INTERNET AND MOBILE ASSOCIATION OF INDIA versus RESERVE BANK OF INDIA

[2020] 2 S.C.R. 297

INTERNET AND MOBILE ASSOCIATION OF INDIA

RESERVE BANK OF INDIA

(Writ Petition (Civil) No. 528 of 2018)

MARCH 04, 2020

[R. F. NARIMAN, ANIRUDDHA BOSE ANDV. RAMASUBRAMANIAN, JJ.]

Reserve Bank of India Act, 1934 – ss.17, 20-22, 26, 38, 45JA,45L, 45U, 45W, 45Z-45ZO – Reserve Bank of India (RBI) issued a“Statement on Developmental and Regulatory Policies” dtd.05.04.18 and circular dtd. 06.04.18 respectively, which directedthe entities it regulated (i) not to deal with or provide services toany individual/business entities dealing with/settling virtualcurrencies (VCs) and (ii) to exit the relationship, if they alreadyhave one, with such individuals/business entities – Challenged bypetitioners (a specialized industry body representing interests ofonline & digital services industry; companies running online cryptoassets exchange platforms; shareholders/founders thereof andindividual crypto assets traders) inter alia on the ground that RBI hasno power to prohibit the activity of trading in VCs through VirtualCurrency Exchanges (VCEs) since they are not legal tender buttradable commodities/digital goods, not falling within the regulatoryframework of 1934 Act or 1949 Act and that VCs do not even fallwithin the credit system of the country to enable RBI under thePreamble to 1934 Act giving it mandate to operate the currency &credit system of the country to its advantage – Held: After 2016Amendment Act, RBI is now vested with the obligation to operatethe monetary policy framework in India – 1934 Act, 1949 Act andthe 2007 Act cumulatively confer very wide powers upon RBI interalia to operate the currency and credit system of the country to itsadvantage; regulate financial system of the country to its advantage;to issue directions to payment system or system participant whichin RBI’s opinion is engaging in any act that is likely to result insystemic risk being inadequately controlled or is likely to affect the

Apayment system, monetary policy or the credit policy of the countryand to issue directions to system providers or system participants orany other person generally, to regulate the payment systems or inthe interest of management or operation of any of the paymentsystems or in public interest – Depending on the text of the statuteBinvolved in the case and the context, various courts in differentjurisdictions have identified virtual currencies to belong to differentcategories ranging from property to commodity to non-traditionalcurrency to payment instrument to money to funds – Petitioners’contention that VCs are just goods/commodities and can never be

regarded as real money and that they are carrying on an activityCover which RBI has no power statutorily, not accepted – Petitioners’contention that the impugned decision is ultra vires is rejected –Impugned Circular does not impose prohibition on the use of/trading in VCs, the prohibition is not per se against the trading inVCs – It is against banking companies, with respect to class of

Dtransactions – Further, RBI cannot be held guilty of non-applicationof mind when the sequence of events from June 2013 up to 02-04-2018 show that RBI was brooding over the issue for almost fiveyears – Also, the contention that the impugned Circular is vitiatedby malice in law and is colorable exercise of power cannot besustained – Impugned Circular cannot be assailed on the basis ofEM. S. Gill test either – It is no doubt true that RBI has very widepowers however, the availability of power is different from themanner and extent to which it can be exercised – RBI has not so farfound, the activities of VCEs to have actually impacted adversely,the way the entities regulated by RBI function – When the consistentFstand of RBI is that they have not banned VCs and when theGovernment of India is unable to take call despite severalcommittees coming up with several proposals including two draftbills, both of which advocated exactly opposite positions, it is notpossible to hold that the impugned measure is proportionate –GImpugned Circular dtd. 06.04.18 is set aside on the ground ofproportionality – Statement dtd. 05.04.18, though challenged, isnot in the nature of statutory direction and hence the question ofsetting aside the same does not arise – Finance Act, 2016 – BankingRegulation Act, 1949 – ss.5, 8, 21, 22, 27, 29A, 30(1B), 35AA, 35AB,35A(1)(a), 36(1)(a), 36AA – Payment and Settlement Systems Act,H2007 – ss.2(1); 2(1)(g), (h), (i), (p) and ss.3, 4(1), 10(2), 11, 17, 18

– Administrative Law – Subordinate Legislation – Doctrine ofProportionality – Doctrine of Deference – Foreign ExchangeManagement Act, 1999 – ss.2(h), (i), (q) – Coinage Act, 2011 –Finance Act, 1994 – Finance Act, 2012 – Sales of Goods Act, 1930– Central Foods and Services Tax Act, 2017 – s.2(75) – Constitutionof India – Art.19(1)(g).

Reserve Bank of India Act, 1934 – Establishment of ReserveBank of India – Object of – Discussed.

Reserve Bank of India Act, 1934 – Preamble to; s.45L(1) –Held: Phrase “credit system of the country to its advantage”, asfound in paragraph 1 of the Preamble, is repeated in sub-sec. (1)of s.45L – Only difference between the two is that paragraph 1 ofthe Preamble speaks about the operation of the credit system, whiles.45L (1) speaks about regulation of the credit system.

Banking Regulation Act, 1949 – Power of Reserve Bank ofIndia under – Discussed.

Reserve Bank of India Act, 1934 – s.3(1) – Held:“management of the currency” appearing in s.3(1) need notnecessarily be confined to the management of what is recognized inlaw to be currency but would also include what is capable of fakingor playing the role of currency.

Payment and Settlement Systems Act, 2007 – Object of –Discussed.

Administrative Law – Colourable exercise of power & malicein law – Reserve Bank of India (RBI) issued circular directing theentities it regulated to not to deal with or provide services to anyindividual/business entities dealing with/settling virtual currencies(VCs) and to exit the relationship, if they have one, with suchindividuals/business entities – Petitioners contended that theinvocation by RBI, of ‘public interest’ as weapon, purportedly forthe benefit of users, consumers or traders of virtual currencies is acolourable exercise of power – Held: Not tenable – Once it isconceded that RBI has powers to issue directions in public interest,it is impossible to exclude users, consumers or traders of virtualcurrencies from the coverage – To constitute colourable exercise ofpower, the act must have been done in bad faith and the power musthave been exercised not with the object of protecting the regulated

Aentities or the public in general, but with the object of hitting thosewho form the target – To constitute malice in law, the act must havebeen done wrongfully and willfully without reasonable or probablecause – Impugned Circular does not fall under the category of eitherof them.

BAdministrative Law – Statutory Authority – Power of RBI anddifference between other statutory creatures & RBI – Discussed.

Banking Regulation Act, 1949 – s.35A(1) – Reserve Bank ofIndia (RBI) issued circular directing the entities it regulated to notto deal with or provide services to any individual/business entitiesCdealing with/settling virtual currencies (VCs) and to exit therelationship, if they have one, with such individuals/business entities– Plea of the petitioners that expression ‘public interest’ appearingin s.35A(1)(a) cannot be given an expansive meaning – Held: Poweru/s.35A to issue directions is to be exercised under fourcontingencies- (i) public interest (ii) interest of banking policy (iii)Dinterest of the depositors & (iv) interest of the banking company –Expression “banking policy” is defined in s.5(ca) to mean any policyspecified by RBI (i) in the interest of the banking system (ii) in theinterest of monetary stability and (iii) sound economic growth –Public interest permeates all these three areas – This is whyEs.35A(1)(a) is invoked in the impugned Circular.

Constitution of India – Art.19(1)(g) – Reserve Bank of India(RBI) issued circular directing the entities it regulated to not to dealwith or provide services to any individual/business entities dealingwith/settling virtual currencies (VCs) and to exit the relationship, ifFthey have one, with such individuals/business entities – Plea of thepetitioners (a specialized industry body representing interests ofonline & digital services industry; companies running online cryptoassets exchange platforms; shareholders/founders thereof andcrypto assets traders) that total prohibition, especially through asubordinate legislation such as directive from RBI, of an activityGnot declared by law to be unlawful, is violative of Art.19(1)(g) –Held: Buying and selling of crypto currencies through VCExchanges can be by way of hobby or as trade/business – Personswho engage in buying and selling virtual currencies, just as matterof hobby cannot pitch their claim on Art.19(1)(g), for what is coveredHtherein are only profession, occupation, trade or business –

INTERNET AND MOBILE ASSOCIATION OF INDIA v.RESERVE BANK OF INDIA

Therefore hobbyists, who are one among the three categories ofcitizens (hobbyists, traders in VCs and VC Exchanges), straightawaygo out of the challenge u/Art.19(1)(g) – Second and third categoriesof citizens namely, those who have made the purchase and sale ofVCs as their occupation or trade, and those who are running onlineplatforms and VC exchanges can certainly pitch their claim on thebasis of Art.19(1)(g).

Words & Phrases - “currency”, “currency notes”, “Indiancurrency” “money”, “regulate” - Definition & Meaning of –Discussed.

Allowing the writ petitions, the Court

HELD: 1.1 Role assigned to, functions entrusted to andthe powers conferred upon RBI as Central Bank

Reserve Bank of India (RBI) is now vested with theobligation to operate the monetary policy framework in India.After the amendment under Act 28 of 2016, the very task ofoperating the monetary policy framework has been conferredexclusively upon RBI. The phrase “credit system of the countryto its advantage”, as found in paragraph 1 of the Preamble, isrepeated in sub-section (1) of Section 45L. The only differencebetween the two is that paragraph 1 of the Preamble speaks aboutthe operation of the credit system, while Section 45L (1) speaksabout regulation of the credit system. While exercising the powerto issue directions conferred by clause (b) of sub-section (1) ofSection 45L, RBI is obliged under sub-section (3) of Section 45L tohave due regard to certain things, one of them being “the effect thebusiness of such financial institution is likely to have on trends inthe money and capital markets”. careful scan of the RBI Act,1934 in its entirety would show that the operation/regulation ofthe credit/financial system of the country to its advantage, is athread that connects all the provisions which confer powers uponRBI, both to determine policy and to issue directions. [Paras6.15, 6.16, 6.26 and 6.30][352-C,E; 355-F-G; 356-G-H]

1.2 The RBI Act, 1934, the Banking Regulation Act, 1949and the Payment and Settlement Systems Act, 2007 cumulativelyrecognize and also confer very wide powers upon RBI (i) tooperate the currency and credit system of the country to its

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Aadvantage (ii) to take over the management of the currency fromcentral government (iii) to have the sole right to make and issuebank 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 say in the determination of inflation target in termsof the consumer price index (vi) to have complete control overBbanking companies (vii) to regulate and supervise the paymentsystems (viii) to prescribe standards and guidelines for theproper and efficient management of the payment systems (ix) toissue directions to payment system or system participant whichin RBI’s opinion is engaging in any act that is likely to result inCsystemic risk being inadequately controlled or is likely to affectthe payment system, the monetary policy or the credit policy ofthe country and (x) to issue directions to system providers orthe system participants or any other person generally, to regulatethe payment systems or in the interest of management oroperation of any of the payment systems or in public interest.D[Para 6.50][364-D-H]1.3 Fixing the identity of VCs

There is unanimity of opinion among all the regulators andthe governments of various countries that though virtualEcurrencies have not acquired the status of legal tender, theynevertheless constitute digital representations of value and thatthey are capable of functioning as (i) medium of exchange and/or (ii) unit of account and/or (iii) store of value. Thegovernments and money market regulators throughout the worldhave come to terms with the reality that virtual currencies areFcapable of being used as real money, but all of them have goneinto the denial mode (like the proverbial cat closing its eyes andthinking that there is complete darkness) by claiming that VCsdo not have the status of legal tender, as they are not backed bya central authority. But what an article of merchandise is capableGof functioning as, is different from how it is recognized in law tobe. 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 ofthe functions of real currency. [Paras 6.59, 6.62][381D-E,382E-G]1.4 The Court does not think that RBI’s role and powercan come into play only if something has actually acquired thestatus of legal tender. The Court does not also think that forRBI to invoke its power, something should have all the fourcharacteristics or functions of money. [Para 6.65][384A-B]

1.5 Depending upon the text of the statute involved in thecase and (ii) depending upon the context, various courts in differentjurisdictions have identified virtual currencies to belong to differentcategories ranging from property to commodity to non-traditionalcurrency to payment instrument to money to funds. While each ofthese descriptions is true, none of these constitute the wholetruth. Every court which attempted to fix the identity of virtualcurrencies, merely acted as the 4 blind men in the Anekantavadaphilosophy of Jainism, (theory of non-absolutism that encouragesacceptance of relativism and pluralism) who attempt to describean elephant, but end up describing only one physical feature ofthe elephant. RBI was also caught in this dilemma. Nothingprevented RBI from adopting short circuit by notifying VCsunder the category of “other similar instruments” indicated inSection 2(h) of FEMA, 1999 which defines ‘currency’ to mean“all currency notes, postal notes, postal orders, money orders,cheques, drafts, travelers’ cheque, letters of credit, bills of exchangeand promissory notes, credit cards or such other similar instrumentsas may be notified by the Reserve Bank.” After all, promissorynotes, cheques, bills of exchange etc. are also not exactlycurrencies but operate as valid discharge (or the creation) of adebt only between 2 persons or peer-to-peer. Therefore, it is notpossible to accept the contention of the petitioners that VCs arejust goods/commodities and can never be regarded as real money.Once it is accepted that some institutions accept virtualcurrencies as valid payments for the purchase of goods andservices, there is no escape from the conclusion that the usersand traders of virtual currencies carry on an activity that fallssquarely within the purview of the Reserve Bank of India. Thestatutory obligation that RBI has, as central bank, (i) to operatethe currency and credit system, (ii) to regulate the financial systemand (iii) to ensure the payment system of the country to be on track,would compel them naturally to address all issues that are perceived

Aas potential risks to the monetary, currency, payment, credit andfinancial systems of the country. If an intangible property can actunder certain circumstances as money (even without faking acurrency) then RBI can definitely take note of it and deal with it.Hence it is not possible to accept the contention of the petitionersthat they are carrying on an activity over which RBI has no powerBstatutorily. [Paras 6.85-6.87][393G, 394A-G]

1.6 RBI is the sole repository of power for the managementof the currency, under Section 3 of the RBI Act. RBI is also vestedwith the sole right to issue bank notes under Section 22(1) andto issue currency notes supplied to it by the Government of IndiaCand has an important role to play in evolving the monetary policyof the country, by participation in the Monetary Policy Committeewhich is empowered to determine the policy rate required toachieve the inflation target, in terms of the consumer price index.Therefore, anything that may pose threat to or have an impactDon the financial system of the country, can be regulated orprohibited by RBI, despite the said activity not forming part ofthe credit system or payment system. The expression“management of the currency” appearing in Section 3(1) neednot necessarily be confined to the management of what isrecognized in law to be currency but would also include what isEcapable of faking or playing the role of currency. It is ironicalthat virtual currencies which took avatar (according to its creatorSatoshi) to kill the demon of central authority (such as RBI),seek from the very same central authority, access to bankingservices so that the purpose of the avatar is accomplished. TheFvery creation of digital currency/ Bitcoin was to liberate themonetary system from being slave to the central authority andfrom being operated in manner prejudicial to private interests.Therefore, the ultra vires argument cannot be accepted whenthe provision of access to banking services without anyinterference from the central authority over long period of timeGis perceived as threat to the very existence of the centralauthority. Hence, it is held that RBI has the requisite power toregulate or prohibit an activity of this nature. [Paras 6.90,6.91][395D-G; 396A-B]

1.7 If at all, the power is only to regulate, not prohibit

The projection of the impugned decisions of RBI as totalprohibition of an activity altogether, may not be correct. Theimpugned Circular does not impose prohibition on the use ofor the trading in VCs. It merely directs the entities regulated byRBI not to provide banking services to those engaged in thetrading or facilitating the trading in VCs. Section 36(1)(a) of theBanking Regulation Act, 1949 very clearly empowers RBI tocaution or prohibit banking companies against entering intocertain types of transactions or class of transactions. Theprohibition is not per se against the trading in VCs. It is againstbanking companies, with respect to class of transactions. Thefact that the functioning of VCEs automatically gets paralyzed orcrippled because of the impugned Circular, is no ground to holdthat it tantamount to total prohibition. So long as those trading inVCs do not wish to convert them into fiat currency in India andso long as the VCEs do not seek to collect their service chargesor commission in fiat currency through banking channels, theywill not be affected by this Circular. Admittedly, peer-to-peertransactions are still taking place, without the involvement ofthe banking channel. In fact, those actually buying and sellingVCs without seeking to convert fiat currency into VCs or vice-versa, are not affected by this Circular. It is only the onlineplatforms which provide space or medium for the traders tobuy and sell VCs, that are seriously affected by the Circular, sincethe commission that they earn by facilitating the trade is requiredto be converted into fiat currency. Interestingly, the petitionersargue on the one hand that there is total prohibition and argue onthe other hand that the Circular does not achieve its originalobject of curtailing the actual trading, though it cripples theexchanges. If the first part of this submission is right, the lattercannot be and if the latter part is right, the former cannot be.When RBI exercises the powers conferred upon it, both to framea policy and to issue directions for its enforcement, such directionsbecome supplemental to the Act itself. The impugned Circular isintended to prohibit banking companies from entering into certainterritories. The Circular is actually addressed to entitiesregulated by RBI and not to those who do not come within thepurview of RBI’s net. But the exercise of such power by RBI,

Aover the entities regulated by it, has caused collateral damageto some establishments like the petitioners’, who do not comewithin the reach of RBI’s net. The power of statutory authorityto do something has to be tested normally with reference to thepersons/entities qua whom the power is exercised. The questionto be addressed in such cases is whether the authority had theBpower to do that act or issue such directive, qua the person towhom it is addressed. While persons who suffer collateraldamage can certainly challenge the action, such challenge will bea very weak challenge qua the availability of power. [Paras 6.94,

6.99 and 6.104, 6.105][397C-G, 398A, 401-F-G, 403 A-B]

C1.8 Section 18 of the Payment and Settlement Systems Actindicates (i) what RBI can do (ii) the persons qua whom it can bedone and (iii) the object for which it can be done. In other words,Section 18 empowers RBI (i) to lay down policies relating to theregulation of payment systems including electronic, non-Delectronic, domestic and international payment systems affectingdomestic transactions and (ii) to give such directions as it mayconsider necessary. These are what RBI can do under Section18. Coming to the second aspect, the persons qua whom thepowers under Section 18 can be exercised are (i) system providers(ii) system participants and (iii) any other person generally orEany such agency. The expression “system provider” is definedunder Section 2(1)(q) to mean person who operates an authorizedpayment system. The expression “system participant” is definedin Section 2(1)(p) to mean bank or any other person participatingin payment system, including the system provider. Other thanFthe expressions ‘system provider’ and ‘system participant’,Section 18 also uses the expressions ‘any other person’ and ‘anysuch agency’. The purposes for which the power under Section18 can be exercised, are also indicated in Section 18. They are (i)regulation of the payment systems (ii) the interest of the

management and operation of any payment system and (iii) publicGinterest. The impugned Circular is primarily addressed to bankswho are “system participants” within the meaning of Section2(1)(p). The banks certainly have system of payment to beeffected between payer and beneficiary, falling thereby withinthe meaning of the expression payment system. Therefore, inHthe overall scheme of the Payment and Settlement Systems Act,

INTERNET AND MOBILE ASSOCIATION OF INDIA v.RESERVE BANK OF INDIA

2007, it is impossible to say that RBI does not have the power toframe policies and issue directions to banks who are systemparticipants, with respect to transactions that will fall under thecategory of payment obligation or payment instruction, if not apayment system. Hence, the argument revolving around Section18 should fail. [Paras 6.106-6.109, 6.111][402B, D-G, G-H,403-A, D-E]

2. Mode of exercise of power:

Satisfaction/Application of mind/relevant and irrelevantconsiderations

In the facts of the present case, RBI could not be held guiltyof non-application of mind. As matter of fact, the issue as to howto deal with virtual currencies has been lingering with RBI fromJune 2013 onwards. The sequence of events from June 2013 upto 02-04-2018 would show that RBI had been brooding over theissue for almost five years, without taking the extreme step.Therefore, RBI can hardly be held guilty of non-application ofmind. If an issue had come up again and again before statutoryauthority and such an authority had also issued warnings to thosewho are likely to be impacted, it can hardly be said that there wasno application of mind. For arriving at “satisfaction” as requiredby Section 35A(1) of Banking Regulation Act, 1949 and Section45JA and 45L of RBI Act, 1934, it was not required of RBI eitherto write thesis or to write judgement. In fact, RBI cannoteven be accused of not taking note of relevant considerations ortaking into account irrelevant considerations. RBI has taken intoaccount only those considerations which multinational bodies andregulators of various countries such as FATF, BIS, etc., havetaken into account. This can be seen even from the earliest pressrelease dated 24-12-2013, which is more elaborate than theimpugned Circular dated 06-04-2018. When series of stepstaken by statutory authority over period of about five yearsdisclose in detail what triggered their action, it is not possible tosee the last of the orders in the series in isolation and concludethat the satisfaction arrived at by the authority is not reflectedappropriately. In any case, pursuant to an order passed by thiscourt on 21-08-2019, RBI gave detailed point-wise reply to therepresentations of the petitioners. In these representations, the

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Apetitioners have highlighted all considerations that they thoughtas relevant. RBI has given its detailed responses on 04-09-2019and 18-09-2019. Therefore, the contention that there was noapplication of mind and that relevant considerations were omittedto be taken note of, loses its vigour in view of the subsequentdevelopments. [Paras 6.113, 6.116-6.118][404B, 405A-D, 406G-BH, 407A-B]

3. Malice In Law/Colorable Exercise

The impugned Circular does not order either the freezingor the closing of any particular account of particular customer.CAll that the impugned Circular says is that RBI regulated entitiesshall exit the relationship that they have with any person or entitydealing with or settling VCs, within three months of the date ofthe Circular. The regulated entities are directed not to provideservices for facilitating any person or entity in dealing with orsettling VCs. Some of the petitioners herein are individuals andDcompanies who run virtual currency exchanges. In case they haveother businesses, the impugned Circular does not order theclosure of their bank accounts relating to other businesses. Theprohibition under paragraph 2 of the impugned Circular is withrespect to the provision of services for facilitating any person orEentity in dealing with or settling VCs. This prohibition does notextend either to the closing or the freezing of the accounts of thepetitioners in relation to their other ventures. There can be noquarrel with the proposition that RBI has sufficient power to issuedirections to its regulated entities in the interest of depositors,in the interest of banking policy or in the interest of the bankingFcompany or in public interest. If the exercise of power by RBIwith view to achieve one of these objectives incidentally causesa collateral damage to one of the several activities of an entitywhich does not come within the purview of the statutory authority,the same cannot be assailed as colourable exercise of power orGbeing vitiated by malice in law. To constitute colourable exerciseof power, the act must have been done in bad faith and the powermust have been exercised not with the object of protecting theregulated entities or the public in general, but with the object ofhitting those who form the target. To constitute malice in law, theact must have been done wrongfully and willfully without reasonableHor probable cause. The impugned Circular does not fall underthe category of either of them. The argument that the invocationby RBI, of ‘public interest’ as weapon, purportedly for the benefitof users, consumers or traders of virtual currencies is colourableexercise of power also does not hold water. Once it is concededthat RBI has powers to issue directions in public interest, it isimpossible to exclude users, consumers or traders of virtualcurrencies from the coverage. In fact, the repeated press releasesissued by RBI from 2013 onwards indicate that RBI did not wantthe members of the public, which include users, consumers andtraders of VCs, even to remotely think that virtual currencieshave legal tender status or are backed by central authority.Irrespective of what VCs actually do or do not do, it is an acceptedfact that they are capable of performing some of the functions ofreal currencies. Therefore, if RBI takes steps to prevent thegullible public from having an illusion as though VCs mayconstitute valid legal tender, the steps so taken, are actuallytaken in good faith. The repeated warnings through press releasesfrom December 2013 onwards indicate genuine attempt on thepart of RBI to safeguard the interests of the public. Therefore,the contention that the impugned Circular is vitiated by malice inlaw and that it is colorable exercise of power, cannot besustained. The power under Section 35A to issue directions is tobe exercised under four contingencies namely (i) public interest(ii) interest of banking policy (iii) interest of the depositors and(iv) interest of the banking company. The expression “bankingpolicy” is defined in Section 5(ca) to mean any policy specified byRBI (i) in the interest of the banking system (ii) in the interest ofmonetary stability and (iii) sound economic growth. Public interestpermeates all these three areas. This is why Section 35A(1)(a) isinvoked in the impugned Circular. Therefore, the argument thatthe impugned decision is colorable exercise of power and it isvitiated by malice in law is rejected. [Paras 6.120, 6.122, 6.123and 6.125][407E-G; 408C-G; 409A-B; F-G]

4. M. S. Gill Reasoning

The impugned Circular cannot be assailed on the basis ofM. S. Gill test, for two reasons. First is that in Chairman, AllIndia Railway Recruitment Board v. K. Shyam Kumar & Ors,

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Athis court held that MS Gill test may not always be applicablewhere larger public interest is involved and that in such situations,additional grounds can be looked into for examining the validityof an order. In Moons Technologies ltd. case this court clarifiedthat though there is no broad proposition that MS Gill test willnot apply where larger public interest is involved, subsequentBmaterials in the form of facts that have taken place after the orderin question is passed, can always be looked at in the larger publicinterest, in order to support an administrative order. The secondreason why the weapon of MS Gill will get blunted in this case, isthat during the pendency of this case, this court passed an interimCorder on 21-08-2019 directing RBI to give point-wise reply tothe detailed representation made by the writ petitioners. Pursuantto the said order, RBI gave detailed responses on 04-09-2019and 18-09-2019. Therefore, the argument based on MS Gill testhas lost its potency. [Para 6.126][410A-D]D5. Wait and watch approach of the other stakeholders

Every one of these stakeholders has different function toperform and are entitled to have an approach depending uponthe prism through which they are obliged to look at the issue.Therefore, RBI cannot be faulted for not adopting the very sameEapproach as that of others. [Para 6.128][411B-C]

- 6. Lighttouch approach of the other countries

The judicial decision of the Court cannot be colored by whatother countries have done or not done. Comparative perspectivehelps only in relation to principles of judicial decision makingFand not for testing the validity of an action taken based on theexisting statutory scheme. [Para 6.129][411E]

7. Precautionary steps taken by petitioners

The fact of the matter is that enhanced KYC norms mayremove anonymity of the customer, but not that of the VC. TheGCourt is not expert to say whether the safety valves put in placecould have addressed all issues raised by RBI. [Para 6.131][412A-C]

8. Different types of VCs require different treatments

HThe very same virtual currency can have unidirectionalor bidirectional flow depending upon the scheme with which the

entities come up. Moreover, the question whether anonymousVCs alone could have been banned leaving the pseudo-anonymous, is for experts and not for this Court to decide. In anycase, the stand taken by RBI is that they have not banned VCs.Hence, the question whether RBI should have adopted differentapproaches towards different VCs does not arise. [Para6.135][413E-F]

9. Acceptance of DLT and rejection of VCs is paradox

There is nothing irrational about the acceptance of atechnological advancement/innovation, but the rejection of by-product of such innovation. There is nothing like “take it orleave it” option. [Para 6.137][413H, A]

10. RBI’s decisions do not qualify for Judicial deference

RBI is not just like any other statutory body created by anAct of legislature. It is creature, created with mandate to getliberated even from its creator. This is why it is given mandate– (i) under the Preamble of the RBI Act 1934, to operate thecurrency and credit system of the country to its advantage and tooperate the monetary policy framework in the country (ii) underSection 3(1), to take over the management of the currency fromthe central government (iii) under Section 20, to undertake toaccept monies for account of the central government, to makepayments up to the amount standing to the credit of its accountand to carry out its exchange, remittance and other bankingoperations, including the management of the public debt of theUnion (iv) under Section 21(1), to have all the money, remittance,exchange and banking transactions in India of the centralgovernment entrusted with it (v) under Section 22(1), to havethe sole right to issue bank notes in India and (vi) under Section38, to get rupees into circulation only through it, to the exclusionof the central government. Therefore, RBI cannot be equated toany other statutory body that merely serves its master. It isspecifically empowered to do certain things to the exclusion ofeven the central government. Therefore, to place its decisionsat pedestal lower than that of even an executive decision, woulddo violence to the scheme of the Act. The RBI Act, 1934 is apre-constitutional legislation, which survived the Constitution by

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Avirtue of Article 372(1) of the Constitution. The differencebetween other statutory creatures and RBI is that what thestatutory creatures can do, could as well be done by the executive.The power conferred upon the delegate in other statutes can betinkered with, amended or even withdrawn. But the powerBconferred upon RBI under Section 3(1) of the RBI Act, 1934 totake over the management of the currency from the centralgovernment, cannot be taken away. The sole right to issue banknotes in India, conferred by Section 22(1) cannot also be takenaway and conferred upon any other bank or authority. RBI byvirtue of its authority, is member of the Bank of InternationalCSettlements, which position cannot be taken over by the centralgovernment and conferred upon any other authority. Therefore,to say that it is just like any other statutory authority whosedecisions cannot invite due deference, is to do violence to thescheme of the Act. In fact, all countries have central banks/Dauthorities, which, technically have independence from thegovernment of the country. To ensure such independence, fixedtenure is granted to the Board of Governors, so that they are notbogged down by political expediencies. Therefore, the argumentthat policy decision taken by RBI does not warrant any deferencecannot be accepted. [Paras 6.139, 6.141][414-D-G; 416-B-E, H]E11.1 Article 19(1)(g) challenge & Proportionality

The buying and selling of crypto currencies through VCExchanges can be by way of hobby or as trade/business. Thedistinction between the two is that there may or may not exist aFprofit motive in the former, while it would, in the latter. Personswho engage in buying and selling virtual currencies, just as amatter of hobby cannot pitch their claim on Article 19(1)(g), forwhat is covered therein are only profession, occupation, trade orbusiness. Therefore hobbyists, who are one among the threecategories of citizens (hobbyists, traders in VCs and VCGExchanges), straightaway go out of the challenge under Article19(1)(g). The second and third categories of citizens namely, thosewho have made the purchase and sale of VCs as their occupationor trade, and those who are running online platforms and VCexchanges can certainly pitch their claim on the basis of Article

19(1)(g). Technically speaking, the second category of citizenscannot claim that the impugned decision of RBI has the effect ofcompletely shutting down their trade or occupation. Citizens whohave taken up the trade of buying and selling virtual currenciesare not prohibited by the impugned Circular (i) either from tradingin crypto-to-crypto pairs (ii) or in using the currencies stored intheir wallets, to make payments for purchase of goods andservices to those who are prepared to accept them, within Indiaor abroad. Virtual currencies cannot be stored anywhere, in thereal sense of the term, as they do not exist in any physical shapeor form. What is actually stored is the private keys, which can beused to access the public address and transaction signatures.The software program in which the private and public keys ofthose who own virtual currencies is stored, is called digital wallet.There are different types of wallets namely (i) paper wallet whichis essentially document that contains public address forreceiving the currency and private key which allows the ownerto spend or transfer the virtual currencies stored in the address(ii) mobile wallet, which is tool which runs as an app on thesmartphone, where the private keys are stored, enabling theowner to make payments in crypto currencies directly from thephone (iii) web wallet, in which the private keys are stored on aserver which is constantly online (iv) desktop wallet, in whichprivate keys are stored in the hard drive and (v) hardware wallet,where the private keys are stored in hardware device such aspen drive. All the above types of wallets except the desktop walletallow great degree of flexibility, in that they can be accessedfrom anywhere in the world. Most of the wallets except perhapsdesktop wallet, have great mobility and have transcendedborders. Therefore, despite the fact that the users and traders ofvirtual currencies are also prevented by the impugned Circularfrom accessing the banking services, the impugned Circular hasnot paralyzed many of the other ways in which crypto currenciescan still find their way to or through the market. Persons whohave suffered deadly blow from the impugned Circular are onlythose running VC exchanges and not even those who are tradingin VCs. [Paras 6.147– 6.154][419-F-H; 420-A-H; 421-A-D]

