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CRYPTOCURRENCY IN CONTEMPORARY TIMES

Author: Sivapuram V.L. Thejaswini, V year of B.B.A.,LL.B.(Hons.) from Alliance School of Law


Introduction

In the recent times, Cryptocurrency has become the most commonly used term. It is also known to be Crypto. It is a form of digital currency. It is an alternative form of payment which is created using encryption algorithms. Crypto is organized by a blockchain network which is a kind of peer-to-peer network. This blockchain also serves as a secure ledger of transactions.


This judgement captures the genesis of virtual currency, the response of the world to virtual currency and the stand taken by India in this context. The judiciary has reaffirmed the stand of the government.

IRAC Rule is followed in this judgement. While briefing a case, there is a need to grasp

Issue the problem faced by the court

Rule the relevant rule used by the court to solve it

Analysis/Application How the court applied the rule to the facts

Conclusionit means the outcome.


Background of the Case

A Cryptocurrency is a virtual/digital currency which is secured by cryptography. It is also not possible to counterfeit such currency. It is not issued by any Central authority so they are immune to the government interference and manipulation.

The Reserve Bank of India (RBI) had been issuing guidelines, statements, press releases and reports since the year 2013 by cautioning the members of entities & public regulated by RBI like NBFCs, Banks etc., from cautioning them with respect to trading in virtual currencies. The RBI has raised concerns such as – protection of market integrity & consumers, money laundering, threat to the credit system etc.,


RBI issued a circular dated 6th April, 2018 – “Statement on Development and Regulatory Bodies”. Through the circular, RBI had prescribed entities regulated by it from dealing in and facilitating transactions in virtual currencies. The circular barred the banks to provide any kind of services to any individual/entity dealing (or) setting virtual currencies.


At the time when circular was issued, there was no legislation passed imposing a ban on the trade of virtual currencies. The prohibition issued by the RBI had a negative effect on the Indian economy because the bank accounts through which virtual currencies were traded could no longer be maintained/operated.


By severing the ties between the traditional economy and virtual currency exchanges the RBI had sought to ring fence those companies trading in virtual currencies without banning the virtual currencies themselves.


Procedural History

● On 27th December of 2013, newspapers reported the first ever raid in India by the Enforcement Directorate of two Bitcoin trading firms in Ahmedabad – rBitco.in and buysellbitco.in. This was said to be the India’s first raid on a Bitcoin trading firm.


Siddharth Dalmia and Vijay Pal Dalmia came up with a writ petition in WP (C) No. 1071 of 2017 under Article 32 of the Constitution seeking the issue of writ of mandamus directing the respondents to declare as illegal.


● The Financial Act Task Force (FATF) has also observed that crypto assets are being used for money laundering and terrorist financing. Coordinated approach at a global level is necessary to limit interconnections and also to prevent abuses with regulated financial institutions.


● The impugned decision is within the range of wide powers conferred upon RBI under the Banking Regulation Act of 1949, The Reserve Bank of India Act of 1934 and the Payment and Settlement System Act of 2007.


Facts of the Case

The RBI issued a circular dated 6th April of 2018 raising the concern about the consumer protection from trade of virtual currencies. This circular is statutory in character, issued in the exercise of powers granted under;

  • The Reserve Bank of India Act, 1934

  • The Banking Regulation Act, 1949

  • The Payment Settlement Act, 2007

Thus, the RBI asked the banks not to deal with the transactions related to the trading of virtual currency.


RBI has directed the bank not to deal with these following services

  • Maintaining the accounts, registering, trading, settling, clearing, giving loans against virtual currencies, accepting virtual currency as collateral, opening accounts of exchanges dealing with them and transfer (or) sale/purchase of virtual currencies.

  • The RBI Circular had effectively prohibited entities regulated by it like NBFCs, banks etc., from trading in virtual currencies (or) facilitating such trade. Virtual currencies remained legal themselves.

  • The Internet Mobile Association of India (a not-for-profit organization representing the digital industry) and some companies running online crypto asset exchange platforms, approached the Supreme Court and various High courts challenging the circular of RBI.

  • The Bench was headed by Justice Rohinton Fali Nariman, S. Ravindra Bhat and V. Rama Subramanian.


