Supreme Court Verdict on Cryptocurrency: Too Late, Too Little?

The Recent verdict [1] of the Indian Supreme Court on cryptocurrencies has brought some relief to the cryptocurrency community. This judgment should not be construed to legalize cryptocurrency trading in India - albeit cryptocurrency community looks at it as a positive signal, as evident from the resumption of INR deposit services and investments in cryptocurrency-related start-ups. Before going into the analysis of the case, let us understand the position of cryptocurrencies around the world and approaches towards the same.

 Cryptocurrencies have been in the market for quite some time now but have been a victim of embargo placed by several countries through their legal and policy landscapes. The intention of creation of such a system of crypto currencies finds mention in the paper presented by Satoshi Nakamoto titled, “Bitcoin: A Peer-to-Peer Electronic Cash System”. He introduced bitcoins as an alternative currency, to counter the problems of debasement of currency by central agencies. What attracted people to his proposal was the limitations and rules in place to restrict the issuance of new bitcoins after reaching 21 million worldwide as against unfair monetary policies of centralized banks, unlimited printing on money by the central banks resulting into devaluation of all savings and holdings.

 Many jurisdictions are skeptical about the use of cryptocurrency and often impose ban or issue warnings for citizens investing in the same. Countries fear that cryptocurrencies being unregulated can pave a way for money laundering and terror financing. Not all countries see the advent of blockchain technology and cryptocurrencies as a threat, albeit for different reasons. Some of the jurisdictions while not recognizing cryptocurrencies as legal tender, see a potential in the technology behind it and are developing a cryptocurrency-friendly regulatory regime to attract investment in technology companies that excel in this sector, e.g., Spain, Belarus, the Cayman Islands, and Luxemburg. Some jurisdictions seek go even further and develop their own system of cryptocurrencies. This category includes Marshall Islands, Venezuela, the Eastern Caribbean Central Bank (ECCB) member states, and Lithuania. [1]

 India didn’t remain untouched by the growing influence of cryptocurrency and numerous cryptocurrency exchanges began to operate. India, like rest of the world was skeptical about the trading and usage of cryptocurrencies considering the risk of volatility and non-regulation. Reserve Bank of India (RBI), for the first time took note of the of the technology risks related to VCs in their Financial Stability Report in 2013 and thereafter, RBI went on issuing notifications cautioning individuals dealings in VCs.

 STATEMENTS ISSUED BY RBI

On 24-12-2013. a press release was issued by RBI cautioning the users advocating that VCs, as a medium of payment in not backed by the central bank or any other authority and hence posed risk. RBI time and again cautioned the users, traders and holders of VCs through its press releases in 2016, 2017 and 2018. The RBI issued a Statement dated 05-04-2018 titled, “Statement on Developmental and Regulatory Policies” to direct entities regulated by it to not provide any services to any individual or business entities dealing with or settling VCs. It also stated that, Regulated entities which already provide services shall exit the relationship within a specified time.

 The Circular titled, “Prohibition on dealing in Virtual Currencies” dated 06-04-2018 was issued by RBI stating regulated entities shall not deal in VCs or provide services for facilitating any person or entity in dealing with of settling VCs, explaining as what would be constituted as “Service”. The circular also went down to stating that entities which are providing such services should exit the relationship within 3 months. The said statements and circular are impugned (now banned) via the quoted judgement.

 PARTIES

The petitioner in the first writ petition is a specialized industry body known as the ‘Internet and Mobile Association of India’ which represents the interests of the online and digital services industry. The petitioners in the second writ petition comprise of few companies which run online crypto assets exchange platforms, the shareholders/founders of these companies and a few individual crypto-assets traders. The respondent was the RBI.

REASON’S FOR FILING THESE PETITIONS

In order to seek a direction from the RBI to not restrict or restrain banks from providing services to Individuals and Businesses engaged in the business of cryptocurrencies and challenge the statement dated 05-04-2018 and circular dated 06-04-2018, these writ petitions were filed.

 In the 180 page long judgment, the Supreme Court dealt, inter alia, with the following issues.

 POWERS OF RBI

The petitioner contended that RBI does not have the power to prohibit VC as it is not a legal tender nor does not come under the purview of the credit system. They also contended that since VCs do not qualify as money, RBI cannot have the power to regulate them. The RBI contended that it agrees to the fact that VCs cannot be termed as currencies, but since VCs can largely affect the monetary stability and the credit system in the country the RBI assumes every power to regulate and control VCs.

The Supreme Court examined the powers conferred on RBI under various statutes and on deciding a definition of VCs. The Court held that VCs are not recognized as legal tender although being capable of performing the functions of money. The Court also recorded that since RBI has the duty to keep the payment system intact, it would assume power to regulate anything which causes adverse effect to the country’s financial system. The Court concluded that VCs fall within the ambit of RBI.

 The Petitioners contended that if RBI assumes any power, such power is only to regulate and not to put prohibition. The petitioners contended that the power to prohibit anything outside the commerce was a legislative policy and cannot be done through an executive order. In support of its contention, the petitioners referred to the definition of the expression “payment system” under the Payment and Settlement Act and contented that VC Exchanges do not operate any payment system and that since the power to issue directions under Section 18 of the said Act was only to regulate payment systems, the invocation of the said power is arbitrary. The SC held that RBI has power to frame policies and issue directions to banks who are system participants, if not payment system and hence the argument revolving section 18 didn’t hold up good.

