The Supreme Court has delivered its landmark judgment on the legality of 2018 RBI circular which had prohibited financial institutions and banks from providing services to crypto businesses. The Court has ruled against the circular holding that such a banking ban is unconstitutional as it fails the test of proportionality. The ban which had led to the closure of crypto exchanges and ultimately forced them to shut down has now been set aside which can now lead to renewed interest in cryptocurrency and relaunch of such exchanges.
The Reserve Bank of India had in 2018 prohibited all entities from dealing or providing services to cryptocurrency businesses. Subsequently, using the powers conferred under the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934, it had prohibited any dealings in virtual currencies and restrained RBI regulated entities from facilitating any person or entity who was dealing with or settling virtual currencies. RBI had thus restrained all financial institutions and banks from providing any access to the banking system to anyone involved in dealing in crypto assets. The primary logic behind such a move was the fear of money laundering and the protection of market integrity.
Writ petitions were then filed before the Apex Court challenging the said circular. The Supreme Court in its detailed judgment referred to the legal position of cryptocurrency in various other jurisdictions. It also referred to the recommendation made by the European Union Parliament, which had suggested not to go for a total ban of the interaction between cryptocurrency business and the formal financial sector as a whole.
The Supreme Court observed that for a law imposing a restriction on the carrying of a business or profession, it must satisfy certain criteria. An evaluation of the direct and immediate impact upon the fundamental rights of the affected citizen and the protection of the larger public interest have to be considered properly before adjudicating on the validity of such a law. It observed that banking channels are the lifeline of any business or trade and it is needless to say that cashless transactions also require proper banking channels. Thus, prohibiting the facility of operating a bank account automatically leads to the closure of trade or business. Thus, RBI had a heavy burden of showing such larger public interest, which warranted severe restrictions on cryptocurrency operations as provided in the circular.
It reasoned that the impugned circular had the indirect effect of throttling the cryptocurrency exchanges but it has not prohibited the actual trading of cryptocurrencies. Thus, a peculiar situation has arisen where instead of prohibiting the actual trading of cryptocurrencies the exchanges have been targeted. The Court further reasoned that though the users and traders of cryptocurrencies are prevented from accessing the banking services, cryptocurrencies can still find their way to the market.
On the question of proportionality, the court utilised De Freitas test (based on the Privy Council judgment of Elloy de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing, 1999), which is a three-fold test enquiring whether the policy is sufficiently important to justify limiting the fundamental right, whether the measures are rationally connected to such an objective and whether such means are no more than is necessary to accomplish the objective. Further, a fourth test regarding the need to balance the societal interest with those of individuals as envisaged in the Bank Mellat v. HM Treasury (No. 2) case (2013 UK Supreme Court case challenging UK Government’s restriction on access to the UK’s financial markets by a major Iranian commercial bank), was also considered. Referring to the said judgment, the Court observed that measure sought to be taken has to pass the test of proportionality. It thus observed that it had to see if there were less intrusive measures available and whether RBI had at least considered those alternatives.
The Court emphasised that the RBI had not actually found the activities of cryptocurrency exchanges impacting RBI regulated entities adversely. Also, RBI has not prohibited virtual currencies in the country and the Inter-Ministerial Committee, which initially recommended a specific legal framework for cryptocurrency was of the opinion that a complete ban might be an extreme tool and the same objectives can be achieved through regulatory measures. The Inter-Ministerial Committee had initially recommended the Crypto-token Regulation Bill, 2018, which allowed the sell and purchase of digital crypto assets at recognised exchanges. But later the same Inter-Ministerial Committee recommended the imposition of total ban on private cryptocurrencies.
The Apex Court finally observed that even the Government has failed to take a final decision on the validity of the cryptocurrency. In fact, the Inter-Ministerial Committee had come to opposite conclusion on this aspect. The Supreme Court observed that though RBI has a special role in the Indian economy and it can exercise various forms of curative and preventive measures, yet in this case, the pre-emptive action taken by it fails the test of proportionality, as it had miserably failed to show any damage caused by entities regulated by it. With this court ruling cryptocurrency, businesses can again witness a strong resurgence.
Rajdeep Banerjee is an advocate and legal consultant and Joyeeta Banerjee is a legal consultant and practicing advocate.
The thoughts and opinions shared here are of the author.
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