Nine issues were flagged before the Supreme Court in the case challenging the ban by Reserve Bank of India (RBI)on cryptocurrency dealings. The Court answered eight of the nine issues in favour of RBI. However, the ban was quashed by the court on one single ground.
I. Power of RBI
The petitioners argued that VCs are not money or other legal tender, but only goods/commodities, thus falling outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007.
The court held that RBI Act, 1934, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 cumulatively confer wide powers on RBI including the power to regulate any matter which can affect the payment system in the country.
As regards the identity of cryptocurrency, it ruled that while VCs are not recognized as legal tender, they are capable of performing some or most of the functions of real currency.
Ergo, it ruled, RBI can regulate VCs.
II. Mode of exercise of power by RBI
The petitioners argued that there was no application of mind by RBI on the effectve ban and that the invocation by RBI, of public interest as a weapon was a colourable exercise of power.
The court referred to various steps taken by RBI with regards to VCs right from 2013 when it had issued a press release warning users about the potential risks involved in the use of the same. It also said the steps taken by RBI were in good faith and to safeguard the interest of the public.
Ergo, it said, there was nothing wrong in how RBI acted.
III. Wait and watch approach of other stakeholders
The petitioners argued that other stakeholders such as the Enforcement Directorate, Department of Economic Affairs and SEBI did not see any grave threat from VCs and did not take any action.
The court ruled that each of stakeholders have a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue.
Ergo, it ruled that RBI can’t be faulted for being the only body to act against VCs.
IV. Light-touch approach of the other countries
The argument was that most countries have not imposed a ban on VCs.
The court however, said that almost all countries in the neighborhood have a similar approach to India’s. Besides, it also said that its judicial decision cannot be colored by what other countries have done or not done.
Therefore, the court ruled, a comparison doesn’t work.
V. Precautionary steps taken by petitioners
The petitioners argued that VC exchanges already had best practices such as avoidance of cash transactions, enhanced KYC (know your customer) norms etc.
The court, however, said that enhanced KYC norms may remove anonymity of the customer, but not that of the VC. Further, it also pointed out that RBI was the best judge of safety.
Ergo, the court ruled, the fact that the petitioners have taken precautionary measures doesn’t change anything.
VI. Different types of VCs require different treatments
The petitioners contented on the basis of the European Parliament’s report released in July 2018 that all virtual currencies are not fully anonymous. Banning transactions only in fully anonymous VCs could have been a better and less intrusive measure, they added.
The court took the view that the question whether anonymous VCs alone could have been banned leaving the pseudo-anonymous, is for experts to decide and not the court.
This is something to be decided by the experts, the court ruled.
VII. Acceptance of DLT and rejection of VCs is a paradox
It was argued that the acceptance of the Distributed Ledger Technology (at the core of VCs) and the rejection of VCs amounts to contradiction, the argument went.
The court held that there is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation.
In effect, Blockchain is fine, but products based on it (such as Bitcoin) need not be, suggests the ruling.
VIII. RBI decision does not qualify for judicial deference
It was the argument of the petitioner that the circular issued by RBI does not have the status of a law and need not be followed.
The court said that such an argument belittles the role of RBI.
Ergo, RBI’s orders in such matters have to be obeyed, said the court.
IX. Article 19(1)(g) and proportionality
It was the argument of the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate.
The court agreed with the petitioners on this.
Banking channels, the court observed, provide the lifeline of any business, trade or profession. The court pointed out that VC exchanges were the entities which were impacted the most by the RBI ban since they do not have any other means of survival if they are disconnected from the banking channels.
Despite the same, the court noted that the RBI did not consider less intrusive measures. It also noted that VCs were not banned by any law and there was no finding by the RBI about anything wrong in the manner which the VC exchanges were functioning.
Therefore, RBI’s order was disproportionate, the court ruled, and quashed it.
