The identity of virtual currencies (VC) was one of the most keenly contested aspects in the cryptocurrency case before the Supreme Court.
It was the claim of the petitioners in the case that VCs are not money or legal tender, but commodities and therefore outside the powers of the Reserve Bank of India (RBI) to regulate.
RBI also took a stand that while VCs are not recognised as legal tender,they can be used as a medium of exchange and hence a ban on them was justified so as to safeguard the payment system in the country. The court, at the outset, acknowledged that the exact identity of virtual currencies eludes precision.
“Some call it an exchange of value, some call it a stock and some call it a good/commodity. There may be no difficulty in accepting the divergence of views, if those views are not driven by fear of regulation”, the judgment said.
In order to address this issue, the court examined in detail about how VCs are treated by regulators in foreign jurisdictions and under foreign laws.
It noted that there was unanimity of opinion among the regulators and the governments of various countries that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and that they are capable of functioning as a medium of exchange.
“The IMF, the FATF, the European Central Bank, the Financial Conduct Authority of the United Kingdom, the Internal Revenue Service of the United States, Department of Treasury and the Canadian Revenue Authority treat virtual currencies as digital representations of value. The European Central Bank went a step further by describing a virtual currency as a type of unregulated digital money”, the court said.
The state of Liechtenstein, the apex court said, considers virtual currencies as digital monetary units which can be exchanged for legal tender and also be used to purchase goods or services, thereby assuming the character of a legal tender. The German Federal Financial Supervisory Authority treats virtual currencies as units of account and consequently as financial instruments. Luxembourg has taken an official position that crypto currencies are actual currencies. Further, some of the states in the Unites States of America have passed laws recognizing virtual currencies as electronic medium of exchange, the apex court noted.
Thus, it was the court’s conclusion that governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money. But at the same time, the top court was also opined that foreign governments, statutory authorities and banking regulators are in denial that VCs do not have the status of a legal tender, as they are not backed by a central authority.
In consonance with the international position, the court concluded that though VCs are not recognized as legal tender, they are capable of performing some or most of the functions of real currency.
Regarding the RBI’s role, the court held that there is no mandate that the role and power of RBI can come into play only if something has actually acquired the status of a legal tender.
Thus, it ruled that if an intangible property can act under certain circumstances as money (even without faking a currency), then RBI can definitely take note of it and deal with it.
Hence it turned down the contention of the petitioners that they are carrying on an activity over which RBI cannot exercise its regulatory powers.
But it ruled against RBI’s order because it was “disproportionate” and prevented people and companies from engaging in a business which is legal in India.