Contentions raised by the Petitioners

  • The RBI lacks the jurisdiction to disallow the trade of virtual currency.

  • The RBI did not have the power to regulate cryptocurrencies since they were neither a ‘patent system’ nor a ‘currency’ but were in the nature of a tradeable commodity.

  • The trading in cryptocurrencies remained a legitimate business activity in the absence of a legislative ban.

  • The impugned circular has placed an arbitrary and unconstitutional restriction on trading in cryptocurrencies.

  • A total ban on trading in cryptocurrencies was not reasonable as it fell out of the principle of proportionality.


Contentions raised by the respondent

IRAC Rule

Issues

  • The respondent disagreed with the fact that it does not have jurisdiction, said that cryptocurrency a mode of digital payment on which RBI holds the power to have control.

  • There is no violation of fundamental rights – Article 14, 19 and 21 of the Indian Constitution as the entities regulated by RBI has no absolute rights and there is no complete ban on virtual currency.

  • The circular is not disproportionate as the RBI gave their entities three months to terminate their ties dealing with virtual currency.

  • It was argued by the RBI that the anonymous nature of cryptocurrency made it susceptible to money laundering and terrorism finance.

  • Widespread use of cryptocurrency could fundamentally undermine the credit system and monetary stability of India.

  • RBI had the authority to make broad-based decisions on the economic policy of the country.


The Supreme Court here has to examine;

a) Whether the ban on virtual currency trading amounts to a ‘reasonable restriction’ to the fundamental right guaranteed under Article 19(1)(g) of the Constitution?

b) Whether the RBI lacks jurisdiction to disallow the trade of virtual currency and if such ban was imposed on misunderstanding?


Rule

  • It was recognized by the Supreme Court that the expression ‘management of currency’ appearing in Section 3(1) of the Reserve Bank of India Act, 1934 was not confined to the management of legally recognized currency only but also included the currency which was capable of faking/playing the role of currency.

  • Section 3 in The Reserve Bank of India Act,1934 deals with the Establishment and incorporation of Reserve Bank;

  • Section 3(1) of the Act is as follows;

“A bank to be called the Reserve Bank of India shall be constituted totake over the management of the currency from the Central Government and to carry on the business of banking in accordance with the provisions of this Act”.


Analysis

This case has mainly focused on the test of Proportionality and Reasonableness”. To address the issue of reasonableness, the test of proportionality was deployed.


Comparative analysis of various judgements cited by the Supreme Court

Proportionality as a standard of judicial review has been recognized in 1952 by Justice Patanjali Shastri in State of Madras v. VG Row.

It was held in this case that -

“The nature of the right alleged to have been infringed, the extent and urgency of the evil sought to be remedied thereby, the prevailing conditions at the time, the underlying purpose of the restrictions imposed, the disproportion of the imposition, should all enter into the judicial verdict[i]”.


In State of Maharashtra v. Indian Hotel and Restaurants Association, it was held that-

“There must have been some empirical data regarding the degree of harm suffered by the regulated entities after establishing that they were harmed[ii]”.


It was held in Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of India, that-

“The RBI is an expert body to which the responsibility of monitoring the economy of the country is entrusted[iii]”.


The latest iteration of the proportionality test was in Modern Dental College v. State of Madhya Pradesh (2016), where a Constitution Bench of the Supreme Court noted,

“Thus, while examining on whether the impugned provisions of the Rules & Statute amount to reasonable restrictions and if they are brought out in the interest of the general public, the exercise that is required to be undertaken is the balancing of fundamental right to carry on occupation on one hand and the restrictions imposed on the other hand. This is known as ‘Doctrine of proportionality”.


The test set out in the Modern Dental College case was four-fold. According to the court, a limitation of a constitutional right will be constitutionally permissible if;

a) If it is designated for a proper purpose

b) The measures undertaken to effectuate such a limitation are rationally connected to the fulfillment of that purpose

c) The measures undertaken are necessary in that there are no alternative measures that may similarly achieve that same purpose with a lesser degree of limitation; and finally

d) There needs to be a proper relation between the importance of achieving the proper purpose and the social importance of preventing the limitation on the Constitutional right[iv].


