Cryptocurrency markets are taking hits from all sides — from declines in value, lawsuits, and regulatory threats — which is eroding the confidence of many to either invest in or trade in cryptocurrencies.
How to regulate cryptocurrency, or a blanket ban is justified?
In March 2020, the Supreme Court set aside an April 6, 2018 circular of the Reserve Bank of India (RBI) prohibiting banks and entities regulated by it from providing services in relation to virtual currencies (VCs).
In the 180-page judgment, the apex court had said: “The position as on date is that VCs are not banned, but trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned circular by disconnecting their lifeline, namely the interface with the regular banking sector.
“What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function, and (ii) despite the fact that VCs are not banned.”
The apex court observed that 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 VCs as digital representations of value.
The SC said that the ultimate recommendation made by the European Union Parliament is not to go for a total ban on the interaction between cryptocurrency business and the formal financial sector.
“The Securities and Exchange Commission, USA, also recognises that virtual currencies are intended to perform many of the same functions as long-established currencies, such as the US dollar, euro or Japanese Yen.
Yet, another wing of the United States Department of Treasury, namely Financial Crimes Enforcement Network, calls virtual currency as a medium of exchange that operates like a currency in some environments, though it may not have all the attributes of a real currency,” noted the bench comprising justices Rohinton Nariman (now retired), Aniruddha Bose and V. Ramasubramanian (now retired).
The apex court observed that the governments and money market regulators throughout the world have come to terms with the reality that VCs are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority.
“But what an article of merchandise is capable of functioning as, is different from how it is recognised in law to be. It is as much true that VCs are not recognised as legal tender, as it is true that they are capable of performing some or most of the functions of real currency,” said Justice Ramasubramanian, who authored the judgment on behalf of the bench.
The apex court had noted that it cannot lose sight of three important aspects:
(1) That the RBI has not so far found, in the past five years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function
(2) That the consistent stand taken by the RBI up to and including in their reply dated September 4, 2019 is that RBI has not prohibited VCs in the country
(3) That even the Inter-Ministerial Committee constituted on 2-11-2017, which initially recommended a specific legal framework, including the introduction of a new law, namely Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures
It said that the key aspects of the Crypto-token Regulation Bill, 2018, show that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of digital crypto assets at recognised exchanges.
“But nevertheless, the measure taken by RBI should pass the test of proportionality, since the impugned circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g),” said the bench.
The top court clarified that persons who engage in buying and selling virtual currencies, just as a matter of hobby, cannot pitch their claim on Article 19(1)(g), for what are covered therein are only profession, occupation, trade or business.
“Therefore hobbyists, who are one among the three categories of citizens (hobbyists, traders in VCs and VC Exchanges), straightaway go out of the challenge under Article 19(1)(g),” the apex court said.
In April 2018, the RBI had ordered financial institutions to break off all ties with individuals or businesses dealing in virtual currency such as Bitcoin within three months. The ban led to plummeting trade volumes and exchanges shutting their businesses.
Questioning the proportionality of such measures, the top court said: “While we have recognised elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none.”
The top court said when the consistent stand of the RBI is that it has not banned VCs and when the Centre is unable to take a call despite several committees coming up with several proposals, including two draft bills, both advocating exactly opposite positions.
“It is not possible for us to hold that the impugned measure is proportionate,” said the bench.
The Internet and Mobile Association of India and other petitioners had challenged the RBI’s circular. They had argued that it had put an end to the industry by taking it out of the formal economy, even though there is no ban on cryptocurrencies in the country.
On April 6, 2018, the central bank had issued a circular that barred RBI-regulated entities from “providing any service in relation to virtual currencies, including those of transfer or receipt of money in accounts relating to the purchase or sale of virtual currencies”.
In its defence, the banking regulator said it had been cautioning users of cryptocurrencies since 2013 and it was “performing its duty” as the topmost regulator of monetary policy in India. The banking regulator had argued that it is empowered to take decisions banning cryptocurrencies.
The apex court said: “It is no doubt true that RBI has very wide powers not only in view of the statutory scheme… but also in view of the special place and role that it has in the economy of the country.
“These powers can be exercised both in the form of preventive as well as curative measures. But the availability of power is different from the manner and extent to which it can be exercised.”
(Sumit Saxena can contacted at sumit.s@ians.in )
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