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A11.2 Though at the time when the impugned Circular wasissued, RBI has not obviously addressed many of the issuesflagged by the writ petitioners, RBI did in fact consider the issuesraised by the petitioners, pursuant to the order passed by thiscourt on 21-08-2019. RBI has also analyzed in Annexure tothe reply dated 18-09-2019 extracted above, the additionalBsafeguards suggested by the petitioners, to see if the purpose ofthe impugned measure can be achieved through less intrusivemeasures. While exercising the power of judicial review the Courtmay not scan the response of RBI in greater detail to find out ifthe response to the additional safeguards suggested by theCpetitioners was just imaginary. But at the same time the Courtcannot lose sight of three important aspects namely, (i) that RBIhas not so far found, in the past 5 years or more, the activities ofVC exchanges to have actually impacted adversely, the way theentities regulated by RBI function (ii) that the consistent standtaken by RBI up to and including in their reply dated 04-09-2019Dis that RBI has not prohibited VCs in the country and (iii) thateven the Inter-Ministerial Committee constituted on 02-11-2017,which initially recommended specific legal framework includingthe introduction of new law namely, Crypto-token RegulationBill 2018, was of the opinion that ban might be an extreme toolEand that the same objectives can be achieved through regulatorymeasures. The Crypto-token Regulation Bill, 2018 initiallyrecommended by the Inter-Ministerial Committee contained aproposal (i) to prohibit persons dealing with activities related tocrypto tokens from falsely posing these products as not beingsecurities or investment schemes or offering investment schemesFdue to gaps in the existing regulatory framework and (ii) toregulate VC exchanges and brokers where sale and purchasemay be permitted. The key aspects of the Crypto-tokenRegulation Bill, 2018, found in paragraph 13 of the ‘Note-precursor to report’ shows that the Inter-Ministerial CommitteeGwas fine with the idea of allowing the sale and purchase of digitalcrypto asset at recognized exchanges. But within year, therewas volte-face and the final report of the very same Inter-Ministerial Committee, submitted in February 2019recommended the imposition of total ban on private cryptocurrencies through legislation to be known as “Banning ofHCryptocurrency and Regulation of Official Digital Currency Act,2019”. The draft of the bill contained proposal to ban the mining,generation, holding, selling, dealing in, issuing, transferring,disposing of or using crypto currency in the territory of India. Atthe same time, the bill contemplated (i) the creation of digitalrupee as legal tender, by the central government in consultationwith RBI and (ii) the recognition of any official foreign digitalcurrency, as foreign currency in India. In case the said enactment(2019) had come through, there would have been an official digitalcurrency, for the creation and circulation of which, RBI/centralgovernment would have had monopoly. But that situation hadnot arisen. The position as on date is that VCs are not banned,but the trading in VCs and the functioning of VC exchanges aresent to comatose by the impugned Circular by disconnecting theirlifeline namely, the interface with the regular banking sector. Whatis worse is that this has been done (i) despite RBI not findinganything wrong about the way in which these exchanges functionand (ii) despite the fact that VCs are not banned. The concern ofRBI is and it ought to be, about the entities regulated by it. Tilldate, RBI has not come out with stand that any of the entitiesregulated by it namely, the nationalized banks/scheduledcommercial banks/co-operative banks/NBFCs has suffered anyloss or adverse effect directly or indirectly, on account of theinterface that the VC exchanges had with any of them. It is notthe case of RBI that any of the entities regulated by it has sufferedon account of the provision of banking services to the onlineplatforms running VC exchanges. It is no doubt true that RBIhas very wide powers not only in view of the statutory scheme ofthe 3 enactments indicated earlier, but also in view of the specialplace and role that it has in the economy of the country. Thesepowers can be exercised both in the form of preventive as wellas curative measures. But the availability of power is differentfrom the manner and extent to which it can be exercised. Whenthe consistent stand of RBI is that they have not banned VCsand when the Government of India is unable to take call despiteseveral committees coming up with several proposals includingtwo draft bills, both of which advocated exactly opposite positions,it is not possible for us to hold that the impugned measure isproportionate. [Paras 6.166 – 6.173][439-A-E; 440-E-F; 441-C-G; 442-A-D]

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A12. Therefore, the petitioners are entitled to succeed andthe impugned Circular dated 06-04-2018 is liable to be set asideon the ground of proportionality. Accordingly, the writ petitionsare allowed and the Circular dated 06-04-2018 is set aside. TheStatement dated 05-04-2018, though challenged in one writpetition, is not in the nature of statutory direction and henceBthe question of setting aside the same does not arise. There isstill one more issue left. It is the freezing of the account ofDiscidium Internet Labs Pvt. Ltd., which is petitioner no. 6 inWP (C) No. 373 of 2018. Admittedly, the activities carried on bythe said petitioner were not declared as unlawful. It is the positiveCcase of RBI that they did not in fact freeze the accounts ofpetitioner no.6. Therefore, RBI is obliged to direct the CentralBank of India to defreeze the account and release the funds.Hence, RBI is directed to issue instructions forthwith to theCentral Bank of India, Worli branch, to defreeze the currentaccount no. 3677101984 of petitioner no. 6 in WP (C) No. 373 ofD2018 and to release the funds lying in the account to the companytogether with interest at the rate applicable. [Paras 7.1 –7.4][442E-H, 443A-C]

Shri Sitaram Sugar Co. Ltd. & Anr v. Union of India &Ors. (1990) 3 SCC 223 : [1990] 1 SCR 909;EJayantilal Amrit Lal Shodhan v. F.N. Rana AIR 1964SC 648 : [1964] SCR 294 – followed.

M S Gill v. The Chief Election Commissioner (1978) 1SCC 405 : [1978] 2 SCR 272; State of Rajasthan v.Basant Nahata (2005) 12 SCC 77 : [2005] 3 Suppl.FSCR 1 – held inapplicable.

CIT v. Kasturi & Sons Ltd. (1999) 3 SCC 346 : [1999]1 SCR 1207; Dhampur Sugar Mills Ltd. v.Commissioner of Trade Tax (2006) 5 SCC 624 : [2006]2 Suppl. SCR 673; Keshavlal Khemchand & Sons Pvt.GLtd. v. Union of India (2015) 4 SCC 770 : [2015] 2SCR 51; Star India Pvt. ltd. v. Dept. of Industrial Policyand Promotion and Ors. (2019) 2 SCC 104 : [2018] 14SCR 128; Khoday Distilleries Ltd. v. State of Karnataka(1995) 1 SCC 574 : [1994] 4 Suppl. SCR 477; St.HJohns Teachers Training Institute v. Regional Director,

NCTE (2003) 3 SCC 321 : [2003] 1 SCR 975; UdaiSingh Dagar v. Union of India (2007) 10 SCC 306 :[2007] 6 SCR 707; Peerless General Finance andInvestment Co. Ltd. v. Reserve Bank of India (1992) 2SCC 343 [1992] 1 SCR 406; ICICI Bank Ltd v. OfficialLiquidator of APS Star Industries Ltd (2010) 10 SCC 1: [2010] 12 SCR 644; Ganesh Bank of Kurunwad Ltd.& Ors v. Union of India & Ors. (2006) 10 SCC 645 :[2006] 5 Suppl. SCR 437; Chairman, All India RailwayRecruitment Board v. K. Shyam Kumar & Ors. (2010) 6SCC 614 : [2010] 6 SCR 291; PRP Exports & Ors v.Chief Secretary, Government of Tamil Nadu & Ors.(2014) 13 SCC 692 : [2013] 16 SCR 1107; MoonsTechnologies Ltd. & Ors v. Union of India & Ors. (2019)SCC Online SC 624; State of Maharashtra v. IndianHotel and Restaurants Association (2013) 8 SCC 519 :[2013] 7 SCR 654 – relied on.

K. Ramanathan v. State of Tamil Nadu 1985 (2) SCC116 : [1985] 2 SCR 1028; Godawat Pan MasalaProducts IP Ltd. & Anr v. Union of India (2004) 7 SCC68 : [2004] 3 Suppl. SCR 239; Union of India & Anr v.Cynamide India Ltd. & Anr (1987) 2 SCC 720 : [1987]2 SCR 841; State of U.P. and Ors v. Babu Ram UpadhyaAIR 1961 SC 751 : [1961] SCR 679; D.K.V. PrasadaRao v. Govt. of A.P. AIR 1984 AP 75; State of Punjab& Anr v. Gurdial Singh & Ors. (1980) 2 SCC 471 :[1980] 1 SCR 1071; Collector (District Magistrate)Allahabad & Anr v. Raja Ram Jaiswal (1985) 3 SCC 1: [1985] 3 SCR 995; Kalabharati Advertising v. HemantVimalnath Narichania & Ors (2010) 9 SCC 437 : [2010]10 SCR 971; Meerut Development Authority v. Assn.Management Studies & Anr. (2009) 6 SCC 171 : [2009]6 SCR 663; Bihar Public Service Commission v. SaiyedHussain Abbas Rizwi & Anr. (2012) 13 SCC 61 : [2012]11 SCR 1032; Utkal Contractors & Joinery (P) Ltd. &Ors v. State of Orissa & Ors. (1987) 3 SCC 279 : [1987]3 SCR 317; Empress Mills v. Municipal Committee,Wardha (1958) SCR 1102; R.K. Garg v. Union of India(1981) 4 SCC 675 : [1982] 1 SCR 947; BALCO

Employees’ Union (Regd.) v. Union of India & Ors,(2002) 2 SCC 333 : [2001] 5 Suppl. SCR 511; SwissRibbons Pvt. Ltd. & Anr v. Union of India & Ors, (2019)4 SCC 17 : [2019] 3 SCR 535; State of Gujarat & Anrv. Shri Ambica Mills Ltd. & Anr. (1974) 4 SCC 656 :[1974] 3 SCR 760; G.K.Krishnan v. Tamil Nadu (1975)1 SCC 375 : [1975] 2 SCR 715; State of M.P. v. NandlalJaiswal (1986) 4 SCC 566 : [1987] 1 SCR 1; P.M.Ashwathanarayana Setty v. State of Karnataka (1989)Supp (1) SCC 696 : [1988] 3 Suppl. SCR 155; T.Velayudhan v. Union of India (1993) 2 SCC 582 :[1993] 1 SCR 832; Delhi Science Forum v. Union ofIndia (1996) 2 SCC 405 : [1996] 2 SCR 767; BhaveshD. Parish v. Union of India (2000) 5 SCC 471 : [2000]1 Suppl. SCR 291; Ugar Sugar Works Ltd. v. DelhiAdministration & Ors. (2001) 3 SCC 635 : [2001] 2SCR 630; Govt. of Andhra Pradesh & Ors v. P. LaxmiDevi (2008) 4 SCC 720 : [2008] 3 SCR 330; VillianurIyarkkai Padukappu Maiyam v. Union of India (2009)7 SCC 561 : [2009] 9 SCR 225; D.G. of Foreign Tradev. Kanak Exports (2016) 2 SCC 226 : [2015] 15 SCR287; State of J & K v. Trikuta Roller Flour Mills Pvt.Ltd. (2018) 11 SCC 260 : [2017] 9 SCR 642; PioneerUrban Land and Infrastructure Ltd. v. Union of India(2019) 8 SCC 416; Md. Yasin v. Town Area Committee(1952) SCR 572; Bennett Coleman & Co. v. Union ofIndia(1972) 2 SCC 788 : [1973] 2 SCR 757; Md.Faruk v. State of Madhya Pradesh & Ors (1969) 1 SCC853 : [1970] 1 SCR 156; Modern Dental College andResearch Centre v. State of Madhya Pradesh. (2016) 7SCC 353 : [2016] 3 SCR 579– referred to.

Moss v. Hancock (1899) 2 QB 111; Wisconsin CentralLtd v. United States 585 US 2018, 138 S. Ct. 2067(2018); SEC v. Trendon Shavers Case No. 4: 13-Cv-416 (August 6, 2013) United States v. Ulbricht 31F.Supp. 3D 540 (2014); United States v. Faiella 39F. Supp.3D 544 (2014); In re Coinflip Inc CFTC Docket No.15-29 dated 17-09-2015; In the matter of TeraExchange

LLC. CFTC Docket No. 15-33 dated 24-09-2015; Inthe matter of BFXNA Inc, d/b/a BITFINEX CFTCDocket No. 16-19 dated 02-06-2016; United States v.Murgio 209 F. Supp. 3D 698 (2016); CommodityFutures Trading Commission v. Patrick McDonnell 18-Cv-361 dated 03-06-2018; Commodity Futures TradingCommission v. My Big Coin Pay, Inc. et al. 18-Cv-10077-RWZ dated 26-09-2018; State of Florida v. MichellAbner Espinoza 14-2923 decided on 22-07-2016 ;State of Florida v. Michell Abner Espinoza 264 So. 3D1055 (2019); B2C2 Ltd. v. Quoine Pte Ltd. [2019] SGHC(I) 3; National Provincial Bank v. Ainsworth [1965] 1AC 1175 at 1248; Quoine Pte Ltd v. B2C2 Ltd [2020]SGCA (I) 02; AA v. Persons Unknown & others ReBitcoin [2019] EWHC 3556 (Comm); Colonial Bankv. Whinney [1885] 30 ChD; Skatteverket v. DavidHedqvist Case C-264/14 dated 22-10-2015; Elloy deFreitas v. Permanent Secretary of Ministry ofAgriculture, Fisheries, Lands and Housing[1999] 1AC 69; Huang v. Secretary of State for the HomeDepartment [2007] UKHL 11; Bank Mellat v. HMTreasury (No. 2) [2013] UKSC 39; Illinois ElectionsBd v. Socialist Workers Party(1979) 440 US 173 –referred to.

“Digital Gold: Bitcoin and the inside story of the Misfits andMillionaires Trying to Reinvent Money”- Book by NathanielPopper; and Virtual Currency, Treasury Update published by theTax Policy Division, Michigan Department of Treasury (Vol. 1(1),November 2015) – referred to.

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[2020] 2 S.C.R.

INTERNET AND MOBILE ASSOCIATION OF INDIA v.RESERVE BANK OF INDIA

CIVIL ORIGINAL JURISDICTION: Writ Petition (Civil) No.528 of 2018.

[UNDER ARTICLE 32 OF THE CONSTITUTION OF INDIA]

With

Writ Petition (Civil) No. 373 of 2018.

Nakul Dewan, Shyam Divan, Sr. Advs., Ashim Sood, JaideepReddy, Alipak Banerjee, Pradhuman Gohil, Mrs. Taruna Singh Gohil,Ms. Ranu Purohit, Ms. Senu Nizar, Arman Pratap Singh, Aditya Kumar,Brijesh Ujjainwal, Rhythm Buaria, Ms. Payal Chanda, Mayank Pandey,Avinash Menon, Ms. Tanya Dayal, Rohan Andrew Naik, V. P. Singh,Raghav Seth, Ms. Sayobani Banu, Shivam, Bharat Makker, HarpreetSingh Ajmani, Ms. Shraddha Deshmukh, Rajat Nair, Mrs. Anil Katiyar,Advs. for the appearing parties.

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AThe Judgment of the Court was delivered byV. RAMASUBRAMANIAN, J.

1. THE STORY LINE:

1.1. Reserve Bank of India (hereinafter, “RBI”) issued a“Statement on Developmental and Regulatory Policies” on April 5,B2018, paragraph 13 of which directed the entities regulated by RBI (i)not to deal with or provide services to any individual or business entitiesdealing with or settling virtual currencies and (ii) to exit the relationship,if they already have one, with such individuals/ business entities, dealingwith or settling virtual currencies (VCs).C1.2. Following the said Statement, RBI also issued circular datedApril 6, 2018, in exercise of the powers conferred by Section 35A readwith 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 18of the Payment and Settlement Systems Act, 2007, directing the entitiesDregulated by RBI (i) not to deal in virtual currencies nor to provide servicesfor facilitating any person or entity in dealing with or settling virtualcurrencies and (ii) to exit the relationship with such persons or entities, ifthey were already providing such services to them.

1.3. Challenging the said Statement and Circular and seeking aEdirection to the respondents not to restrict or restrain banks and financialinstitutions regulated by RBI, from providing access to the bankingservices, to those engaged in transactions in crypto assets, the petitionershave come up with these writ petitions. The petitioner in the first writpetition is specialized industry body known as ‘Internet and MobileFAssociation of India’ which represents the interests of online and digitalservices industry. The petitioners in the second writ petition comprise ofa few companies which run online crypto assets exchange platforms,the shareholders/founders of these companies and few individual cryptoassets traders. It must be stated here that the individuals who are someof the petitioners in the second writ petition are young high-techGentrepreneurs who have graduated from premier educational institutionsof technology in the country.

Contents of the impugned Statement and Circular of RBI:

1.4. The Statement dated 05-04-2018 issued by RBI, impugned inthese writ petitions, sets out various developmental and regulatory policyHmeasures for the purpose of (i) strengthening regulation and supervision

(ii) broadening and deepening financial markets (iii) improving currencymanagement (iv) promoting financial inclusion and literacy and (v)facilitating data management. Paragraph 13 of the said statement whichfalls under the caption “currency management” deals directly withvirtual currencies and the same constitutes the offending portion of theimpugned Statement. Therefore, paragraph 13 of the impugned Statementalone is extracted as follows:

-13. Ringfencing regulated entities from virtual currencies

Technological innovations, including those underlying virtualcurrencies, have the potential to improve the efficiency andinclusiveness of the financial system. However, VirtualCurrencies (VCs), also variously referred to as cryptocurrencies and crypto assets, raise concerns of consumerprotection, market integrity and money laundering, amongothers.

Reserve Bank has repeatedly cautioned users, holders andtraders of virtual currencies, including Bitcoins, regardingvarious risks associated in dealing with such virtualcurrencies. In view of the associated risks, it has been decidedthat, with immediate effect, entities regulated by RBI shall notdeal with or provide services to any individual or businessentities dealing with or settling VCs. Regulated entities whichalready provide such services shall exit the relationship withina specified time. circular in this regard is being issuedseparately.

1.5. The Circular dated 06-04-2018 deals entirely with virtualcurrencies and the prohibition on dealing with the same. This Circular isstatutory in character, issued in exercise of the powers conferred by (i)the Reserve Bank of India Act, 1934 (ii) the Banking Regulation Act,1949 and (iii) the Payment Settlement Systems Act, 2007. This Circularin its enirety is reproduced as follows:

Prohibition on dealing in Virtual Currencies (VCs)

Reserve Bank has repeatedly through its public notices onDecember 24, 2013, February 01, 2017 and December 05,2017, cautioned users, holders and traders of virtualcurrencies, including Bitcoins, regarding various risksassociated in dealing with such virtual currencies.

2. In view of the associated risks, it has been decided that,with immediate effect, entities regulated by the Reserve Bankshall not deal in VCs or provide services for facilitating anyperson or entity in dealing with or settling VCs. Such servicesinclude maintaining accounts, registering, trading, settling,clearing, giving loans against virtual tokens, accepting themas collateral, opening accounts of exchanges dealing withthem and transfer/receipt of money in accounts relating topurchase/sale of VCs.

3. Regulated entities which already provide such services shallexit the relationship within three months from the date of thiscircular.

4. These instructions are issued in exercise of powersconferred by section 35A read with section 36(1)(a) ofBanking Regulation Act, 1949, section 35A read with section36(1)(a) and section 56 of the Banking Regulation Act, 1949,Dsection 45JA and 45L of the Reserve Bank of India Act, 1934and Section 10(2) read with Section 18 of Payment andSettlement Systems Act, 2007.

2. THE SETTING

2.1. The Statement dated 05-04-2018 and the Circular datedE06-04-2018 of RBI, impugned in these writ petitions, were culminationof flurry of activities by different stakeholders, nationally and globally,over period of about 5 years. Therefore, it is necessary to see thesetting in which (or the backdrop against which) the impugned decisionsof RBI were posited. While doing so, it will also be necessary to takeFnote of the developments that have taken place during the pendency ofthese writ petitions, so that we have close-up as well as aerial view ofthe setting.

2.2. It was probably for the first time that RBI took note oftechnology risks in changing business environment, in their FinancialGStability Report of June 2013. Paragraph 3.60 of this report noted thatglobally, the use of online and mobile technologies was driving theproliferation of virtual currencies. Therefore, the report stated that thosedevelopments pose challenges in the form of regulatory, legal andoperational risks. Box 3.4 of the said report dealt specifically with virtualcurrency schemes and it started by defining virtual currency as aHtype of unregulated digital money, issued and controlled by itsdevelopers and used and accepted by the members of specificvirtual community. It was declared in Box 3.4 of the said report that“the regulators are studying the impact of online payment optionsand virtual currencies to determine potential risks associated withthem”.

2.3. In June 2013, the Financial Action Task Force (hereinafter,“FATF”), also known by its French name, Groupe d’action financière,which is an inter-governmental organization founded in 1989 on theinitiative of G-7 to develop policies to combat money laundering, cameup with what came to be known as “New Payment Products andServices Guidance” (NPPS Guidance, 2013). It was actually Guidancefor Risk Based Approach to Pre-paid cards, Mobile Payments andInternet-based Payment Services. But this Guidance did not define theexpressions ‘digital currency’, ‘virtual currency’, or ‘electronic money’,nor did it focus on virtual currencies, as distinct from internet basedpayment systems that facilitate transactions denominated in real money(such as Paypal, Alipay, Google Checkout etc.). Therefore, short-termtypologies project was initiated by FATF for promoting fullerunderstanding of the parties involved in convertible virtual currencysystems and for developing risk matrix.

2.4. On 24-12-2013, Press Release was issued by RBI cautioningthe users, holders and traders of virtual currencies about the potentialfinancial, operational, legal and customer protection and security relatedrisks that they are exposing themselves to. The Press Release notedthat the creation, trading or usage of VCs, as medium of payment isnot authorized by any central bank or monetary authority and hencemay pose several risks narrated in the Press Release.

2.5. On 27-12-2013, newspapers reported the first ever raid inIndia by the Enforcement Directorate, of 2 Bitcoin trading firms inAhmedabad, by name, rBitco.in and buysellbitco.in. This was statedto be India’s first raid on Bitcoin trading firm and the second globally,after Federal Bureau of Investigation of the United States of Americaconducted raid in October of the same year.

2.6. Thereafter, report titled “Virtual Currencies – KeyDefinitions and Potential AML/CFT Risks” was issued in June 2014 byFATF, highlighting, both legitimate uses and potential risks associated

Awith virtual currencies. What is of great significance about this FATFreport is that it defined 2 important words. The FATF report defined‘Virtual currency’ as digital representation of value that can betraded digitally and functioning as (1) medium of exchange; and/or (2) unit of account; and/or (3) store of value, but not havinga legal tender status. The FATF report also defined ‘Cryptocurrency’Bto mean math-based, decentralised convertible virtual currencyprotected by cryptography by relying on public and private keys totransfer value from one person to another and signedcryptographically each time it is transferred.

2.7. Again, in June 2015, FATF came up with “Guidance for aCRisk Based Approach to Virtual Currencies”, which suggested certainrecommendations, as follows:

A. Countries to identify, assess and understand risks and to takeaction aimed at mitigating such risks. National authorities to undertake acoordinated risk assessment of VC products and services that:D

(1) enables all relevant authorities to understand how specific virtualcurrency products and services function and impact regulatoryjurisdictions for Anti Money Laundering (‘AML’ for short)/Combatingthe Financing of Terrorism (‘CFT’ for short) treatment purposes;

E(2) promote similar AML/CFT treatment for similar products andservices having same risk profiles.

B. Where countries are prohibiting virtual currency products andservices, they should take into account among other things, the impact aprohibition would have on local and global level of money laundering/Fterrorism financing risks, including whether prohibition would drive suchpayment activities underground, where they will operate without AML/CFT controls.

2.8. The FATF submitted report in October 2015 on "EmergingTerrorist Financing Risks". The report was divided into four parts, underthe captions (i) introduction (ii) financial management of terroristGorganisations (iii) traditional terrorist financing methods and techniquesand (iv) emerging terrorist financing threats and vulnerabilities. Evenwhile acknowledging in part 3 of the report that the traditional methodsof moving funds through the banking sector happens to be the mostefficient way of movement of funds for terrorist organisations, the reportHacknowledged the emergence of new payment products and services in

part 4 of the report. The report took note of different methods of terroristfinancing, such as self-funding, crowd funding, social network fund raisingwith prepaid cards etc. Coming to virtual currencies, the report notedthe following:

"Virtual currencies have emerged and attracted investment inpayment infrastructure built on their software protocols. Thesepayment mechanisms seek to provide new method fortransmitting value over the internet. At the same time, virtualcurrency payment products and services (VCPPS) present ML/TF risks. The FATF made preliminary assessment of theseML/TF risks in the report Virtual Currencies Key Definitionsand Potential AML/CFT Risks. As part of staged approach,the FATF has also developed Guidance focusing on the pointsof intersection that provide gateways to the regulated financialsystem, in particular convertible virtual currency exchangers.

Virtual currencies such as bitcoin, while representing greatopportunity for financial innovation, have attracted theattention of various criminal groups, and may pose risk forTF (terrorist financing). This technology allows for anonymoustransfer of funds internationally. While the original purchaseof the currency may be visible (e.g., through the bankingsystem), all following transfers of the virtual currency aredifficult to detect. The US Secret Service has observed thatcriminals are looking for and finding virtual currencies thatoffer: anonymity for both users and transactions; the abilityto move illicit proceeds from one country to another quickly;low volatility, which results in lower exchange risk; widespreadadoption in the criminal underground; and reliability.

Law enforcement agencies are also concerned about the useof virtual currencies (VC) by terrorist organisations. They haveseen the use of websites affiliated with terrorist organisationsto promote the collection of bitcoin donations. In addition,law enforcement has identified internet discussions amongextremists regarding the use of VC to purchase arms andeducation of less technical extremists on use of VC. Forexample, posting on blog linked to ISIL proposed usingbitcoin to fund global extremist efforts." (emphasis supplied)

AIn support of the above conclusions, the report also indicated acase study, which concerned the arrest of one Ali Shukri Ameen, whoadmitted to have had Twitter account with 4000 followers. He claimedto have used his Twitter handle to provide instructions on how to use avirtual currency to mask the provision of funds to ISIL. In an article, thelink to which he tweeted to his followers, it was elaborated how jihadistsBcould utilize the virtual currency to fund their efforts. (It must be notedthat the report also took note of how prepaid cards and other internet-based payment services could also be used for terror financing).

2.9. The Bank of International Settlements (hereinafter, “BIS”)which is body corporate established under the laws of Switzerland,Cway back in the year 1930 pursuant to an agreement signed at Hague on22-01-1930 and owned by 60 Central Banks of different countries includingRBI, has several committees, one of which is “Committee on Paymentsand Market Infrastructure” (CPMI). This committee started taking noteof digital currencies, while dealing with innovations in retail payments.This committee formed sub-group within the CPMI Working Group onDRetail Payments, to undertake an analysis of digital currencies. On thebasis of the findings of the sub-group, CPMI of BIS submitted reportin November 2015 on Digital currencies. The sub-group identified threekey aspects relating to the development of digital currencies one ofwhich was that the assets featured in digital currency schemes,Etypically have some monetary characteristics such as being usedas means of payment, but are not backed by any authority. InNote 1 under the Executive Summary of the said report, it was stated asfollows: “although digital currencies typically do have some, but notall the characteristics of currency, they may also havecharacteristics of commodity or other asset. Their legal treatmentFcan vary from jurisdiction to jurisdiction.” (emphasis supplied)Paragraph 4 of the said report dealt with the “implications for centralbanks, of digital currencies and their underlying decentralized paymentmechanisms”. In the said paragraph, the report indicated that “digitalcurrencies represent technology for settling peer to peer paymentsGwithout trusted third parties and may involve non-sovereigncurrency”. Though the report stated that the impact of digitalcurrencies on the mainstream financial system is negligible as atthat time, some of the implications indicated in the report mayactually materialize if there was widespread adoption of digitalcurrencies. Two risks were noted in the report and they were consumer

protection and operational risks. But in so far as distributed ledgertechnology is concerned, the report was positive. However, the reportcautioned that widespread substitution of bank notes with digitalcurrencies could lead to decline in central banks’ non-interestpaying liabilities and that if the adoption and use of digital currencieswere to increase significantly, the demand for existing monetaryaggregates and the conduct of monetary policy could be affected.Nevertheless, the report stated that at present, the use of private digitalcurrencies is too low for these risks to materialize.2.10. In December 2015, the Financial Stability Report of RBIwas issued, and it included chapter on “Financial Sector Regulation”.The same dealt with the challenges posed by technology-based innovationssuch as virtual currency schemes. In Box 3.1 of the said report, it wasindicated that though the initial concerns over the emergence ofvirtual currency schemes were about the underlying design, episodesof excessive volatility in their value and their anonymous naturewhich goes against global money laundering rules rendered theirvery existence questionable. However, the report noted that theregulators and authorities need to keep pace with developments, as manyof the world’s largest banks started supporting joint effort for settingup of private blockchain and building an industry-wide platform forstandardizing the use of technology.

2.11. In December 2016, the Financial Stability Report of RBIcame. It took note of the rapid developments taking place in Fin Tech(financial technology) globally and exhorted the regulators to gear up toadopt technology (christened as RegTech). Paragraph 3.22 of the saidreport identified the establishment of regulatory sandboxes[1] and innovationhubs for testing new products and services and providing support/guidanceto regulated as well as unregulated entities. The report also noted thatfast paced innovations such as virtual currencies have brought risks andconcerns about data security and consumer protection on one hand andfar reaching potential impact on the effectiveness of monetary policyitself on the other hand. The report took note of the fact that manycentral banks around the world, had already started examining thefeasibility of creating their own digital currencies, after fretting overthem initially.

1 Regulatory sandbox refers to live testing of new products/services in controlled/testregulatory environment.

A2.12. In January 2017, the Institute for Development and Researchin Banking Technology (IDRBT) established by RBI in 1996 as aninstitution to work at the intersection of banking and technology submitteda Whitepaper on “Applications of blockchain technology to banking andfinancial sector in India”. While dealing with the applications of blockchaintechnology in chapter 3, the whitepaper also enlisted the advantages andBdisadvantages of digital currency. While the advantages indicated were(i) control and security, (ii) transparency and (iii) very low transactioncost, the disadvantages indicated were risk and volatility.

