Adv Dr. Mahendra Limaye’s ANALYSIS OF JUDGEMENT DELIVERD ON VIRTUAL CURRENCEY

On March 4, 2020 the Hon Supreme Court of India delivered a path-breaking judgment which is viewed or interpreted as apex court in India have allowed virtual currencies in India or Indian apex court has lifted ban on virtual currencies and hence trading in virtual currency is legal. But in my views above interpretation is totally wrong. The petitioners received benefit of doubt and lassitude from government’s part also played imperative role in tiling the balance in favour of petitioners.

It should be clearly understood that the order passed by Hon Supreme Court was for striking down circular issued by RBI dated April 6, 2018, stating in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (hereinafter, “RBI Act, 1934”) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007.

The brief facts of matter can be summarized as below.

Reserve Bank of India issued few advisory guidelines with reference to crypto currency activities in India and also a “Statement on Developmental and Regulatory Policies” on April 5, 2018, paragraph 13 of which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).

As per RBI these various guidelines were in the public interest. This circular was challenged by several petitioners, one association working for free and fair use of internet and others were exchanges dealing in crypto currency trading activities, through this bunch of writ petitions.

Though the prayer for striking down the applicability of circular was upheld by the Hon. Supreme Court of India, the order pronounced by the bench consisted of Hon. Justice Rohinton Fali Nariman, Aniruddha Bose and V. Ramasubramanian needs vigilant evaluation for better and correct understanding about the judgement.

The Apex Court has observed that the consistent stand of RBI is that they have not banned VCs. It further observed that the Government of India is unable to take a tangible and decisive call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions that government is proposing to ban the mining, generation, holding, selling, dealing in, issuing, transferring, disposing of or using crypto currency in the territory of India.

Court have recognized in this order, the power of RBI to take a pre-emptive action by issuing such circulars, but while testing of the order on backdrop of the proportionality of such measure, for the determination of same RBI needs to show at least some semblance of any damage suffered by its regulated entities but it failed to do so.

In its judgement, Hon. Court observed, “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.”  Court was convinced about wide powers of RBI and issuance of the circulars as preventive measures for betterment of Indian Financial scenario but as the circulars could not pass the test of proportionality, the circulars were smacked down.

So it should not be seen as Supreme Court has lifted the ban on crypto currency in India or now crypto currencies trading are official in India as many of us are construing this decision. In entire judgement Hon. Supreme has never uttered a single word about legitimacy or genuineness of virtual currencies or about exchanges trading such virtual currencies but only decided that the activities of petitioner exchanges, trading in virtual currency were not declared unlawful and hence their bank accounts could not be debit frozen by the banks citing the challenged RBI Circular.

The order of Hon. Supreme Court has sumptuously discussed various grounds cited as below;

1)    Whether RBI has no power to prohibit the activity of trading in virtual currencies through VC exchanges?

2) Whether the power to issue directions “in the public interest” conferred under Section 35A(1)(a) of the Banking Regulation Act, 1949 and the power to caution or prohibit banking companies against entering into any particular transaction conferred under Section 36(1)(a) extend to the issue of blanket directions that would deny access by virtual currency exchanges, to the banking services of the country, as the expression “public interest” appearing in a particular provision in a statute should take its colour from the context of the statute.

3)  Whether the power conferred upon RBI under Section 10(2) of the Payment and Settlement Systems Act, 2007 to issue guidelines is also applicable to virtual currency exchanges, as the services rendered by them do not fall within the definition of the expression “payment system” under Section 2(1)(i) of the said Act.

4) While regulation of a trade or business through reasonable restrictions imposed under a law made in the interests of the general public is saved by Article 19(6) of the Constitution, whether a total prohibition, especially through a subordinate legislation such as a directive from RBI, of an activity not declared by law to be unlawful, is violative of Article 19(1) (g).

The petitioners argued mainly following grounds which were negated by the Hon Apex Court.

1)     No Power at all for RBI – The Hon. Apex Court observed that the RBI Act, 1934, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 cumulatively recognize and also confer very wide powers upon RBI (i) to operate the currency and credit system of the country to its advantage (ii) to take over the management of the currency from central government (iii) to have the sole right to make and issue bank notes that would constitute legal tender at any place in India (iv) regulate the financial system of the country to its advantage (v) to have a say in the determination of inflation target in terms of the consumer price index (vi) to have complete control over banking companies (vii) to regulate and supervise the payment systems (viii) to prescribe standards and guidelines for the proper and efficient management of the payment systems (ix) to issue directions to a payment system or a system participant which in RBI’s opinion is engaging in any act that is likely to result in systemic risk being inadequately controlled or is likely to affect the payment system, the monetary policy or the credit policy of the country and (x) to issue directions to system providers or the system participants or any other person generally, to regulate the payment systems or in the interest of management or operation of any of the payment systems or in public interest.

Hon. Supreme Court held that Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system.

Additionally Hon Court held that, “If at all, the power is only to regulate, not prohibit.”

2)     RBI cannot issue instructions: Supreme court held that in the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 should fail.

3)     Whether exercise of power is proper and with application of mind and relevant considerations was made by the RBI?  Hon. Apex court could not hold RBI guilty of non-application of mind. As a matter of fact the issue as to how to deal with virtual currencies has been lingering with RBI from June 2013 onwards, when the Financial Stability Report took note of the challenges posed by virtual currencies in the form of regulatory, legal and operational risks. The Financial Stability Report of December 2015 also raised concerns about excessive volatility in the value of VCs and the anonymous nature which went against global money laundering rules rendering their very existence questionable. RBI also issued a press release on 01-02-2017 and once again cautioning the users, holders and traders of virtual currencies. Apex Court observed that all the above sequence of events from June 2013 up to 02-04-2018 would show that RBI had been brooding over the issue for almost five years, without taking the extreme step. Therefore, RBI can hardly be held guilty of non-application of mind.

