RBI vs IMAI – SC Judgement dated 4-Mar-2020

The Supreme Court of India (SC) came out with its awaited judgement on virtual currency ruling the case in the favour of Internet and Mobile Association of India (IMAI) whereby declaring the Reserve Bank of India (RBI) circular no.  RBI/2017-18/154DBR.No.BP.BC.104/08.13.102/2017-18 dated April 6, 2019 imposing a prohibition on the entities regulated by RBI to provide any services for facilitating any individual or businesses in dealing with or settling virtual currency.

The major issues raised by the petitioner and the response of Supreme Court are discussed below –

S.no. Issue raised by petitioners Supreme Court held
1. Power of RBI of prohibiting the trading of virtual currency since-

Virtual currencies (VCs) are not legal tender but tradable commodities/digital goods, not falling within the regulatory framework

– VCs do not qualify as money, as they do not fulfill the four characteristics of money namely medium of exchange, unit of account, store of value and constituting a final discharge of debt, thus RBI has no power to regulate it.

– Virtual currencies do not fall within the credit system of the country and

– The guidelines issued under Payment and Settlement Systems Act, 2007 (PSSA) not applicable on virtual currency exchanges, as the services rendered by them do not fall within the definition of the expression “payment system”

– SC stated that various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds.

SC further stated that what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as much true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency. Therefore, VCs cannot be considered just goods/commodities.

– The cases and reports of regulators and government of various countries were considered and it was accepted that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value.

It was stated that if an intangible property can act under certain circumstances as money (even without faking a currency) then RBI can take note of it and deal with it.

– The reports of various regulators showed that it was clear that VCs has potential to become a threat to a financial system of a country.

SC stated that 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.

– The court accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, and there is no escape from the conclusion that the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the RBI. It was further stated that the circular was addressed to the banks which comes under the definition of ‘system participants’ of PSSA.

The banks certainly have a system of payment to be effected between a payer and a beneficiary, falling thereby within the meaning of the expression payment system.

Therefore, 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.

SC believed that it does not think that RBI’s role and power can come into play only if something has actually acquired the status of a legal tender also RBI to invoke its power, something should have all the four characteristics or functions of money.

Neither the RBI Act, 1934 nor the Banking Regulation Act, 1949 nor the Payment and Settlement Systems Act, 2007 nor the Coinage Act, 2011 define the words ‘currency’ or ‘money’, but the term ‘currency’[1] is defined under section 2(h) of Foreign Exchange Management Act, (FEMA) 1999.

Nothing prevented RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in Section 2(h) of FEMA, 1999.

It was pointed that the very creation of digital currency was to liberate the monetary system from being a slave to the central authority and from being operated in a manner prejudicial to private interests.

Therefore, the ultra vires argument cannot be accepted when the provision of access to banking services without any interference from the central authority over a long period of time is perceived as a threat to the very existence of the central authority. Hence, it was held that RBI has the requisite power to regulate or prohibit an activity of this nature.

2. The power to issue directions on the basis of expression “public interest” appearing in a particular provision in a statute should take its colour from the context of the statute. Once it was 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 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. 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.

Therefore, if RBI takes steps to prevent the gullible public from having an illusion as though VCs may constitute a valid legal tender, the steps so taken, are actually taken in good faith.

SC stated that 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 does not hold water.

3. A decision to prohibit an article as res extra commercium is a matter of legislative policy and must arise out of an Act of legislature and not by a notification issued by an executive authority SC stated that whether an article is to be prohibited as res extra commercium, is a matter of legislative policy and must arise out of an act of legislature and not by a mere executive notification is correct, but this contention omits to take note of the crucial role assigned to RBI in the economic sphere.

It was further stated that the projection of the impugned decisions of RBI as a total prohibition of an activity altogether, is not correct. The impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI to not enter into a class of transactions.

The fact that the functioning of Virtual Currencies Exchanges (VCEs) automatically gets paralyzed or crippled because of the impugned Circular, is no ground to hold that it tantamount to total prohibition.

4. Assuming that RBI had the power to issue the circular under the stated acts, the same must be tested on following grounds –

– application of mind/ satisfaction/relevant and irrelevant considerations

– Malice in law/colorable exercise of power

–  M.S. Gill reasoning

–          It was stated that the matter of dealing with VCs has been li 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. The reports and other advisory circulars issued by RBI from June 2013 up to 02-04-2018 show that RBI had been brooding over the issue for almost five years, without taking the extreme step. Therefore, it cannot be said that RBI can be held guilty of non-application of mind.

–          For arriving at a “satisfaction” as required by Section 35A(1) of Banking Regulation Act, 1949 and Section 45JA and 45L of RBI Act, 1934, it was not required of RBI either to write a thesis or to write a judgement.

–          It was further stated that RBI cannot be accused of not taking note of relevant considerations or taking into account irrelevant considerations as RBI has taken into account those considerations which multinational bodies and regulators of various countries such as Financial Action task Force, Bank of International Settlements etc., have taken into account.

– When a series of steps taken by a statutory authority over a period of about five years disclose in detail what triggered their action, it is not possible to see the last of the orders in the series in isolation and conclude that the satisfaction arrived at by the authority is not reflected appropriately.