2.13. On 01-02-2017, RBI again issued Press Release cautioningusers, holders and traders of virtual currencies. Closely on the heels ofCthis Press Release, the Government of India, Ministry of Finance,constituted, in April 2017, an Inter-Disciplinary Committee comprising ofthe Special Secretary (Economic Affairs) and representatives of theDepartments of Economic Affairs, Financial Services, Revenue, HomeAffairs, Electronics and Information Technology, RBI, NITI Aayog, andState Bank of India. The task of the Committee was to (i) take stock ofDthe status of VCs in India and globally, (ii) examine the existing globalregulatory and legal structures and (iii) suggest measures for dealingwith VCs. The Committee was mandated to submit report within 3months.

2.14. The report of the Inter-Disciplinary Committee was submittedEon 25-07-2017 and it contained certain recommendations which are asfollows:

(i) very visible and clear warning should be issued throughpublic media informing the general public that theGovernment does not consider crypto-currencies such asFbitcoins as either coins or currencies. These are neither alegally valid medium of exchange nor desirable way to storevalue. The Government also does not consider it desirablefor people to use or invest in something which has no realunderlying asset value.

G(ii) very visible and clear warning should be issued, throughpublic media, advising all those who have been offering tobuy or sell these currencies, or offering platform to exchangethese currencies, to stop this forthwith.

(iii) Those who have bought these currencies in good faithand are holding these should be advised to offload these inany jurisdiction where it is not illegal to do so.

(iv) All consumer protection and enforcement agencies shouldbe advised to take action against all those who, despite thesewarnings, indulge in buying/selling or offering platform fortrading of these currencies, since the presumption would bethat it is being done with illegal, fraudulent or tax evadingintent.

(v) If the Government agrees with the above recommendations,a committee should be constituted with members from DEA,RBI, SEBI, DoR, DoLA, Consumer Affairs, and MeitY, tosuggest whether any further actions, including legislativechanges, are required to make possession, trade and use ofcrypto-currencies expressly illegal and punishable.

(vi) Finally, it is clarified that none of the aboverecommendations are meant to restrict the use of blockchaintechnology for purposes other than that of creating or tradingin crypto-currencies.

2.15. In August 2017, Securities and Exchange Board of India(SEBI) established 10-member advisory panel to examine global fintechdevelopments and report on opportunities for the Indian securities market.The goal of the new Committee on Financial and Regulatory Technologieswas to help prepare India to adopt fintech solutions and foster innovationswithin the country.

2.16. On 02-11-2017, the Government of India constituted acommittee chaired by the Secretary (Department of Economic Affairs)and comprising of Secretary, Ministry of Electronic and InformationTechnology, Chairman, SEBI and Deputy Governor, RBI (Inter-MinisterialCommittee) to propose specific actions to be taken in relation to VCs.

2.17. At that stage, two persons, by name, Siddharth Dalmia andVijay Pal Dalmia came up with writ petition in WP (C) No.1071 of2017 under Article 32 of the Constitution of India seeking the issue of awrit of mandamus directing the respondents to declare as illegal and ban

Aall virtual currencies as well as ban all websites and mobile applicationswhich facilitate the dealing in virtual currencies. Similarly, another person,by name, Dwaipayan Bhowmick came up with writ petition in WP (C)No.1076 of 2017, seeking the issue of writ of mandamus directing therespondents to regulate the flow of Bitcoin (crypto money) and toconstitute committee of experts to consider the prohibition/regulationBof Bitcoin and other crypto currencies. On 13.11.2017, this Court orderednotice in both the writ petitions.

2.18. Around the same time, namely, November 2017, the Inter-Regulatory Working Group on Fintech and Digital Banking, set up byRBI, pursuant to decision taken by the Financial Stability andCDevelopment Council Sub-Committee way back in April 2016, submitteda report. This report, in paragraph 2.1.3.2, dealt with Digital Currencies.It defined ‘digital currencies’ to mean digital representations ofvalue, issued by private developers and denominated in their ownunit of account. The Report also stated that “digital currencies arenot necessarily attached to fiat currency, but are accepted byDnatural or legal persons as means of exchange.”2.19. Thereafter, RBI issued another Press Release dated 05-12-2017 reiterating the concerns expressed in earlier press releases. TheGovernment of India, Ministry of Finance also issued statement on 29-12-2017 cautioning the users, holders and traders of VCs that they areEnot recognized as legal tender and that the investors should avoidparticipating in them.

2.20. On 01-02-2018, the Minister of Finance, in his budget speechsaid that the Government did not consider crypto currencies as legaltender or coin and that all measures to eliminate the use of theseFcurrencies in financing illegitimate activities or as part of the paymentsystem, will be taken by the Government. However, he also said that theGovernment will explore the use of blockchain technology proactivelyfor ushering in digital economy.

2.21. The Central Board of Direct Taxes (CBDT), by an OfficeGMemorandum dated 05-03-2018, submitted to the Department ofEconomic Affairs, draft scheme proposing ban on cryptocurrencies.But the draft scheme advocated step-by-step approach, as many personshad already invested in cryptocurrencies. The scheme also contained anadvice to carry out legislative amendments before banning them.

2.22. In the wake of meeting of G-20 Finance Ministers andCentral Bank Governors that was scheduled to be held in mid-March2018, the Financial Stability Board[2] (FSB) sent out communicationdated 13-03-2018. It was indicated in the said communication that asper the initial assessment of FSB, crypto assets did not pose risks toglobal financial stability, as their combined global market value even attheir peak, was less than 1% of global GDP. But the report also notedthat the initial assessment was likely to change and that crypto assetsraised host of issues around consumer and investor protection as wellas their use to shield illicit activity and for money laundering and terroristfinancing.

2.23. The communique issued by G-20, after the meeting of itsFinance Ministers and Central Bank Governors on March 19-20, 2018also acknowledged that technological innovation including thatunderlying crypto assets, has the potential to improve the efficiencyand inclusiveness of the financial system and the economy morebroadly. But it also noted that crypto assets do raise issues with respectto consumer and investor protection, market integrity, tax evasion,money laundering and terrorist financing. Though crypto assetslacked the key attributes of sovereign currencies, they could, atsome point, have financial stability implications. Therefore, thecommunique resolved to implement FATF standards and to call oninternational standard-setting bodies to continue their monitoring of cryptoassets and their risks.

2.24. On 02-04-2018, RBI sent an e-mail to the Government,enclosing note on regulating crypto assets. It was with reference tothe record of discussions of the last meeting of the Inter-MinisterialCommittee on virtual currency. This note examined the pros and cons ofbanning and regulating cryptocurrencies and suggested that it had to bedone, backed by suitable legal provisions.

2.25. Immediately thereafter, the Statement dated 05-04-2018 andthe Circular dated 06-04-2018, impugned in these writ petitions came tobe issued by RBI. It appears that at around the same time (April 2018),the Inter-Ministerial Committee submitted its initial report, (or precursor

2 FSB was established by G-20 in April 2009, as successor to the Financial StabilityForum founded in 1999 by G-7 Finance Ministers and Central Bank Governors.

Ato the report) along with draft bill known as Crypto Token and CryptoAsset (Banning, Control and Regulation) Bill, 2018.[3]

2.26. But in the meantime, few companies which run onlinecrypto assets exchange platforms together with the shareholders/founders of those companies and few individual crypto assets tradersBcame up with the first of the writ petitions on hand, namely WP (C) No.373 of 2018, challenging the aforesaid Statement dated 05-04-2018 andCircular dated 06-04-2018. On 01-05-2018 this writ petition was directedto be tagged along with the writ petitions WP (C) Nos. 1071 and 1076 of2017 which sought ban on or regulation of cryptocurrencies.

C2.27. On 11-05-2018, all the three writ petitions, namely WP (C)Nos. 1071 and 1076 of 2017 and 373 of 2018, came up for hearing. Atthat time, it was pointed out that few High Courts were also seized ofwrit petitions concerning cryptocurrencies. Therefore, this Court gaveliberty to RBI to move appropriate applications for transfer of all thosecases to this Court.D

2.28. Accordingly, RBI came up with transfer petitions and thetransfer petitions were taken on Board on 17-05-2018 and directionwas issued that no High Court shall entertain any writ petition relating tothe impugned Circular dated 06-04-2018. This Court also passed aninterim order on 17-05-2018 permitting the petitioners in WP (C) No.E1071 of 2017 to submit representation to RBI with further directionto RBI to deal with the same in accordance with law.

2.29. In the meantime, the Internet and Mobile Association ofIndia came up with the second of the writ petitions on hand, namely WP(C) No. 528 of 2018 and notice was ordered in the said writ petition onF03-07-2018. While doing so, this Court issued direction to RBI todispose of the representation, if any, already submitted by the Association.Accordingly, RBI considered the representation and issued twocommunications dated 06-07-2018 and 09-07-2018.

2.30. On 23-07-2018, SEBI sent its comments on the 2018 Bill,Gto the Department of Economic Affairs. Their primary objection to theBill was that they are not best suited to be the regulators of cryptoassets and tokens.

3 The fate of the 2018 Bill is not known but fresh bill called ‘Banning ofCryptocurrency and Regulation of Official Digital Currency Bill, 2019’ has beenHsubmitted.

2.31. Next came the Annual Report of RBI for the year 2017-2018. It contained separate Box II.3.2 on “Cryptocurrency: Evolvingchallenges”. The relevant portion of the same reads as follows:

“Though cryptocurrency may not currently pose systemicrisks, its increasing popularity leading to price bubbles raisesserious concerns for consumer and investor protection, andmarket integrity. Notably, Bitcoins lost nearly US$200 billionin market capitalisation in about two months from the peakvalue in December 2017. As per the CoinMarketCap, theoverall cryptocurrency market had nearly touched US$800billion in January 2018.

The cryptocurrency eco-system may affect the existingpayment and settlement system which could, in turn, influencethe transmission of monetary policy. Furthermore, being storedin digital/electronic media – electronic wallets – it is prone tohacking and operational risks, few instances of which havealready been observed globally. There is no establishedframework for recourse to customer problems/disputesresolution as payments by cryptocurrencies take place on apeer-to-peer basis without an authorised central agency whichregulates such payments. There exists high possibility of itsusage for illicit activities, including tax avoidance. Theabsence of information on counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject usersto unintentional breaches of anti-money laundering laws(AML) as well as laws for combating the financing of terrorism(CFT) (Committee on Payments and Market Infrastructures –CPMI, 2015). The Bank for International Settlements (BIS)

has recently warned that the emergence of cryptocurrencieshas become combination of bubble, Ponzi scheme andan environmental disaster, and calls for policy responses (BIS,2018). The Financial Action Task Force (FATF) has alsoobserved that cryptoassets are being used for moneylaundering and terrorist financing. globally coordinatedapproach is necessary to prevent abuses and to strictly limitinterconnections with regulated financial institutions.

On global level, regulatory responses to cryptocurrencyhave ranged from complete clamp down in some jurisdictions

Ato comparatively ‘light touch regulatory approach’. TheSecurities and Exchange Commission (SEC) and theCommodity Futures Trading Commission (CFTC) have emergedas the primary regulators of cryptocurrencies in the UnitedStates, where these assets like most other jurisdictions, donot enjoy the legal tender status. Asian countries haveBexperienced oversized concentration of crypto players –Japan and South Korea account for the biggest shares ofcrypto asset markets in the world. In the case of Bitcoins,half of transactions worldwide are carried out in Japan. InSeptember 2017, Japan approved transactions by itsCexchanges in cryptocurrencies. China’s exchanges hosted adisproportionately large volumes of global Bitcoin tradinguntil their ban recently. […]

Developments on this front need to be monitored as sometrading may shift from exchanges to peer-to-peer mode, whichmay also involve increased usage of cash. Possibilities ofmigration of crypto exchange houses to dark pools/cash andto offshore locations, thus raising concerns on AML/CFT andtaxation issues, require close watch.” (emphasis supplied)

2.32. In this background, all the four writ petitions namely WPE(C) Nos. 1071 and 1076 of 2017 (seeking ban) and WP (C) Nos. 373and 528 of 2018 (challenging the indirect ban) came up for hearing,along with the transfer petitions, on 25-10-2018, when this Court wasinformed that the Union of India had already constituted committeeand that this Inter-Ministerial Committee was deliberating on the issue.Therefore, the writ petitions were adjourned to enable the Committee toFcome up with their recommendations.2.33. It appears that the Committee so constituted, submitted areport on 28-02-2019 indicating the action to be taken in relation to virtualcurrencies. bill known as “Banning of Cryptocurrency and Regulationof Official Digital Currency Bill, 2019” had also been prepared by thenGto be introduced in the Lok Sabha. To this report of the Committee, isappended, the minutes of the discussions of the Committee in the meetingsheld on 27-11-2017, 22-02-2018, and 09-01-2019. The contents of thereport of the Inter-Ministerial Committee dated 28-02-2019, can be wellunderstood only if we look at the Record of Discussions of the meetingsof the Committee. The Record of Discussions held on 27-11-2017 showsH

that the Inter-Ministerial Committee was of the initial view that thebanning option was difficult to implement and that it can also drivesome operators underground, encouraging the use of suchcurrencies for illegitimate purposes. But it was generally agreed inthe said meeting that VCs cannot be treated as currency. However, inthe meeting held on 22-02-2018, the Deputy Governor, RBI madean initial intervention and argued in favour of using the banningoption. Eventually, the other members of the Committee agreed, and itwas resolved in the said meeting that detailed paper on the option ofbanning VCs, including draft law could be prepared and submitted byRBI and CBDT. It was also resolved to prepare detailed paper withinDepartment of Economic Affairs on options of regulating crypto assets.Following the same, it was resolved in the next meeting held on 09-01-2019 that Standing Committee should be constituted to revisit certainissues. Eventually, the Inter-Ministerial Committee submitted the aforesaidreport dated 28-02-2019. The key aspects of this report are:

i. Virtual currency is digital representation of value that can bedigitally traded and it can function as medium of exchange and/or aunit of account and/or store of value, though it does not have the statusof legal tender.

ii. Initial Coin Offerings (hereinafter, “ICO”) are way forcompanies to raise money by issuing digital tokens in exchange for fiatcurrency or cryptocurrency, but there is clear risk with the issuance ofICOs as many of the companies are looking to raise money withouthaving any tangible products. In the year 2018, as many as 983 ICOswere issued, through which funds to the tune of USD 20 billion wereraised.

iii. Virtual currencies are accorded different legal treatment bydifferent countries, which range from barter transactions to mode ofpayment to legal tender. Countries like China have imposed completeban.

iv. The mining of non-official virtual currencies is very resource-intensive requiring enormous amounts of electricity which may prove tobe an environmental disaster.

v. They may also affect the ability of the Central Banks to carryout their mandates.

vi. China has not only banned trading in cryptocurrencies but alsoused its firewall to ban crypto currency exchanges. China even blockedcrypto currency focused accounts from WeChat and crypto-currencyrelated content from Baidu. However, Chinese traders use VPNs tocircumvent these bans.

BThe report dated 28-02-2019 of the Inter-Ministerial Committeefinally made certain recommendations which included complete banon private cryptocurrencies.

2.34. It is important to note here that the report of the Inter-Ministerial Committee dated 28-02-2019 not only recommended aCban, but also specifically endorsed the stand taken by RBI to eliminatethe interface of institutions regulated by RBI from crypto currencies.

2.35. As matter of fact, the issue of the impugned Circular byRBI was even taken note of by the Financial Stability Board (of G-20),in document titled ‘Crypto Assets Regulators Directory’, submitted toDG-20 Finance Ministers and Central Bank Governors in April 2019. Whileacknowledging the fact that RBI does not have legal mandate to directlyregulate crypto assets, this Directory indicated that with view to ringfence its regulated entities from the risks associated with VCs, RBI hasissued the impugned Circular.

E2.36. In report released in June 2019 under the caption‘Guidance for risk-based approach to Virtual Assets and VirtualAsset Service Providers’, FATF reiterated risk-based approachadvocated in FATF 2012 and 2015 recommendations. At the same time,this Guidance recognized that jurisdiction has the discretion toprohibit VA activities and VASPs in order to support other policyFgoals not addressed in the Guidance such as consumer protection,safety and soundness or monetary policy. But the Guidance alsosuggested that countries which prohibit VA activities or VASPs shouldalso assess the effect that such prohibition may have on their moneylaundering and terrorist financing risks.

G2.37. It is also relevant to note here that the Government wasconscious of the impugned Circular issued by RBI. This can be seenfrom the answer provided by the Minister of State in the Ministry ofFinance, on 16-07-2019 in response to question raised in the RajyaSabha (Unstarred question no. 2591). While answering in the negative,the question whether the Government had banned cryptocurrencies inH

the country, the Minister of State added that RBI has been issuingadvisories, press releases and circulars.

2.38. On 22-07-2019, the Report of the Inter-Ministerial Committee,recommending ban, along with the draft of the Bill “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019”, washosted in the website of the Department of Economic Affairs. Therefore,on 08-08-2019, the first two writ petitions namely WP (C) Nos. 1071and 1076 of 2017 were delinked and adjourned to January 2020, since,the prayers made in these two writ petitions (seeking ban) appearedsubstantially answered.

2.39. Thereafter, the present writ petitions were taken up forhearing and this Court passed an interim direction on 21-08-2019, directingthe Reserve Bank of India to give detailed point-wise reply to therepresentations dated 29-05-2018 and 30-05-2018. The reply alreadygiven by RBI to the representations dated 29-05-2018 and 30-05-2018was found by this Court to be inadequate and hence this direction.Accordingly, RBI gave detailed point-wise reply on 04-09-2019 and18-09-2019. Thereafter, the present writ petitions were taken up forhearing.

3. FLASHBACK

3.1. The archeological excavations carried out at the (world wideweb) sites, reveal that this digital currency civilization is just 12 years old(at the most, 37 years). But these excavations became necessary sincevirtual currencies, known by different names such as crypto assets, cryptocurrencies, digital assets, electronic currency, digital currency etc., eludean exact and precise definition, making it impossible to identify them asbelonging either to the category of legal tender solely or to the categoryof commodity/good or stock solely.3.2. Any attempt to define what virtual currency is, it appears,should follow the Vedic analysis of negation namely “neti, neti”.Avadhuta Gita of Dattatreya says, “by such sentences as ‘that thouare’, our own self or that which is untrue and composed of the 5elements, is affirmed, but the sruti says ‘not this not that’.”[4] Theconcept of Neti Neti is an expression of something inexpressible, but

4 tattvamasyādivākyena svātmā hi pratipādita% neti neti śrutirbrūyād anrtam pāñcabhautikam-

Awhich seeks to capture the essence of that to which no other definitionapplies. This conundrum will squarely apply to crypto currencies andhence this flashback, into its genesis, so that its DNA is sequenced.

3.3. Though the idea of digital cash appears to have been firstintroduced by David Lee Chaum, an American Computer Scientist andBCryptographer way back in 1983 in research paper and was actuallylaunched by him in 1990 through company by name Digicash, thecompany filed for bankruptcy in 1998, with Digicash becoming Digi-crash. But the actual story of creation of cryptocurrencies began, in amore scientific way, according to Nathaniel Popper, the New York Timesjournalist,[5] in 1997, when British Cypherpunk[6] by name Adam BackCreleased plan called hashcash, which claimed to have solved some ofthe problems that stalled the digital cash project. But this program hadits shortcomings. Another Cypherpunk by name Nick Szabo, came upwith concept called bitgold, which attempted to solve hashcash’sshortcomings. Soon, an American by name Wei Dai came up withDsomething called b-money. Hal Finney, another American created hisown option. But all of them had common goal, which, as revealed byAdam Back was as follows:

“What we want is fully anonymous, ultra low transaction cost,transferable units of exchange. If we get that going… theEbanks will become the obsolete dinosaurs they deserve tobecome.”

3.4. But all these experiments continued to hit roadblocks, untilthe emergence of Satoshi Nakamoto (who still remains anonymous) inthe world of netizens. It appears that Satoshi sent an e-mail in AugustF2008 to Adam Back attaching white paper prepared by him on whatwas called ‘Bitcoin’. The gist of what Satoshi stated in his paper isindicated in simple terms, for the understanding of the common man, byNathaniel Popper, in his book as follows:

“Rather than relying on central bank or company to issueGand keep track of the money – as the existing financial systemand Chaum’s DigiCash did – this system was set up so that

5 From his book “Digital Gold: Bitcoin and the inside story of the Misfits and MillionairesTrying to Reinvent Money”.

6 Cypherpunk is an activist advocating widespread use of strong cryptography andprivacy enhancing technologies, as route to social and political change. This word wasHadded to the Oxford English Dictionary in November 2006.

every Bitcoin transaction, and the holdings of every user,would be tracked and recorded by the computers of all thepeople using the digital money, on communally maintaineddatabase that would come to be known as the blockchain.

The process by which this all happened had many layers, andit would take even experts, months to understand how theyall worked together. But the basic elements of the system canbe sketched out in rough terms, and were in Satoshi’s paper,which would become known as the Bitcoin white paper.

According to the paper, each user of the system could haveone or more public Bitcoin addresses – sort of like bankaccount numbers – and private key for each address. Thecoins attached to given address could be spent only by aperson with the private key corresponding to the address.The private key was slightly different from traditionalpassword, which has to be kept by some central authority tocheck that the user is entering the correct password. In Bitcoin,Satoshi harnessed the wonders of public-key cryptographyto make it possible for user – let’s call her Alice again – tosign off on transaction, and prove she has the private key,without anyone else ever needing to see or know her privatekey.

Once Alice signed off on transaction with her private keyshe would broadcast it out to all the other computers on theBitcoin network. Those computers would check that Alice hadthe coins she was trying to spend. They could do this byconsulting the public record of all Bitcoin transactions, whichcomputers on the network kept copy of. Once the computersconfirmed that Alice’s address did indeed have the money shewas trying to spend, the information about Alice’s transactionwas recorded in list of all recent transactions, referred to asa block, on the blockchain. […]

The result of this complicated process was something that wasdeceptively simple but never previously possible: financialnetwork that could create and move money without centralauthority. No bank, no credit card company, no regulators.The system was designed so that no one other than the holderof private key could spend or take the money associated

Awith particular Bitcoin address. What’s more, each user ofthe system could be confident that, at every moment in time,there would be only one public, unalterable record of whateveryone in the system owned. To believe in this, the usersdidn’t have to trust Satoshi, as the users of DigiCash had totrust David Chaum, or users of the dollar had to trust theBFederal Reserve. They just had to trust their own computersrunning the Bitcoin software, and the code Satoshi wrote,which was open source, and therefore available for everyoneto review. If the users didn’t like something about the rules setdown by Satoshi’s software, they could change the rules.CPeople who joined the Bitcoin network were, quite literally,both customers and owners of both the bank and the mint.”

3.5. That Satoshi and the Cypherpunks who participated inthe initial experiments developed Bitcoin as an alternative toconventional currency, to counter the problems of debasement ofDcurrency by central agencies, was made clear by Satoshi himselfwhen he said: “The root problem with conventional currency is allthe trust that’s required to make it work. The Central Bank must betrusted not to debase the currency but the history of fiat currenciesis full of breaches of that trust.”

E3.6. What attracted people to Satoshi’s proposal, was the factthat while Central Banks had no restraints in unlimited printing of money,thereby devaluing all savings and holdings, the Bitcoin software had rulesto ensure that the process of creating new coins would stop after 21million were out in the world. When Martti Malmi, student at theHelsinki University of Technology, joined hands with Satoshi to improviseFthe project and to market it, he formulated the philosophy in the followingwords:

“Be safe from the unfair monetary policies of the monopolisticCentral Banks and the other risks of centralized power overa money supply. The limited inflation of Bitcoin system’sGmoney supply is distributed evenly (by CPU power) throughoutthe network, not monopolized to banking elite.”

3.7. Therefore, it is beyond any pale of doubt that irrespective ofthe metamorphosis (or gene mutation) it has undergone over the years,bitcoin, the Adam or Manu of the race of cryptocurrencies, wasHdeveloped as an alternative to fiat currency. Keeping this birth chart of

virtual currencies in mind, let us now see how the petitioners are aggrievedby the impugned decisions of RBI, the grounds on which they challengethe same and the justification sought to be provided by RBI.

4. BACKGROUND SCORE (of the petitioners)

4.1. The theme of the song of the petitioners in one of the writpetitions, as fine-tuned by Shri Ashim Sood, learned Counsel, can besummarized as follows:

I. RBI has no power to prohibit the activity of trading in virtualcurrencies through VC exchanges since:

(i) Virtual currencies are not legal tender but tradable commodities/digital goods, not falling within the regulatory framework of theRBI Act, 1934 or the Banking Regulation Act, 1949.

(ii) Virtual currencies do not even fall within the credit system ofthe country, so as to enable RBI to fall back upon the Preamble tothe RBI Act 1934, which gives mandate to RBI to operate thecurrency and credit system of the country to its advantage.

(iii) Neither the power to regulate the financial system of thecountry to its advantage conferred under Section 45JA, nor thepower to regulate the credit system of the country conferred underSection 45L of the RBI Act, 1934 exercisable in public interestand upon arriving at satisfaction, is so elastic as to cover goodsthat do not fall within the purview of the financial system or creditsystem of the country.

(iv) The power to issue directions “in the public interest” conferredunder Section 35A(1)(a) of the Banking Regulation Act, 1949and the power to caution or prohibit banking companies againstentering into any particular transaction conferred under Section36(1)(a) do not extend to the issue of blanket directions that woulddeny access by virtual currency exchanges, to the banking servicesof the country, as the expression “public interest” appearing in aparticular provision in statute should take its colour from thecontext of the statute.

(v) The power conferred upon RBI under Section 10(2) of thePayment and Settlement Systems Act, 2007 to issue guidelinesfor proper and efficient management of payment systems andunder Section 18 of the said Act to lay down policies relating to

Athe regulation of payment systems and to give directions pertainingto the conduct of business relating to payments systems,exercisable in public interest upon being satisfied, is also notapplicable to virtual currency exchanges, as the services renderedby them do not fall within the definition of the expression “paymentsystem” under Section 2(1)(i) of the said Act.B

II. Assuming but not admitting that RBI has the power to dealwith the activities carried on by VCEs, the mode of exercise of suchpower can be tested on certain well established parameters. They are –

(i) application of mind/satisfaction/relevant and irrelevantCconsiderations

(ii) Malice in law/colorable exercise of power

(iii) M.S. Gill reasoning

(iv) Calibration/Proportionality

DIII. All other stake holders such as the Department of EconomicAffairs of the Government of India, Securities and Exchange Board ofIndia, Central Board of Direct Taxes, etc., have actually recognized thepositive and beneficial aspects of cryptocurrencies as digital assets andthe Distributed Ledger Technology from which crypto currencies emanateand hence have recommended only regulatory regime, but RBI hasEtaken contra position without any rational basis.

IV. Many of the developed and developing economies of the world,multinational and international bodies and the courts of various countrieshave scanned crypto currencies, but found nothing pernicious about themand even the attempt of the Government of India to bring legislationFbanning crypto currencies, is yet to reach its logical end.

V. RBI should have taken into account the fact that the membersof Petitioner association have taken necessary precautions includingavoiding cash transactions, ensuring compliance with KYC norms, oftheir own accord and allowing peer-to-peer transactions only within theGcountry.

VI. RBI has not applied its mind to the fact that not every cryptocurrency is anonymous. The report of the European Parliament alsoclassified VCs into anonymous and pseudo-anonymous. Therefore, ifthe problem sought to be addressed is anonymity of transactions, theH

same could have been achieved by resorting to the least invasive optionof prohibiting only anonymous VCs.

VII. It is paradox that blockchain technology is acceptable toRBI, but crypto currency is not.

VIII. The benefit of the rule of judicial deference to economicpolicies of the state is not available to RBI, as the impugned Circular isan exercise of power by statutory body corporate and is neither alegislation nor an exercise of executive power. In any case, there is nodeference in law to process but only to opinion emanating from theprocess. No study was undertaken by RBI before the impugned measurewas taken and hence, the impugned decisions are not even based uponknowledge or expertise.

IX. While regulation of trade or business through reasonablerestrictions imposed under law made in the interests of the generalpublic is saved by Article 19(6) of the Constitution, total prohibition,especially through subordinate legislation such as directive from RBI,of an activity not declared by law to be unlawful, is violative of Article19(1)(g). Whether directive would tantamount to “regulation” or“prohibition”, depends upon the impact of the directive.

4.2. The contentions of the petitioners in the other writ petition(WP (C) No. 373 of 2018), as set to tune by Shri Nakul Dewan, learnedSenior Counsel, are:

I. The immediate effect of the impugned Circular is to completelysevere the ties between the virtual currency market and the formal Indianeconomy, without actually legislative ban on the trading of VCs, therebypromoting cash and black-market transactions.

II. The impugned Circular fails to take note of the differencebetween various VC schemes such as closed VC schemes, unidirectionalflow VC schemes and bidirectional flow VC schemes and unreasonablydifferentiates between unidirectional flow schemes and bidirectional flowschemes, by targeting only bidirectional flow schemes.

III. VCs do not qualify as money, as they do not fulfill the fourcharacteristics of money namely medium of exchange, unit of account,store of value and constituting final discharge of debt and since RBIhas accepted this position, they have no power to regulate it.

IV. Considering the fact that historically, money as understood inthe social sense and money as understood in the legal sense, are different,the courts in different jurisdictions such as USA and Singapore haveunderstood VCs to be akin to money or funds at times or as commodities/intangible properties at other times.

V. The impugned Circular is manifestly arbitrary, based on non-reasonable classification and it imposes disproportionate restrictions.

VI. decision to prohibit an article as res extra commercium is amatter of legislative policy and must arise out of an Act of legislatureand not by notification issued by an executive authority.

4.3. In addition to the aforementioned legal contentions, Shri NakulDewan learned Senior Counsel also submitted that as result of theimpugned Circular, the virtual currency exchange (VCE) run by one ofthe petitioners in one writ petition was shut down on 30-03-2019, theVCE run by another petitioner became non-operational, though theirDwebsite still opens and the VCE run by yet another petitioner by nameDiscidium Internet Labs Pvt. Ltd., not only became non-operational, butan amount of Rs. 12 crores lying in their account also got frozen.However, one VCE by name CoinDCX alone survives, by operating ona peer-to-peer (P2P) basis.

4.4. In support of their respective contentions, Shri Ashim Soodand Shri Nakul Dewan, the learned counsels, relied upon number ofdecisions of this court and other courts. We shall refer to them when wetake up their contentions for analysis.

5. SCRIPT (of RBI)

5.1. RBI has filed counter-affidavit in one of these writ petitions,covering the entire gamut. But the response of RBI to the contentions ofthe petitioners is available not only in the counter-affidavit, but also insome communications issued by them pursuant to certain interimdirections issued by this court.

5.2. For instance, this Court passed an interim direction on 21-08-2019, after hearing lengthy arguments, directing the Reserve Bank ofIndia to give detailed point-wise reply to the representations dated 29-05-2018 and 30-05-2018. Pursuant to the said interim direction, RBIgave detailed point-wise reply on 04-09-2019 and 18-09-2019.Therefore, RBI’s stand in these cases has to be culled out not only from

the counter-affidavit but also from the orders passed/replies issued tothe representations of the writ petitioners, during the pendency of thesewrit petitions.

5.3. In brief, the response of RBI to the issues raised by thepetitioners, as articulated by Shri Shyam Divan, learned Senior Counsel,can be summarized as follows:

(i) Virtual currencies do not satisfy the criteria such as store ofvalue, medium of payment and unit of account, required for beingacknowledged as currency.

