INTERNET AND MOBILE ASSOCIATION OF INDIA V. RESERVE BANK OF INDIA

CASE: INTERNET AND MOBILE ASSOCIATION OF INDIA V. RESERVE BANK OF INDIA
(2020) 10 SCC 274.

Writ Petition (Civil) No. 528 of 2018

Court: Supreme Court of India

Bench: 3-Judge Bench

1. Justice R.F. Nariman

2. Justice Aniruddha Bose

3. Justice V. Ramasubramanian

Bench Type: Division Bench

Date of Judgement: 4 March 2020.

Parties Involved:

1. Petitioners: The Internet and Mobile Association of India (IAMAI) is a non-profit industry organization that represents key stakeholders in the digital and internet economy of India, including cryptocurrency exchanges and blockchain-based businesses. The petitioners also had a number of virtual currency exchanges whose business was negatively impacted by the impugned RBI circular.

2. Respondent: The Central Bank of India (RBI), the banking institution of India that controls the monetary policy, banking, and financial stability under the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949.

Facts:

The case was occasioned by regulatory interventions by the Reserve Bank of India on virtual currencies (VCs) like Bitcoin, Ethereum, Ripple, and other cryptocurrencies. Virtual currencies started to emerge as prominent in the world in the early 2010s in the form of decentralised digital assets based on block chain tech. In India, cryptocurrency exchanges were used to buy and sell virtual currencies in the form of fiat currency through banking. RBI released a series of cautionary notes between 2013 and 2017 where the central bank cautioned users, traders, and holders of virtual currencies of the possible risks such as volatility, consumer protection issues, money laundering and cyber security risks. Yet, these recommendations did not introduce any ban. RBI released a circular on 6 April 2018, which is called Prohibition on dealing in Virtual Currencies (VCs). Through this circular, RBI instructed all the parties it regulates, such as banks, NBFCs, payment system providers and financial institutions, to stop offering services to persons or businesses that dealt in virtual currencies. These services were maintenance of accounts, clearing, settlement, loans and payment services.

As a result of the circular: Banking channels became unavailable to cryptocurrency exchanges. Exchanging fiat to crypto was no longer a possibility. Some of the exchanges closed down or shifted operations out of India. The circular placed a de facto ban on the trading of virtual currency without legislation restriction.
Remarkably, during the issuance of the circular: There was no legislation against virtual currencies in India. RBI did not find any evidence that cryptocurrency exchanges had a real impact of harming the banking system. The issue was still under consideration by an inter-ministerial committee. Finding the circular aggravating, IAMAI and aggrieved interchanges petitioned writs under Article 32 of the Constitution, claiming the circular to be unconstitutional, arbitrary, and not proportional.

Issues Raised:

The Supreme Court outlined and investigated the following essential legal concerns: The question of whether or not the Reserve Bank of India was statutorily empowered to regulate or prohibit transactions in virtual currencies. The question of whether or not virtual currency exchanges may conduct trade or business under Article 19(1)(g) of the Constitution. Whether the RBI circular of 6 April 2018 infringed the principle of proportionality.

Whether or not the impugned circular was liable to be set aside as being arbitrary and unreasonable and without empirical justification.

Arguments of the Parties:

Contention by the Petitioners:

Violation of Article 19(1)(g): The petitioners contended that cryptocurrency exchanges were conducting a legitimate business and that the RBI circular was placing unreasonable limitations on their right to trade and profession without a statutory support. Absence of Legislative Ban: Parliament did not provide a law to prohibit virtual currencies. RBI was not able to indirectly prohibit by administrative directions.

Lack of Proportionality: The circular had the largest possible restriction, the total denial of access to banking services, without looking into less invasive regulatory solutions like KYC standards, surveillance, or licensing.

No Evidence of Harm: RBI did not show any tangible harm that cryptocurrency exchanges have on the banking system or financial stability.
Excess of Regulatory Power: RBI had the ability to control banking organizations but not to ban businesses that only consume banking services but do not create systemic risk.

Non-Application of Mind: The circular was made without adequate study, consultation with stakeholders, and impact assessment.
Respondent (RBI) Arguments:

Wide Regulatory Powers: RBI argued that under the RBI Act, 1934 and Banking Regulation Act, it had wide jurisdiction to regulate the issues that concerned the financial system, and this included new technologies such as virtual currencies.

Risk to Financial Stability: Currencies Virtual currencies were associated with risks of money laundering, financing of terrorism, consumer fraud and volatility, and loss of monetary control.

Preventive Regulation: RBI said that it did not need to wait till the damage had been done; it was crucial to take precautionary actions regarding financial regulation.

There is no Essential Right to Banking Services: The petitioners did not have a basic right to require the services of a bank regarding businesses that involved speculative digital assets.

Policy Decision: The circular was an expert judgment that is policy-based, and judicial restraint in economic affairs should be exercised by the courts.

Judgment/Final Decision:

The Supreme Court permitted the writ petitions and quashed the RBI circular dated 6 April 2018.

Key Findings:

RBI could also control virtual currencies. Cryptocurrency exchanges were involved in a legitimate business. The impugned circular did not pass the test of proportionality. The circular was illegal in that it placed unnecessary restrictions disproportionately. The Court did not find virtual currencies illegal or did not prevent the possibility of their regulation in the future by RBI.

The Ratio Decendi/Legal Reasoning:

A. The regulatory power of RBI was upheld. The Court also determined that virtual currencies fall into the regulatory sphere of RBI because they affect: Payment systems Monetary stability Banking operations Although virtual currencies are not legal tender, the RBI as a financial regulator should have exercised control.

B. Article 19(1)(g) Right to Trade: The Court acknowledged that cryptocurrency exchanges support the buying and selling of cryptocurrencies and, therefore, conduct a legitimate business that falls under Article 19(1)(g). Any limitation of such business should meet Article 19(6).

C. Doctrine of Proportionality. The Court used the four prong proportionality test: Legitimate aim Rational connection Necessity Balancing of interests Although the aim of RBI was valid, the process was excessive. Denying banking services was tantamount to closure of the business.

D. Lack of Empirical Evidence The Court highlighted that RBI did not generate any data or study demonstrating that the cryptocurrency exchanges had resulted in: Damage to banks Risk to financial stability. Regulatory breakdown Prevention should nevertheless be reasonable and evidence-based.

E. Less Restrictive Alternatives Overridden. The Court noted that RBI might have implemented: Not banning, but regulating. Enhanced KYC norms Monitoring mechanisms The lack of thinking about alternatives made the circular arbitrary.

Conclusion & Observations:

The verdict in Internet and Mobile Association of India v. The case RBI (2020) is the first big ruling in the crossroads of technology, finance, and constitutional law. It restated the fact that regulatory bodies, despite their broad powers, are bound to operate within constitutional bounds and proportionality.

The case underscores that judicial review is open to economic regulation. Unless supported by legislation, innovation cannot be smothered. Indirect bans cannot be provided through administrative circulars. Although the Court did not challenge the reasonableness of the power of RBI to regulate virtual currencies, it resoundingly dismissed the bans that were unsubstantiated by evidence. The case still informs the current cryptocurrency and fintech regulation in India and is a highly sensitive case precedent on proportionality in administrative action.