4)     The argument that the invocation by RBI, of ‘public interest’ as a weapon, purportedly for the benefit of users, consumers or traders of virtual currencies is a colourable exercise of power also does not hold water. Once it is conceded that RBI has powers to issue directions in public interest, it is impossible to exclude users, consumers or traders of virtual currencies from the coverage. In fact, the repeated press releases issued by RBI from 2013 onwards indicate that RBI did not want the members of the public, which include users, consumers and traders of VCs, even to remotely think that virtual currencies have a legal tender status or are backed by a central authority.

The only arguments in support of petitioners were on Article 19(1) (g) challenge & Proportionality. It was argued that any restriction to the freedom guaranteed under Article 19(1) (g) should pass the test of reasonableness in terms of Article 19(6). It is contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate. It is further contended that the right to access the banking system is actually integral to the right to carry on any trade or profession and that therefore legislation, subordinate or otherwise whose effect or impact severely impairs the right to carry on a trade or business, not prohibited by law, would be violative of Article 19(1) (g).

Reasoning of the Apex Court -- In order to test the validity of the impugned action on the touchstone of Article 19(1)(g), we may have to understand the fundamental distinction between (i) the purchase and sale of virtual currencies by and between two individuals or entities and (ii) the business of online exchanges that provide certain services such as the facility of buying and selling of virtual currencies, the storing or securing of the virtual currencies in what are known as wallets and the conversion of virtual currencies into fiat currency and vice versa.

The buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business. The distinction between the two is that there may or may not exist a profit motive in the former, while it would, in the latter. Persons who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Article 19(1) (g), for what is covered therein are only profession, occupation, trade or business. Therefore hobbyists, who are one among the three categories of citizens (hobbyists, traders in VCs and VC Exchanges), straightaway go out of the challenge under Article 19(1)(g). The second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the basis of Article 19(1)(g).

Technically speaking, the second category of citizens cannot claim that the impugned decision of RBI has the effect of completely shutting down their trade or occupation. Citizens who have taken up the trade of buying and selling virtual currencies are not prohibited by the impugned Circular (i) either from trading in crypto-to-crypto pairs (ii) or in using the currencies stored in their wallets, to make payments for purchase of goods and services to those who are prepared to accept them, within India or abroad.

In all cases where legislative/executive action infringing the right guaranteed under Article 19(1) (g) were set at naught by this court, this court was concerned with a ban/prohibition of an activity. The question of the prohibited/banned activities having the potential to destabilize an existing system did not arise in those cases.

If a central authority like RBI, on a conspectus of various factors perceive the trend as the growth of a parallel economy and severs the umbilical cord that virtual currency has with fiat currency, the same cannot be very lightly nullified as offending Article 19(1)(g). But nevertheless, the measure taken by RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1) (g).

On the question of proportionality, the reliance was placed on four-pronged test summed up in the opinion of the majority in Modern Dental College and Research Centre v. State of Madhya Pradesh. These four tests are (i) that the measure is designated for a proper purpose (ii) that the measures are rationally connected to the fulfilment of the purpose (iii) that there are no alternative less invasive measures and (iv) that there is a proper relation between the importance of achieving the aim and the importance of limiting the right.

Court articulated that we cannot lose sight of three important aspects namely, (i) that RBI has not so far found, in the past 5 years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function (ii) that the consistent stand taken by RBI up to and including in their reply dated 04-09-2019 is that RBI has not prohibited VCs in the country and (iii) that even the Inter-Ministerial Committee constituted on 02-11-2017, which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures.

Surprisingly there was a volte-face and the final report of the very same Inter-Ministerial Committee, submitted in February 2019 recommended the imposition of a total ban on private crypto currencies through a legislation to be known as “Banning of Crypto currency and Regulation of Official Digital Currency Act.”

The draft of the bill contained a proposal to ban the mining, generation, holding, selling, dealing in, issuing, transferring, disposing of or using crypto currency in the territory of India. At the same time, the bill contemplated (i) the creation of a digital rupee as a legal tender, by the central government in consultation with RBI and (ii) the recognition of any official foreign digital currency, as foreign currency in India.

The position as on date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned.

Court also pointed out that 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, 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.

Court finally proclaimed that , “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 testing 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 contradictory suggestions, in finality in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality.”

This elaborate analysis highlights that though Apex Court has accepted the powers of RBI to issue circulars in Public Interest but as there was no blanket order banning Virtual Currency and diametrically opposite views by Central government regarding virtual currencies let down the populous move of RBI banning VC exchanges from banking exposures.

It is understood that RBI is in process of challenging the impugned order by review petition but as government has not shown any clarity about its stand on virtual currencies it would be, in my view, a futile exercise. Rather RBI should convince the government about potential dangers of regulating the virtual currency and government should come up with a law or notification to ban the same.

Author Adv. Dr. Mahendra Limaye is a Cyber Legal Consultant based in Nagpur and heads Mahendra Limaye Associates a Pan India Cyber Law firm specialising in Cyber Litigation. The author is also part of Cyber Awareness Organisation, which is running Cyber Crime Helpline for free advisory of Cyber Crime victims and has imparted free Legal advice to more than 1,00,000 victims across India. He could be contacted at mahendralimaye@yahoo.com or 09422109619/8830139056.