(ii) Virtual currency exchanges do not have any formal orstructured mechanism for handling consumer disputes/ grievances.

(iii) Virtual currencies are capable of being used for illegal activitiesdue to their anonymity/pseudo-anonymity.

(iv) Increased use of virtual currencies would eventually erodethe monetary stability of the Indian currency and the credit system.

(v) The impugned decision of RBI is legislative in character andis in the realm of an economic policy decision taken by an expert bodywarranting hands-off approach from the Court.

(vi) The impugned decision is within the range of wide powersconferred upon RBI under the Banking Regulation Act, 1949, the ReserveBank of India Act, 1934 and the Payment and Settlement Systems Act,2007.

(vii) No one has an unfettered fundamental right to do businesson the network of the entities regulated by RBI.

(viii) The impugned decisions do not violate any of the rightsguaranteed by Articles 14, 19 and 21 of the Constitution of India.

(ix) The impugned decisions are not excessive, confiscatory ordisproportionate in as much as RBI has given three months’ time to theaffected parties to sever their relationships with the banks. This is apartfrom the repeated cautions issued to the stakeholders by RBI throughPress Releases from the year 2013.

(x) The ambit of the 2013 press release was much wider than justconsumer protection. RBI cautioned users, holders and traders of VCsabout the potential financial, operational, legal, customer protection andsecurity related risks they were exposing themselves to.

A(xi) The host of material taken note of by RBI in their reports, thereports of the committees to which RBI was party and the cautionsrepeatedly issued by RBI over period of 5 years, would demonstratethe application of mind on the part of RBI. They also demonstrate thatRBI did not proceed in haste but proceeded with great care and caution.Therefore, the satisfaction arrived at by them was too loud and clear toBbe ignored. The standard for considering the impugned Circular, is theexistence of material and not the adequacy or sufficiency of suchmaterial.

(xii) In any case, there is no complete ban on virtual currencies oron the use of distributed ledger technology by the regulated entities.C

(xiii) The impugned decisions were necessitated in public interestto protect the interest of consumers, the interest of the payment andsettlement systems of the country and for protection of regulated entitiesagainst exposure to high volatility of the virtual currencies. RBI isempowered and duty bound to take such pre-emptive measures in publicDinterest and the power to regulate includes the power to prohibit.

(xiv) The impugned decisions were necessitated because in theopinion of RBI, VC transactions cannot be termed as payment system,but only peer-to-peer transactions which do not involve system providerunder the Payments and Settlement Systems Act. Despite this, VCEtransactions have the potential to develop as parallel system of payment.

(xv) The KYC norms followed by the VCEs are far below whatother participants in the payments and monetary system follow. In anycase, KYC norms are ineffective, as the inherent characteristic ofanonymity of VCs does not get remedied.F

(xvi) Cross-border nature of the trade in VCs, coupled with thelack of accountability, has the potential to impact the regulated paymentssystem managed by RBI. large constituent of the VC universe doesnot hold membership of the Petitioner association or is not evenaccountable for their acts but is material and instrumental in driving theGVC trade.

(xvii) RBI or any other Government authority would not be ableto curtail, limit, regulate or control the generation of VCs and theirtransactions, resulting in ever-present and inevitable financial risks.

6. UNFOLDING OF THE PLOT

6.1. In the light of the above factual matrix and the rivalcontentions, let us now see how the plot before us, unfolds.

I. No Power at all for RBI (Ultra vires)

6.2. The first ground of attack revolves around the power of RBIto deal with, regulate or even ban VCs and VCEs. The entire foundationof this contention rests on the stand taken by the petitioners that VCsare not money or other legal tender, but only goods/commodities, fallingoutside the purview of the RBI Act, 1934, Banking Regulation Act, 1949and the Payment and Settlement Systems Act, 2007. In fact, the impugnedCircular of RBI dated 06-04-2018 was issued in exercise of the powersconferred upon RBI by all these three enactments. Therefore, if virtualcurrencies do not fall within subject matter covered by any or all ofthese three enactments and over which RBI has statutory control,then the petitioners will be right in contending that the Circular is ultravires.

6.3. Hence it is necessary (i) first to see the role historicallyassigned to central bank such as RBI, the powers and functionsconferred upon and entrusted to RBI and the statutory scheme of all theabove three enactments and (ii) then to investigate what these virtualcurrencies really are. Therefore, we shall divide our discussion in thisregard into two parts, the first concerning the role, powers and functionsof RBI and the second concerning the identity of virtual currencies.

Role assigned to, functions entrusted to and the powersconferred upon RBI as Central Bank

6.4. The Reserve Bank of India was established under Act 2 of1934 for the purpose of (i) regulating the issue of bank notes, (ii) keepingof reserves with view to securing monetary stability in the country and(iii) operating the currency and credit system of the country to itsadvantage. The role of central bank such as the Reserve Bank in aneconomy is to manage (i) the currency (ii) the money supply and (iii)interest rates. The unique feature of central bank is the monopoly thatit has on increasing the monetary base in the state and the control it hasin the printing of the national currency. The central bank virtually functionsas “a lender of last resort” to banks suffering liquidity crisis.

A6.5. Historians trace the rise of modern central banks to theestablishment of the Bank of England under Royal Charter granted on27-07-1694 through the Tunnage Act, 1694. The establishment of thisbank in 1694 was not actually for stimulating the economy but forfinancing the war that England had with France. The currency crisis of1797 and the creation of ratio between the gold reserves held by theBBank of England and the notes that the bank could issue, under the BankCharter Act, 1844 brought huge changes in the way the central bankwas supposed to function.

6.6. In so far as India is concerned, the functions of centralbank were originally conferred upon the Imperial Bank of India, establishedCin the year 1921, under the Imperial Bank of India Act, 1920. The reasonwhy and the manner in which the Imperial Bank was established, isquite interesting to see. At the time when the British Crown took overthe control of the territories in India, after the Sepoy Mutiny of 1857,there were three Presidency Banks, one in Calcutta, another in BombayDand the third in Madras. All these three banks established respectively in1809, 1840 and 1843, were authorized to issue notes up to certain specifiedlimits. But this privilege was withdrawn in 1862 under the Paper CurrencyAct, which vested the sole right to issue notes with the Government ofIndia.E6.7. The question of absorption of the three Presidency Banksinto central bank came up for consideration on and off. Though theChamberlain Commission, known as the Royal Commission on IndianFinance and Currency, appointed in 1913, felt the need for setting up acentral bank, the proposal did not materialize. But after the First WorldWar, the Presidency Banks themselves favoured an amalgamation.FTherefore, the Imperial Bank of India Bill providing for the amalgamationof all the three Presidency Banks was passed in September 1920 andcame into effect in January 1921. The trend of setting up central banksgained momentum internationally, after the International FinancialConferences held at Brussels in 1920 and at Genoa in 1922.G

6.8. But the maintenance of an overvalued exchange rate to helpBritish exporters, gave rise to clash between the colonial administrationand Indian business interests. The Congress sought devaluation and hencea Royal Commission was set up in 1925 to examine the matter. ThisRoyal Commission on Indian Currency and Finance, also known as Hilton

Young Commission (to which Dr. B. R. Ambedkar also contributed astatement), recommended the creation of strong Central Bank forIndia in 1926. Though bill known as the Gold Standard and ReserveBank of India Bill, 1927 to give effect to the recommendations wasintroduced in the Legislative Assembly, it was withdrawn on 10-02-1928.From 1930 onwards, the question of establishing Reserve Bankreceived fresh impetus, when Constitutional reforms for the country wereundertaken.

6.9. The White Paper on Indian Constitutional Reforms, presentedin March 1933, assumed that Reserve Bank, free from political influence,would have to be set up and should already be successfully operatingbefore the first Federal Ministry was installed.

6.10. Subsequently, Departmental Committee (hereinafterreferred to, as “the India Office Committee”) was appointed in Londonby the India Office, which submitted report dated 14-03-1933. Thisreport was followed up by the appointment of the “London Committee”,which endorsed the India Office Committee’s view that the ReserveBank should be free from any political influence.

6.11. Therefore, Bill drafted on the basis of the recommendationsof the London Committee was introduced in September 1933. In 1934,the Bill was passed. The Reserve Bank of India commenced operationsas the country’s central bank on 01-04-1935. Under the Reserve Bank(Transfer of Public Ownership) Act, 1948, the bank was nationalized.

6.12. Once the historical background of the creation of RBI isunderstood, it will be easy to appreciate its role in the economy of thecountry and the functions and powers exercised by it statutorily.

6.13. As the Preamble of the RBI Act suggests, the object ofconstitution of RBI was threefold namely (i) regulating the issue of banknotes (ii) keeping of reserves with view to securing monetary stabilityin the country and (iii) operating the currency and credit system of thecountry to its advantage.

6.14. In fact, the original Preamble of the Act contained only threeparagraphs. But paragraphs 2 and 3 of the Preamble were substitutedwith 3 new paragraphs by Act 28 of 2016. Paragraphs 2 and 3 of theoriginal Preamble and paragraphs 2 to 4 substituted in 2016, are presentedin tabular column as follows:

Paragraphs 2 and 3 as they originally stood Paragraphs 2 to 4 now substituted

6.15. It may be observed from the newly substituted paragraphsthat RBI is now vested with the obligation to operate the monetarypolicy framework in India. An indication of the primary objective ofthe monetary policy is provided in paragraph 3 which says that themaintenance of price stability is the prime objective even while theDobjective of growth is to be kept in mind. Paragraph 2 recognizes thenecessity to have modern monetary policy framework to meet thechallenge of an increasingly complex economy.

6.16. Therefore, it is clear that after the amendment under Act 28of 2016, the very task of operating the monetary policy framework hasbeen conferred exclusively upon RBI.E

6.17. Though the expression “monetary policy” is not defined inthe Act, an entire chapter under the title “Monetary Policy” containingSections 45Z to 45ZO was inserted as Chapter IIIF. The provisions ofthis chapter are given overriding effect upon the other provisions of theAct, under Section 45Z. Under Section 45ZA(1), the central governmentFis empowered to determine the inflation target in terms of the consumerprice index, once in every 5 years, in consultation with RBI. The policyrate required to achieve the inflation target is to be determined by aMonetary Policy Committee, constituted under Section 45ZB.

6.18. The object of establishment of RBI is also spelt out in SectionG3(1). It says that “a bank to be called the Reserve Bank of Indiashall be constituted for the purpose of taking over the managementof the currency from the Central Government and of carrying onthe business of banking in accordance with the provisions of thisAct”.

6.19. Chapter III of the Act enlists the central banking functionsof RBI. Section 17 authorizes RBI to carry on and transact severalkinds of businesses listed therein, one of which, referred in sub-section(15) is the making and issue of bank notes. Section 20 which forms partof Chapter III, obliges RBI (i) to accept monies for account of the centralgovernment (ii) to make payments up to the amount standing to thecredit of its account and (iii) to carry out its exchange, remittance andother banking operations including the management of the public debtof the Union. Under Section 21, the central government is obliged toentrust all its money, remittance, exchange and banking transactions inIndia with RBI. Under Section 22(1), RBI has the sole right to issuebank notes in India (however, the central government has the powerunder Section 28A(2) to issue Government of India notes of thedenominational value of Rs. 1/-). It may also issue currency notes of theGovernment of India, on the recommendations of the Central Board, fora period fixed by the central government. Sub-section (2) of Section 22goes one step further by stipulating that on and from the date onwhich Chapter III comes into force, the central government shallnot issue any currency notes.

6.20. Section 26(1) makes every bank note legal tender at anyplace in India in payment, which is guaranteed by the central government.Since bank note issued by RBI is legal tender guaranteed by thecentral government, the central government is also vested with the powerunder sub-section (2) of Section 26 to declare any series of bank notesof any denomination, to cease to be legal tender. But this can be doneonly on the recommendation of the Central Board of Directors of RBI.

6.21. Under Section 38, the central government is prohibited fromputting into circulation any rupees, except through RBI. Similarly, RBI isalso prohibited from disposing of rupee coin otherwise than for the purposeof circulation.

6.22. Chapter IIIB which contains provisions relating to non-bankinginstitutions (NBFCs) receiving deposits and financial institutions, containstwo important provisions, one in Section 45JA and another in Section45L. Sub section (1) of Section 45JA reads as follows:

45JA. Power of Bank to determine policy and issuedirections.— (1) If the Bank is satisfied that, in the publicinterest or to regulate the financial system of the country to

its advantage or to prevent the affairs of any non-bankingfinancial company being conducted in manner detrimentalto the interest of the depositors or in manner prejudicial tothe interest of the non-banking financial company, it isnecessary or expedient so to do, it may determine the policyand give directions to all or any of the non-banking financialcompanies relating to income recognition, accountingstandards, making of proper provision for bad and doubtfuldebts, capital adequacy based on risk weights for assets andcredit conversion factors for off balance-sheet items and alsorelating to deployment of funds by non-banking financialcompany or class of non-banking financial companies ornon-banking financial companies generally, as the casemaybe, and such non-banking financial companies shall bebound to follow the policy so determined and the direction soissued.

6.23. It may be seen that the aforesaid provision uses certainwords similar to those found in paragraph 1 of the Preamble. Whileparagraph 1 of the Preamble speaks about the power of RBI to operatethe currency and credit system of the country to its advantage, Section45JA speaks about the power of RBI to regulate the financial system ofthe country to its advantage.

6.24. The salient feature of Section 45JA is that it empowersRBI, both (i) to determine the policy and (ii) to give directions to allNBFCs in respect of certain matters. The concerns sought to beaddressed by Section 45JA(1) are (i) public interest (ii) financialsystem of the country (iii) interests of the depositors and (iv) interestsFof NBFCs.

6.25. Section 45L addresses yet another concern namely, theregulation of the credit system of the country to its advantage. Section45L reads as follows:

45L. Power of Bank to call for information from financialinstitutions and to give directions.—

(1) If the Bank is satisfied for the purpose of enabling it toregulate the credit system of the country to its advantage it isnecessary so to do, it may—

(a) require financial institutions either generally or any groupof financial institutions or financial institution in particular,to furnish to the Bank in such form, at such intervals andwithin such time, such statements, information or particularsrelating to the business of such financial institutions orinstitution, as may be specified by the Bank by general orspecial order;

(b) give to such institutions either generally or to any suchinstitution in particular, directions relating to the conduct ofbusiness by them or by it as financial institutions or institution.

(2) Without prejudice to the generality of the power vested inthe Bank under clause (a) of sub-section (1), the statements,information or particulars to be furnished by financialinstitution may relate to all or any of the following matters,namely, the paid-up capital, reserves or other liabilities, theinvestments whether in Government securities or otherwise,the persons to whom, and the purposes and periods for which,finance is provided and the terms and conditions, includingthe rates of interest, on which it is provided.

(3) In issuing directions to any financial institution underclause (b) of sub-section (1), the Bank shall have due regardto the conditions in which, and the objects for which, theinstitution has been established, its statutory responsibilities,if any, and the effect the business of such financial institutionis likely to have on trends in the money and capital markets.

6.26. It may be seen that the phrase “credit system of the countryto its advantage”, as found in paragraph 1 of the Preamble, is repeatedin sub-section (1) of Section 45L. The only difference between the twois that paragraph 1 of the Preamble speaks about the operation ofthe credit system, while Section 45L (1) speaks about regulation ofthe credit system. While exercising the power to issue directionsconferred by clause (b) of sub-section (1) of Section 45L, RBI is obligedunder sub-section (3) of Section 45L to have due regard to certainthings, one of them being “the effect the business of such financialinstitution is likely to have on trends in the money and capitalmarkets”.

A6.27. Chapter IIID of the Act contains provisions for the regulationof transactions in derivatives, money markets or securities, etc. Theexpression “money market instruments” is defined in clause (b) of Section45U as follows:

45U(b) “money market instruments” include call or noticeBmoney, term money, repo, reverse repo, certificate of deposit,commercial usance bill, commercial paper and such other debtinstrument of original or initial maturity up to one year as theBank may specify from time to time;

6.28. Section 45W empowers RBI to determine the policy relatingCto interest rates or interest rate products and to give directions in thatbehalf to all or any of the agencies dealing in securities, money marketinstruments, etc., for the purpose of regulating the financial system ofthe country to its advantage. Section 45W(1) reads as follows:

45W. Power to regulate transactions in derivatives, moneyDmarket instruments, etc.—(1) The Bank may, in public interest,or to regulate the financial system of the country to itsadvantage, determine the policy relating to interest rates orinterest rate products and give directions in that behalf to allagencies or any of them, dealing in securities, money marketinstruments, foreign exchange, derivatives, or otherEinstruments of like nature as the Bank may specify from timeto time:

Provided that the directions issued under this sub-sectionshall not relate to the procedure for execution or settlementof the trades in respect of the transactions mentioned therein,Fon the Stock Exchanges recognised under section 4 of theSecurities Contracts (Regulation) Act, 1956 (42 of 1956).

6.29. It is important to note that Section 45W(1) contains merelyan illustrative list of transactions. This is seen by the use of the expression“other instruments of like nature” appearing in the above provision.G

6.30. careful scan of the RBI Act, 1934 in its entirety wouldshow that the operation/regulation of the credit/financial system ofthe country to its advantage, is thread that connects all theprovisions which confer powers upon RBI, both to determine policyand to issue directions.

6.31. RBI Act, 1934 is not the only Act from which RBI derivesits powers. The Banking Regulation Act, 1949 is also source of powerfor RBI to do certain things. This can be seen from the Statement ofObjects and Reasons for the Banking Regulation Act, 1949. One of themain features of the Bill as indicated in the Statement of Objects andReasons was “widening the powers of RBI so as to enable it to come tothe aid of the banking companies in times of emergency”.

6.32. Section 5 of the Banking Regulation Act, 1949 which containsthe interpretation clause defines the expression “banking policy” underclause (ca) of Section 5. This definition reads as follows:

5(ca) “banking policy” means any policy which is specifiedfrom time to time by the Reserve Bank in the interest of thebanking system or in the interest of monetary stability or soundeconomic growth, having due regard to the interests of thedepositors, the volume of deposits and other resources of thebank and the need for equitable allocation and the efficientuse of these deposits and resources;

6.33. Since Banking Regulation Act, 1949 was issued after theRBI Act, 1934 and the nationalization of RBI, Section 5(ca) borrowscertain words such as “interest of the banking system” and “interest ofthe monetary stability” and “economic growth” from the RBI Act, 1934.

6.34. Section 8 of the Banking Regulation Act, 1949 prohibits abanking company from directly or indirectly dealing in the buying orselling or bartering of goods. The Explanation to Section 8 also definesthe word “goods”, for the purposes of Section 8. Section 8 reads asfollows:

8 - Prohibition of trading –

Notwithstanding anything contained in section 6 or in anycontract, no banking company shall directly or indirectly dealin the buying or selling or bartering of goods, except inconnection with the realisation of security given to or held byit, or engage in any trade, or buy, sell or barter goods forothers otherwise than in connection with bills of exchangereceived for collection or negotiation or with such of itsbusiness as is referred to in clause (i) of sub-section (1) ofsection 6:

PROVIDED that this section shall not apply to any suchbusiness as is specified in pursuance of clause (o) of sub-section (1) of section 6.

Explanation.—For the purposes of this section, “goods”means every kind of movable property, other than actionableBclaims, stocks, shares, money, bullion and specie, and allinstruments referred to in clause (a) of sub-section (1) ofsection 6.

6.35. Section 21 empowers RBI to determine the policy inrelation to advances to be followed by banking companies. TheCdetermination of policy may be in (i) public interest (ii) interests ofdepositors or (iii) interests of the banking policy. Once policy isdetermined by RBI under Section 21(1), all banking companies are boundto follow the policy.

6.36. No company can carry on banking business in India unlessDit holds license issued by RBI. Under Section 22(1), RBI has power toissue license, subject to certain terms and conditions as it may think fit toimpose.

6.37. Every banking company is obliged under Section 27(1) ofthe Banking Regulation Act, 1949 to submit to RBI, monthly returns inEthe prescribed form, showing its assets and liabilities. RBI is conferredwith powers under Section 29A even to call for information about theaffairs of any associate enterprise of banking company. Under sub-section (2) of Section 29A, RBI can even cause an inspection of anyassociate enterprise of banking company. power to conduct specialaudit of banking company’s accounts is also conferred upon RBI underFSection 30(1B).

6.38. Section 35A of Banking Regulation Act, 1949 empowersRBI to issue directions to banking companies. Such directions are bindingon the banking companies. The directions under Section 35A may beissued (i) in public interest (ii) in the interest of banking policy (iii) toGprevent the affairs of the banking company from being conducted in amanner prejudicial to the interests of the depositors or of the bankingcompany itself and (iv) to secure the proper management of the bankingcompany. Section 35A(1) reads as follows:

35A. Power of the Reserve Bank to give directions.—(1)HWhere the Reserve Bank is satisfied that—

(a) in the public interest; or

(aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company beingconducted in manner detrimental to the interests of thedepositors or in manner prejudicial to the interests of thebanking company; or

(c) to secure the proper management of any banking companygenerally, it is necessary to issue directions to banking companies generally or to any banking company inparticular, it may, from time to time, issue such directions as itdeems fit, and the banking companies or the banking company,as the case may be, shall be bound to comply with suchdirections.

6.39. Section 35AA and Section 35AB, inserted by the AmendmentAct 30 of 2017 (pursuant to the enactment of Insolvency and BankruptcyCode, 2016), empowers RBI respectively (i) to issue directions to anybanking company to initiate insolvency resolution process, if so authorizedby the central government and (ii) to issue directions to any bankingcompany for the resolution of stressed assets.

6.40. Section 36(1)(a) empowers RBI to caution or prohibit bankingcompanies against entering into any particular transaction or class oftransactions. Section 36(1)(a) reads follows:

36. Further powers and functions of Reserve Bank.—(1) TheReserve Bank may—(a) caution or prohibit banking companies generally or any banking company in particular against entering into any particular transactionor class of transactions, and generally give advice to anybanking company;

Part IIA and IIAB of the Banking Regulation Act, 1949 conferspowers upon the Reserve Bank (i) under Section 36AA to removemanagerial or other persons from office (ii) under Section 36AB to appointadditional directors and (iii) under Section 36ACA to order thesupersession of the board of directors.

6.41. For long time, RBI drew its powers only from the aforesaid2 enactments, namely RBI Act, 1934 and the Banking Regulation Act,1949. But with the passage of time, as the industrial economy grew and

Aseveral banking companies came into existence and need to fast trackpaper-based cheque processing increased, the banks came together toset up clearing houses. The clearing houses developed the procedure ofnetting (arriving at the multilateral net settlement). But with the adventof technology, new payment systems such as MICR clearing, ElectronicFunds Transfer Systems, cash-based payment systems, RTGS (real timeBgross settlement) etc. became popular. The development of multiplepayment systems, which operated only in the realm of contracts amongvarious stakeholders, did not have legislative sanction. Therefore, anAct known as the Payment and Settlement Systems Act, 2007 wasenacted with the object of providing for the regulation and supervision ofCpayment systems in India and to designate RBI as the authority for thatpurpose.6.42. It is seen from the Statement of Objects and Reasons of theBill that RBI is empowered to regulate and supervise various paymentand settlement systems in India including those operated by non-banks,Dcard companies, other payment system providers and the proposedumbrella organization for retail payments. The Act further empowersRBI to (i) lay down the procedure for authorization of payment systems(ii) lay down the operation and technical standards for payment systems(iii) issue directions and guidelines to system providers (iv) call forinformation and furnish returns and documents from the service providersE(v) audit and inspect the systems and premises of the system providers(vi) lay down the duties of the system providers and (vii) make regulationsfor carrying out the provisions of the Act.

6.43. Section 2(1)(i) defines “payment system”. The Sectionreads as follows:F

2(1)(i) “payment system” means system that enables paymentto be effected between payer and beneficiary, involvingclearing, payment or settlement service or all of them, butdoes not include stock exchange;

GExplanation.- For the purposes of this clause, “paymentsystem” includes the systems enabling credit card operations,debit card operations, smart card operations, money transferoperations or similar operations;

6.44. Under Section 3 of the Payment and Settlement SystemsAct, 2007 RBI is the designated authority for the regulation andHsupervision of payment systems under the Act.

6.45. Chapter III of the Act deals with “authorisation of paymentsystems”. Section 4(1) of the Payment and Settlement Systems Act,2007 provides that any person other than RBI seeking to commence oroperate payment system shall take authorization from the ReserveBank in that regard. Section 4(1) reads as follows:

4. Payment system not to operate without authorisation.—(1)No person, other than the Reserve Bank, shall commence oroperate payment system except under and in accordancewith an authorisation issued by the Reserve Bank under theprovisions of this Act:

Provided that nothing contained in this section shall applyto—

(a) the continued operation of an existing payment system oncommencement of this Act for period not exceeding sixmonths from such commencement, unless within such period,the operator of such payment system obtains an authorisationunder this Act or the application for authorisation made undersection 7 of this Act is refused by the Reserve Bank;

(b) any person acting as the duly appointed agent of anotherperson to whom the payment is due;

(c) company accepting payments either from its holdingcompany or any of its subsidiary companies or from any othercompany which is also subsidiary of the same holdingcompany;

(d) any other person whom the Reserve Bank may, afterconsidering the interests of monetary policy or efficientoperation of payment systems, the size of any payment systemor for any other reason, by notification, exempt from theprovisions of this section.

6.46. Chapter IV of the Act specifies the regulatory andsupervisory powers of RBI. Under Section 10, RBI is empowered toprescribe certain standards and guidelines for the proper and efficientmanagement of the payment systems. The Section reads as follows:

10. Power to determine standards.—(1) The Reserve Bankmay, from time to time, prescribe—

(a) the format of payment instructions and the size and shapeof such instructions;

(b) the timings to be maintained by payment systems;

(c) the manner of transfer of funds within the payment system,either through paper, electronic means or in any other manner,Bbetween banks or between banks and other systemparticipants;

(d) such other standards to be complied with the paymentsystems generally;

C(e) the criteria for membership of payment systems includingcontinuation, termination and rejection of membership;

(f) the conditions subject to which the system participantsshall participate in such fund transfers and the rights andobligations of the system participants in such funds.

(2) Without prejudice to the provisions of sub-section (1), theReserve Bank may, from time to time, issue such guidelines,as it may consider necessary for the proper and efficientmanagement of the payment systems generally or withreference to any particular payment system.

6.47. Section 11 of the Act provides that any change in the systemwhich would affect the structure or the operation of the payment systemwould require prior approval from the Reserve Bank. Section 11 readsas follows:

11. Notice of change in the payment system.—(1) No systemFprovider shall cause any change in the system which wouldaffect the structure or the operation of the payment systemwithout—

(a) the prior approval of the Reserve Bank; and

(b) giving notice of not less than thirty days to the systemGparticipants after the approval of the Reserve Bank:

Provided that in the interest of monetary policy of the countryor in public interest, the Reserve Bank may permit the systemprovider to make any changes in payment system withoutgiving notice to the system participants under clause (b) or

requiring the system provider to give notice for period longerthan thirty days.

(2) Where the Reserve Bank has any objection, to the proposedchange for any reason, it shall communicate such objectionto the systems provider within two weeks of receipt of theintimation of the proposed changes from the system provider.

(3) The system provider shall, within period of two weeks ofthe receipt of the objections from the Reserve Bank forwardhis comments to the Reserve Bank and the proposed changesmay be effected only after the receipt of approval from theReserve Bank.

6.48. Section 17 empowers RBI to issue directions to paymentsystem or system participant, which, in RBI’s opinion is engagingin any act that is likely to result in systemic risk being inadequatelycontrolled or is likely to affect the payment system, the monetarypolicy or the credit policy of the country. The Section reads as follows:

17. Power to issue directions.—Where the Reserve Bank is ofthe opinion that,—

(a) payment system or system participant is engaging in,or is about to engage in, any act, omission or course ofconduct that results, or is likely to result, in systemic risk beinginadequately controlled; or

(b) any action under clause (a) is likely to affect the paymentsystem, the monetary policy or the credit policy of the country,

the Reserve Bank may issue directions in writing to suchpayment system or system participant requiring it, within suchtime as the Reserve Bank may specify –

(i) to cease and desist from engaging in the act, omission orcourse of conduct or to ensure the system participants to ceaseand desist from the act, omission or course of conduct; or

(ii) to perform such acts as may be necessary, in the opinionof the Reserve Bank, to remedy the situation.

6.49. Section 18 of the Payment and Settlement Systems Act,2007 further empowers RBI to issue directions to system providersor the system participants or any other person generally, to

Aregulate the payment systems or in the interest of managementor operation of any of the payment systems or in public interest.The Section reads as follows:

18. Power of Reserve Bank to give directions generally.—Without prejudice to the provisions of the foregoing, theBReserve Bank may, if it is satisfied that for the purpose ofenabling it to regulate the payment systems or in the interestof management or operation of any of the payment systemsor in public interest, it is necessary so to do, lay down policiesrelating to the regulation of payment systems includingelectronic, non-electronic, domestic and international paymentCsystems affecting domestic transactions and give suchdirections in writing as it may consider necessary to systemproviders or the system participants or any other person eithergenerally or to any such agency and in particular, pertainingto the conduct of business relating to payment systems.D6.50. Thus, the RBI Act, 1934, the Banking Regulation Act, 1949and the Payment and Settlement Systems Act, 2007 cumulativelyrecognize and also confer very wide powers upon RBI (i) to operatethe currency and credit system of the country to its advantage (ii) totake over the management of the currency from central governmentE(iii) to have the sole right to make and issue bank notes that wouldconstitute legal tender at any place in India (iv) regulate the financialsystem of the country to its advantage (v) to have say in thedetermination of inflation target in terms of the consumer priceindex (vi) to have complete control over banking companies (vii) toregulate and supervise the payment systems (viii) to prescribeFstandards and guidelines for the proper and efficient managementof the payment systems (ix) to issue directions to payment systemor system participant which in RBI’s opinion is engaging in anyact that is likely to result in systemic risk being inadequatelycontrolled or is likely to affect the payment system, the monetaryGpolicy or the credit policy of the country and (x) to issue directionsto system providers or the system participants or any other persongenerally, to regulate the payment systems or in the interest ofmanagement or operation of any of the payment systems or in publicinterest.

6.51. Having taken note of the role of RBI as central bank inthe economy of the country, the functions entrusted to them and thepowers conferred upon them under various statutes, let us undertakethe exercise of fixing the identity of virtual currencies.

Fixing the identity of VCs

6.52. As we have stated in Part 3 of this judgment, the exactidentity of virtual currencies eludes precision. Some call it an exchangeof value, some call it stock and some call it good/commodity. Theremay be no difficulty in accepting the divergence of views, if those viewsare not driven by fear of regulation. But if someone presents it ascurrency to regulator of stock market and presents it as commodityto regulator of money market and so on and so forth, the definition willnot merely elude proper molecular structure but also elude regulation.This is where the problem of law lies. George Friedman, the founderand Chairman of Geopolitical Futures LLC, an online publication, aptlysummarized this dilemma as follows: “Bitcoin is neither fish norfowl…But both pricing it as commodity when no commodity existsand trying to make it behave as currency, seem problematic. Theproblem is not that it is not issued by the Government nor that it isunregulated. The problem is that it is hard to see what it is.”6.53. It is now universally accepted that Satoshi envisioned adigital analog to old-fashioned gold, new kind of universal moneythat could be owned by everyone and spent anywhere. It was designedto live with cleverly constructed de-centralized network without centralauthority. Satoshi himself defined it as “a new electronic cash systemthat’s fully peer-to-peer, with no trusted third party.”

