Reserve Bank of India (RBI) first issued its ban on banks‟ dealings with crypto businesses back in April 2018 (the ‘order’), which took effect in July of that year2 . The RBI notification was then challenged before the Supreme Court of India by the Internet & Mobile Association of India (IAMAI). The Court, whilst deciding the matter, looked at the draft bill which has been proposed (but not passed) by the legislature, namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. The Court held that the stand of the legislature cannot be gauged from this bill as the bill, on the one hand, imposed criminal liabilities on the users of cryptocurrencies and criminalized certain activities like mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. On the other hand, the bill paved the way for the government to introduce its own digital currency, namely „Digital Rupee,‟ by the Central Bank. The Court also emphasized that The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-Ministerial Committee contained proposals (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted. The key aspects of the Crypto-token Regulation Bill, 2018, found in paragraph 13 of the „Note-precursor to report‟ shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of a digital crypto asset at recognized exchanges. Therefore, the intention and the stand of the legislature remains unclear on the matter of cryptocurrencies.
The Court first determined the reason because of which the notification by the RBI had been issued. The reason given by the RBI is the cryptocurrencies might disrupt the existing financial institutions. As reported during the January hearings, IAMAI‟s legal counsel had argued before the court that RBI had itself failed to adequately research the matter before deciding to take action. “Opinion cannot be formed on imaginary grounds,” the counsel had argued.
The Court agreed that the RBI had failed to prove or bolster (through reasonable grounds) how the functioning of existing institutions could be disrupted through cryptocurrencies. The Court relied on its decision in State of Maharashtra v. Indian Hotel and Restaurants Association; there must have been at least some empirical data about the degree of harm suffered by the regulated entities (after establishing that they were harmed). 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. The Court further iterated that the administrative orders, like the order in question, should be well reasoned and have a rational and cannot be ambiguous. Without the backing of any sort of reasoning, such orders or notification need to be quashed.
The Court then applied the doctrine of proportionality before finally deciding the issue in favour of cryptocurrency. The doctrine of proportionality includes the following:
(1) whether the objective of the measure is sufficiently important to justify the limitation of a protected right,
(2) whether the measure is rationally connected to the objective,
(3) whether a less intrusive measure could have been used without unacceptably compromising the achievement of the objective, and
(4) whether, balancing the severity of the measure‟s effects on the rights of the persons to whom it applies against the importance of the objective, to the extent that the measure will contribute to its achievement, the former outweighs the latter.
The court held that RBI needed to pass the above test and to show at least some semblance of any damage suffered by its regulated entities. But the RBI could not show any. The Court finally held that the consistent stand of RBI is that they have not banned VCs 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, the Court cannot hold that the impugned measure is proportionate.
The impugned order by the RBI was hence quashed and, the order seems well reasoned. It would be a welcome move for cryptocurrencies, blockchain technology and exchanges across the country.