The Supreme Court relied upon State of Maharashtra v. Indian Hotel and Restaurants Association case, where it was held here that- “There must have been some empirical data regarding the harm suffered by traditional economy due to cryptocurrency”.


By applying this test, the Supreme Court held that a total ban on trading in virtual currencies was excessive and disproportionate. The RBI was unable to produce sufficient empirical data to establish the adverse impact of virtual currencies on the economy.


It was reasoned by the court that since virtual currencies themselves were legal, it would be punitive to place a ban on those who merely facilitate its trading. It also adverted to the EU (European Union) Parliament, July 2018 Report which recommended that a total ban on the linkage between cryptocurrency and the former financial sector was not necessary, in order to hold that the RBI had failed to consider alternatives before placing a total ban.


Analyzing/Applying the facts with that of the reasons given in the judgement

  • It is submitted that the test set out in Modern Dental College case is satisfied by the impugned circular.

  • It was introduced for a proper purpose – to protect the monetary and credit system of India from unpredictable virtual currencies which were highly susceptible to criminal use.

  • The measures have a rational connection to this purpose – the impugned circular served the link between virtual currencies and the formal economy thereby mitigating this risk.

  • As the lesser alternatives were there, so the measures were necessary for the purpose– the RBI had also considered and rejected other alternatives such as formation of an investor protection fund, insurance of crypto-assets etc.,

  • The measures balanced the social objective of safeguarding India’s economy – it also includes investors, consumers etc.,

  • It prohibits only the entities regulated by RBI from trading in virtual currencies as opposed to placing a total ban on virtual currency itself.


EU Parliament Report

  • Furthermore, the reliance was placed on the recommendation of the EU Parliament Report. The recommendation was made by the EU Parliamentin the European Context, and even then, member states were not bound by it.

  • The fact that virtual currencies are not proscribed themselves, only goes to show that the state adopted a lesser intrusive option than a total ban on virtual currencies.

  • Furthermore, even if the RBI failed to produce sufficient empirical evidence to establish the harm already caused by virtual currencies to the traditional economy, but this did not preclude the RBI from taking pre-emptive steps to ensure that such harm does not accrue in the future.


Conclusion/Outcome

  • The Supreme Court has recognized the unique and wide powers that the RBI has. It was held that the RBI had power to regulate virtual currencies and those circulars/decisions of the RBI would invite due deference.

  • It was also noted in this regard that the RBI had been consistently issuing guidelines, statements, press releases in order to caution the public as well as entities regulated by it from trading & dealing in virtual currencies.

  • The RBI was a specialized statutory body that has been acting consistently and in good faith.

  • This case advances the test of proportionality as a standard of judicial review. Henceforth, the state will be required to substantiate its claim of purported harm suffered by way of empirical data. In order to balance the interests of the state and to allow the authorities to function seamlessly, they ought to be allowed a ‘margin of appreciation’ within which they exercise their powers.

  • This doctrine was developed in the context of EU law, whereby member states were granted a ‘margin of appreciation’ within which they were to implement EU law. Member states were given a narrow margin of appreciation in matters where an individual’s identity (or) existence was at stake, racial/ethical discrimination (or) matters pertaining to an intimate aspect of one’s private life.

  • In our present case, the RBI has acted within its powers consistently and with due application of mind. The test of proportionality as set out in the Modern Dental College case was adequately met. Moreover, the requirement of empirical data to substantiate the harm caused to the traditional economy could not preclude RBI from taking pre-emptive measures as it thought fit.

  • This judgement has only stuck down the circular issued by the RBI but have not declared the virtual currencies as legal/illegal. Recently a bill has been drafted – Banning of Cryptocurrency and regulation of Official Digital Currency Bill, 2019. This Bill was drafted in regard of the legal status of the virtual currency in India[v].

[i] 1952 AIR 196, 1952 SCR 597. [ii] CIVIL APPEAL NO. 2704 O 2006. [iii] WRIT PETITION (CIVIL) NO. 901 OF 2014 [iv] CIVIL APPEAL NO. 4060 OF 2009. [v] Writ Petition (Civil) No. 528 of 2018.