6.54. It is true that though, at its birth, it was conceived of only asan alternative to money, crypto currencies assumed different shapes,different shades and different utility values over the past decade andmore. Several international monetary agencies/watchdogs are dabblingto find out what these are and they are also divided in their opinion. Forinstance, in report submitted on 22-01-2019 to the InternationalMonetary Fund (IMF), by Jeffrey Franks, Director of its Europe Office,under the title ‘Cryptocurrencies and Monetary Policy’, it is pointed outas follows:-

A1. Money has evolved over time, to meet customary demands,but its basic functions such as (A) retaining store of value;(B) acting as means of payment and (C) acting as unit ofaccount, have all remained the same.

2. There are four basic characteristics of crypto currencyBlike bitcoin, they are (A) digital in nature (B) private (C) globaland (D) run on an autonomous and de-centralized algorithm.

6.55. According to the said report, there are four factors which liebehind the rise of crypto currencies. They are: (1) the development ofblockchain technology (2) concerns about conventional money andCbanking, that arose out of the sub-prime mortgage crisis in 2008 and theunconventional monetary policies/quantitative easing (3) privacy concernsand (4) political views about the role of the Government.

6.56. The IMF report says that crypto currencies perform poorlyin terms of the three basic functions of currencies. While the store ofDvalue increased 2000% from January 2017 to December 2017, therewas also fall during the year 2018. As means of payment, the acceptanceof crypto currencies, according to the IMF report is very low and fewcompanies such as Microsoft, Dish network etc. have begun to acceptcrypto currencies for limited transactions. As unit of account, so far,no goods or services are priced in crypto currencies.E

6.57. On its potential impact on the monetary policies ofgovernments, the IMF report says the following:-

“But in the future, large crypto currencies holdings couldcomplicate monetary policy management”

FEventually the conclusions reached in the report are as follows:-

•Crypto currencies today do not do good job atfulfilling the main functions of money.

•They may be favored by some for ideological,technological or monetary policy reasons.

•The blockchain technology they use does have someimportant advantages in controlling fraud andmaintaining privacy.

•But they also open up avenues for tax evasion andcriminal activity.

6.58. The petitioners claim that today virtual currency is not moneyor other legal tender, but good/tradable commodity and hence RBI hasno role in regulating/banning the same. RBI has also taken stand thatVCs are not recognized as legal tender, but they seek to justify theimpugned decisions, on the ground that VCs are capable of being usedas medium of exchange. Therefore, it is necessary to see how VCswere defined (i) by regulators in different jurisdictions and (ii) by thegovernments and other statutory authorities of various countries, throughstatutory instruments and non-statutory directives and (iii) by courts ofdifferent jurisdictions.

DEFINITION OF VCs – BY REGULATORS

CS.No.RegulatorDefinition of Virtual Currency1.International MonetaryVCs are digital representations of value, issuedFund[7]by private developers and denominated in theirown unit of account.[8]VCs can be obtained, stored, accessed, andDtransacted electronically, and can be used for avariety of purposes, as long as the transactingparties agree to use them.The concept of VCs covers wider array of“currencies,” ranging from simple IOUs (I oweyou) of issuers (such as Internet or mobileEcoupons and airline miles), to VCs backed byassets such as gold,[9] and “cryptocurrencies” suchas Bitcoin.As digital representation of value, VCs fall withinthe broader category of digital currencies.However, they differ from other digitalFcurrencies, such as e-money, which is digitalpayment mechanism for (and denominated in)fiat currency. VCs, on the other hand, are notdenominated in fiat currency and have their ownunit of account.VCs fall short of the legal concept of currency orGmoney.

7 Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Note, Dong He et al., page7, 16, 17 (January 2016) (available at https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf, lastaccessed on 27-02-2020) – presented by IMF Managing Director, Christine Lagarde, presented at the WorldEconomic Forum (https://www.ccn.com/imf-director-talks-up-virtual-currencies-and-blockchain-tech/, lastaccessed on 27-02-2020).

8 Given the fast evolving nature of the industry, universal definition has yet to emerge and could quicklychange as the VC ecosystem continues to transform.

9 This type of VCs is backed by the combination of existing tangible assets or national currencies and thecreditworthiness of the issuer.

AAt present, VCs do not completely fulfill the threeeconomic roles associated with money: high pricevolatility of VCs limits their ability to serve as areliable store of value; the current small size andlimited acceptance network of VCs significantlyrestrics their use as medium of exchange; as ofnow, there is little evidence that VCs are used asBan independent unit of account.2.Financial Action TaskJune 2015:[10]ForceVirtual currency is digital representation of valuethat can be digitally traded and functions as (1) amedium of exchange; and/or (2) unit of account;and/or (3) store of value, but does not have legalCtender status (i.e., when tendered to creditor, is avalid and legal offer of payment) in any jurisdiction.It is not issued nor guranteed by any jurisdiction,and fulfils the above functions only by agreementwithin the community of users of the virtualcurrency.DOctober 2018:[11]Virtual Asset — virtual asset is digitalrepresentation of value that can be digitally traded,or transferred, and can be used for payment orinvestment purposes. Virtual assets do not includedigital representations of flat currencies, securitiesEand other financial assets that are already coveredelsewhere in the FATF Recommendations.For the purposes of applying the FATFRecommendations, countries should considervirutal assets as "property," "proceeds," "funds,""funds or other assets," or other "correspondingvalue."F3.European Central Bank2012:[12]A virutal currency is type of unregulated, digitalmoney, which is issued and usually controlled byits developers, and used and accepted among themembers of specific virutal community. Thisdefinition may need to be adapted to future ifGfundamental characteristics change.

10Guidance for Risk-Based Approach – Virtual Currencies, FATF, page 26 (June 2015) available at http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf(Last accessed on 27-02-2020).11 Glossary of the FATF Recommendations (updated on October 2018) available at https://www.fatf-gafi.org/glossary/u-z/(Last accessed on 27-02-2020).12 Virtual Currency Schemes, European Central Bank, page 13 (October 2012) available at http://Hwww.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf(Last accessed on 27-02-2020).INTERNET AND MOBILE ASSOCIATION OF INDIA v.RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

2017:[13]AAbsent university accepted definition, 'virualcurrencies' can be defined as digitalrepresentation of value which, despite notbeing issued by central bank or anothercomparable public authority, nor being'attached', subject to certain exceptions, to aBflat currency, are voluntarily accepted, bynatural or legal persons, as means ofexchange, and which are stored, transferredand traded electronically, without tangible,real-world representation.This definition of ‘virutal currencies’ capturesCdecentralised, peer-to-peer VCs – as distinctfrom E-money or Internet (software)-basedschemes, which merely facilitate transactionsdenominated in fiat money or in central bank-issued digital currencies – which, while devoidof legal tender status, fulfil, at least to someextent, all three traditional functions of moneyDby way of agreement within their usercommunity. This definition does not, however,extend to centrally-issued digital currencies,such as the central bank digital currencies underconsideration, at the time of writing, in severaljurisdictions.EEuropean Banking Authority in 2014:[14]VCs are defined as digital representation ofvalue that is neither issued by central bankor public authority nor necessarily attachedto FC, but is used by natural or legal personsas means of exchange and can be transferred,stored or traded electronically.F4.European Securities andCrypto-asset: type of private asset thatMarkets Authority[15]depends primarily on cryptography andDistributed Ledger Technology (DLT) orsimilar technology as part of their perceivedor inherent value...Crypto-asset additionallymeans an asset that is not issued by centralGbank.

13 Phoebus Athanassiou, Impact of Digital Innovation on the Processing of Electronic Payments andContracting: An Overview of Legal Risks, Legal Working Paper Series, No. 16, European Central Bank(October 2017) available at https://www.ecb.europa.eu/pub/pdf/scplps/ecb.lwp16.en.pdf?344b9327fec917bd7a8fd70864a94f6e(Last accessed on 27-02-2020).14 EBA Opinion on ‘virtual currencies’, page 11, 13 (July 2014) available at https://eba.europa.eu/sites/default/documents/files/documents/10180/657547/81409b94-4222-45d7-ba3b-7deb5863ab57/EBA-Op-2014-08%20Opinion%20on%20Virtual%20Currencies.pdf(Last accessed on 27-02-2020).15 Advice - Initial Coin Offerings and Crypto-Assets (January 2019) available at https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf(Last accessed on 27-02-2020).

[2020] 2 S.C.R.

A5.Financial ConductCryptoassets are cryptographically securedAuthority Uniteddigital representation of value or contractualKingdom[16]rights that is powered by forms of DLT andcan be stored, transferred or tradedelectronically.While cryptoassets can be used as means ofBexchange, they are not considered to be acurrency or money, as both the Bank of Englandand the G20 Finance Ministers and CentralBank Governors have previously set out. Theyare too volatile to be good store of value,they are not widely accepted as means ofCexchange, and they are not used as unit ofaccount.6.Internal Revenue2014:[17]Service, Department of"virutal currency" may be used to pay for goodsTreasury, USAor services, or held for investment. Virtualcurrency is digital representation of valueDthat functions as medium of exchage, unitof account, and/or store of value.Convertible VC is treated as property for U.S.federal tax purposes. General tax principlesthat the apply to property transactions applyto transactions using virtual currency. VC isEnot treated as currency that could generateforeign currency gain or loss for U.S. federaltax purposes.2018:[18]Virutal currency, as generally defined, is digitalrepresentation of value that function in theFsame manner as country's traditionalcurrency.16 Guidance on Cryptoassets, Consultation Paper, CP 19/3, Financial Conduct Authority, page 7 (January2019) available at https://www.fca.org.uk/publication/consultation/cp19-03.pdf (Last accessed on 27-02-G2020) and Guidance on Cryptoassets, Feedback and Final Guidance to CP 19/3, Policy Statement, PS19/22(July 2019) available at https://www.fca.org.uk/publication/policy/ps19-22.pdf (Last accessed on 27-02-2020).17 IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for U.S. Federal Tax Purposes;General Rules for Property Transactions Apply (March 2014) available at https://www.irs.gov/newsroom/irs-virtual-currency-guidance (Last accessed on 27-02-2020) and https://www.irs.gov/pub/irs-drop/n-14-21.pdf (Last accessed on 27-02-2020).18 IRS reminds taxpayers to report virtual currency transactions (March 2018) available at https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions (Last accessed on 27-H02-2020).

7.Securities and ExchangeBitcoin has been described as decentralized,ACommission, USApeer-to-peer virutal currency that is used likemoney – it can be exchanged for traditionalcurrencies such as the U.S. dollar, or used topurchase goods or services, usually online.Unlike traditional currencies, Bitcoin operateswithout central authority or banks and is notBbacked by any government.[19]Speaking broadly, crypto currencies purportto be items of inherent value (similar, forinstance, to cash or gold) that are designed toenable purchases, sales and other financialtransactions. They are intended to provideCmany of the same functions as long-establishedcurrencies such as the U.S. dollar, euro orJapanese yen but do not have the backing of agovernment or other body.[20]8.Commodity FuturesSection 1a(9) of the Act (US CommodityTrading Commission,Exchange Act) defines "commodity" to include,DUSAamong other things, "all services, rights, andinterests in which contracts for future deliveryare presently or in the future dealt in." 7 U.S.C.§ 1a(9). The definition of “commodity” isbroad. See, e.g., Board of Trade of City ofChicago v. SEC, 677 F. 2d 1137, 1142 (7thCir. 1982). Bitcoin and other virtual currenciesEare encompassed in the definition andproperly defined as commodities.[21]9.Financial CrimesVirtual currency is medium of exchange thatEnforcementoperates like currency in some environments,Network, Departmentbut does not have all the attributes of realFof Treasury, USA[22]currency. In particular, virtual currency doesnot have legal tender status in any jurisdiction.19 Investor Alert: Bitcoin and Other Virtual Currency-Related Investments (May 2014) available at https://www.sec.gov/oiea/investor-alerts-bulletins/investoralertsia_bitcoin.html (Last accessed on 27-02-2020).20 Chairman Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings (December 2017) availableat https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 (Last accessed on 27-02-2020).21 In the Matter of: Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29. 2015WL 5535736 (September 17, 2015) available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (Last accessed on 27-02-2020).

22 Guidance - Application of FinCEN’s Regulations to Persons Administering, Exchanging, or UsingVirtual Currencies (March 2013) available at https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (Last accessed on 27-02-2020).

[2020] 2 S.C.R.

AThis guidance addresses “convertible” virtualcurrency. This type of virtual currency eitherhas an equivalent value in real currency, oracts as substitute for real currency.10.Canada RevenueCryptocurrency is digital representation ofAgency (CRA)[23]value that is not legal tender. It is digitalBasset…that works as medium of exchangefor goods and services between the partieswho agree to use it.CRA generally treats cryptocurrency like acommodity for purposes of Income Tax Act.CAny income from transactions involvingcryptocurrency is generally treated as businessincome or as capital gain, depending on thecircumstances.Virtual currency is digital asset that can beused to buy and sell goods or services.DCryptocurrency is blockchain-based, virtualcurrency. When cryptocurrency is used to payfor goods or services, the rules for bartertransactions apply for income tax purposes.A barter transaction occurs when any twopersons agree to exchange good or servicesand carry out that exchange without legalEcurrency. Virtual currency can also be boughtor sold like commodity.[24]FG

23 Guide for cryptocurrency users and tax professionals (Last modified on 27 June 2019) available at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html (Last accessed on 27-02-2020).

24 Virtual Currency (Last modified on 26 June 2019) available at https://www.canada.ca/en/revenue-agency/Hprograms/about-canada-revenue-agency-cra/compliance/digital-currency.html (Last accessed on 27-02-2020).

INTERNET AND MOBILE ASSOCIATION OF INDIA v.373RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]DEFINITIONS UNDER STATUTORY ENACTMENTS ANDANON-STATUTORY DIRECTIVES OF GOVERNMENTSS.No.CountryStatutorySection/ Article defininng VCEnactment/Non-StatutoryDirectiveB1.JapanPaymentArticle 2(5): The term “Virtual Currency”Services Act,as used in this Act means any of the following:2009(i) property value (limited to that which isrecorded on an electronic device or any otherobject by electronic means, and excluding theCJapanese currency, foreign currencies, andCurrency-Denominated Assets; the sameapplies in the following item) which can beused in relation to unspecified persons for thepurpose of paying consideration for thepurchase or leasing of goods or the receipt ofprovision of services and can also be purchasedDfrom and sold to unspecified persons acting ascounterparties, and which can be transferredby means of an electronic data processingsystem; and(ii) property value which can be mutuallyexchanged with what is set forth in theEpreceding item with unspecified persons actingas counterparties, and which can be transferredby means of an electronic data processingsystem.2019 amendment to this Act (to come intoforce from April 2020) uses the term “cryptoFassets (angoshisan)” in place of the term“virtual currency”.The 2019 Amendment added crypto assets tothe term “financial instruments” for thepurposes of defining underlying assets of thederivative transactions subject to derivativeGregulations under the FIEA (FinancialInstruments and Exchange Act), and thereforethe same regulations applicable to otherderivative transactions under the FIEA willapply to crypto asset derivative transactions.These regulations include certain conductregulations, such as the notice requirementH374SUPREME COURT REPORTS[2020] 2 S.C.R.Aprior to trading, and prohibitions on makingfalse statements, providing conclusivejudgements, and engaging in uninvitedsolicitation.2.MaltaVirutalArticle 2(2): “virtual financial asset” or “VFA”Financialmeans any form of digital medium recordationAsset Act,that is used as digital medium of exchange,B2018unit of account, or store of value and that isnot -(a) electronic money;(b) financial instrument; or(c) virtual token;“virtual token” means form of digital mediumrecordation whose utility, value or applicationCis restricted solely to the acquisition of goodsor services, either solely within the DLTplatform on or in relation to which it was issuedor within limited network of DLT platforms.3.CanadaProceeds ofSection 1(2): virtual currency meansCrime (Money(a) digital representation of value that can beDLaundering)used for payment or investment purposes thatand Terroristis not fiat currency and that can be readilyFinancingexchanged for funds or for another virtualRegulations,currency that can be readily exchanged for2002[25]funds; or(b) private key of cryptographic systemthat enables person or entity to have accessEto digital representation of value referred toin paragraph (a).4.BahamasPaymentNo specific legislation for crypto currencies.InstrumentsBut according to Central Bank, Bahamas the(Oversight)regulations which provide framework for aRegulations,system of national electronic payment services,F2017apply to crypto currencies.Article 2(1): electronic money or e-moneymeans electronically stored monetary value asrepresented by claim on the issuer, which isissued on receipt of funds for the purpose ofmaking payment transactions and which isGaccepted as means of payment by personsother than the issuer, and includes monetaryvalue stored magnetically or in any othertangible or intangible device (such as SIM cardor software).H25 As amended in June 2019, which amendment is yet to come into force.

Bill is under consideration that would bringAvirtual currencies within the ambit of proceedsof crime legislation (Proceeds of Crime Bill,2018). Clause (2) of the Bill defines:“virtual currency” as digital representation ofvalue which can be digitally traded and func-tions as – (a) medium of exchange; (b) unitof account; or (c) store of value, that does notBhave legal tender status or carry any securityor guarantee in any jurisdiction.“currency or money” means coin and papermoney of any jurisdiction that is designated aslegal tender or is customarily used and acceptedas medium of exchange, including virtual cur-Crency as means of payment.5.EstoniaMoneySection 3(9): cryptocurrencies (virtualLaunderingcurrencies) are value represented in digitaland Terroristform that is digitally transferable, preservable,Financingor tradable and that which natural persons orPreventionlegal persons accept as payment instrument,DAct, 2017but that is not the legal tender of any countryor funds (banknotes or coins, scripturalmoney held by banks, or electronic money).6.LatviaLaw onSection 1 (2[2]): virtual currency - digitalPrevention ofrepresentation of value which can beMoneytransferred, stored or traded digitally andELaunderingoperate as means of exchange, but has notand Terroristmbeen recognised as legal means of payment,andcannot be recognised as banknote and coin,Proliferationnon-cash money and electronic money, and isFinancing, asnot monetary value accrued in the paymentamended ininstrument which is used in the cases referredF2017to in Section 3, Clauses 10 and 11 of the Lawon the Payment Services and ElectronicMoney;7.LiechtensteinDue DiligenceArticle 2(1)(l): Virtual currencies shall beAct, 2019understood to be digital monetary units, whichcan be exchanged for legal tender, used toGpurchase goods or services or to preserve valueand thus assume the function of legal tender.H

[2020] 2 S.C.R.

A8.IsraelSupervision ofSection 11A (7) defines financial asset.FinancialFinancial asset includes virtual currency.[26]Services Law,5776-20169.JerseyProceeds ofArticle 4(4): ‘Virtual currency’ means anyBCrimecurrency which (whilst not itself being issued(Miscellaneousby, or legal tender in, any jurisdiction) –Amendments)(a) digitally represents value;(Crown(Jersey)(b) is unit of account;dependency)Regulations(c) functions as medium of exchange; and2016(d) is capable of being digitally exchanged formoney in any form.CArticle 4(5): For the avoidance of doubt,virtual currency does not include anyinstrument which represents or stores(whether digitally or otherwise) value that canbe used only to acquire goods and services inor on the premises of, or under commercialagreement with, the issuer of the instrument.D10.MexicoFinancialIt defines virtual assets as representations ofTechnologyvalue electronically registered and utilized byInstitutionsthe public as means of payment for all typesLaw, 2018of legal transactions, which may only be(Chapter ontransferred electronically.[27]Virtual Assets)E11.AustriaMinistry ofTreats virtual currency as ‘other intangibleFinancecommodity’.[28]12.CzechVice GovernorTreats virtual currency as ‘commodity’.[29]RepublicCzechFNational Bank

26 Regulation of Cryptocurrency Around the World – Israel, Report of The Law Library of Congress, GlobalLegal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-G27survey.php#israel (Last accessed on 27-02-2020). Regulation of Cryptocurrency Around the World – Mexico, Report of The Law Library of Congress, GlobalLegal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#mexico (Last accessed on 27-02-2020).

28 Regulation of Cryptocurrency Around the World – Austria, Report of The Law Library of Congress, GlobalLegal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#austria (Last accessed on 27-02-2020).

29 Regulation of Cryptocurrency Around the World – Czech Republic, Report of The Law Library of Congress,Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/Hworld-survey.php#czech (Last accessed on 27-02-2020).

A13. GermanyGermanThe Authority qualifies virtual currencies asFederal“units of account” and therefore, “financialFinancialinstruments”.SupervisoryBut bitcoin is considered to be crypto tokenAuthorityby German Bundesbank (because it does notfulfil the typical functions of currency).[30]B14. LuxembourgMinister ofRecognized before the Parliament that cryptoFinancecurrencies are actual currencies.[31]15. SlovakiaMinistry ofVirtual currencies must be treated as “shortFinance,term financial assets other than money”.[32]SlovakiapublishedCguidance16. EuropeanEuropeanArticle 3(18): ‘Virtual Currencies’ means aUnionUnion'sdigital representation of value that is notDirectiveissued or guaranteed by central bank or a2018/843 ofpublic authority, is not necessarily attached30 May 2018to legally established currency and does notD(5[th] Anti-possess legal status of currency or money,Moneybut is accepted by natural or legal persons asLaunderinga means of exchange and which can beDirective)transferred, stored and traded electronically.17. UnitedHM RevenueCryptoassets (or ‘cryptocurrency’ as theyEKingdom& Customs,are also known) are cryptographically securedUK[34]digital representation of value or contractualrights that can be : • transferred • stored • traded electronicallyHMRC does not consider cryptoassets to beFcurrency or money.30 Regulation of Cryptocurrency Around the World – Germany, Report of The Law Library of Congress, GlobalLegal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#germany (Last accessed on 27-02-2020). 31 Regulation of Cryptocurrency Around the World – Luxembourg, Report of The Law Library of Congress,Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#luxembourg (Last accessed on 27-02-2020).32 Regulation of Cryptocurrency Around the World – Slovakia, Report of The Law Library of Congress,Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#slovakia (Last accessed on 27-02-2020).33 European Union’s Directive 2018/843 available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN (Last accessed on 27-02-2020).34 Policy paper, Cryptoassets: Tax for Individuals (December 2019) available at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals (Last accessed on 27-02-2020).

[2020] 2 S.C.R.

ACryptocurrencies have unique identityand cannot therefore be directly comparedto any other form of investment activity orpayment mechanism.[35]Bank ofThe first part of the word ‘crypto’, meansBEngland[36]‘hidden’ or ‘secret’ reflecting the securetechnology used to record who owns what,and for making payments between users.The second part of the word, ‘currency’, tellsus the reason cryptocurrencies were designedin the first place: type of electronic cash.CBut cryptocurrencies aren't like the cash wecarry. They exist electronically and use peer-to-peer system. There is no central bank orgovernment to manage the system or step inif something goes wrong.D18. UnitedNew YorkSection 2(p): virtual currency means any typeStates ofof digital unit that is used as medium ofAmerica[BitLicenceexchange or form of digitally stored value.Regulation (23Virtual currency shall be broadly construedCRR-NYto include digital units of exchange that: have200)]a centralized repository or administrator; anddecentralized and have no centralizedErepository or administratory; or may becreated or obtained by computing ormanufacturing effort. Virtual currency shallnot be construed to include any of thefollowing:(1) digitals units that:F(i) are used solely within online gamingplatforms;(ii) have no market or application outsideof those gaming platforms;(iii) cannot be converted into, or redeemedfor, fiat currency or virtual currencyl and(iv) may or may not be redeemable forGreal-world goods, services, discounts, orpurchases;

35 Policy paper on Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies, HM Revenue &Customs (March 3, 2014) available at https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies (Last accessed on 27-02-2020).36 What are cryptoassets (cryptocurrencies)? available at https://www.bankofengland.co.uk/Hknowledgebank/what-are-cryptocurrencies (Last accessed on 27-02-2020).

(2) digital units that can be redeemed forAgoods, services, discounts, or purchases aspart of customer affinity or rewards programwith the issuer and/or other designatedmerchants or can be redeemed for digital unitsin another customer affinity or rewardsprogram, but cannot be converted into, orredeemed for, fiat currency or virtual currency;Bor(3) digital units used as part of prepaid cards;North CarolinaVirtual currency– digital representation ofvalue that can be digitally traded and functionsC[Moneyas medium of exchange, unit of account, orTransmittersa store of value but only to the extent definedAct § (53-as stored value under subdivision (19) of this208.42)]section, but does not have legal tender statusas recognized by the United StatesGovernment.Connecticut“Virtual currency” means any type of digitalDunit that is used as medium of exchange or a[Generalform of digitally stored value or that isStatues ofincorportated into payment systemConnecticut,technology.Sec. 36a-596]Virtual currency shall be construed to includedigital units of exchange that (A) have aEcentralized repository or administratory; (B)are decentralized and have no centralizedrepository or administrator; or (C) may becreated or obtained by computing ormanufacturing effort.Virtual currency shall not be construed toFinclude digital units that are used (i) solelywithin online gaming platforms with no marketor application outside such gaming platforms,or (ii) exclusively as part of consumer affinityor rewards program, and can be applied solelyas payment for purchases with the issuer orother designated merchants, but cannot beGconverted into or redeemed for fiat currency.Florida(2) (i) “Virtual currency” means medium ofexchange in electronic or digital format that is[Floridanot coin or currency of the United States orMoneyany other country.H

ALaunderingAct (Fla. Stat.§ 896.101)]IllinoisA digital currency is an electronic medium ofexchange used to purchase goods and services.[DigitalA digital currency may also be exchanged forBCurrencymoney. digital currency, by nature of itsRegulatoryproperties detailed below, is distinct fromGuidancemoney.(2017)][37]LouisianaVirtual currency is an electronic medium ofCexchange that does not have all the attributes[Consumerof real or fiat currencies. Virtual currenciesand Investerinclude cryptocurrencies, such as Bitcoin andAdvisory onLitecoin, which are not legal tender and areVirtualnot issued or backed by any central bank orCurrency bygovernmental authority. Virtual currencies areOffice of:DFinancial•not backed by the United States or anyInstituteother national government.(2014)][38]•not insured by the Federal DepositInsurance Corporation or anygovernmental agency;•not backed by any physical commodity,such as gold or silver; andE•not legal tender for debts.Virtual currencies have legitimate purposesand can be purchased, sold, and exchangedwith other types of virtual currencies or realcurrencies like the U.S. dollar. This can happenthrough various mechanisms such asexchangers, administrators, or merchants thatFare willing to accept virtual currencies in lieuof real currency.MichiganConvertible virtual currency is digitalrepresentation of value that has an equivalent[Michiganvalue in real currency, such as the UnitedDepartment ofStates Dollar (USD), and/or acts as aGTreasurysubstitute for real currency.Guidance

37 Digital Currency Regulatory Guidance, Illinois Department of Financial and Professional Regulation(June 13, 2017) available athttps://www.idfpr.com/Forms/DFI/CCD/IDFPR%20-%20Digital%20Currency%20Regulatory%20Guidance.pdf (Last accessed on 27-02-2020).38 Office of Financial Institutions, State of Louisiana, Consumer and Investor Advisory on VirtualCurrency (August 2014) available at http://www.ofi.state.la.us/SOCGuidanceVirtualCurrency.pdf (LastHaccessed on 27-02-2020).

(January prominent example of convertible virtualA2015)][39]currency is Bitcoin, form of e-currency thathas been around since 2008.Washington“Virtual currency” means digitalrepresentation of value used as medium ofUniformexchange, unit of account, or store of value,BMoneybut does not have legal tender status asServices Actrecognized by the United States government.(RCW“Virtual currency” does not include the19.230.010)software or protocols governing the transferof the digital representation of value or otheruses of virtual distributed leger systems toverify ownership or authenticity in digitalCcapacity when the virtual currency is not usedas medium of exchange.Wyoming(xxii) “Virtual currency” means any type ofdigital representation of value that:Wyoming(A) Is used as medium of exchange, unit ofMoneyaccount or store of value; andDTransmitter(B) Is not recognized as legal tender by theAct [W.S. 40-United States government.22-102(a)]

6.59. It may be seen from the contents of the tables given abovethat there is unanimity of opinion among all the regulators and thegovernments of various countries that though virtual currencies havenot acquired the status of legal tender, they nevertheless constitutedigital representations of value and that they are capable of functioningas (i) medium of exchange and/or (ii) unit of account and/or (iii) astore of value. The IMF, the FATF, the European Central Bank, theFinancial Conduct Authority of the United Kingdom, the Internal RevenueService of the United States, Department of Treasury and the CanadianRevenue Authority treat virtual currencies as digital representations ofvalue. The European Central Bank went step further by describing avirtual currency as type of unregulated digital money. The InternalRevenue Service of the United States, Department of Treasury hasrecognized that virtual currency can function in the same manner as acountry’s traditional currency. The Securities and Exchange Commission,USA also recognizes that virtual currencies are intended to perform

EFG

39 Virtual Currency, Treasury Update published by the Tax Policy Division, Michigan Department ofTreasury (Vol. 1(1), November 2015) available at https://www.michigan.gov/documents/treasury/Tax-Policy-November2015-Newsletter_504036_7.pdf (Last accessed on 27-02-2020).

Amany of the same functions as long-established currencies such as USdollar, Euro or Japanese Yen. Yet another wing of the United StatesDepartment of Treasury namely Financial Crimes Enforcement Networkcalls virtual currency as medium of exchange that operates like acurrency in some environments, though it may not have all the attributesof real currency.B

6.60. The Bank of International Settlements, as pointed out inPart 2 of this judgment, got sub-group within the Committee onPayments and Market Infrastructure (CPMI) to undertake an analysisof digital currencies. In report submitted by them in November 2015,this sub-group recognized that though the use of private digital currenciesCwas too low at that time for certain risks to materialize, the widespreadsubstitution of bank notes over period of time, with digital currencies,could lead to decline in non-interest paying liabilities of central banksand that the conduct of the monetary policy could be affected.

6.61. Similarly, the state of Liechtenstein considers virtualDcurrencies as digital monetary units which can be exchanged for legaltender and also be used to purchase goods or services, thereby assumingthe character of legal tender. The German Federal Financial SupervisoryAuthority treats virtual currencies as units of account and consequentlyas financial instruments. Luxembourg has taken an official position thatEcrypto currencies are actual currencies. Some of the states in the UnitesStates of America have passed laws recognizing virtual currencies aselectronic medium of exchange.6.62. It is clear from the above that the governments and moneymarket regulators throughout the world have come to terms with theFreality that virtual currencies are capable of being used as real money,but all of them have gone into the denial mode (like the proverbial catclosing its eyes and thinking that there is complete darkness) by claimingthat VCs do not have the status of legal tender, as they are not backedby central authority. But what an article of merchandise is capableof functioning as, is different from how it is recognized in law to be.GIt is as much true that VCs are not recognized as legal tender, as itis true that they are capable of performing some or most of thefunctions of real currency.

