The Supreme Court has allowed banks and financial institutions to provide services related to cryptocurrencies by setting aside the Reserve Bank of India (RBI) circular of 2018 which had prohibited them.

A three-judge bench, headed by Justice R.F. Nariman, said the RBI circular is liable to be set aside on the ground of “proportionality”. “Accordingly, the writ petitions are allowed and the circular dated April 6, 2018 is set aside,” said the bench, also comprising justices Aniruddha Bose and V. Ramasubramanian.

“When the consistent stand of RBI is that they have not banned virtual currencies 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,” the bench said in its 180-page verdict.

The apex court delivered the verdict on pleas challenging the RBI circular. The petitioner, Internet and Mobile Association of India (IMAI), had argued in the top court that the RBI had banned cryptocurrencies on “moral grounds” as no prior studies were conducted to analyse their effect on the economy.

It had contended that the RBI barred all the entities regulated by it from providing services to any individual or business dealing in virtual currencies.

What is cryptocurrency?

A virtual currency is a digital representation of value that can be digitally traded and functions as a medium of exchange / a unit of account or a store of value.

A virtual currency may be a private medium of exchange, but does not in any way reflect a sovereign guarantee of the value or legal tender status. Virtual currency is therefore distinguished from the fiat currency of a country that is designated as its legal tender.

Cryptocurrencies are a subset of virtual currencies that are decentralised, and protected by cryptography. Bitcoin is an example of a cryptographic virtual currency, and was the first of its kind. 

Concerned over the risk associated in dealing with virtual currencies, such as Bitcoins, RBI in its April 2018 circular, prohibited trading in such digital currencies.

RBI can exercise preventive measures

According to the circular, the entities regulated by the RBI were prohibited 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 apex court said there is no doubt that RBI has very wide powers not only in view of the statutory scheme, but also in view of the special place and role 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, it said.

The court noted that the RBI’s concern is about the entities regulated by it and till now, it has not come out with a stand that any of the entities regulated by it, be it nationalised banks/scheduled commercial banks/cooperative banks or NBFCs, has suffered any loss or adverse effect directly or indirectly, on account of the interface that the virtual currency exchanges had with any of them.

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 virtual currency exchanges, it added.

Cryptocurrency players welcomed the SC order lifting two-year old ban on trading in virtual currencies by the RBI, saying the move will encourage them to expand their offerings in the country.

Govt panel bats for ban on cryptocurrencies

The government had constituted an inter-ministerial committee on to study the issues related to virtual currencies and propose specific action to be taken in this matter. 

The panel comprising officials from the finance ministry’s department of economic affairs, the ministry of information technology, and RBI finalised a report last year and a draft Bill — Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. 

The committee suggested banning of private cryptocurrencies, like Bitcoin, and criminalising any activities related to virtual currencies. The panel, however, pitched for the introduction of an official digital currency with a status of a legal tender and appropriately regulated by the RBI. 

The report has also highlighted the positive aspect of distributed ledger technology (DLT) and suggested various applications, especially in financial services in India.

Governments around the world have been looking into ways to regulate cryptocurrencies but no major economy has taken the drastic step of placing a blanket ban on owning them, even though concern has been raised about the misuse of consumer data and its possible impact on the financial system.

The need for regulations surrounding digital currencies has also gained momentum after Facebook announced plans to launch its cryptocurrency, Libra.

Several central banks around the world are also considering issuing their own digital currencies in the next few years, the Bank for International Settlements (BIS) said in a report in January.

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