SC says central bank has powers but order didn’t pass ‘proportionality’ test. (File)
The Supreme Court Wednesday set aside an April 2018 circular of the Reserve Bank of India (RBI) which had said that all entities regulated by it “shall not deal in virtual currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs”.
A three-judge bench of Justices Rohinton Fali Nariman, Aniruddha Bose, and V Ramasubramanian, ruled that the RBI’s blanket ban prohibiting banks dealing with VC holders or exchanges did not pass the test of “proportionality”.
In its 180-page judgment, the bench held that while RBI had very wide “preventive as well as curative” powers to regulate entities under its ambit, “the availability of power is different from the manner and extent to which it can be exercised”.This is the second major circular issued by the RBI that has been set aside by the SC.
The court has not explicitly mentioned whether lenders will henceforth be able to trade in VCs or not. Experts, however, hoped that the ruling will make the banking regulator reconsider its approach on VC and come up with a new, calibrated framework or regulation for the same.
In April 2019, the apex court had set aside the banking continued on page 2 SC quashes RBI ban, clears way for virtual currency operations regulator’s February 12, 2017 circular in which it had issued directions to banks on resolving bad debts of companies, including specific directions that lenders needed to start the resolution process as soon as a borrower defaulted on a term loan, and that the defaulting company must be taken to the insolvency courts within 180 days.
The SC had then said that the RBI had acted beyond its legal powers while issuing the directive. The second RBI circular, barring with immediate effect banks and other financial institutions from dealing in VCs, had come on April 6, 2018.
Banks or any other entities regulated by RBI, which had already entered into such transactions, were asked to “exit the relationship within three months”, the RBI had then said.
The banking regulator had then also issued directions that apart from dealing with VC holders or exchanges, other services such as maintaining their accounts, registering them or clearing loans against such currencies, accepting them as collateral was also barred with immediate effect.
After the circular, VC exchanges and holders, as well as the Internet and Mobile Association of India (IAMAI), had challenged the RBI’s powers to bar banks and financial institutions from dealing in such digital currencies.
The IAMAI had, during the hearing of the case, also said that RBI had banned banks from dealing in VC just on “moral ground” as neither the regulator nor the government had conducted any study to analyse if these currencies had caused any damage to the domestic financial institutions.
Though the SC agreed with the submission of the petitioners that the RBI, indeed, did not have any ground to prove that the banks or financial institutions regulated by it had suffered any damage due to VCs over the past five years, it held that the bank regulator did, nonetheless, have powers to regulate any currencies in the system.
Furthermore, the apex court also disagreed with the submission of the petitioners that the acceptance of Distributed Ledger Technology, or blockchain, and the rejection of VCs by the RBI as well as the government is a “contradiction” in terms.
“There is nothing irrational about the acceptance of a technological advancement or innovation but the rejection of a by-product of such innovation. There is nothing like a ‘take it or leave it’ option,” the bench said.
The apex court also said that the RBI could not be faulted for acting in the way it did because regulators and domestic agencies such as the Department of Economic Affairs, the Directorate of Enforcement or the Securities and Exchange Board of India (SEBI) had not acted in the same manner.
“Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others,” the court said.
Apart from domestic agencies, the RBI could also not be faulted for not adopting a “light-touch” approach as adopted by other countries, the SC said, adding that there could be no comparison with other countries such as the US, UK, Japan, or Singapore as they were developed economies.
“Therefore, we will not test the correctness of the measure taken by RBI on the basis of the approach adopted by other countries,” the apex court said.
Citing a reply received under Right to Information and another reply given to the Lok Sabha by the Minister of State for Finance, where the RBI had said that it had “no power to freeze the accounts either of defaulting companies or of shell companies”, the petitioners had contended that RBI’s action on VCs was “hit by arbitrariness and caprice”.
The top court, however, disagreed with this submission and held that “repeated warnings through press releases from December 2013 onwards indicate a genuine attempt on the part of RBI to safeguard the interests of the public”.
The RBI’s 2018 ban was preceded by warnings and cautions to the users, holders, and traders of virtual currencies about the potential financial, operational, legal, and customer protection and security-related risks that they were exposing themselves to.
In its June 2013 Financial Stability Report, the RBI had for the first time mentioned that the use of online and mobile technologies was driving the proliferation of virtual currencies. The banking regulator had then also said that virtual currencies were a type of unregulated digital money, issued and controlled by its developers and used and accepted by the members of a specific virtual community. RBI had then said that it was studying the “impact of online payment options and virtual currencies to determine potential risks associated with them”.
Later, then finance minister Arun Jaitley, too, had said that the government did not consider VCs as legal tender and would take all measures to eliminate payments using them.
Though the RBI had not placed a blanket ban on VC, other countries such as China, Russia, and Vietnam have placed a complete prohibition in any transactions using cryptocurrency. On the other hand, countries such as the US, UK, Canda, Singapore, and Australia have accepted the use of VC in some form or the other.
With the order, resumption of operations at cryptocurrency exchanges and backward linkages with the banking sector is likely. The ruling also means that people holding bitcoins and other virtual currencies would be able to place these as collateral or obtain loans, provided the country’s lenders agree to accepting them.