6.63. The word “currency” is defined in Section 2(h) of the ForeignExchange Management Act, 1999 (hereinafter, “FEMA”) to includeH

“all currency notes, postal notes, postal orders, money orders,cheques, drafts, travelers’ cheques, letters of credit, bills of exchangeand promissory notes, credit cards or such other similar instrumentsas may be notified by the Reserve Bank.” The expression “currencynotes” is also defined in Section 2(i) of FEMA to mean and include cashin the form of coins and bank notes. Again, FEMA defines “Indiancurrency” under Section 2(q) to mean currency which is expressed ordrawn in Indian rupees, but which would not include special bank notesand special one rupee notes issued under Section 28A of the RBI Act.But RBI has taken stand in paragraph 24 of its counter-affidavit thatVCs do not fit into the definition of the expression “currency” underSection 2(h) of FEMA, despite the fact that FATF, in its report on June2014 on “Virtual Currencies: Key Definitions and Potential AML/CFTRisks” defined virtual currency to mean “digital representation of valuethat can be digitally traded and functions as (1) medium ofexchange; and/or (2) unit of account; and/or (3) store of value,but does not have legal tender status.” According to the report, legaltender status is acquired only when it is accepted as valid andlegal offer of payment when tendered to creditor.

6.64. Traditionally ‘money’ has always been defined in terms ofthe 3 functions or services that it provides namely (1) medium ofexchange (2) unit of account and (3) store of value. But in course oftime, fourth function namely that of being final discharge of debt orstandard of deferred payment was also added. This fourth function isacquired by money through the conferment of the legal tender status bya Government/central authority. Therefore, capitalizing on this fourthdimension/function and drawing distinction between money asunderstood in the social sense and money as understood in the legalsense, it was contended by Shri Nakul Dewan, learned Senior Counsel,with particular reference to the book ‘Property Rights in Money’ byDavid Fox and the decision of the Queen’s Bench in Moss v. Hancock[40]and the decision of the US Supreme Court in Wisconsin Central Ltd v.United States,[41] that so long as VCs do not qualify as money either inthe legal sense (not having legal tender status) or in the social sense(not being widely accepted by huge population as medium ofexchange), they cannot be treated as currencies within the meaning of

40 (1899) 2 QB 111

41 585 US ___ 2018, 138 S. Ct. 2067 (2018)

Aany of the statutory enactments from which RBI draws its energy andpower.

6.65. But we do not think that RBI’s role and power cancome into play only if something has actually acquired the status ofa legal tender. We do not also think that for RBI to invoke its power,Bsomething should have all the four characteristics or functions ofmoney. Moss v. Hancock (supra), itself century old decision (1899),relies upon the definition of ‘money’ as given by F. A. Walker in histreatise ‘Money, Trade and Industry’ (actual title of the book appears tobe ‘Money in its relation to Trade and Industry’), published in 1879 tothe effect that “money is that which passes freely from hand to handCthroughout the community in final discharge of debts and fullpayment for commodities, being accepted equally without referenceto the character or the credit of the person who offers it and withoutthe intention of the person who receives it to consume it or apply itto any other use than in turn to tender it to others in discharge ofDdebts or payment for commodities.”

6.66. But that 1879 definition cannot be accepted as perfect, finaland everlasting, in modern times. Cross border transactions andtechnological advancements have removed many shackles created byold concepts (except perhaps those created by law courts). This factEhas been recognized in the dissent of Breyer, J., in Wisconsin Central(supra) when he says “…what we view as money has changed overtime. Cowrie shells once were such medium but no longer are…our currency originally included gold, coins and bullion, but after1934, gold could not be used as medium of exchange… perhapsone day employees will be paid in Bitcoin or some other type ofFcurrency”. In the linguistic sense, Oxford English Dictionary has alreadyincluded “property or possessions of any kind viewed as convertibleinto money” within the definition of money. Therefore, Breyer, J.,points out in his dissent “So, where does this duel of definitions leadus? Some seem too narrow; some seem too broad; some seemGindeterminate. The result is ambiguity”. He therefore concluded thatstock options given to employees constitute money remuneration for theservices rendered. But the majority proceeded on the basis that whenthe law was enacted, the term ‘money’ was not used in an expansivesense.

6.67. Neither the RBI Act, 1934 nor the Banking Regulation Act,1949 nor the Payment and Settlement Systems Act, 2007 nor the CoinageAct, 2011 define the words ‘currency’ or ‘money’. But FEMA definesthe words ‘currency’, ‘currency notes’, ‘Indian currency’ and ‘Foreigncurrency’. We have taken note of these definitions. Interestingly, Section2(b) of Prize Chits and Money Circulation Schemes (Banning) Act, 1978defines money to include cheque, postal order, demand draft,telegraphic transfer or money order. Clause (33) of Section 65B ofthe Finance Act, 1994, inserted by way of Finance Act, 2012 defines‘money’ to mean “legal tender, cheque, promissory note, bill ofexchange, letter of credit, draft, pay order, traveler cheque, moneyorder, postal or electronic remittance or any other similar instrument,but shall not include any currency that is held for its numismaticvalue”. This definition is important, for it identifies many instrumentsother than legal tender, which could come within the definition ofmoney.

6.68. The Sale of Goods Act, 1930 does not define ‘money’ or‘currency’ but excludes money from the definition of the word ‘goods’.The Central Goods and Services Tax Act, 2017 defines ‘money’ underSection 2(75) to mean “the Indian legal tender or any foreigncurrency, cheque, promissory note, bill of exchange, letter of credit,draft, pay order, traveler cheque, money order, postal or electronicremittance or any other instrument recognised by RBI, when usedas consideration to settle an obligation or exchange with Indianlegal tender of another denomination but shall not include anycurrency that is held for its numismatic value.”6.69 In CIT v. Kasturi & Sons Ltd.,[42] question arose as towhether the replacement by the insurer, of an article destroyed by oneof the perils as against which coverage is provided, would be taken to be“money” within the meaning of Section 41(2) of the Income Tax Act,1961. This court held that the word “money” used in Section 41(2) hasto be interpreted only as actual money or cash and not as any other thingor benefit which could be evaluated in terms of money.

6.70. In Dhampur Sugar Mills Ltd. v. Commissioner of TradeTax,[43] this court was concerned with the question whether the adjustmentof price of molasses from the amount of license fee would amount to

42 (1999) 3 SCC 34643 (2006) 5 SCC 624

Asale within the meaning of the U.P. Trade Tax Act, 1948. The argumentadvanced was that an exchange or barter cannot be said to be sale.After referring to the phrase “cash, deferred payment or other valuableconsideration”, this court pointed out that “money is legal tender, butcash is narrower than money.” This is for the reason that incontradistinction to cash, deferred payment or other valuableBconsideration would also come within the meaning of money, for thepurpose of the Act.

6.71. Just as the very concept of ‘money’ or ‘currency’ haschanged over the years, and different jurisdictions and different statuteshave adopted different definitions of ‘money’ and ‘currency’, dependingCupon the issue sought to be addressed, the concept of VCs have alsoundergone sea of change, with different regulators and statutoryauthorities adopting different definitions, leading to diametrically oppositeviews emerging from courts across the spectrum. Let us now see howcourts in other jurisdictions have grappled with the definition of the wordD‘virtual currency’.

6.72. The Securities and Exchange Commission (SEC) of theUnited States of America prosecuted person by name Trendon Shavers,who was the founder and operator of Bitcoin Savings and Trust (BTCST),for soliciting illicit investments in Bitcoin related opportunities from aEnumber of lenders, defrauding them to the tune of 700,000 BTC in funds.While SEC contended that Bitcoin investments were securities, Shaverscontended that Bitcoin is not money and hence, not ‘securities’. But theSherman Division Eastern District Court of Texas opined in SEC v.Trendon Shavers,[44]that: “It is clear that bitcoin can be used asmoney. It can be used to purchase goods or services and as ShaversFstated, used to pay for individual living expenses. The only limitationof bitcoin is that it is limited to those places that accept it as currency.However, it can also be exchanged for conventional currencies suchas the US dollar, euro, yen and Yuan. Therefore, bitcoin is currencyor form of money…”G6.73. In United States v. Ulbricht[[45]] the United States District

6.73. In United States v. Ulbricht,[[45]] the United States DistrictCourt, Southern District, New York was concerned with the defendant’smotion to dismiss four counts namely (i) participation in narcoticstrafficking conspiracy (ii) continuing criminal enterprise (iii) computer

44 Case No. 4: 13-Cv-416 (August 6, 2013)H45 31F. Supp. 3d 540 (2014)

hacking conspiracy and (iv) money laundering conspiracy, for which theGrand jury returned indictment. The allegation against the defendantwas that Ulbricht engaged in these offences by designing, launching andadministering website called Silk Road, as an online marketplace forillicit goods and services. According to the prosecution, Bitcoin was usedto launder the proceeds. The website was available only to those usingTor (abbreviation for ‘The Onion Router’), free and open sourcesoftware and network that allows anonymous, untraceable internetbrowsing. Payments were allowed only through Bitcoin. Opposing themoney laundering charge, Ulbricht contended that the use of Bitcoin didnot involve legally cognizable financial transaction. But the court held“Bitcoins carry value-that is their purpose and function-and act asa medium of exchange. Bitcoins may be exchanged for legal tender,be it US dollars, euros or some other currency”.

6.74. The decision in Ulbricht (supra) was closely followed byanother decision of the same court in United States v. Faiella.[46] Thiswas also case where the defendants were charged with the operationof an underground market in the virtual currency bitcoin via the websiteSilk Road. Faiella moved the District court to dismiss count one of theindictments namely that of operating an unlicensed money transmittingbusiness in violation of particular statute. The contention of the defendantwas (i) that Bitcoin does not qualify as money (ii) that operating Bitcoinexchange does not constitute “transmitting” of money and (iii) that he isnot money transmitter. While rejecting the motion, the court held“bitcoin clearly qualifies as money or funds under the plain meaningdefinitions. Bitcoin can be easily purchased in exchange forordinary currency, acts as denominator of value and is used toconduct financial transactions.” The decision in Trendon Shavers(supra) was relied upon.

6.75. While the district courts of USA took the view that virtualcurrency can be used as money, the Commodity Futures TradingCommission (CFTC) took view in In re Coinflip, Inc,[47] that virtualcurrencies are “commodities”. This was in relation to the initiation ofpublic administrative proceedings to determine whether the defendantwas engaged in violation of the provisions of Commodity Exchange Actand the Commission’s Regulations by operating an online facility named

46 39F. Supp. 3d 544 (2014)

47 CFTC Docket No. 15-29 dated 17-09-2015

ADerivabit offering to connect buyers and sellers of Bitcoin optioncontracts. Interestingly, the defendant admitted an offer of settlement inanticipation of administrative proceedings.

6.76. Within week, another entity, by name, TeraExchange LLCalso submitted an offer of settlement before CFTC In the matter ofBTeraExchange LLC.[48] CFTC reiterated even in that case that Bitcoinis commodity under the relevant statute. Another Bitcoin exchange, byname Bitfinex, also conceded the position, before the CFTC when publicadministrative proceedings were sought to be initiated against them. Inthe order accepting the offer of settlement, delivered on 02-06-2016 Inthe matter of BFXNA Inc, d/b/a BITFINEX,[49] CFTC recorded thatCBitcoin and other virtual currencies are commodities under the relevantprovisions of the statute.6.77. In United States v. Murgio,[50] which was also before theUS District Court, S.D. New York, the defendant was charged withoperating Coin.mx, as an unlicensed money transmitting business. TheDgovernment alleged that Murgio and his co-conspirators attempted toshield the true nature of his Bitcoin exchange business by operatingthrough several front companies, to convince financial institutions thatCoin.mx was just members-only association of individuals interestedin collectable items. Count one of the indictments was the allegedEconspiracy in the operation of an unlicensed money transmitting business,punishable under 18 U. S. C. § 1960. Under Section 1960, businessmust (i) transfer on behalf of public, (ii) funds and (iii) in violation oflicensing and registration requirements, to qualify as an unlicensed moneytransmitting business. The court concluded that Bitcoins are funds withinthe plain meaning of the term, as the word “funds” would mean pecuniaryFresources, generally accepted as medium of exchange or means ofpayment. Interestingly, the defendant’s contention that Bitcoin is acommodity as held by CFTC was rejected by the court.

6.78. However, despite the opinion of other District courts in fourprevious cases, the United States District Court, Eastern district of NewGYork held in preliminary hearing for injunctive relief, in CommodityFutures Trading Commission v. Patrick McDonnell [51] (Memorandum

48 CFTC Docket No. 15-33 dated 24-09-2015

49 CFTC Docket No. 16-19 dated 02-06-201650 209 F. Supp. 3d 698 (2016)51 18-Cv-361 dated 03-06-2018H

and order), that virtual currencies are commodities within the meaningof the Commodity Exchange Act. But it is seen from the order that therewas no ‘currency versus commodity’ debate in the entire order.

6.79. similar view was taken by United States District Court,District of Massachusetts in Commodity Futures Trading Commissionv. My Big Coin Pay, Inc. et al.,[52] holding that since there is futurestrading in virtual currencies, they constitute ‘commodity’ within themeaning of the Statute.

6.80. State of Florida v. Michell Abner Espinoza,[53]is aninteresting case which came up before the Eleventh Judicial Circuit inand for Miami-Dade County, Florida. In that case, Detective of theMiami Police department teamed up with Special Agent of the MiamiElectronic Crimes Task Force of the United States Secret Service toinitiate an investigation into virtual currencies. After getting in touch witha person who advertised the sale of Bitcoins in an online platform run bya peer-to-peer Bitcoin exchange by name Localbitcoins.com, the teamorganized an undercover operation in December 2013/January 2014.The Detective offered to pay for the Bitcoins through stolen credit cardsand when the transaction was about to take place, the offeror wasarrested. He was charged with one count of unlawfully engaging inmoney services business and 2 counts of money laundering. Thedefendant filed motions for dismissal and the State filed motions forstriking out those motions. While allowing the defendant’s motion todismiss all the 3 counts on the ground that the court will be unwilling topunish man for selling his property to another, when his action fallsunder statute that is so vaguely written that even legal professionalshave difficulty finding singular meaning, the court ruled as follows:

“Nothing in our frame of references allows us to accuratelydefine or describe Bitcoin……. Bitcoin may have someattributes in common with what we commonly refer to as money,but differ in many important aspects. While Bitcoins can beexchanged for items of value, they are not commonly usedmeans of exchange. They are accepted by some but not by allmerchants or service providers. …. With such volatility theyhave limited ability to act as store of value, anotherimportant attribute of money. This court is not an expert in

52 18-Cv-10077-RWZ dated 26-09-2018

53 14-2923 decided on 22-07-2016

Aeconomics, however it is very clear, even to someone withlimited knowledge in the area, that Bitcoin has long way togo before it is equivalent of money. The Florida Legislaturemay choose to adopt statutes regulating virtual currency infuture. At this time, however, attempting to fit the sale of Bitcoininto statutory scheme regulating money services businessesBis like fitting square peg in round hole”

6.81. But the decision of the Circuit Court was appealed to theThird District Court of Appeal, State of Florida. By an opinion renderedon 30-01-2019, reported as State of Florida v. Michell Abner Espinoza[54]the Court of Appeal reversed the decision of the Circuit Court and held,Cafter referring to the June 2014 Report of FATF titled “Virtual currencies:key definitions and potential AML/CFT risks” that given the plainlanguage of the Florida statutes governing money service businessesand the nature of bitcoin and how it functions, Espinoza was actingboth as payment instrument seller and engaging in the businessDof money transmitter. The Court of Appeal pointed out that thedefinition of “payment instrument” included “a cheque, draft, warrant,money order, travelers’ cheque, electronic instrument or otherinstrument, payment of money or monetary value, whether or notnegotiable”. The phrase “money services business” was defined in thestatute to include any person who acts as payment instrument seller.ESince the expression monetary value means medium of exchange,whether or not redeemable in currency, the court concluded that VCsare payment instruments and hence person dealing with the same is inmoney services business. Though Bitcoin does not expressly fall withinthe definition of “currency” found in the statute, the court concludedFthat Bitcoin would certainly fall under the definition of paymentinstrument. The Court of Appeal took note of the fact that severalrestaurants in the Miami area accepted Bitcoins as form of paymentand hence Bitcoin functions as medium of exchange. (What is importantto note about this decision is that it dealt with penal statute. This is why

the Circuit court followed the cautionary approach, not to allow citizenGto be prosecuted on the basis of conjectures about what is moneyservices business. But the Court of Appeal found on fundamentals thatthe business concerned payment instrument and that therefore, therewas no ambiguity.)

6.82. In completely different context, the Singapore InternationalCommercial Court ruled in B2C2 Ltd. v. Quoine Pte Ltd.,[55]that virtualcurrency can be considered as property which is capable of being heldon trust. The case arose out of dispute between person who tradedin virtual currencies and the VC Exchange platform on which he traded.The dispute revolved more around the breach of contract and breach oftrust than around the identity of virtual currencies. It was in that contextthat the court opined that crypto currencies satisfied the definition of‘property’ as provided by the House of Lords in National ProvincialBank v. Ainsworth[56]to the effect that it must be “definable, identifiableby third parties, capable in its nature of assumption by third parties,and have some degree of permanence or stability”. The court furthernoted that “crypto currencies are not legal tender in the sense ofbeing regulated currency issued by government but do have thefundamental characteristic of intangible property as being anidentifiable thing of value”. The decision of the Commercial Courtwas appealed to the Court of Appeal. While dismissing Quoine’s appealon breach of contract claim, but allowing it on breach of trust claim, theCourt of Appeal held in Quoine Pte Ltd v. B2C2 Ltd[57] that thoughcrypto currencies are capable of assimilation into the general conceptsof property, there are difficult questions as to the type of property that isinvolved. Therefore, the Court of Appeal did not take final position onthe question, since it felt that the precise nature of the property rightinvolved, was not clear.

6.83. In very recent decision, in AA v. Persons Unknown &others Re Bitcoin,[58] the English High Court ruled that Bitcoin is property.But this decision was on the basis of the definition adopted by UKJurisdictional Taskforce of the Law Tech Delivery Panel, in its “LegalStatement on the Status of Cryptoassets and Smart Contracts”, thatcrypto assets constitute property under English law. The facts out ofwhich this decision arose, were peculiar. The IT system of Canadianinsurance company was hacked through malware called Bitpaymer,which encrypted all the data of the company. ransom equivalent ofUS $ 950,000 in Bitcoin was demanded by the hackers for decryption.

55 [2019] SGHC (I) 3

56 [1965] 1 AC 1175 at 1248

57[2020] SGCA (I) 02

58 [2019] EWHC 3556 (Comm)

CDE

AAfter negotiations through specialist intermediary by name IncidentResponse Company, the insurance company paid the ransom into walletand retrieved the data with the decryption tools provided by the hackers.Thereafter the insurance company engaged the services of blockchaininvestigation outfit known as Chainalysis Inc., which found that of theBtotal of 109.25 Bitcoins transferred as ransom, 13.25 Bitcoins (worthapproximately US $ 120,000 at the time) had been converted into anuntraceable fiat currency. The remaining 96 Bitcoins had been transferredto “wallet” linked to Virtual Currency exchange known as Bitfinex(registered in the British Virgin Islands). The insurance company thensued the VC Exchange before the High Court and sought ancillaryCdisclosure orders to know the identity of persons who held the Bitcoinsin the wallet of the exchange. The company also sought proprietaryinjunction. Interestingly, the Court agreed to hear the application in privateand protect the identity of the insurer which got hacked, for they fearedretaliatory copycat attacks. The core issue before the court was whetherDcrypto currencies constituted form of property capable of being thesubject matter of proprietary injunction. After referring to Fry L.J’sstatement in Colonial Bank v. Whinney,[59]that all things personal areeither in possession or in action and that the law knows no third categorybetween the two and also after referring to the four classic criteria forproperty, [namely they are (i) definable; (ii) identifiable by third parties;E(iii) capable in their nature of assumption by third parties; and (iv) capableof some degree of permanence] set out by Lord Wilberforce in NationalProvincial Bank v. Ainsworth (supra), Bryan, J held in AA v. PersonsUnknown that virtual currencies are neither choses in action (notembodying right capable of being enforced in action) nor choses inFpossession (being virtual and incapable of being possessed). However,the court ruled that VCs can still be treated as property, by applying the4 criteria laid down in National Provincial Bank and Law Tech DeliveryPanel’s Legal Statement, though it did not constitute statement of thelaw. Bryan J. was convinced that the statement’s detailed legal analysisGof the proprietary status of cryptocurrencies was “compelling” and shouldbe adopted by the court. Thus, what prevailed with the court was thedefinition provided by Law Tech Delivery Panel’s UK JurisdictionTask Force, which, unlike RBI, did not enjoy statutory status, butwas only an industry-led government backed initiative.

H59 [1885] 30 ChD

6.84. The ruling of the European Court of Justice in Skatteverketv. David Hedqvist,[60] was with particular reference to the identity ofvirtual currencies. ECJ was in this case asked to decide referencefrom Supreme Administrative Court, Sweden on whether transactionsto exchange traditional currency for the ‘Bitcoin’ virtual currency orvice versa, which Mr. Hedqvist wished to perform through company,were subject to value added tax. The opinion of the court was to theeffect that:

(i) Bitcoin with bidirectional flow which will be exchanged fortraditional currencies in the context of exchange transactions cannot becategorized as tangible property since virtual currency has no purposeother than to be means of payment.

(ii) VC transactions do not fall within the concept of the supply ofgoods as they consist of exchange of different means of payment andhence, they constitute supply of services.

(iii) Bitcoin virtual currency being contractual means of paymentcould not be regarded as current account or deposit account, apayment or transfer, and unlike debt, cheques and other negotiableinstruments (referred to in Article 135(1)(d) of the EU VAT Directive),Bitcoin is direct means of payment between the operators that accept.

(iv) Bitcoin virtual currency is neither security conferring aproperty right nor security of comparable nature.

(v) The transactions in issue were entitled to exemption frompayment of VAT as they fell under the category of transactions involving‘currency [and] bank notes and coins used as legal tender’.

(vi) Article 135(1)(e) EU Council VAT Directive 2006/112/EC is applicable to non-traditional currencies i.e., to currenciesother than those that are legal tender in one or more countries in sofar as those currencies have been accepted by the parties to atransaction as an alternative to legal tender and have no purposeother than to be means of payment.

The court accordingly concluded that virtual currencies wouldfall under this definition of non-traditional currencies.

6.85. Thus (i) depending upon the text of the statute involved inthe case and (ii) depending upon the context, various courts in different

60 Case C-264/14 dated 22-10-2015

Ajurisdictions have identified virtual currencies to belong to differentcategories ranging from property to commodity to non-traditionalcurrency to payment instrument to money to funds. While each ofthese descriptions is true, none of these constitute the whole truth. Everycourt which attempted to fix the identity of virtual currencies, merelyacted as the 4 blind men in the Anekantavada philosophy of Jainism,[61]B(theory of non-absolutism that encourages acceptance of relativism andpluralism) who attempt to describe an elephant, but end up describingonly one physical feature of the elephant.

6.86. RBI was also caught in this dilemma. Nothing preventedRBI from adopting short circuit by notifying VCs under the categoryCof “other similar instruments” indicated in Section 2(h) of FEMA,1999 which defines ‘currency’ to mean “all currency notes, postalnotes, 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 byDthe Reserve Bank.” After all, promissory notes, cheques, bills of exchangeetc. are also not exactly currencies but operate as valid discharge (orthe creation) of debt only between 2 persons or peer-to-peer. Therefore,it is not possible to accept the contention of the petitioners that VCs arejust goods/commodities and can never be regarded as real money.

E6.87. Once we are clear about the above confusion, and once it isaccepted that some institutions accept virtual currencies as valid paymentsfor the purchase of goods and services, there is no escape from theconclusion that the users and traders of virtual currencies carry on anactivity that falls squarely within the purview of the Reserve Bank ofIndia. The statutory obligation that RBI has, as central bank, (i) toFoperate the currency and credit system, (ii) to regulate the financialsystem and (iii) to ensure the payment system of the country to beon track, would compel them naturally to address all issues thatare perceived as potential risks to the monetary, currency, payment,credit and financial systems of the country. If an intangible propertyGcan act under certain circumstances as money (even without faking acurrency) then RBI can definitely take note of it and deal with it. Henceit is not possible to accept the contention of the petitioners that they arecarrying on an activity over which RBI has no power statutorily.

61 According to this doctrine, truth and reality are perceived differently from differentHpoints of view and no single point is the complete truth.

6.88. In Keshavlal Khemchand & Sons Pvt. Ltd. v. Union ofIndia,[62]this court pointed out that “Reserve Bank of India is an expertbody to which the responsibility of monitoring the economic systemof the country is entrusted, under various enactments like the RBIAct, 1934, the Banking Regulation Act, 1949.” Therefore, (i) in theteeth of the statutory scheme of these enactments (ii) from the waydifferent courts and regulators of different jurisdictions have treated VCsand (iii) from the very characteristics of VCs, it is clear that they havethe potential to interfere with the matters that RBI has the power torestrict or regulate. Hence, we have no hesitation in rejecting the firstcontention of the petitioners that the impugned decision is ultra vires.

6.89. It was argued that the Preamble of the RBI Act speaksonly about the role of RBI in operating the currency and credit systemof the country to its advantage and that since virtual currencies may notform part of the credit system of the country as they are not recognizedas currency, the invocation of the provisions of RBI Act was out ofcontext.

6.90. But as pointed out elsewhere, RBI is the sole repository ofpower for the management of the currency, under Section 3 of the RBIAct. RBI is also vested with the sole right to issue bank notes underSection 22(1) and to issue currency notes supplied to it by the Governmentof India and has an important role to play in evolving the monetary policyof the country, by participation in the Monetary Policy Committee whichis empowered to determine the policy rate required to achieve the inflationtarget, in terms of the consumer price index. Therefore, anything thatmay pose threat to or have an impact on the financial system ofthe country, can be regulated or prohibited by RBI, despite the saidactivity not forming part of the credit system or payment system.The expression “management of the currency” appearing in Section3(1) need not necessarily be confined to the management of what isrecognized in law to be currency but would also include what is capableof faking or playing the role of currency.

6.91. It is ironical that virtual currencies which took avatar(according to its creator Satoshi) to kill the demon of central authority(such as RBI), seek from the very same central authority, access tobanking services so that the purpose of the avatar is accomplished. Aswe have pointed out elsewhere, the very creation of digital currency/

62 (2015) 4 SCC 770

ABitcoin was to liberate the monetary system from being slave to thecentral authority and from being operated in manner prejudicial toprivate interests. Therefore, the ultra vires argument cannot be acceptedwhen the provision of access to banking services without any interferencefrom the central authority over long period of time is perceived as athreat to the very existence of the central authority. Hence, we hold thatBRBI has the requisite power to regulate or prohibit an activity of thisnature.

If at all, the power is only to regulate, not prohibit

6.92. The next contention that if at all, RBI is conferred only withCthe power to regulate, but not to prohibit, as seen from the expresslanguage of Section 45JA of the RBI Act, does not appeal to us. In StarIndia Pvt. ltd. v. Dept. of Industrial Policy and Promotion and Ors.,[63]this court opined that the word “regulate” has very broad meaningincluding the power to prohibit. The following passage from K.Ramanathan v. State of Tamil Nadu[64]was quoted in Star India (supra):D

19. It has often been said that the power to regulate does notnecessarily include the power to prohibit, and ordinarily theword “regulate” is not synonymous with the word “prohibit”.This is true in general sense and in the sense that mereregulation is not the same as absolute prohibition. At the sameEtime, the power to regulate carries with it full power over thething subject to regulation and in absence of restrictive words,the power must be regarded as plenary over the entire subject.It implies the power to rule, direct and control, and involvesthe adoption of rule or guiding principle to be followed, orthe making of rule with respect to the subject to be regulated.FThe power to regulate implies the power to check and mayimply the power to prohibit under certain circumstances, aswhere the best or only efficacious regulation consists ofsuppression. It would therefore appear that the word“regulation” cannot have any inflexible meaning as to excludeG“prohibition”. It has different shades of meaning and musttake its colour from the context in which it is used havingregard to the purpose and object of the legislation, and theCourt must necessarily keep in view the mischief which thelegislature seeks to remedy.

63 (2019) 2 SCC 104H64 1985 (2) SCC 116

6.93. The contention that the power to prohibit something as resextra commercium is always legislative policy and that therefore thesame cannot be done through an executive fiat, omits to take note of thecrucial role assigned to RBI in the economic sphere. It is true that inGodawat Pan Masala Products IP Ltd. & Anr v. Union of India,[65] itwas held that whether an article is to be prohibited as res extracommercium, is matter of Legislative policy and must arise out ofan Act of legislature and not by mere executive notification. Butwe must remember that in Khoday Distilleries Ltd. v. State ofKarnataka,[66] while dealing with prohibitions on alcohol it was held thatwhat articles and goods should be allowed to be produced, possessed,sold and consumed is to be left to the judgment of legislative andexecutive wisdom.6.94. In any case, the projection of the impugned decisions ofRBI as total prohibition of an activity altogether, may not be correct.The impugned Circular does not impose prohibition on the use of or thetrading in VCs. It merely directs the entities regulated by RBI not toprovide banking services to those engaged in the trading or facilitatingthe trading in VCs. Section 36(1)(a) of the Banking Regulation Act,1949 very clearly empowers RBI to caution or prohibit banking companiesagainst entering into certain types of transactions or class of transactions.The prohibition is not per se against the trading in VCs. It is againstbanking companies, with respect to class of transactions. The fact thatthe functioning of VCEs automatically gets paralyzed or crippled becauseof the impugned Circular, is no ground to hold that it tantamount to totalprohibition. So long as those trading in VCs do not wish to convert theminto fiat currency in India and so long as the VCEs do not seek to collecttheir service charges or commission in fiat currency through bankingchannels, they will not be affected by this Circular. Admittedly, peer-to-peer transactions are still taking place, without the involvement of thebanking channel. In fact, those actually buying and selling VCs withoutseeking to convert fiat currency into VCs or vice-versa, are not affectedby this Circular. It is only the online platforms which provide space ormedium for the traders to buy and sell VCs, that are seriously affectedby the Circular, since the commission that they earn by facilitating thetrade is required to be converted into fiat currency. Interestingly, thepetitioners argue on the one hand that there is total prohibition and argue

65 (2004) 7 SCC 68

66 (1995) 1 SCC 574

ABC

Aon the other hand that the Circular does not achieve its original object ofcurtailing the actual trading, though it cripples the exchanges. If the firstpart of this submission is right, the latter cannot be and if the latter partis right, the former cannot be.

6.95. The reliance placed in this regard by the petitioners on theBdecision of this court in State of Rajasthan v. Basant Nahata[67] maynot be appropriate. The said decision arose out of challenge to theconstitutional validity of Section 22A of the Registration Act, 1908 insertedby way of State Amendment by the State of Rajasthan. By the saidamendment, the state government was conferred with unbridled powersto declare by notification in the official gazette, the registration of anyCdocument or class of documents as opposed to public policy. In exerciseof the power so conferred, the state government issued notificationsdeclaring the registration of an irrevocable power of attorney or powerof attorney to be in force for more than certain period, authorizing theattorney to transfer any immovable property, as opposed to public policy.DThis court found that the delegation made by Section 22A was uncanalisedand unguided. In addition, the court found that transaction betweentwo persons capable of entering into contract, which does not contraveneany statute, would be valid in law and that when the State of Rajasthandid not make such transactions illegal, it cannot strike at the documentsrecording such transactions. The court held that Section 22A cannotEcontrol the transactions which fall outside the scope of the Act, througha subordinate legislation.

