Before 2021 RBI was very much clear about its policies regarding Cryptocurrency. The central bank through its notification in 2018 specified that not only purchase but also registering, trading, settling, mortgaging cryptocurrency is cautioned. Back in 2018 RBI was concerned with issues of risks associated with virtual currencies. But after its circular that was published on May 31, 2021, all the confusion regarding trading in virtual currency was cleared. As said by many industrialists & economists that this new circular of RBI is a ray of hope for the Indian virtual ecosystem.
RBI in its notification posted on 31st May 2021 removed the restrictions & approved the banks to facilitate the trading in virtual currency. RBI said that its previous direction of 2018 is set aside after the Supreme Court’s order on 04th Mar 2021 in the case of Internet Mobile Association v. RBI. In compliance with the order of the Supreme Court, the previous circular is held invalid. Hence the banks can continue with the facilitation of trading in virtual currency.
What is Cryptocurrency?
The ‘crypto’ is algorithms & cryptographic techniques that secure payment online. Cryptocurrency or virtual currency is a kind of digital asset that is secured by cryptography (the science of hiding information). It is basically a currency in files of the computer which is not controlled by any regulation or government. For maintaining the integrity of virtual transactions Blockchains technology plays a major role.
There are many types of virtual currencies which is being traded around the world. The one which is still considered the most popular and valuable is Bitcoin, launched in 2009, which was the first block-chain based virtual currency. Others on the list are Altcoin, Peercoin, and Ethereum, etc.
Supreme Court’s Verdict in the case of (Internet and Mobile Association of India v. Reserve Bank of India) Writ Petition (Civil) No.528 of 2018
Background of the case
The central bank issued a notification on 8th April 2018, stating that banks cannot support the flow of virtual currency in the country including providing or setting any kind of services dealing with virtual currency to any individual or entity. RBI’s major concern here was that virtual currency has so many risks associated with it. Due to its structure and management, it can help in money laundering, terrorism funding and even can cause loss to the economy as we do not have any statutory regulations for virtual currency.
Facts of the case
RBI has consistently warned banks, traders & holders of the virtual currency not to deal in it back in 2013. Relying on its previous notifications, RBI on 5th April 2018 issued a circular stating its increasing concerns about consumer protection from the trade of cryptocurrency. RBI was of the view that trading in virtual currency will lead to many negative consequences such as terrorist funding, hacking, loss to the economy, etc. RBI directed the banks not to associate themselves with the trading of virtual currency. The activities that were restricted by RBI were maintaining, registering, trading, settling, and giving loans against virtual currencies.
A petition was filed by the Internet Mobile Association of India against the 2018 circular of RBI imposing restrictions on trading in virtual currency.
- The circular of RBI infringed Article 19 (1) (g) of the constitution which secures the right to occupation & trade or business. Directions of RBI against virtual currency are against the test of reasonableness.
- Petitioner contended that virtual currency is different from currency notes or coins. It is a medium of exchange. Hence RBI’s approach against it was done in bad faith.
- RBI cannot restrict the trading of virtual currency as it is not a legal tender hence, not regulated by RBI.
- RBI issued circulars based on a report of the committee to which RBI was a part. Hence, the decision of restricting trade in virtual currency was not done in bad faith.
- The right to do business cannot be secured without reasonable restriction. Therefore, RBI has the jurisdiction to interfere.
- The circulars were issued in the public interest, to protect the interest of consumers, to safeguard & secure the payment system against the high-risk structure of virtual currency. The right to prohibit is a part of the right to regulate.
Supreme Court declared RBI’s circular of 2018 as disproportionate & set aside the directions given to banks. Court held the directions of RBI as unreasonable as it could not pass the test of reasonableness under part III of the constitution. Neither RBI has found any illegal activities going around during the exchange of virtual currency nor has RBI specifically banned virtual currency in the country. Thus, putting a bar on banks on facilitating transactions of virtual currency is against Article 19(1) (g).
The Apex court has cleared the position of RBI in directing the banks regarding the facilitation of virtual currency transactions. But the court seems to be silent on the legality of the virtual transactions. Due to the absence of any statutory act, the issue of virtual currency is still unsolved. The parliament has prepared a bill on a virtual currency called ‘Banning of Cryptocurrency & regulation of official digital currency Bill, 2019. The bill specifies the use, restrictions, issuance of the virtual currency in the territory of India. The bill is still under the consideration stage in the parliament. It is clear that whenever the bill will be passed it will clarify the position of cryptocurrency & its legality in India.