SC allows banks to provide services on cryptocurrencies; sets aside RBI order

The Supreme Court Wednesday allowed banks and financial institutions to provide services related to cryptocurrencies by setting aside the RBI circular of 2018 which had prohibited them.

Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds, operating independently of a central bank.

A three-judge bench, headed by Justice R F Nariman, said the Reserve Bank of India (RBI) circular is liable to be set aside on the ground of "proportionality".

"Accordingly, the writ petitions are allowed and the circular dated April 6, 2018 is set aside," said the bench, also comprising justices Aniruddha Bose and V Ramasubramanian.

"When the consistent stand of RBI is that they have not banned VCs (virtual currencies) 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 bench said in its 180-page verdict.

The apex court delivered the verdict on pleas challenging the RBI circular.

According to the circular, the entities regulated by the RBI were prohibited from "providing any service in relation to virtual currencies including those of transfer or receipt of money in accounts relating to the purchase or sale of virtual currencies".

The court said there is no doubt that RBI has very wide powers not only in view of the statutory scheme, but also in view of the special place and role it has in the economy of the country.

These powers can be exercised both in the form of preventive as well as curative measures but the availability of power is different from the manner and extent to which it can be exercised, it said.

The petitioner, Internet and Mobile Association of India (IMAI), had argued in the top court that the RBI had banned cryptocurrencies on "moral grounds" as no prior studies were conducted to analyse their effect on the economy.

It had contended that the RBI barred all the entities regulated by it from providing services to any individual or business dealing in virtual currencies.

Regarding the petitioners' comparison with other countries on the issue, the bench said in its judgement that the judicial decision cannot be coloured by what other countries have done or not done.

The court said the petitioners argument that most of the countries, except China, Vietnam, Pakistan, Nepal, Bangladesh, UAE, have not imposed a ban (total or partial) may not take them anywhere as the list of nations where such a ban has been imposed discloses a commonality.

"Almost all countries in the neighbourhood of India have adopted the same or similar approach (in essence India is ring fenced). In any case, our judicial decision cannot be coloured by what other countries have done or not done.

"Comparative perspective helps only in relation to principles of judicial decision making and not for testing the validity of an action taken based on the existing statutory scheme," it said.

There can also be no comparison with the approach adopted by countries such as UK, US, Japan, Singapore, Australia, New Zealand and Canada as they have developed economies capable of absorbing greater shocks, the bench said.

"Indian economic conditions cannot be placed on par. Therefore, we will not test the correctness of the measure taken by RBI on the basis of the approach adopted by other countries, though we have, for better understanding of the complexities of the issues involved, undertaken a survey of how the regulators and courts of other countries have treated VCs,' it said.

The court said persons who have suffered a deadly blow from the RBI's circular are only those running VC exchanges and not even those who are trading in VCs.

"Persons trading in VCs, even now have different options.... But the VC exchanges do not appear to have found out any other means of survival (at least as of now) if they are disconnected from the banking channels," it said.

The court also said that as on date VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the RBI's circular by disconnecting their lifeline, that is, the interface with the regular banking sector.

The court noted that the RBI's concern is about the entities regulated by it and till now, it has not come out with a stand that any of the entities regulated by it, be it nationalised banks/ scheduled commercial banks/ cooperative banks or NBFCs, has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.

It is not the case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exchanges, it added.

In 2013, the RBI in an advisory cautioned users, holders, and traders of virtual currencies, including Bitcoins, about the potential financial, operational, legal, customer protection, and security-related risks that they were exposing themselves to.

On July 3, 2018 while hearing IMAI's plea, the top court had refused to stay the RBI circular prohibiting banks and financial institutions from dealing with the cryptocurrencies like bitcoin.