6.96. But the said decision is of no assistance to the petitioners,since none of the provisions of the RBI Act or the Banking RegulationAct are under challenge before us. The delegation itself is not in questionFbefore us. Unlike the Registration Act, Section 36(1)(a) of the BankingRegulation Act, 1949 empowers RBI to specifically target transactions.Moreover, RBI’s role in the economy of the country is not akin to thepower of any other delegate.

6.97. While holding that price fixation may normally be legislativeGact, this court pointed out in Union of India & Anr v. Cynamide Indialtd. & Anr:[68]

67 (2005) 12 SCC 77H68 (1987) 2 SCC 720

“…with the proliferation of delegated legislation, there is atendency for the line between legislation and administrationto vanish into an illusion. Administrative, quasi-judicialdecisions tend to merge in legislative activity and, conversely,legislative activity tends to fade into and present anappearance of an administrative or quasi-judicial activity.Any attempt to draw distinct line between legislative andadministrative functions, it has been said, is ‘difficult in theoryand impossible in practice’. ... The distinction between thetwo has usually been expressed as ‘one between the generaland the particular’. ‘A legislative act is the creation andpromulgation of general rule of conduct without referenceto particular cases; an administrative act is the making andissue of specific direction or the application of generalrule to particular case in accordance with the requirementsof policy’. ‘Legislation is the process of formulating generalrule of conduct without reference to particular cases andusually operating in future; administration is the process ofperforming particular acts, of issuing particular orders or ofmaking decisions which apply general rules to particularcases’.” (emphasis supplied)

6.98. On the effect and force of delegated legislation, this courtheld in St. Johns Teachers Training Institute v. Regional Director,NCTE:[69]

“The regulations made under power conferred by the statuteare supporting legislation and have the force and effect, ifvalidly made, as an Act passed by the competent legislature.”.

Similar views were expressed in Udai Singh Dagar v. Union ofIndia,[70] when the court held:”...a legislative Act must be read withthe regulations framed. subordinate legislation, as is well known,when validly framed, becomes part of the Act.”

6.99. Law is well settled that when RBI exercises the powersconferred upon it, both to frame policy and to issue directions for itsenforcement, such directions become supplemental to the Act itself. InPeerless General Finance and Investment Co. Ltd. v. Reserve Bank

69 (2003) 3 SCC 321

70 (2007) 10 SCC 306

ABC

Aof India,[71] this court followed the decisions in State of U.P. and Ors v.Babu Ram Upadhya[72] and D.K.V. Prasada Rao v. Govt. of A.P.[73]tohold that Rules made under statute must be treated as if they werecontained in the Act and that therefore they must be governed by thesame principles as the statute itself. Useful reference can also be madein this regard to the following observations in ICICI Bank Ltd v. OfficialBLiquidator of APS Star Industries Ltd:[74]

“40. When delegate is empowered by Parliament to enact apolicy and to issue directions which have statutory forceand when the delegatee (RBI) issues such guidelines (policy)having statutory force, such guidelines have got to be readas supplement to the provisions of the BR Act, 1949. The“banking policy” is enunciated by RBI. Such policy cannotbe said to be ultra vires the Act.” (emphasis supplied)

6.100. In his treatise on Administrative Law, Durga Das Basu[75]states:D

The scope of judicial review is narrowed down when statuteconfers discretionary power upon an executive authority tomake such rules or regulations or orders ‘as appear to him tobe necessary’ or ‘expedient’, for carrying out the purposesof the statute or any other specified purpose. In such case,Ethe check of ultra vires vanishes for all practical purposesinasmuch as the determination of the necessity or expediencyis taken out of the hands of the Courts and the only groundupon which Courts may interfere is that the authority actedmala fide or never applied his mind to the matter, or appliedan irrelevant principle in making statutory order. (emphasisFsupplied)

6.101. In Jayantilal Amrit Lal Shodhan v. F.N. Rana,[76] themajority pointed out that there can be no assumption that the legislativefunctions are exclusively performed by the legislature, executive functionsby the executive and judicial functions by the judiciary alone. The courtGindicated that the Constitution has not made an absolute or rigid division

71 (1992) 2 SCC 34372 AIR 1961 SC 75173 AIR 1984 AP 7574 (2010) 10 SCC 175 Ch. 4, Pg. 121, 6th Edition, 2004H76 AIR 1964 SC 648

of functions between the three agencies of the state and that at timesthe exercise of legislative or judicial functions are entrusted to theexecutive. very important observation made by the Constitution Benchin Jayantilal (supra) was as follows:

“…..in addition to these quasi-judicial and quasi-legislativefunctions, the executive has also been empowered by statuteto exercise functions which are legislative and judicial incharacter and in certain instances, powers are exercisedwhich appear to partake at the same moment of legislative,executive and judicial characteristics.”

6.102. In Shri Sitaram Sugar Co. Ltd. & Anr v. Union of India& Ors,[77]the Constitution bench of this court held that whether an orderis characterized as legislative or administrative or quasi-judicial or whetherit is determination of law or fact, the judgment of the expert bodyentrusted with power is generally treated as final and the judicial functionis exhausted when it is found to have “warrant in the record” and arational basis in law.

6.103. It must be pointed out that the power of RBI is not merelycurative but also preventive. This is acknowledged by this court in GaneshBank of Kurunwad Ltd. & Ors v. Union of India & Ors.,[78]where itwas held that RBI has right to take pre-emptive action taking intoaccount the totality of the circumstances.

“It is not that when there is run on the bank then only RBImust intervene or that it must intervene only when there are agood number of court proceedings against the bankconcerned. RBI has to take into account the totality of thecircumstances and has to form its opinion accordingly.”

6.104. The impugned Circular is intended to prohibit bankingcompanies from entering into certain territories. The Circular is actuallyaddressed to entities regulated by RBI and not to those who do notcome within the purview of RBI’s net. But the exercise of such powerby RBI, over the entities regulated by it, has caused collateral damageto some establishments like the petitioners’, who do not come within thereach of RBI’s net.

77 (1990) 3 SCC 223

78 (2006) 10 SCC 645

A6.105. The power of statutory authority to do something has tobe tested normally with reference to the persons/entities qua whom thepower is exercised. The question to be addressed in such cases is whetherthe authority had the power to do that act or issue such directive, quathe person to whom it is addressed. While persons who suffer collateraldamage can certainly challenge the action, such challenge will be veryBweak challenge qua the availability of power.

6.106. Apart from the provisions of the RBI Act, 1934 and theBanking Regulation Act, 1949, the impugned Circular also refers to thepower under Section 18 of the Payment and Settlement Systems Act,2007. In order to buttress their contention regarding the availability ofCpower to regulate, the petitioners refer to the definition of the expression“payment system” under Section 2(1)(i) of the said Act and contendthat VCEs do not operate any payment system and that since the powerto issue directions under Section 18 is only to regulate the paymentsystems, the invocation of the said power to something that does not fallDwithin the purview of payment system, is arbitrary.6.107. But Section 18 of the Payment and Settlement SystemsAct indicates (i) what RBI can do (ii) the persons qua whom it can bedone and (iii) the object for which it can be done. In other words, Section18 empowers RBI (i) to lay down policies relating to the regulation ofEpayment systems including electronic, non-electronic, domestic andinternational payment systems affecting domestic transactions and (ii)to give such directions as it may consider necessary. These are whatRBI can do under Section 18. Coming to the second aspect, the personsqua whom the powers under Section 18 can be exercised are (i) systemproviders (ii) system participants and (iii) any other person generally orFany such agency. The expression “system provider” is defined underSection 2(1)(q) to mean person who operates an authorized paymentsystem. The expression “system participant” is defined in Section 2(1)(p)to mean bank or any other person participating in payment system,including the system provider. Other than the expressions ‘systemGprovider’ and ‘system participant’, Section 18 also uses the expressions‘any other person’ and ‘any such agency’.

6.108. It is true that the purposes for which the power underSection 18 can be exercised, are also indicated in Section 18. They are(i) regulation of the payment systems (ii) the interest of the managementHand operation of any payment system and (iii) public interest.

6.109. As we have pointed out elsewhere, the impugned Circularis primarily addressed to banks who are “system participants” within themeaning of Section 2(1)(p). The banks certainly have system ofpayment to be effected between payer and beneficiary, falling therebywithin the meaning of the expression payment system.

6.110. It may also be relevant to take note of the definition of theexpressions “payment instruction” and “payment obligation” appearingin clauses (g) and (h) of subsection (1) of Section 2 which read as follows:

2(1)(g) “payment instruction” means any instrument,authorisation or order in any form, including electronic means,to effect payment,—

(i) by person to system participant; or

(ii) by system participant to another system participant;

2(1)(h) “payment obligation” means an indebtedness that isowned by one system participant to another system participantas result of clearing or settlement of one or more paymentinstructions relating to funds, securities or foreign exchangeor derivatives or other transactions;

6.111. Therefore, in the overall scheme of the Payment andSettlement Systems Act, 2007, it is impossible to say that RBI does nothave the power to frame policies and issue directions to banks who aresystem participants, with respect to transactions that will fall under thecategory of payment obligation or payment instruction, if not paymentsystem. Hence, the argument revolving around Section 18 should fail.

II. Mode of exercise of power:

Satisfaction/Application of mind/relevant and irrelevantconsiderations

6.112. That takes us to the next question whether the power wasexercised properly in manner prescribed by law. The argument of ShriAshim Sood, learned Counsel for the petitioner is that assuming thatRBI has the requisite power under Section 35A(1) of Banking RegulationAct, 1949 to do what it has done, the necessary sine qua non is the“satisfaction”. Section 35A(1) of the Banking Regulation Act, 1949 aswell as Section 45JA and 45L of the RBI Act, 1934 empower RBI toissue directions “if it is satisfied” about the existence of certain

Aparameters. Satisfaction can be arrived at only by (i) gathering facts (ii)sifting relevant material from those which are irrelevant and (iii) formingan opinion about the cause and connection between relevant materialand the decision proposed to be taken. In respect of each of theserequirements, the learned Counsel relied upon certain judicial precedents.

B6.113. But we do not think that in the facts of the present case,we could hold RBI guilty of non-application of mind. As matter of fact,the issue as to how to deal with virtual currencies has been lingeringwith RBI from June 2013 onwards, when the Financial Stability Reporttook note of the challenges posed by virtual currencies in the form ofregulatory, legal and operational risks. The Financial Stability Report ofCJune 2013 led to press release dated 24-12-2013 cautioning the users,holders and traders of virtual currencies about the potential financial,operational, legal and consumer protection and security related risksassociated with virtual currencies. Then came the Financial StabilityReport of December 2015 which raised concerns about excessiveDvolatility in the value of VCs and their anonymous nature which wentagainst global money laundering rules rendering their very existencequestionable. The Financial Stability Report of December 2016 also tooknote of the risks associated with virtual currencies qua data security andconsumer protection. The report also recorded concerns about farreaching potential impact of the effectiveness of monetary policy itself.ETherefore, the report suggested RegTech to deal with FinTech.

6.114. IDRBT, established by RBI to work at the intersection ofbanking and technology submitted white paper in January 2017, whichenlisted the advantages as well as disadvantages of digital currencies.This white paper was taken note of by RBI in the Financial StabilityFReport of June 2017. In the meantime, RBI issued press release on01-02-2017 once again cautioning the users, holders and traders of virtualcurrencies.

6.115. The sub-committee of the Financial Stability andDevelopment Council took decision in April 2016, pursuant to whichGRBI set up an Inter-Regulatory Working Group on FinTech and DigitalBanking. This Working Group submitted report in November 2017,after which RBI issued third press release on 05-12-2017. ThereafterRBI also sent mail on 02-04-2018 to the central government, enclosinga note on regulating crypto assets. To be fair to RBI, even this noteHexamined the pros and cons of banning and regulating crypto currencies.

6.116. All the above sequence of events from June 2013 up to 02-04-2018 would show that RBI had been brooding over the issue foralmost five years, without taking the extreme step. Therefore, RBI canhardly be held guilty of non-application of mind. If an issue had come upagain and again before statutory authority and such an authority hadalso issued warnings to those who are likely to be impacted, it can hardlybe said that there was no 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 ofRBI either to write thesis or to write judgement.

6.117. In fact, RBI cannot even be accused of not taking note ofrelevant considerations or taking into account irrelevant considerations.RBI has taken into account only those considerations which multinationalbodies and regulators of various countries such as FATF, BIS, etc., havetaken into account. This can be seen even from the earliest press releasedated 24-12-2013, which is more elaborate than the impugned Circulardated 06-04-2018. The press release dated 24-12-2013 reads as follows:

RBI cautions users of Virtual Currencies against Risks

The Reserve Bank of India has today cautioned the users,holders and traders of Virtual currencies (VCs), includingBitcoins, about the potential financial, operational, legal,customer protection and security related risks that they areexposing themselves to.

The Reserve Bank has mentioned that it has been looking atthe developments relating to certain electronic records claimedto be “Decentralised Digital Currency” or “Virtual Currency”(VCs), such as, Bitcoins, litecoins, bbqcoins, dogecoins etc.,their usage or trading in the country and the various mediareports in this regard.

The creation, trading or usage of VCs including Bitcoins, asa medium for payment are not authorised by any central bankor monetary authority. No regulatory approvals, registrationor authorisation is stated to have been obtained by the entitiesconcerned for carrying on such activities. As such, they maypose several risks to their users, including the following:

• VCs being in digital form are stored in digital/electronicmedia that are called electronic wallets. Therefore, they are

prone to losses arising out of hacking, loss of password,compromise of access credentials, malware attack etc. Sincethey are not created by or traded through any authorisedcentral registry or agency, the loss of the e-wallet could resultin the permanent loss of the VCs held in them.

• Payments by VCs, such as Bitcoins, take place on peer-to-peer basis without an authorised central agency whichregulates such payments. As such, there is no establishedframework for recourse to customer problems / disputes /charge backs etc.

• There is no underlying or backing of any asset for VCs. Assuch, their value seems to be matter of speculation. Hugevolatility in the value of VCs has been noticed in the recentpast. Thus, the users are exposed to potential losses on accountof such volatility in value.

• It is reported that VCs, such as Bitcoins, are being tradedon exchange platforms set up in various jurisdictions whoselegal status is also unclear. Hence, the traders of VCs onsuch platforms are exposed to legal as well as financial risks.

• There have been several media reports of the usage of VCs,including Bitcoins, for illicit and illegal activities in severaljurisdictions. The absence of information of counterpartiesin such peer-to-peer anonymous/ pseudonymous systemscould subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism(AML/CFT) laws.

The Reserve Bank has also stated that it is presently examiningthe issues associated with the usage, holding and trading ofVCs under the extant legal and regulatory framework of thecountry, including Foreign Exchange and Payment Systemslaws and regulations.

6.118. When series of steps taken by statutory authority overa 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 andconclude that the satisfaction arrived at by the authority is not reflectedappropriately. In any case, pursuant to an order passed by this court onH21-08-2019, RBI has given detailed point-wise reply to the

representations of the petitioners. In these representations, the petitionershave highlighted all considerations that they thought as relevant. RBIhas given its detailed responses on 04-09-2019 and 18-09-2019.Therefore, the contention that there was no application of mind and thatrelevant considerations were omitted to be taken note of, loses its vigourin view of the subsequent developments.

Malice in law/colorable exercise

6.119. Drawing our attention to reply given by RBI dated 26-04-2017 to query under the Right to Information Act, and the replygiven by Minister of State for Finance in response to question raised inthe Lok Sabha (Unstarred Question No. 2113) on 28-07-2017, whereinRBI took position that they had no power to freeze the accounts eitherof defaulting companies or of shell companies, it was contended by ShriAshim Sood, that the impugned Circular goes contrary to the position sotaken officially, as the Circular has the effect of closing the accounts ofVCEs and that therefore it was hit by arbitrariness and caprice.

6.120. But the above argument arises out of misconception aboutthe purport of the impugned Circular. The impugned Circular does notorder either the freezing or the closing of any particular account of aparticular customer. All that the impugned Circular says is that RBIregulated entities shall exit the relationship that they have with any personor entity dealing with or settling VCs, within three months of the date ofthe Circular. The regulated entities are directed not to provide servicesfor facilitating any person or entity in dealing with or settling VCs. Someof the petitioners herein are individuals and companies who run virtualcurrency exchanges. In case they have other businesses, the impugnedCircular does not order the closure of their bank accounts relating toother businesses. The prohibition under paragraph 2 of the impugnedCircular is with respect to the provision of services for facilitating anyperson or entity in dealing with or settling VCs. This prohibition does notextend either to the closing or the freezing of the accounts of thepetitioners in relation to their other ventures.

6.121. Taking clue from the averment contained in the counter-affidavit of RBI to the effect that “VCs are outside the ambit of thecentral authority’s effective sphere of control and management” andalso referring to the stand taken by RBI in their letter dated 04-09-2019to the effect that “neither VCs nor the businesses involved in providingVC based services come under the regulatory purview of RBI”, it was

Acontended by Shri Ashim Sood that the impugned Circular is colourableexercise of power and tainted by malice in law, in as much as it seeks toachieve an object completely different from the one for which the poweris entrusted. State of Punjab & Anr v. Gurdial Singh & Ors,[79]Collector(District Magistrate) Allahabad & Anr v. Raja Ram Jaiswal,[80]andKalabharati Advertising v. Hemant Vimalnath Narichania & Ors[81]Bare relied upon in this regard.

6.122. But the above contention is completely misconceived. Therecan be no quarrel with the proposition that RBI has sufficient power toissue directions to its regulated entities in the interest of depositors, inthe interest of banking policy or in the interest of the banking companyCor in public interest. If the exercise of power by RBI with view toachieve one of these objectives incidentally causes collateral damageto one of the several activities of an entity which does not come withinthe purview of the statutory authority, the same cannot be assailed as acolourable exercise of power or being vitiated by malice in law. ToDconstitute colourable exercise of power, the act must have been done inbad faith and the power must have been exercised not with the object ofprotecting the regulated entities or the public in general, but with theobject of hitting those who form the target. To constitute malice in law,the act must have been done wrongfully and willfully without reasonableor probable cause. The impugned Circular does not fall under the categoryEof either of them.

6.123. The argument that the invocation by RBI, of ‘public interest’as weapon, purportedly for the benefit of users, consumers or tradersof virtual currencies is colourable exercise of power also does not holdwater. Once it is conceded that RBI has powers to issue directions inFpublic interest, it is impossible to exclude users, consumers or traders ofvirtual currencies from the coverage. In fact, the repeated press releasesissued by RBI from 2013 onwards indicate that RBI did not want themembers of the public, which include users, consumers and traders ofVCs, even to remotely think that virtual currencies have legal tenderGstatus or are backed by central authority. Irrespective of what VCsactually do or do not do, it is an accepted fact that they are capable ofperforming some of the functions of real currencies. Therefore, if RBI

79 (1980) 2 SCC 47180 (1985) 3 SCC 1H81 (2010) 9 SCC 437

takes steps to prevent the gullible public from having an illusion as thoughVCs may constitute valid legal tender, the steps so taken, are actuallytaken in good faith. The repeated warnings through press releases fromDecember 2013 onwards indicate genuine attempt on the part of RBIto safeguard the interests of the public. Therefore, the contention thatthe impugned Circular is vitiated by malice in law and that it is colorableexercise of power, cannot be sustained.

6.124. Relying upon (i) the decision in Meerut DevelopmentAuthority v. Assn. Management Studies & Anr,[82] wherein it was heldthat the term “public interest” must be understood and interpreted in thelight of the entire scheme, purpose and object of the enactment (ii) thedecision in Bihar Public Service Commission v. Saiyed Hussain AbbasRizwi & Anr,[83] wherein it was held that the term “public interest” doesnot have rigid meaning and takes its colour from the statute in which itoccurs (iii) the decision in Utkal Contractors & Joinery (P) Ltd. &Ors v. State of Orissa & Ors,[84] wherein it was held that the words of astatute take their colour from the reason for it and (iv) the decision inEmpress Mills v. Municipal Committee, Wardha,[85] wherein it washeld that general words and phrases must usually be construed as beinglimited to the actual object of the Act, it was contended that the expression‘public interest’ appearing in Section 35A(1)(a) of the Banking RegulationAct, 1949, cannot be given an expansive meaning.6.125. But the said argument does not take the petitionersanywhere. As we have indicated elsewhere, the power under Section35A to issue directions is to be exercised under four contingencies namely(i) public interest (ii) interest of banking policy (iii) interest of the depositorsand (iv) interest of the banking company. The expression “bankingpolicy” is defined in Section 5(ca) to mean any policy specified byRBI (i) in the interest of the banking system (ii) in the interest ofmonetary stability and (iii) sound economic growth. Public interestpermeates all these three areas. This is why Section 35A(1)(a) isinvoked in the impugned Circular. Therefore, we reject the argumentthat the impugned decision is colorable exercise of power and it isvitiated by malice in law.

82 (2009) 6 SCC 17183 (2012) 13 SCC 6184 (1987) 3 SCC 27985 (1958) SCR 1102

AM. S. Gill Reasoning

6.126. The impugned Circular cannot be assailed on the basis ofM. S. Gill[86] test, for two reasons. First is that in Chairman, All IndiaRailway Recruitment Board v. K. Shyam Kumar & Ors,[87] this courtheld that MS Gill test may not always be applicable where larger publicBinterest is involved and that in such situations, additional grounds can belooked into for examining the validity of an order. This was followed in

PRP Exports & Ors v. Chief Secretary, Government of Tamil Nadu& Ors.[88] In 63 Moons Technologies ltd. & Ors v. Union of India &Ors,[89] this court clarified that though there is no broad proposition thatMS Gill test will not apply where larger public interest is involved,Csubsequent materials in the form of facts that have taken place after theorder in question is passed, can always be looked at in the larger publicinterest, in order to support an administrative order. The second reasonwhy the weapon of MS Gill will get blunted in this case, is that during thependency of this case, this court passed an interim order on 21-08-2019Ddirecting RBI to give point-wise reply to the detailed representationmade by the writ petitioners. Pursuant to the said order, RBI gave detailedresponses on 04-09-2019 and 18-09-2019. Therefore, the argument basedon MS Gill test has lost its potency.

Calibration/Proportionality

6.127. The next argument is that the impugned measure is extremeand that it will not pass the test of proportionality. For the purpose ofconvenience, we shall take up this argument together with the argumentrevolving around Article 19(1)(g) while dealing with the reasonablenessof the restriction.FIII. Wait and watch approach of the other stakeholders

6.128. The argument that other stakeholders such as theEnforcement Directorate which is concerned with money laundering,the Department of Economic Affairs which is concerned with theeconomic policies of the State, SEBI which is concerned with securityGcontracts and CBDT which is concerned with the tax regime relating togoods and services, did not see any grave threat and that therefore RBI’sreaction is knee-jerk, is not acceptable. Enforcement Directorate can86 M S Gill v. The Chief Election Commissioner, (1978) 1 SCC 40587 (2010) 6 SCC 61488 (2014) 13 SCC 692H89 (2019) SCC Online SC 624

step in only when actual money laundering takes place, since the statutoryscheme of Prevention of Money Laundering Act deals with procedurewhich is quasi-criminal. SEBI can step in only when the transactionsinvolve securities within the meaning of Section 2(h) of the SecuritiesContracts (Regulation) Act, 1956. CBDT will come into the picture onlywhen the transaction related to the sale and purchase of taxable goods/commodities. Every one of these stakeholders has different functionto perform and are entitled to have an approach depending upon theprism through which they are obliged to look at the issue. Therefore,RBI cannot be faulted for not adopting the very same approach as thatof others.

-IV. Lighttouch approach of the other countries

6.129. The argument that most of the countries except very fewlike China, Vietnam, Pakistan, Nepal, Bangladesh, UAE, have not imposeda ban (total or partial) may not take the petitioners anywhere. The list ofcountries where ban similar to the one on hand and much more hasbeen imposed discloses commonality. Almost all countries in theneighborhood of India have adopted the same or similar approach (inessence India is ring fenced). In any case, our judicial decision cannotbe colored by what other countries have done or not done. Comparativeperspective helps only in relation to principles of judicial decision makingand not for testing the validity of an action taken based on the existingstatutory scheme.

6.130. There can also be no comparison with the approach adoptedby countries such as UK, US, Japan, Singapore, Australia, New Zealand,Canada etc., as they have developed economies capable of absorbinggreater shocks. Indian economic conditions cannot be placed on par.Therefore, we will not test the correctness of the measure taken by RBIon the basis of the approach adopted by other countries, though wehave, for better understanding of the complexities of the issues involved,undertaken survey of how the regulators and courts of other countrieshave treated VCs.

V. Precautionary steps taken by petitioners

6.131. The next contention of the petitioners is that the VCexchanges run by them have already put in place certain best practicessuch as (i) avoidance of cash transactions (ii) enhanced KYC normsand (iii) confining their services only to persons within India. Therefore,

Ait is contended that all the issues flagged by RBI have already beenaddressed and that therefore, there was no necessity to disconnect thetrade from the regular banking channels. But the fact of the matter isthat enhanced KYC norms may remove anonymity of the customer, butnot that of the VC. Even the European Parliament, in the portion of itsreport relied upon by Shri Ashim Sood accepts that the adequacy ofBmandatory registration of users (as less invasive measure),whether or not of fully anonymous or pseudo anonymous cryptocurrencies depends on the users’ compliance with the registrationrequirement. After pointing out that compliance will partly depend onan adequate sanctioning toolbox in the event of breach, the report wondersCwhether it is at all possible outside of the context of randomly bumpinginto it, at least when fully anonymous VCs are concerned. In any case,we are not experts to say whether the safety valves put in place couldhave addressed all issues raised by RBI.VI. Different types of VCs require different treatmentsD6.132. Drawing our attention to Report by the EuropeanParliament under the caption ‘Cryptocurrencies and Blockchain’, releasedin July 2018, it is contended by Shri Ashim Sood, learned Counsel for thepetitioners that all virtual currencies are not fully anonymous. While some,such as Dash and Monero are fully anonymous, others such as BitcoinEare pseudo-anonymous. Therefore, it is contended that banningtransactions only in fully anonymous VCs could have been better andless intrusive measure. An identical argument is advanced by Shri NakulDewan learned Senior Counsel for the petitioners, with reference to areport of October 2012 of the European Central Bank on “VirtualCurrency Schemes”. According to the said Report, Virtual CurrencyFschemes can be classified into three types, depending upon their interactionwith traditional real money and real economy. They are (i) closed virtualcurrency schemes basically used in an online game (ii) virtual currencyschemes having unidirectional flow (usually an inflow), with aconversion rate for purchasing the virtual currency which canGsubsequently be used to buy virtual goods and services, but exceptionallyalso to buy real goods and services and (iii) virtual currency schemeshaving bidirectional flow, where they act like any other convertiblecurrency with two exchange rates (buy and sell) which can subsequentlybe used to buy virtual goods and services as well as real goods andservices.H

6.133. Let us first deal with Shri Nakul Dewan’s submission. Inthe very same October 2012 Report of the European Central Bank,it is accepted that virtual currencies (i) resemble money and (ii)necessarily come with their own dedicated retail payment systems.These two aspects are indicated in the Report to be covered by the term“Virtual Currency Scheme”.

6.134. But the entire premise on which the petitioners havedeveloped their case is that they are neither money nor constitute apayment system. Therefore, if the Report of the European Central Bankis to be accepted, it should be accepted in total and cannot be selectivelytaken.

6.135. The examples provided in the October 2012 Report of theEuropean Central Bank show that there are VC Schemes set up byentities such as Nintendo, in which consumers can purchase points onlineby using credit card or in retail stores by purchasing Nintendo pointscard which cannot be converted back to real money. The Report alsoshows that one VC by name Linden Dollars is issued in virtual worldcalled “Second life”, where users create avatars (digital characters),which can be customized. Second life has its own economy where userscan buy and sell goods and services from and to each other. But theyfirst need to purchase Linden dollars using fiat currency. Later they canalso sell Linden dollars in return for fiat currency. Therefore, it is clearthat the very same virtual currency can have unidirectional orbidirectional flow depending upon the scheme with which the entitiescome up. Moreover, the question whether anonymous VCs alone couldhave been banned leaving the pseudo-anonymous, is for experts and notfor this Court to decide. In any case, the stand taken by RBI is that theyhave not banned VCs. Hence, the question whether RBI should haveadopted different approaches towards different VCs does not arise.

VII. Acceptance of DLT and rejection of VCs is paradox

6.136. It was argued that the acceptance of the Distributed LedgerTechnology and the rejection of VCs is actually contradiction in terms.This argument is based upon the various reports, both of RBI and of theInter-Ministerial Group, to the effect that DLT is part of FinTech.

6.137. The above contention, in legal terms, is about the irrationalityof the impugned decision. But there is nothing irrational about theacceptance of technological advancement/innovation, but the rejection

[2020] 2 S.C.R.

Aof by-product of such innovation. There is nothing like “take it orleave it” option.

VIII. RBI’s decisions do not qualify for Judicial deference6.138. It is contended by Shri Ashim Sood, learned Counsel forthe petitioners that the impugned Circular does not have either the statusBof legislation or the status of an executive action, but is only the exerciseof power conferred by statute upon statutory body corporate.Therefore, it is his contention that the judicial rule of deference asarticulated in R.K. Garg v. Union of India,[90]BALCO Employees’Union (Regd.) v. Union of India & Ors,[91]and Swiss Ribbons Pvt.CLtd. & Anr v. Union of India & Ors,[92] will not apply to the decisiontaken by statutory body like RBI. If, legislation relating to economicmatters is placed at the highest pedestal, an executive decision withregard to similar matters will be placed only at lower pedestal and thedecision taken by statutory body may not even be entitled to any suchdeference or reverence.

6.139. But given the scheme of the RBI Act, 1934 and the BankingRegulation Act, 1949, the above argument appears only to belittle therole of RBI. RBI is not just like any other statutory body created by anAct of legislature. It is creature, created with mandate to get liberatedeven from its creator. This is why it is given mandate – (i) under theEPreamble of the RBI Act 1934, to operate the currency and credit systemof the country to its advantage and to operate the monetary policyframework in the country (ii) under Section 3(1), to take over themanagement of the currency from the central government (iii) underSection 20, to undertake to accept monies for account of the centralFgovernment, to make payments up to the amount standing to the creditof its account and to carry out its exchange, remittance and other bankingoperations, including the management of the public debt of the Union(iv) under Section 21(1), to have all the money, remittance, exchangeand banking transactions in India of the central government entrustedwith it (v) under Section 22(1), to have the sole right to issue bank notesGin India and (vi) under Section 38, to get rupees into circulation onlythrough it, to the exclusion of the central government. Therefore, RBIcannot be equated to any other statutory body that merely serves its

90 (1981) 4 SCC 67591 (2002) 2 SCC 333H92 (2019) 4 SCC 17

master. It is specifically empowered to do certain things to the exclusionof even the central government. Therefore, to place its decisions at apedestal lower than that of even an executive decision, would do violenceto the scheme of the Act.

