Case Analysis: Internet and Mobile Association of India Vs. Reserve Bank of India
Lets Trade Crypto: Indian Supreme
court quashes prohibition
This
article reflects the decision of the Supreme court that set aside the RBI circular
dated 06.04.2018 which prohibited the banks and entities regulated by it to
deal in Virtual currencies or to provide banking services facilitating any
person or entity dealing with or settling VCs.
General introduction to
virtual currencies:
Virtual
currency is a type of unregulated digital currency which is not issued or
controlled by a central bank. Virtual currencies are ordinarily issued by
private issuers and used among specific virtual communities. The security of
the software and networks that virtual currencies stand on is a critical
concern. The traditional regulated currencies are backed by fiat currency or
hard assets such as gold. In contrast, virtual currencies are not backed with
any intrinsic value. The value of a virtual currency is highly
volatile. Therefore, it is a less favorable tool to be used as a medium of
exchange.
About the case:
Taking
into account the associated risks in virtual currencies, RBI issued a circular
dated 06.04.2018 stating that entities regulated by RBI shall not deal in VCs
or provide services for facilitating any person or entity in dealing with or
settling VCs. Such services include maintaining accounts, registering, trading,
settling, clearing, giving loans against virtual tokens, accepting them as
collateral, opening accounts of exchanges dealing with them, and transfer/receipt of money in accounts relating to purchase/ sale of VCs. Regulated
entities that already provide such services shall exit the relationship within
three months from the date of this circular. SC declared the guidelines of the
circular to be inappropriate and hence declared to be unenforceable. Justice Rohinton
Nriman, Anirudhha Bose and V. Ramasubramanion were the judges of the Supreme Court
of India, under whom the judgment to the petition filled by the Internet and Mobile
Association of India (IMAI) was pronounced.
Facts of the case:
On
5th April 2018 Reserve Bank of India issued a press release raising the
concern about consumer protection from the trade of virtual currency. They were
of the view that trading in virtual currency also referred to as cryptocurrencies
are prone to hacking and therefore would lead to money laundering, terrorist
activities, etc. In this view RBI through its circular asked the banks to not
deal with the transactions related to the trading of virtual currency. Challenging the impugned
Circular and seeking a direction to the respondents not to restrict or restrain
banks and financial institutions regulated by RBI to engage in transactions in
crypto assets, the petitioners have come up with these writ petitions. The
petitioners were (i) specialized industry bodies representing the
interests of the online and digital services industry, (ii) companies
which run online crypto assets exchange platforms, (iii) the
shareholders/founders of these companies, and (iv) a few individual
crypto-assets traders.
Out of several grounds, the main ground
of attack revolved around the power of RBI to deal with, regulate or even ban
Virtual Currencies (VCs) and Virtual Currency Exchanges (VCEs). The entire
foundation of this contention rested on the stand taken by the petitioners that
VCs are not money or other legal tenders, but only goods/commodities, falling
outside the purview of the RBI Act, 1934, the Banking Regulation Act, 1949, and
the Payment and Settlement Systems Act, 2007. Therefore the petitioners came up
with the argument that if virtual currencies do not fall within subject matter
covered by any or all of these three enactments and over which RBI has a
statutory control, then the Circular was ultra vires.
Issues:
Petitioner contended that RBI with
respect to the impugned circular lacks jurisdiction to prohibit the trade of
virtual currencies. The RBI however strongly disagreed with the contentions
stating that VC is a mode of digital payment which authorizes RBI to control
the same.
The petitioner also contended that the
VCs are not a kind of currency note or coin but are a medium of exchange or a
store of value to which the respondent replied saying that VCs do not satisfy the criteria such as store of value, medium of
payment, and unit of account, required for being acknowledged as currency.
Judgment:
The court was of the view that although RBI being the Central
bank had sweeping powers and plays an
enhanced role in the improvement of the Indian economy, it has not come up
with a situation where any of the entities regulated by it has suffered any
loss or adverse effect, directly or indirectly while trading in virtual
currencies. Hence the court allowed the writ petitions by setting aside the
circular dated 06.04.2018 on the ground of proportionality. The thrust of the
court’s conclusion is that RBI could have implemented regulatory measures than
complete prohibition.
Conclusion:
As
per the aforementioned points and based on the decision of the court the
petitioner succeeds and the circular is declared to be an unenforceable cause of
which the businesses can continue trading in virtual currencies. Given this
fact it is also pertinent to note that the Supreme Court has only struck down
the circular issued by RBI without commenting or declaring such currencies to
be legal or illegal. There is no such regulation in India which controls or
regulates the dealing in such currencies, hence they remain unregulated till
date.
Legal opinion:
While
digital currencies might be confused with conventional electronic money, it is
not the same as they are not considered as any tangible commodity due to which
they cannot be physically owned or transferred between the parties. The concept
of VCs being fairly new as compared to traditional currency in the country yet
has no legal standing. Having no central authority or platform to deal in such
transactions makes it more debatable in various parts of the world.
For
instance, when an investor holding is stolen there is no standard legal
procedure to recover such missing funds nor is there any authority for the
investor to approach to. Just because the businesses have not reported any
damage or loss incurred through these investments does not change the fact that
the market for such investments is unreliable and volatile.
There
is widespread belief that cryptocurrencies provide criminal organizations a
new means to commit fraud, money laundering, and various other criminal
activities. Having no authority to regulate the flow of such funds has
boosted the funding for terror activities. The International Monetary Fund
(IMF) has pointed out that rolling of funds for money laundering or terror
activities can have serious cross-border or even global adverse effects. So in
my opinion RBI being the central authority for the country to regulate funds
has the power to regulate or prohibit such trading by various entities where
the question of nation’s security arises. Also if not prohibit such trading,
RBI should at least provide with a central platform for investors to trade in
such currencies which will help them keep track on various activities
involving international transactions. Due to the detailed reasons, I am of the
view that the Supreme Court should not have quashed or set aside the circular as it
was in my opinion a step to curb the potential risks involved in the security
of the nation and to enhance the legality of all business transactions.
*The legal opinion reflects the view of the author in pursuance of the said matter.
By,
Adv. Vaidehi Dhopavkar
Team K&T Forlex
Mumbai | Pune | New Delhi |
Singapore | Shanghai
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References:
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243
https://indiankanoon.org/doc/12397485/
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