In a significant verdict in favour of cryptocurrency -related businesses, the Supreme Court on Wednesday quashed an April 6, 2018 circular of the Reserve Bank of India (RBI) banning banks and financial institutions from providing services to any individual or business entities dealing with or settling cryptocurrencies, including Bitcoin.
The central bank’s decision, a virtual ban, almost killed these companies and the sector by disconnecting their lifeline, namely the interface with the regular banking sector. Some managed to change their business models (into so-called peer-to-peer or P2P transactions, for instance), but many died.
The top court held that the ban by RBI, despite the banking regulator not finding anything wrong about the manner in which these cryptocurrency companies were functioning and despite the fact that they had not been banned by any law in India, was violative of freedom to carry on trade guaranteed by Article 19(1)(g) of the Constitution and was wholly disproportionate to the object sought to be achieved.
“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 headed by justice Rohinton Nariman ruled.
Cryptocurrency exchanges welcomed the verdict of the top court.
“Needless to say, today is a historic day for not just the crypto community, but for the entire country. The removal of the ban by the Supreme Court is going to open new opportunities for India in terms of investments, economic growth, financial inclusion, and market maturation. We have always seen crypto as a potential to unlock India’s dream of becoming a $5 trillion economy and remain committed to carrying out the hard work which is necessary to make this dream come true,” said Sumit Gupta, co-founder and CEO of CoinDCX, one of the four crypto-exchanges which petitioned the Supreme Court.
On April 5, 2018 RBI had issued a press release stating that VCs, referred to as crypto currencies and crypto assets, raised concerns related to consumer protection, market integrity and money laundering. In view of the associated risks, it was stated that banks should not deal with crypto-related businesses.
A day later, on April 6, 2018, it issued a circular stating that entities regulated by it 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,” the notification said.
The central bank’s decision was challenged by the industry grouping Internet and Mobile Association of India (IMAI), which questioned RBI’s powers to impose the ban since cryptocurrencies weren’t a “currency” in the legal sense of the term. Instead, IMAI had insisted that cryptocurrencies were more in the nature of a commodity and, therefore, that RBI was not empowered to regulate them.
A second petition was also filed by a few companies which run online crypto exchange platforms.
In its arguments before the bench, which also comprised justices Aniruddha Bose and V Ramasubramanian, the central bank underscored that it had treated cryptocurrency as a digital means of payment that had to be nipped in the bud so that the country’s payment system is not jeopardised.
In this context, RBI referred to the many occasions when it had cautioned users of cryptocurrencies about virtual currency. In December 2013, for instance, it warned users, holders and traders of virtual currencies, including Bitcoin,, about the potential financial, legal and security-related risks associated with it.
The identity of VCs, that is whether they are currency or commodity, was one of the most keenly contested aspects in the case.
The court, addressing this aspect, placed extensive reliance on treatment of VCs by regulators in foreign jurisdictions and foreign laws.
It noted that there was unanimity of opinion among all the regulators and the governments of various countries that though VCs had not acquired the status of legal tender, they nevertheless constituted digital representations of value and that they were capable of functioning as a medium of exchange.
Thus, it drew the conclusion that though VCs were not recognised as legal tender, they were capable of performing some or most of the functions of real currency and that RBI, therefore, is empowered to regulate it.
However, the argument which clinched the case for the petitioner was that the RBI circular was violative of Article 19(1)(g) of the Constitution which guarantees the freedom to practice any profession or to carry on any trade, occupation or business. It was the petitioners’ case that since access to banking was the equivalent of the supply of oxygen in any modern economy, the denial of such access by RBI when the business itself was not prohibited by any law made by the Parliament, was not a reasonable restriction and that it was also extremely disproportionate to the objective.
The court agreed with the petitioners on this.
Banking channels, the court observed, provide the lifeline of any business, trade or profession. The moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, resulting in the trade or business getting automatically shut down. Hence, it held that the burden of showing that larger public interest warranted such a serious restriction bordering on prohibition, was heavily on RBI.
The court also referred to the “deadly blow” which VC exchanges suffered due to the ban since they did not have any other means of survival once disconnected from the banking channels.
“Obviously, RBI did not consider the availability of alternatives before issuing the impugned circular,” the court said. It, therefore, ruled that the ban was disproportionate to the objective sought to be achieved.
The objective of RBI was to prohibit the sale and purchase of VCs so as to protect the rights of consumers and safeguard the existing payment system. However, the circular only hit the VC exchanges and not actual trading in VCs. Despite the fact that the users and traders of virtual currencies were also prevented by the RBI circular from accessing banking services, it did not paralyse many of the other ways in which crypto currencies could find their way to or through the market, the apex court observed.
The court also noted that the two draft bills which were proposed by an inter-ministerial committee — constituted by the Union government to examine the issues associated with VCs — advocated diametrically opposite positions as regards VCs.
The Crypto-token Regulation Bill, 2018 initially recommended by the inter-ministerialCommittee contained a proposal to
regulate VC exchanges and brokers. But within a year,the final report of the same inter-ministerial committee, submitted in February 2019, recommended the imposition of a total ban on private crypto currencies, the court noted. “When 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, it is not possible for us to hold that the impugned measure is proportionate”, the apex court concluded.