– SC stated that there is no quarrel with the proposition that 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.

Thus, if such exercise of power by RBI with a view to achieve one of these objectives incidentally causes a collateral damage to one of the several activities of an entity which does not come within the purview of the statutory authority, the same cannot be assailed as a colourable exercise of power or being vitiated by malice in law.

It was further stated that to constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and wilfully without reasonable or probable cause, which is not the case here as RBI did take actions in good faith and within its powers.

– SC stated that impugned Circular cannot be assailed on the basis of M. S. Gill[2] test, for two reasons.

First is that in Chairman, All India Railway Recruitment Board v. K. Shyam Kumar & Ors,87 it was held that MS Gill test may not always be applicable where larger public interest is involved.

The second reason is that during the pendency of the case, the court passed an interim order on 21-08-2019 directing RBI to give a point-wise reply to the detailed representation made by the writ petitioners. Pursuant to the said order, RBI gave detailed responses on 04-09-2019 and 18-09-2019.

5. Wait and watch approach of other stake holders such as the Department of Economic Affairs of the Government of India, Securities and Exchange Board of India, Central Board of Direct Taxes SC stated that other stakeholders of the economy did not see any grave threat regarding VCs and therefore RBI’s reaction is knee-jerk, is not acceptable.

SC further stated that every stakeholder has a different role to play and function to perform and can have an approach as per the prism through which they are obliged to look in the issue. Thus, RBI cannot be faulted for not adopting the very same approach as that of others.

6. Lenient approach by Other counties on VCs matter The approach of various countries regarding VCs was discussed in the court and it was agreed that many countries except for few, have not imposed a ban (total or partial) on VCs.

Comparative perspective helps only in relation to principles of judicial decision making and not for testing the validity of an action taken based on the existing statutory scheme.

In addition to this, India economic conditions cannot be placed at par with developed countries like, US, UK, Canada, Japan, etc as these are capable of absorbing greater economic shocks than India.

SC stated that its judicial decision cannot be coloured by what other countries have done or not done.

7. Precautionary measures taken by members SC stated that determining that whether the precautions taken by the VCs traders and members would have addressed all the issues raised by RBI can be done by an expert in this area. SC stated that it is not an expert to determine the fact.
8. Different approach for different category of crypto currency. The petitioners stated that all virtual currencies are not fully anonymous. While some, such as Dash and Monero are fully anonymous, others such as Bitcoin are pseudo-anonymous. Therefore, it was contended that banning transactions only in fully anonymous VCs could have been a better and less intrusive measure rather than banning all of them.

SC stated that the entire premise on which the petitioners have developed their case was that VCs are neither money nor constitute a payment system.

It was further stated that the question whether anonymous VCs alone could have been banned leaving the pseudo-anonymous, is for experts and not for the Court to decide.

The stand taken by RBI was that they have not banned VCs. Hence, the question whether RBI should have adopted different approaches towards different VCs does not arise.

9. Paradox in acceptance of blockchain technology by RBI but not of crypto currency. It was stated that RBI and Inter-Ministerial Group has accepted the blockchain technology as a part of Financial Technology. However, their non accepted of crypto currency cannot be considered irrational.

SC further stated that there was nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation. It is not like a “take it or leave it” option.

10. RBI action does not qualify judicial deference It was accepted that a legislation relating to economic matters is placed at the highest pedestal, an executive decision with regard to similar matters will be placed only at a lower pedestal and the decision taken by a statutory body may not even be entitled to any such deference or reverence.

However, SC stated that RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get liberated even from its creator. Therefore, RBI cannot be equated to any other statutory body that merely serves its master. It is specifically empowered to do certain things to the exclusion of even the central government, like issue of notes.

The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. However, the powers conferred upon RBI under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the central government, cannot be taken away. Similarly, the power to issue notes cannot be taken away from RBI and given to another bank.

Therefore, to say that RBI is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act.

11. Attack on Article 19(1)(g) of the Constitution.

SC stated that banking channels provide the lifeline of any business, trade or profession.

The persons who have suffered a deadly blow from the impugned Circular are only those running VC exchanges and not those who are trading in VCs.

Persons trading in VCs, now have different options, but the VC exchanges do not appear to have found out any other means of survival (at least as of now) if they are disconnected from the banking channels.

SC stated that RBI did not consider the availability of alternatives before issuing the impugned circular.

It was further stated 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;

– that the consistent stand taken by RBI up to is that RBI has not prohibited VCs in the country; and

– 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.

The key aspects of the Crypto-token Regulation Bill, 2018, shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of digital crypto asset at recognized exchanges. But within a year, 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

Cryptocurrency and Regulation of Official Digital Currency Act.

SC stated that as on date 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 and this has been done –

– despite RBI not finding anything wrong about the way in which these exchanges function; and

– despite the fact that VCs are not banned.

It is accepted that the concern of RBI is and it ought to be, about the entities regulated by it. However, 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 VCs.

SC further stated that there is no doubt 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 power to take a pre-emptive action or the proportionality of such measure, RBI needs to show at least some hint of any damage suffered by its regulated entities. But there is none.

[1] Currency incudes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.

[2] MS Gill v. The Chief Election Commissioner, (1978) 1 SCC 405

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