As the blockchain enthusiasts, the exchanges dealing with Crypto Currencies ("CCs")and individuals holding CCs, across the globe watched in approbation, The Supreme Court of India, in the matter of Internet and Mobile Association of India vs Reserve Bank of India, Writ Petition (Civil) No. 528 of 2018 ("IMAI Case"), quashed the notification ("Notification") issued by Reserve Bank of India ("RBI"). The Notification had directed all entities regulated by RBI not to deal in CCs or provide 'services' for facilitating any person or entity in dealing with or settling CCs and to exit the relationship with such persons or entities, if they were already providing such service to them. The term said 'services' included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges, dealing with them and transfer or receipt of money in accounts relating to purchase or sale of CCs .
Points of Contention
The major averments raised by the Petitioners in the said matter were challenging the constitutional validity of the Notification on the following grounds that the:
Commodity vs. currency:
The Petitioners contended the RBI CCs are not 'money' or a 'legal tender' and are merely good/tradable commodity and hence RBI has no role in regulating/banning the same. Accordingly, they contended that the RBI inherently lacked powers to issue the Notification.
The court while dealing with the treatment given to CCs by various jurisdictions and analysing its nature agreed that as of the present date CCs are capable of functioning as (i) a medium of exchange and/or (ii) a unit of account and/or (iii) a store of value, while they lack the legal backing of being called as a 'legal tender'. However, yet the RBI has wide powers under Section 35A of the Banking Regulation Act, 1949 ("BRA") and Reserve Bank of India Act, 1934 to regulate or prohibit trading in CCs.
This could be a more cogent approach since VCs are not notified under the category of "other similar instruments" indicated in Section 2(h) of FEMA, 1999 which defines the term 'currency' and hence cannot be explicitly term as 'currency' today.
No Application of mind and malice in law:
The Petitioners contended that in issuing the Notification there has been no application of mind and the same is vitiated by malice in law. The court after deliberating on the reasoning furnished by the RBI during the course of proceedings, came to the conclusion that irrespective of what VCs actually do or do not do, it is an accepted fact that they are capable of performing some of the functions of real currencies and there were various reason proposed by RBI like cases of money laundering, terrorism financing and anonymity of transactions which obliterate the contention that there was no application of mind by RBI.
The Court further said that the power under Section 35A of BRA to issue directions is to be exercised under four contingencies namely (i) public interest (ii) interest of banking policy (iii) interest of the depositors and (iv) interest of the banking company. The expression "banking policy" is defined in Section 5(ca) to mean any policy specified by RBI (i) in the interest of the banking system (ii) in the interest of monetary stability and (iii) sound economic growth. Public interest permeates all these three areas. This is why Section 35A(1)(a) is invoked in the Notification. Therefore, the court rejected the argument of the petitioners that the decision pursuant to the Notification is a colourable exercise of power and it is vitiated by malice in law.
What became the decisive and the governing factor to determine the validity of the Notification was the 'doctrine of proportionality' read with Right to carry out 'Trade or Business'. The court set aside the Notification on the point of contention that the Notification failed to pass the tenets of proportionality. While quashing the Notification, the court held,
"6.172. As we have pointed out earlier, the concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them. As held by this court in State of Maharashtra v. Indian Hotel and Restaurants Association, (2013) 8 SCC 519, there must have been at least some empirical data about the degree of harm suffered by the regulated entities (after establishing that they were harmed). It is not the case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exchanges.
6.173. It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of the 3 enactments indicated earlier, 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. While we have recognized 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. When the consistent stand of 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."
It may be said that the there was an apparent contradiction within in the government directives. Where on one hand the Inter-Ministerial Committee ("IMC") constituted on November 02, 2017, initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018 and was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures, on the other hand in July 2019, the IMC released its report and proposed a bill criminalizing carrying on any activity connected with Crypto Currencies in India, including mining, buying, selling or storing Crypto Currencies, and their use as a means of raising funds or for investments.
Also, the Circular showed a hassled way of dealing with an economic situation where the RBI was crippled to find alternative solutions to progressive approach of regulating the trading of CCs. It seems, as the court said, that the RBI didn't evaluate or come up with any actual damage done or caused to the entities regulated by it, as a result of trading in CCs.
The Circular showed a hassled way of dealing with an economic situation where the RBI was crippled to find alternative solutions to progressive approach of regulating the trading of CCs.
The Crypto Currencies: How they have to be seen
In the present global scenario, the CCs may be treated as virtual asset of a particular value that can be digitally traded, or transferred, and can be used for payment or investment purposes. The concept of CCs have undergone a sea of change, with different jurisdictions, regulators and statutory authorities according different status to them.
In the Indian scenario, the CCs can definitely be said to have the trappings of currency but are actually an asset that can be traded or is a medium of exchange. It is to be noted that even the Notification never challenged the very existence of the CCs, it was their trading that was banned by the Notification. Whether they will ever be considered a fiat currency? Or assume the shape of a hybrid currency? Or they may not be a legal tender but they have the attributes of performing most of the functions a legal currency backed by a state permits?, will only be evident in times to come and depend upon the market and economic forces and the role of the regulators.
My Observation and Conclusion
The judgment in the IMAI case comes as a welcome move towards a progressive digital economy. The Indian market forces had already explored themselves into the use, trade and sale of CCs and have established highly successful business in the form of crypto exchanges and blockchain driven start-ups and therefore one cannot sign off CCs completely.
What needs to be looked into is the regulation of various ills attached to dealing in CCs, namely the anonymity of transactions and the volatility and fluctuation of the value of Crypto Currencies. Since the identity of participants is not revealed in the transaction, it may give rise to cybercrimes, money laundering, terrorism financing, illicit activities, misinformed investments by consumers and market frauds without any trace of offenders. It is to be seen how the law makers and the RBI regulate the trading of CCs, either by coming up with a substantive legislation by Parliament or regulation by RBI for regulating and facilitating the dealings in CCs. A few measures that could be adopted are mandatory reporting of sale, trade and usage of CCs to RBI to ensure the identity of participants and the amounts transacted and quarterly/monthly filings by crypto exchanges with RBI intimating the necessary information of all transaction in CCs.
No. DBR. No. BP. BC. 104 /08. 13.102/2017-18, April 06, 2018, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11243
 Constitution of India, 1950, Art. 19 (1)(g).
 Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019
Views Are Personal Only.
(Author is a Corporate Lawyer)