013, only issued cautionary press notessetting out the same concerns. At the time the Circular was issued, the RBI did not highlight any new risk.

The challenge and the Court’s findings

This Circular was primarily challenged on two alternative grounds: firstly, that the RBI’s powers did not encompass within its ambit the regulation of VCs since such currency was only a tradable commodity and not legal tender; and secondly, even assuming that VCs fell within the RBI’s regulatory purview, the Circular had disproportionately infringed the petitioners’ rights. 

The RBI’s power to regulate VCs

The petitioners had contended that VCs were not equivalent to money or legal tender. To the contrary, they were akin to a good or a commodity and were therefore not circumscribed by the RBI’s power to issue the Circular.  

Relying on authorities including judgements of the courts in the USA, UK and Singapore, it was asserted that there were four cumulative hallmarks of money—a store of value, a unit of account, a widely accepted medium of exchange and serving as a final discharge of debt.  While the first three insignia were characteristics of money in the social sense, the fourth trait was characteristic of legal tender. While VCs did have the first two characteristics, not being widely acceptable, they were not capable of being classified as money in the social sense. VCs were also not recognised as a final discharge of debt, and therefore not legal tender.

The Court, in determining these contentions and cognisant of the danger of VCs falling into a regulatory vacuum, noted that the role of the RBI was to regulate the country’s monetary system. The Court acknowledged that VCs ‘belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to fund’, but qualified its finding by stating that it did not reflect the position of law in its entirety. While not equating VCs to legal tender or fiat money, the Court was hesitant to accept the contention that VCs ‘can never be regarded as real money’. The Court concluded that even if something was not equivalent to currency but functioned as money ‘under certain circumstances’, the RBI had the power to deal with it in pursuance of its role as the apex regulator of the country’s financial system.

The proportionality of the Circular

Having held that VCs were amenable to regulation by the RBI, the Court proceeded to examine whether the RBI’s Circular satisfied the test of proportionality. 

It was argued that the petitioners’ fundamental right to trade, as recognised by the Constitution, was affected since the Circular had the effect of putting multiple VC exchanges out of business. While the petitioners accepted that the right to trade could be subjected to reasonable restrictions, the restrictions had to be a measure which was proportionate to the concerns. It was highlighted that the doctrine of proportionality required that if alternative and less intrusive measures existed, those should have been adopted.

The Court accepted the submission and held that the Circular was disproportionate because none of the RBI’s regulated entities had ‘suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them’.  Furthermore, by relying on the regulatory approaches in other jurisdictions, the Court held that there were alternative regulatory means through which the RBI could have achieved its stated objectives. The thrust of the Court’s conclusion in this regard was that regulation would be a more proportionate response than prohibition.

Conclusion

The Court’s judgement is relevant in ascertaining the role of judicial review in relation to economic policy decisions. Without expanding the scope of its jurisdiction, the Court has, on a finding of fact, taken a view where it requires statutory authorities to not make policy decisions without objectively reliable empirical data.

 

Nakul Dewan is a Senior Advocate, Supreme Court of India and Barrister, Twenty Essex, Singapore and London. He is one of the lawyers who appeared on behalf of the petitioners in the case before the Supreme Court of India.

Rohan Andrew Naik is an Advocate, Supreme Court of India. He assisted Mr. Dewan during the case before the Supreme Court of India.