On 4 March 2020, the Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India set aside a controversial RBI Circular dated 6 April 2018 (“Circular”) prohibiting dealings in virtual currencies.
The Circular did not prohibit the citizens from dealing in cryptocurrency expressly. The RBI imposed a prohibition on the regulated entities, namely the banks, from dealing or providing services to any person facilitating the dealing or settling in virtual currencies. Further, the banks and other regulated entities providing such services were required to exit within three months.
RBI has power to regulate cryptocurrecies: The SC examined the nature of cryptocurrency as amounting “fiat money”. This question would legitimise the RBI regulating the use of cryptocurrency. The SC observed that “if an intangible property can act under certain circumstances as money (even without faking a currency), the RBI can definitely take note of it and deal with”. Therefore, RBI has the requisite power to regulate or prohibit an activity of this nature. Additionally, as long as the entities regulated by RBI were providing services in regard to cryptocurrencies, the RBI has the authority to regulate such services.
Disproportionate Action Taken By RBI: The SC examined the proportionality of the action taken by the RBI. It was held that the prohibition was a disproportionate action considering the RBI was not able to present any empirical evidence in respect of any negative impact of such services being provided in the financial sector. Further, the SC observed that RBI could have adopted “alternative and less intrusive measure” that would have the same consequence with a lesser degree of limitation. One such measure cited was putting up safeguards to protect and regulate the financial sector. Having held that the action was disproportionate, the Circular was set aside by the SC on grounds of being ultra vires the Constitution of the country.
This post has been contributed by Ms. Vaneesa Agrawal and Ms. Sanyukta Srivastav.
[DISCLAIMER: This article is for academic purpose and is solely to provide readers with general information regarding developments in Indian law. The information contained herein does not constitute legal or a professional advice.]