Supreme Court Sets Aside RBI Circular That Curbed Cryptocurrencies In India
WATCH | The future of cryptocurrencies in India.
The Supreme Court has set aside the Reserve Bank of India’s 2018 circular that barred banks and other financial institutions from facilitating transactions involving cryptocurrencies.
The bench, headed by Justice Rohinton F Nariman, quashed the central bank’s circular on grounds of disproportionality. The judgment, authored by Justice V Ramasubramanian, noted that the RBI has failed to show “at least some semblance of any damage suffered by its regulated entities’’ to back its decision to effectively bar crytocurrencies in India.
The Internet and Mobile Association of India and other petitioners had challenged the circular by arguing 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. The RBI’s move will deny the industry access to banks and move such transactions into cash. By doing so, regulators and law enforcement agencies will find it even tougher to monitor virtual currencies in India, the petitioners argued.
While the Supreme Court did not accept the petitioners’ argument that the RBI’s decision was ultra vires and in violation of fundamental rights, it ruled that the restrictions put in place by the RBI are disproportionate.
“There can be no quarrel with the proposition that the RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company or in public interest,” the judgment said.
But when it comes to the test of proportionality of the RBI’s measure, the central bank needs to provide proof that its regulated entities have been damaged by virtual currency exchanges and other entities, the court said, adding that the RBI could not show any proof of damage.
When the consistent stand of the RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals, including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.Supreme Court Order
The top court cited the example of European Union Parliament which did not go for a complete ban on inter-linkages between cryptocurrencies and the formal financial sector as a whole. The RBI, however, did not consider the availability of alternatives, the top court said.
A Ban Without A Ban
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”. The banking regulator said it had been cautioning users of cryptocurrencies since 2013 and those who ignored them did it at their own risk.
In its response in the Supreme Court, the RBI said it was “performing its duty” as the topmost regulator of monetary policy in India and its decision was within the measures it’s empowered to take when it feels such steps are required against industries that may jeopardise the payment system of the country.
The RBI’s diktat had forced many startups in the cryptocurrency space to either shut down or alter business models. This, despite the fact that cryptocurrencies are not technically banned in India.
A government draft bill which had proposed to ban cryptocurrencies is yet to be cleared.
Uncertainty Not Over
To be sure, the government and the central bank can still step in to curb or regulate cryptocurrency businesses.
L Viswanathan, partner, Cyril Amarchand Mangaldas said that the RBI’s regulatory powers are wide and with the benefit of the Supreme Court’s judgment, the central bank will reconsider its approach to cryptocurrency.
The RBI could “come up with a new, calibrated framework or regulation that deals with the reality of these technological advancements and simultaneously balancing considerations of regulatory, consumer protection, security and monetary control that the RBI is expected to have over currency and financial products,” he said.
For now, though, the industry hopes they will be able to scale-up once again.
“I feel that the startup ecosystem in the blockchain and the crypto space will get a boost, thanks to this judgment. There will not be any fear for startups to work in these areas anymore,” said Nischal Shetty, founder and chief executive officer of WazirX—a bitcoin exchange platform.
“We have seen many startups that were doing well before the RBI circular, but they have either shut down or pivoted,” said Ashish Singhal, founder and CEO, CruxPay and Coinswitch “This verdict will push the government and various regulators to come out with a set of regulations that not only help startups in the space but also safeguard users and customers.”