NO APPLICATION OF MIND

The Petitioners also contended that there was no application of mind in issuing the impugned circular and statement whereas Supreme Court, on the other hand, held RBI responsible for not taking any extreme step. The SC recorded that RBI has taken steps in consonance with the considerations of multinational bodies like FATF, BIS etc. and hence it cannot be accused of not taking note of relevant considerations or taking into account irrelevant considerations.

 COLOURABLE EXERCISE OF POWER AND MALICE IN LAW

The Petitioner’s also contended the issue of the circular was a colourable exercise of power as it tried to achieve a completely different objective as against what it was meant for. The Supreme Court stated “To constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and wilfully without reasonable or probable cause. The impugned Circular does not fall under the category of either of them.” Hence, the SC rejected the argument of the Petitioner.

 VIOLATIVE OF ARTICLE 19

The next contention of the Petitioner was with respect to Article 19(1)(g) of the Constitution. The Petitioner contended that prohibition on carrying of activity which is not prohibited by law would be considered as unreasonable and would fail the test of reasonableness enshrined in Article 19(6). The petitioner contended that putting a ban on VCs was not reasonable restriction and was extremely disproportionate. Such ban which impairs the right to carry business or trade is violative of Article 19(1)(g).

 To this contention, the RBI argued that the Petitioner’s are not citizens and are not entitled to maintain a challenge under Article 19(1)(g) and there is no fundamental right to purchase, sell, transact or invest in VCs and therefore Article 19(1)(g) cannot be invoked.

 The SC, however, objected to the contentions of RBI for two reasons namely, (i) that at least some of the petitioners are not claiming any right to purchase, sell or transact in VCs, but claiming a right to provide a platform for facilitating an activity of trading in VCs between individuals/entities who want to buy and sell VCs) which is not yet prohibited by law and (ii) that in any case, the impugned Circular does not per se prohibit the purchase or sale of VCs. The SC observed that the impugned circular has not closed up all the ways of VCs entering into the market. It was also observed that if RBI finds out that VCs are operating and are creating a parallel economy in the country, the same would be considered to violate Article 19(1)(g).

PROPORTIONALITY

The Petitioner’s relied on the four-pronged test summed up in Modern Dental College and Research Centre v. State of Madhya Pradesh [2]. The four tests are:

(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 Petitioner’s also relied on De Freitas Test as enshrined in Elloy de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing [3] Case along with other precedents around the world. The RBI Circular fails the test of Proportionality because of the following reasons:

    The RBI was not able to prove that VC exchanges have impacted adversely.

   The RBI has not prohibited VCs in the country although they have flagged there usage in numerous notifications.

    Inter-ministerial Committee had earlier allowed the use of VCs but within a year imposed a total ban which clearly shows that the government is not clear on this position.

JUDGEMENT

The Supreme Court held that petitioners are entitled to succeed, and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality.

ANALYSIS AND SUGGESTIONS

The Supreme Court verdict cannot be considered as complete in itself as it failed to answer all the questions relating to the use and trade of VCs. The verdict revolved around the powers of RBI to regulate VCs and issue of the statement and circular impugned in this case. The verdict however does not provide a concrete position with respect to the VCs. Questions with respect to legality of the use of cryptocurrency remains open.

It appears that even RBI wasn’t sure about its power to issue directions relating to VCs. Post the verdict, it is also clear that RBI can take measures as to regulation or ban of cryptocurrency provided it has sufficient reasons to do the same. The Judgment was restricted to the scrutiny of the impugned statements issued by RBI; and did not discuss anything about the legality or adoption of cryptocurrency in India. To conclude, the SC verdict has not put an end to the debate around cryptocurrency or provided necessary impetus for the growth of cryptocurrency in India.

Before this verdict, the Inter-ministerial committee have submitted draft of the bill ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ which intends to control and regulate digital currency in India. The draft Bill also seeks to prohibit mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. In light of this fact and recent verdict of the Supreme Court it is clear that the intention of the government was to ban cryptocurrency. In conclusion, clouds still linger over the future of cryptocurrency in the aftermath of the Supreme Court verdict.

India has made significant developments in the field of blockchain and Artificial Intelligence and considering this it should not shy away from dealing with the concept of cryptocurrency. Rather, India should work on streamlining the process and regulation of cryptocurrency and work towards its goal of becoming a digital economy. Let’s hope RBI would devise a robust regulatory framework for cryptocurrencies rather than banning them. Post this verdict, the Industry has also demanded that cryptocurrencies to be included in the Regulatory sandbox of RBI. This would mean that, such entities would enjoy immunity from regulatory intervention and can experiment in such environment once they are admitted in the Regulatory sandbox. The next move by the Legislators or RBI would greatly decide the fate of cryptocurrency in India.

Research by Utkarsh Mishra, Final year law student, Amity University

References:

1.      Internet and Mobile Association of India v. Reserve Bank of India W.P (C) No. 528 of 2018 with WP (C) No. 373 of 2018.

2.      Regulation of Cryptocurrency Around the World, http://loc.gov/law/help/cryptocurrency/world-survey.php#brazil

3.      (2016) 7 SCC 353

4.      [1999] 1 AC 69

5.      https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf