THE ICFAI UNIVERSITY, DEHRADUN

Summer Internship Program 2021

Student’s Name: MOHIT PRASAD

Enrolment No:18FLICDDN02076
Batch Name & Year: BA.LL. B {HONS.} 2018-2023
CASE STUDY ON BAN BY RBI ON CRYPTOCURRENCY

SUBMITTED BY: SUBMITTED TO:

-MOHIT PRASAD - MR. SAURABH SIDHHARTHA
&
- MR. ABHISHEK KUKRETI
 CASE STUDY ON

THE JUDGMENT OF HON’BLE SUPREME COURT CONCERNING

‘LEGALITY OF THE CRYPTOCURRENCIES CURRENCY’

INTERNET AND MOBILE ASSOCIATION OF INDIA

… PETITIONER

VERSUS

RESERVE BANK OF INDIA

… RESPONDENT

CITATION:2020 SCCOnline SC 275

BENCH: V. RAMASUBRAMANIAN, ROHITNON FALI NARIMAN, ANIRUDHA

BOSE

DATED: 04 MARCH 2020

I. BRIEF FACTS OF THE CASE:

1. The advent of cryptocurrencies in India gave way to the setting up of numerous
cryptocurrencies exchanges which were majorly operating without any laws or
regulations monitoring their conduct.
2. The Reserve Bank of India issued a “Statement on Developmental and Regulatory
Policies” on 5th April 2018, banning regulated financial institutions from providing
services to business dealing in exchange/trading of cryptocurrencies.
3. Following the statement, a circular dated 6th April 2018 was also issued, which directed
the entities regulated by the RBI to:
a. Not to deal in virtual currencies nor to provide services for facilitating aby
person or entity in dealing with or settling virtual currencies, and
b. To exit the relationship with such persons or entities, if they were already
providing such services to them.
 4. The petitioner aggrieved by the statement and the circular dated 05/04/2018 &
06/04/2018 respectively challenged the said statement and circular before the Hon’ble
S. C. of India, by way of writ petition (civil).
5. Hence, the case-
II. ISSUES BEFORE THE HON’BLE COURT:

Majorly three issues surfaced before the Hon’ble SC, primarily relating to the regulation of
cryptocurrencies by the RBI. The issues are mentioned below:

1. Whether the Reserve Bank of India has the capacity to regulate matters pertaining to
the cryptocurrencies (virtual currencies)
2. Whether the cryptocurrencies (virtual currencies) amounted to money?
3. Whether the circular issued was within the purview of the power of the Reserve Bank
of India?

III. CONTENTION BY THE PETITIONERS:

The petitioners (Cryprocurrency exchanges Koinex, CoinDCX, Throughbit and CoinDelta) put
forward the below mentioned contentions while challenging the impugned statement and
circulars by the Reserve Bank of India:

1. That the Reserve Bank of India exceeded its power granted under the banking
Regulation Act, 1948, Payment and Settlement Systems Act, 2007, and the Reserve
Bank of India Act, 1934, to issue the circular, as the cryptocurrencies were not subject
to the above-mentioned acts and regulations.
2. That the legal character of the cryptocurrencies iis not the same as money or other legal
tenders as they neither have the same degree of acceptance to function as an acceptable
medium of exchange nor they can be utilised to settle a debt. It is rather a good tradeable
commodity. Thus, RBI had no role in regulating or prohibiting it.
3. That even if it is to be assumed that the RBI had the powers to regulate virtual
currencies; still, they cannot prohibit banks and other financial institutions from dealing
in them altogether.
4. That the RBI used indirect means to do what it could not do directly, I,e, the colorable
exercise of power. The indirect effect of the circular was shutting down of
 cryptocurrencies exchanges; something that RBI had already admitted was beyond the
scope of its powers.
5. That the approach of RBI was not in synchronization with that of other regulators under
whose purview, the subject matter was rested. Money laundering came under the
purview of the Central Board of Direct Taxes. None of these regulators asked for a
complete ban on cryptocurrencies initially.
6. Other jurisdictions especially the non-authoritarian ones, had adopted measures to
regulate cryptocurrencies instead of banning them outrightly.
7. When proper safeguards such as anti-money laundering practices, Know your
Customer (KYC) measures, etc had already been adopted by the cryptocurrencies
exchanges, there was no need to prohibit banks and other financial entities regulated by
RBI from dealing in them.
8. That the fundamental right of the petitioners guaranteed under Art. 19 (1) (g) of the
Constitution to carry on occupation, business or trade is violated.
9. RBI exercised its powers to issue a circular, guaranteed to it under a statute that cannot
be equated with the same judicial acceptance as is given to the executive or the
legislative action.

IV. CONTETNTION OF THE RESPONDENTS:

1. That the respondent derived its power from the Banking Regulation Act, 1948, Payment
and settlement Systems Act, 2007 and Reserve Bank of India Act, 1934, to issue the
circular.
2. That it was not a decision made in haste. Rather it was a proportionate response to the
perils posed by cryptocurrencies.

3. That cryptocurrencies were being used in a manner similar to the legal currency of the
country in purchasing products available on Amazon.
4. There was a possibility to remit money abroad without the supervision of regulators.
5. That the respondent had the inherent duty to protect the payment system of the country
from being compromised.
6. That the fiscal and economic policies enunciated by RBI had the statutory force of law,
and should not be interfered with by the courts.
 7. That the respondent submitted extensive literature on Cryptocurrencies on which it
relied on issuing the circular.

V. OBSERVATION AND DECISION OF THE HON’BLE SUPREME COURT:

1. The hon’ble court refuted the first contention made by the petitioners and held that
cryptocurrencies are competent in performing almost all the functions of real currency
and constitute a digital representation of value. They are competent to function as a unit
of account, a store of value, and/or a medium of exchange.
2. That the RBI has power the power to regulate cryptocurrencies as they affect the
financial system of the country. Despite the fact that cryptocurrencies are not legal and
do not form a part of the payment system.
3. That the ban imposed by the RBI was not a blanket ban, it only prohibited the banks
and legal entities regulated by the RBI to not deal in cryptocurrencies. Thus, it can be
inferred that those entities who are not regulated by RBI can still deal in
cryptocurrencies.
4. The contention that ‘colorable exercise of power by the RBI’ resulted in collateral
damages suffered by the cryptocurrencies exchanges was alos refuted. The Court
observed that the decision taken by the RBI was motivated by the need to protect
interest of the public and that the RBI did not ban the cryptocurrencies completely.
5. While addressing the contention of the petitioners under art. 19(1) (g), after applying
the test of proportionality the SC held that cryptocurrencies exchanges that provide
services such as trading and storing of cryptocurrencies I n digital wallets were
drastically affected as they would not be able to survive without having to access the
banking channels.
6. The Hon’ble SC held that there were less invasive means of achieving the same
objective that was not considered by RBI at the time of issuing the circular, and it failed
to provide data showing any resemblance of damage suffered by the financial entities
regulated by it. Further, as per the proposals made by the European Parliament, and
Cryptocurrencies-Regulation Bill 2018, blanket ban on cryptocurrencies was not
advocated.
7. The circular was quashed as it was adjudged to have failed the test of
proportionality and thus, could not be termed as a proper measure.
VI. SUGGESTION &WAY FORWARD:
1. The Govt. should place the Cryptocurrencies under the exclusive umbrella of RBI to
ensure that there is clarity in provisions for the regulation of cryptocurrencies.
2. The government should set up an advisory council consisting of lawmakers, regulators,
service providers, national and international cryptocurrencies operators who would
formulate policies and advise on intricate issues pertaining to cryptocurrencies.

3. The government should set up a government-backed VC exchange. This would give

rise to a Public-Private Partnership model striking the chord of compliance and privity
of transactions between users. This would also ensure the necessary KYC process
compliance by the regulator to its required standard and give the users the concurrence
of privacy of their transactions. This move could also give confidence to domestic and
foreign investors who are still wary of the government’s decision.
4. The Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned
subsidiary of RBI which insures bank deposits up to Rs. Five Lakhs in case a bank fails,
similarly, mandatory provision can be imposed upon VCs, once it manifests into a
widely accepted form of investment and exchange. A materiality threshold for the same
should be configured by the government, to ensure stability. The materiality threshold
must be commensurate to the value of the market and updated from time to time.
5. The Income-tax department must issue guidelines on how to tax VCs differently based
on the function exercised by the user. It can be held as stock-in-trade being transferred.
It can act as consideration on the sale of goods and services and as an investment being
transferred in exchange for real currency. For instance, if it is a self-generated capital
asset in the form of mining then it would fall under Section 55 of the Income-tax Act,
1961, which is completely silent on the issue since the cost of acquisition of a VC
cannot be determined yet.

VII. CONCLUSION:

It is clear that this judgment has answered the question of legality of cryptocurrencies, as a
matter of fact this question was never pondered upon before. However, the risks identified by
the RBI consisting of anonymity, money laundering, the complexity of the KYC process and
the interests of users and investors. The good news is that the doors of dealing and trading in
cryptocurrencies have been thrown open and the daredevil investors can try their hands.

In order to run shoulder to shoulder with world and even to lead the world someday,
India needs to embrace this new concept of cryptocurrencies, in matter of decades we have
travelled from the mechanical to electronic age. If India chooses to discard this new tool and
continue with old practices then it is better, we travel back to the stone ages.