6.140. On the primary question of switching over to judicial “silentmode” or “hands off mode”, qua economic legislation, it is not necessaryto catalogue all the decisions of this court such as State of Gujarat &Anr v. Shri Ambica Mills Ltd. & Anr,[93]G.K.Krishnan v. Tamil Nadu,[94]R. K. Garg v. Union of India (supra), State of M.P. v. Nandlal Jaiswal,[95]P.M. Ashwathanarayana Setty v. State of Karnataka,[96]PeerlessGeneral Finance and Investment Co. Ltd. v. Reserve Bank of India(supra), T. Velayudhan v. Union of India,[97]Delhi Science Forum v.Union of India,[98]Bhavesh D. Parish v. Union of India,[99]Ugar SugarWorks ltd. v. Delhi Administration & Ors,[100]BALCO Employees’Union (Regd.) v. Union of India (supra), Govt. of Andhra Pradesh& Ors v. P. Laxmi Devi,[101]Villianur Iyarkkai Padukappu Maiyam v.Union of India,[102]D.G. of Foreign Trade v. Kanak Exports,[103]Stateof J & K v. Trikuta Roller Flour Mills Pvt. Ltd.,[104] and Pioneer UrbanLand and Infrastructure Ltd. v. Union of India,[105] as the entire historyof the doctrine of deference from Lochner Era has been summarizedby this court in Swiss Ribbons Pvt. Ltd. v. Union of India (supra). Infact, even the learned Counsel for the petitioners is ad idem with thelearned Senior Counsel for RBI that economic regulations require duejudicial deference. The actual argument of the learned Counsel for thepetitioners is that such deference may differ in degree from being veryweak in respect of the decision of statutory authority, to being verystrong in respect of legislative enactment.

93 (1974) 4 SCC 65694 (1975) 1 SCC 37595 (1986) 4 SCC 56696 (1989) Supp (1) SCC 69697 (1993) 2 SCC 58298 (1996) 2 SCC 40599 (2000) 5 SCC 471100 (2001) 3 SCC 635101 (2008) 4 SCC 720102 (2009) 7 SCC 561103 (2016) 2 SCC 226104 (2018) 11 SCC 260105 (2019) 8 SCC 416

A6.141. But as we have pointed out above, RBI is not just anyother statutory authority. It is not like stream which cannot be greaterthan the source. The RBI Act, 1934 is pre-constitutional legislation,which survived the Constitution by virtue of Article 372(1) of theConstitution. The difference between other statutory creatures andRBI is that what the statutory creatures can do, could as well beBdone by the executive. The power conferred upon the delegate inother statutes can be tinkered with, amended or even withdrawn.But the power conferred upon RBI under Section 3(1) of the RBIAct, 1934 to take over the management of the currency from thecentral government, cannot be taken away. The sole right to issueCbank notes in India, conferred by Section 22(1) cannot also be takenaway and conferred upon any other bank or authority. RBI by virtue ofits authority, is member of the Bank of International Settlements, whichposition cannot be taken over by the central government and conferredupon any other authority. Therefore, to say that it is just like any otherstatutory authority whose decisions cannot invite due deference, is to doDviolence to the scheme of the Act. In fact, all countries have centralbanks/authorities, which, technically have independence from thegovernment of the country. To ensure such independence, fixed tenureis granted to the Board of Governors, so that they are not bogged downby political expediencies. In the United States of America, the Chairmanof the Federal Reserve is the second most powerful person next only toEthe President. Though the President appoints the seven-member Boardof Governors of the Federal Reserve, in consultation with the Senate,each of them is appointed for fixed tenure of fourteen years. Only oneamong those seven is appointed as Chairman for period of four years.As result of the fixed tenure of 14 years, all the members of Board ofFGovernors survive in office more than three governments. Even theEuropean Central Bank headquartered in Frankfurt has President, Vice-President and four members, appointed for period of eight years inconsultation with the European Parliament. World-wide, centralauthorities/banks are ensured an independence, but unfortunately Section8(4) of the RBI Act, 1934 gives tenure not exceeding five years, as theGcentral government may fix at the time of appointment. Though the shortertenure and the choice given to the central government to fix the tenure,to some extent, undermines the ability of the incumbents of office to beabsolutely independent, the statutory scheme nevertheless provides forindependence to the institution as such. Therefore, we do not accept theargument that policy decision taken by RBI does not warrant anyHdeference.

IX. Article 19(1)(g) challenge & Proportionality

6.142. The next ground of attack is on the basis of Article 19(1)(g).Any restriction to the freedom guaranteed under Article 19(1)(g) shouldpass the test of reasonableness in terms of Article 19(6). It is contendedby the petitioners that since access to banking is the equivalent of thesupply of oxygen in any modern economy, the denial of such access tothose who carry on trade which is not prohibited by law, is not areasonable restriction and that it is also extremely disproportionate. It isfurther contended that the right to access the banking system is actuallyintegral to the right to carry on any trade or profession and that thereforea legislation, subordinate or otherwise whose effect or impact severelyimpairs the right to carry on trade or business, not prohibited by law,would be violative of Article 19(1)(g). Reliance is placed in this regardon the decisions of this court in (i) Md. Yasin v. Town Area Committee,[1]where it was held that the right under Article 19(1)(g) is affected when“in effect and in substance”, the impugned measures brought about atotal stoppage of business, both, in commercial sense and from apractical point of view, even though there was no prohibition in form and(ii) Bennett Coleman & Co. v. Union of India,[2] where this court heldthat the impact and not the object of the measure will determine whetheror not, fundamental right is violated. It is further contended, on thestrength of the decision in Md. Faruk v. State of Madhya Pradesh &Ors,[3] that the imposition of restriction on the exercise of fundamentalright may be in the form of control or prohibition and that when theexercise of fundamental right is prohibited, the burden of proving thata total ban on the exercise of the right alone may ensure the maintenanceof the general public interest, lies heavily upon the state. It was held inthe said decision that law which directly infringes the right guaranteedunder Article 19(1)(g) may be upheld only if it is established that it seeksto impose reasonable restrictions in the interest of the general public anda less drastic restriction will not ensure the interest of the general public.

6.143. The parameters laid down in Md. Faruk areunimpeachable. While testing the validity of law imposing restrictionon the carrying on of business or profession, the court must, as

106 (1952) SCR 572107 (1972) 2 SCC 788108 (1969) 1 SCC 853

Aformulated in Md. Faruk, attempt an evaluation of (i) its direct andimmediate impact upon of the fundamental rights of the citizens affectedthereby (ii) the larger public interest sought to be ensured in the light ofthe object sought to be achieved (iii) the necessity to restrict the citizens’freedom (iv) the inherent pernicious nature of the act prohibited or itscapacity or tendency to be harmful to the general public and (v) theBpossibility of achieving the same object by imposing less drastic restraint.

6.144. There can also be no quarrel with the proposition thatbanking channels provide the lifeline of any business, trade or profession.This is especially so in the light of the restrictions on cash transactionscontained in Sections 269SS and 269T of the Income Tax Act, 1961.CWhen currency itself has undergone metamorphosis over the centuries,from stone to metal to paper to paperless and we have ushered into thedigital age, cashless transactions (not penniless transactions) requirebanking channels. Therefore, the moment person is deprived of thefacility of operating bank account, the lifeline of his trade or business isDsevered, resulting in the trade or business getting automatically shut down.Hence, the burden of showing that larger public interest warranted sucha serious restriction bordering on prohibition, is heavily on RBI.6.145. In the counter-affidavit filed in WP (C) No. 528 of 2018,RBI has raised 2 fundamental objections in this regard. The first is thatEcorporate bodies/entities who have come up with the challenge are not‘citizens’ and hence, not entitled to maintain challenge under Article19(1)(g). This objection may hold good in respect of the writ petitionfiled by Internet and Mobile Association of India, which is described bythem as not-for-profit association of corporate entities who are in thetrade. But this objection may not hold good in respect of the other writFpetition, as the companies running VC exchanges have not come upalone. The shareholders and promoters have come up with the secondwrit petition along with those entities and hence the challenge underArticle 19(1)(g) cannot be said to be not maintainable.

6.146. The second objection of RBI is that there is no fundamentalGright to purchase, sell, transact and/or invest in VCs and that therefore,the petitioners cannot invoke Article 19(1)(g). But this contention is liableto be rejected outright for two reasons namely, (i) that at least some ofthe petitioners are not claiming any right to purchase, sell or transact inVCs, but claiming right to provide platform for facilitating an activityH(of trading in VCs between individuals/entities who want to buy and sell

VCs) which is not yet prohibited by law and (ii) that in any case theimpugned Circular does not per se prohibit the purchase or sale of VCs.This is why it is contended by the learned Counsel for the petitioners,that what is hit by the impugned Circular is not the actual target. Theactual target of the impugned Circular, as seen from variouscommunications and committee reports that preceded the same, is thetrade in VCs. The object of hitting at trading in VCs, is to ensure (i)consumer protection (ii) prevention of violation of money laundering laws(iii) curbing the menace of financing of terrorism and (iv) safeguardingof the existing monetary/payment/credit system from being polluted. Buthitting the target directly, is not within the domain of RBI and hence theimpugned Circular purportedly seeks to protect only the regulated entities,by ring-fencing them. In the process, it has hit VC Exchanges and notthe actual trading of VCs, though as consequence, the volume oftransactions in VCs (perhaps through VCEs alone) is stated to havecome down. People who wish to buy and sell VCs can still do so merrily,without using the medium of VC Exchange and without seeking toconvert the virtual currencies into fiat currency. It is in this context thatthe contention revolving around Article 19(1)(g) has to be examined.

6.147. In order to test the validity of the impugned action on thetouchstone of Article 19(1)(g), we may have to understand thefundamental distinction between (i) the purchase and sale of virtualcurrencies by and between two individuals or entities and (ii) the businessof online exchanges that provide certain services such as the facility ofbuying and selling of virtual currencies, the storing or securing of thevirtual currencies in what are known as wallets and the conversion ofvirtual currencies into fiat currency and vice versa. The buying and sellingof crypto currencies through VC Exchanges can be by way of hobby oras trade/business. The distinction between the two is that there may ormay not exist profit motive in the former, while it would, in the latter.

6.148. Persons who engage in buying and selling virtual currencies,just as matter of hobby cannot pitch their claim on Article 19(1)(g), forwhat 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 ofthe challenge under Article 19(1)(g).

6.149. The second and third categories of citizens namely, thosewho have made the purchase and sale of VCs as their occupation or

Atrade, and those who are running online platforms and VC exchangescan certainly pitch their claim on the basis of Article 19(1)(g). Technicallyspeaking, the second category of citizens cannot claim that the impugneddecision of RBI has the effect of completely shutting down their tradeor occupation. Citizens who have taken up the trade of buying and sellingvirtual currencies are not prohibited by the impugned Circular (i) eitherBfrom trading in crypto-to-crypto pairs (ii) or in using the currencies storedin their wallets, to make payments for purchase of goods and services tothose who are prepared to accept them, within India or abroad. As amatter of fact, reports/articles in online journals suggest (i) that feweateries such as Kolonial, vintage themed pizzeria in Mumbai’s WorliCarea, Suryawanshi restaurant in Indiranagar, Bengaluru and Suri AndhraMess in Taramani, Chennai were accepting payments in virtualcurrencies (Mumbai and Chennai eateries are now closed and the onein Bangalore has stopped accepting) and (ii) that there are fewintermediaries which accept payments in Bitcoins for gift cards which inturn facilitate online shopping from popular sites.D

6.150. An important aspect to be taken note of is that virtualcurrencies cannot be stored anywhere, in the real sense of the term, asthey do not exist in any physical shape or form. What is actually storedis the private keys, which can be used to access the public address andtransaction signatures.E

6.151. The software program in which the private and public keysof those who own virtual currencies is stored, is called digital wallet.There are different types of wallets namely (i) paper wallet which isessentially document that contains public address for receiving thecurrency and private key which allows the owner to spend or transferFthe virtual currencies stored in the address (ii) mobile wallet, which isa tool which runs as an app on the smartphone, where the private keysare stored, enabling the owner to make payments in crypto currenciesdirectly from the phone (iii) web wallet, in which the private keys arestored on server which is constantly online (iv) desktop wallet, inGwhich private keys are stored in the hard drive and (v) hardware wallet,where the private keys are stored in hardware device such as pendrive.

6.152. All the above types of wallets except the desktop walletallow great degree of flexibility, in that they can be accessed fromHanywhere in the world. For instance, paper wallets are printed in the

form of QR codes that can be scanned, and transaction completed byusing the private keys. Similarly, mobile wallets run as an app on thesmartphone and hence they allow person to use the crypto currencystored in the wallet for buying anything, even while travelling abroad,provided the vendor accepts payments in crypto currencies. Paper walletsand mobile wallets can also be used to draw fiat currency from virtualcurrency ATMs available in countries like USA, Canada, Switzerland,etc.

6.153. In other words, most of the wallets except perhaps desktopwallet, have great mobility and have transcended borders. Therefore,despite the fact that the users and traders of virtual currencies are alsoprevented by the impugned Circular from accessing the banking services,the impugned Circular has not paralyzed many of the other ways inwhich crypto currencies can still find their way to or through the market.

6.154. Persons who have suffered deadly blow from theimpugned Circular are only those running VC exchanges and not eventhose who are trading in VCs. Persons trading in VCs, even now havedifferent options, some of which we have discussed above (wizardsmay have many more options). But the VC exchanges do not appear tohave found out any other means of survival (at least as of now) if theyare disconnected from the banking channels.

6.155. In all cases where legislative/executive action infringingthe right guaranteed under Article 19(1)(g) were set at naught by thiscourt, this court was concerned with ban/prohibition of an activity. Thequestion of the prohibited/banned activities having the potential todestabilize an existing system, did not arise in those cases. The pleadingscontained in the first writ petition filed by the Association, would showthat three companies who are members of the Internet and MobileAssociation of India, had combined total of approximately 17 lakhsverified users throughout India. These companies held combined totalof approximately Rs. 1365 crores of user funds in trust. The approximatemonthly transaction volume of just these three companies was aroundRs. 5000 crores. Even according to the petitioner, the crypto asset industryis estimated to have market capitalization of approximately 430 billionUS dollars globally. India is estimated to contribute between 2 and 10%based on varied estimates. It is admitted in WP (C) No. 373 of 2018 thatthe total number of investors in Indian crypto market was approximately20 lakhs and the average daily trade volume was at least Rs. 150 crores,

Aat the time when the writ petition was filed. Therefore, if centralauthority like RBI, on conspectus of various factors perceive the trendas the growth of parallel economy and severs the umbilical cord thatvirtual currency has with fiat currency, the same cannot be very lightlynullified as offending Article 19(1)(g).

B6.156. But nevertheless, the measure taken by RBI should passthe test of proportionality, since the impugned Circular has almost wipedthe VC exchanges out of the industrial map of the country, therebyinfringing Article 19(1)(g). On the question of proportionality, the learnedCounsel for the petitioners relies upon the four-pronged test summed upin the opinion of the majority in Modern Dental College and ResearchCCentre v. State of Madhya Pradesh.[109] These four tests are (i) that themeasure is designated for proper purpose (ii) that the measures arerationally connected to the fulfillment of the purpose (iii) that there areno alternative less invasive measures and (iv) that there is properrelation between the importance of achieving the aim and the importanceDof limiting the right. The court in the said case held that mere ritualisticincantation of “money laundering” or “black money” does not satisfythe first test and that alternative methods should have been explored.

6.157. Let us now see whether the impugned Circular would failthe four-pronged test. In fact, the Privy Council originally set forth inEElloy de Freitas v. Permanent Secretary of Ministry of Agriculture,Fisheries, Lands and Housing,[110] only three-fold test namely (i)whether the legislative policy is sufficiently important to justify limiting afundamental right (ii) whether the measures designed to meet thelegislative objective are rationally connected to it and (iii) whether themeans used to impair the right or freedom are no more than is necessaryFto accomplish the objective. These three tests came to be known as DeFreitas test. But fourth test namely “the need to balance the interestsof society with those of individuals and groups” was added by the Houseof Lords in Huang v. Secretary of State for the Home Department.[111]These four tests were more elaborately articulated by the Supreme CourtGof United Kingdom in Bank Mellat v. HM Treasury (No. 2).[112]

109 (2016) 7 SCC 353110 [1999] 1 AC 69111 [2007] UKHL 11H112 [2013] UKSC 39

6.158. Bank Mellat (supra) is an important decision to be takennote of, as it concerned almost an identical measure by which HerMajesty’s Treasury restricted access to the UK’s financial markets by amajor Iranian commercial bank on account of its alleged connectionwith Iran’s nuclear program. This was done by the Treasury by way ofa direction under Schedule 7 of the Counter Terrorism Act, 2008, requiringall persons operating in the financial sector not to have any commercialdealings with Bank Mellat. Schedule 7 of the Act dealt with “terroristfinancing and money laundering”. This Schedule 7 has several parts,Part 1 providing “conditions for giving direction”, Part 2 indicating the“persons to whom direction may be given”, Part 3 laying down therequirements that may be imposed by direction, Part 4 containing“procedural provisions and licensing”, Part 5 dealing with enforcementand information powers, Part 6 dealing with civil penalties, Part 7 listingout the offences and Part 8 containing supplemental provisions. Paragraph14 of Schedule 7 of the said Act enables the Treasury to issue generaldirections, to all persons or description of persons operating in thefinancial sector. But certain procedural safeguards are provided inparagraph 14(2) as well as paragraph 9(6). Under paragraph 14(2), ageneral direction issued to persons operating in the financial sector, mustbe laid before the Parliament and will cease to have effect if not approvedby resolution of each House of Parliament before the end of 28 days.Under paragraph 9(6), the requirements imposed by direction, either inthe form of customer due diligence or in the form of ongoing monitoringor in the form of systematic reporting or in the form of limiting or ceasingbusiness, should be proportionate, having regard to the advice given bythe Financial Action Task Force or having regard to the reasonable beliefthat the Treasury has about the risks of terrorist financing or moneylaundering activities or the development of radiological, biological, nuclearor chemical weapons. In addition to these procedural safeguards, Section63 of the aforesaid Act provided for remedy to person affected byany such decision of the Treasury, to apply to the High Court or inScotland, to the Court of Session. Section 63(3) specifically recognizedthe application of the principles of judicial review, to the applicationsfiled against such measures.

6.159. It is in the context of those specific statutory prescriptionsfor judicial review available in UK (unlike in India) that Bank Mellatchallenged the Treasury’s decision. The challenge was both on proceduraland substantive grounds. By majority of 6 to 3, the Supreme Court of

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Athe United Kingdom allowed the appeal of the Bank on proceduralgrounds. On the substantive grounds, the appeal of the Bank was allowedby majority of 5 to 4.

6.160. Lord Reed who wrote dissent both on the proceduralgrounds and the substantive grounds, traced the history of the doctrineBof proportionality as follows:

68. The idea that proportionality is an aspect of justice canbe traced back via Aquinas to the Nicomachean Ethics andbeyond. The development of the concept in modern times as astandard in public law derives from the Enlightenment, whenthe relationship between citizens and their rulers came to beconsidered in new way, reflected in the concepts of the socialcontract and of natural rights. As Blackstone wrote in hisCommentaries on the Laws of England, 9[th] (1783), Vol 1, p125, the concept of civil liberty comprises “natural liberty sofar restrained by human laws (and not farther) as is necessaryand expedient for the general advantage of the public”. Theidea that the state should limit natural rights only to theminimum extent necessary developed in Germany into publiclaw standard known as Verhältnismäßigkeit, orproportionality. From its origins in German administrative law,where it forms the basis of rigorously structured analysis ofthe validity of legislative and administrative acts, the conceptof proportionality came to be adopted in the case law of theEuropean Court of Justice and the European Court of HumanRights. From the latter, it migrated to Canada, where it hasreceived particularly careful and influential analysis, andfrom Canada it spread to number of other common lawjurisdictions.

69. Proportionality has become one of the general principlesof EU law, and appears in article 5(4) of the Treaty onEuropean Union (“TEU”). The test is expressed in morecompressed and general terms than in German or Canadianlaw, and the relevant jurisprudence is not always clear, atleast to reader from common law tradition. In R v Ministry

of Agriculture, Fisheries and Food, ex p Fedesa and others(Case C-331/88) [1990] ECR I-4023, the European Court ofJustice stated (para 13):

“The Court has consistently held that the principle ofproportionality is one of the general principles of Communitylaw. By virtue of that principle, the lawfulness of theprohibition of an economic activity is subject to the conditionthat the prohibitory measures are appropriate and necessaryin order to achieve the objectives legitimately pursued by thelegislation in question; when there is choice between severalappropriate measures recourse must be had to the leastonerous, and the disadvantages caused must not bedisproportionate to the aims pursued.”

The intensity with which the test is applied – that is to say, thedegree of weight or respect given to the assessment of theprimary decision-maker - depends upon the context.

70. As I have mentioned, proportionality is also conceptapplied by the European Court of Human Rights. As the courthas often stated, inherent in the whole of the Convention is asearch for fair balance between the demands of the generalinterest of the community and the requirements of the protectionof the individual’s fundamental rights (see eg Sporrong andLönnroth v Sweden (1982) 5 EHRR 35, para 69). The courthas described its approach to striking such balance indifferent ways in different contexts, and in practice oftenapproaches the matter in relatively broad-brush way. Incases concerned with A1P1, for example, the court has oftenasked whether the person concerned had to bear an individualand excessive burden (see eg James v United Kingdom (1986)8 EHRR 123, para 50). The intensity of review variesconsiderably according to the right in issue and the contextin which the question arises. Unsurprisingly, given that it isan international court, its approach to proportionality doesnot correspond precisely to the various approaches adoptedin contracting states.71. An assessment of proportionality inevitably involves avalue judgment at the stage at which balance has to be

struck between the importance of the objective pursued andthe value of the right intruded upon. The principle does nothowever entitle the courts simply to substitute their ownassessment for that of the decision-maker. As I have noted,the intensity of review under EU law and the Convention variesaccording to the nature of the right at stake and the contextin which the interference occurs. Those are not however theonly relevant factors. One important factor in relation to theConvention is that the Strasbourg court recognises that it maybe less well placed than national court to decide whetheran appropriate balance has been struck in the particularnational context. For that reason, in the Convention case lawthe principle of proportionality is indissolubly linked to theconcept of the margin of appreciation. That concept does notapply in the same way at the national level, where the degreeof restraint practised by courts in applying the principle ofproportionality, and the extent to which they will respect thejudgment of the primary decision maker, will depend uponthe context, and will in part reflect national traditions andinstitutional culture. For these reasons, the approach adoptedto proportionality at the national level cannot simply mirrorthat of the Strasbourg court.

72. The approach to proportionality adopted in our domesticcase law under the Human Rights Act has not generallymirrored that of the Strasbourg court. In accordance with theanalytical approach to legal reasoning characteristic of thecommon law, more clearly structured approach has generallybeen adopted, derived from case law under Commonwealthconstitutions and Bills of Rights, including in particular theCanadian Charter of Fundamental Rights and Freedoms of1982. The three-limb test set out by Lord Clyde in De Freitasv Permanent Secretary of Ministry of Agriculture, Fisheries,Lands and Housing [1999] 1 AC 69, 80 has been influential:

“whether: (i) the legislative objective is sufficiently importantto justify limiting fundamental right; (ii) the measuresdesigned to meet the legislative objective are rationallyconnected to it; and (iii) the means used to impair the right orfreedom are no more than is necessary to accomplish theobjective.”

De Freitas was Privy Council case concerned withfundamental rights under the constitution of Antigua andBarbuda, and the dictum drew on South African, Canadianand Zimbabwean authority. The three criteria have howeveran affinity to those formulated by the Strasbourg court incases concerned with the requirement under articles 8 to 11that an interference with the protected right should benecessary in democratic society (eg Jersild v Denmark(1994) Publications of the ECtHR Series No 298, para 31),provided the third limb of the test is understood as permittingthe primary decision-maker an area within which its judgmentwill be respected.

73. The De Freitas formulation has been applied by the Houseof Lords and the Supreme Court as test of proportionalityin number of cases under the Human Rights Act. It washowever observed in Huang v Secretary of State for the HomeDepartment [2007] UKHL 11; [2007] 2 AC 167, para 19that the formulation was derived from the judgment of DicksonCJ in R v Oakes [1986] 1 SCR 103, and that further elementmentioned in that judgment was the need to balance theinterests of society with those of individuals and groups. That,it was said, was an aspect which should never be overlookedor discounted. That this aspect constituted fourth criterionwas noted by Lord Wilson, with whom Lord Phillips and LordClarke agreed, in R (Aguilar Quila) v Secretary of State forthe Home Department [2011] UKSC 45; [2012] 1 AC 621,para 45.74. The judgment of Dickson CJ in Oakes provides the clearestand most influential judicial analysis of proportionality withinthe common law tradition of legal reasoning. Its attraction asa heuristic tool is that, by breaking down an assessment ofproportionality into distinct elements, it can clarify differentaspects of such an assessment, and make value judgmentsmore explicit. The approach adopted in Oakes can besummarised by saying that it is necessary to determine (1)whether the objective of the measure is sufficiently importantto justify the limitation of protected right, (2) whether themeasure is rationally connected to the objective, (3) whether

less intrusive measure could have been used withoutunacceptably compromising the achievement of the objective,and (4) whether, balancing the severity of the measure’s effectson the rights of the persons to whom it applies against theimportance of the objective, to the extent that the measurewill contribute to its achievement, the former outweighs thelatter. The first three of these are the criteria listed by LordClyde in De Freitas, and the fourth reflects the additionalobservation made in Huang. I have formulated the fourthcriterion in greater detail than Lord Sumption, but there is nodifference of substance. In essence, the question at step fouris whether the impact of the rights infringement isdisproportionate to the likely benefit of the impugned measure.

75. In relation to the third of these criteria, Dickson CJ madeclear in R v Edwards Books and Art Ltd [1986] 2 SCR 713,781-782 that the limitation of the protected right must be “onethat it was reasonable for the legislature to impose”, and thatthe courts were “not called upon to substitute judicial opinionsfor legislative ones as to the place at which to draw preciseline”. This approach is unavoidable, if there is to be any realprospect of limitation on rights being justified: as BlackmunJ once observed, judge would be unimaginative indeed ifhe could not come up with something little less drastic or alittle less restrictive in almost any situation, and thereby enablehimself to vote to strike legislation down (Illinois ElectionsBd v Socialist Workers Party (1979) 440 US 173, 188- 189);especially, one might add, if he is unaware of the relevantpracticalities and indifferent to considerations of cost. To allowthe legislature margin of appreciation is also essential if afederal system such as that of Canada, or devolved systemsuch as that of the United Kingdom, is to work, since strictapplication of “least restrictive means” test would allowonly one legislative response to an objective that involvedlimiting protected right.

76. In relation to the fourth criterion, there is meaningfuldistinction to be drawn (as was explained by McLachlin CJin Alberta v Hutterian Brethren of Wilson Colony [2009] 2SCR 567, para 76) between the question whether particularobjective is in principle sufficiently important to justify limiting

particular right (step one), and the question whether, havingdetermined that no less drastic means of achieving theobjective are available, the impact of the rights infringementis disproportionate to the likely benefits of the impugnedmeasure (step four).

6.161. Despite the fact that the Iranian bank succeeded by greatermajority on procedural grounds and by thin majority on the substantivegrounds, common thread is seen, both, in the opinion of the majorityand in the opinion of the minority. Firstly, it was agreed even by themajority that cases which lay in the areas of foreign policy and nationalsecurity were once regarded as unsuitable for judicial scrutiny, but theyhave been opened up by the express terms of the 2008 Act, becausethey may engage the rights of designated persons or others under theEuropean Convention on Human Rights. Therefore, there was unanimityof opinion that any assessment of rationality and proportionalitymust recognize that the nature of the issue required the Treasury tobe allowed large margin of judgment. Even Lord Sumption whowrote the lead judgment for the majority agreed that “the making ofGovernment and legislative policy cannot be turned into judicialprocess”. An interesting statement made by Blackmun J in IllinoisElections Bd v. Socialist Workers Party[113] was quoted by Lord Reedin his dissent which reads “a judge would be unimaginative indeed ifhe could come up with something little less drastic or little lessrestrictive in almost any situation and thereby enable himself tovote to strike legislation down”. In essence, there was unanimity ofopinion on the fact that margin of appreciation should certainly beallowed to the decision-maker. But on the ground of proportionality, themajority struck down the ban imposed by the UK Treasury. The highlightsof the decision, as formulated by the court itself, read as follows:

(i) The essential question before the court was whether theinterruption of Bank Mellat’s commercial dealings in the UK bore somerational and proportionate relationship to the statutory purpose of hinderingthe pursuit by Iran of its nuclear weapons programmes.

(ii) For the majority, there were two particular difficulties with thedirection, namely (a) it did not explain or justify the singling out BankMellat; and (b) the justification was not one which Ministers advancedbefore Parliament, and was in some respects inconsistent with it.

113 (1979) 440 US 173

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A(iii) The risk, according to the majority, was not specific to BankMellat but an inherent risk of banking, and the risk posed by Bank Mellat’saccess to those markets was no different from that posed by othercomparable banks.

(iv) Singling out Bank Mellat, according to the court, was arbitraryBand irrational, and disproportionate to any contribution which it couldrationally be expected to make to the direction’s objective.

(v) By contrast, the minority were satisfied that, in view of thewide margin of appreciation given to the Treasury in these matters, thedirection was rationally connected to the objective and was proportionate.

6.162. We cannot and need not go as far as the majority had gonein Bank Mellat. U.K. has statute where standards of procedure forjudicial review are set out and the majority decision was on the applicationof those standards. But even by our own standards, we are obliged tosee if there were less intrusive measures available and whether RBIDhas at least considered these alternatives. On the question of availabilityof alternatives, the July 2018 report of the European Union Parliament(titled ‘Cryptocurrencies and Blockchain’) is relied upon by Shri AshimSood. The relevant portion (in paragraph 5.4) reads as follows:“In this respect we also note that some cryptocurrencies thatare now on the market, such as Dash and Monero, are fullyanonymous, whereas others, such as Bitcoin and the like arepseudo-anonymous, basically meaning that if great effort ismade and complex techniques are deployed, it is possible forauthorities to find out users’ identities. These fully anonymouscryptocurrencies are designed to stay in the dark and outsideof the scope of authorities. After AMLD5 (Fifth Anti-MoneyLaundering Directive of the European union) this will nolonger be possible to the fullest extent: the cryptocurrencyusers that want to convert their cryptocurrency into fiatcurrency via virtual currency exchange or hold theirportfolio via custodian wallet provider, will be subject tocustomer due diligence. But, as aforementioned, there is stilla whole world outside of these new obliged entities underAMLD5. It goes without saying that this may soundparticularly interesting for criminals seeking for new ways tolaunder money, finance terrorists or evade taxes. If

legislator does not want to outright ban these cryptocurrencies- and for not imposing such ban good argument is thatcash is also fully anonymous and lawful - the only way tofind out who uses them is to require users to registermandatorily. For reasons of proportionality it could then beconsidered to make the registration subject to materialitythreshold.” (emphasis supplied)

6.163. The discussion in paragraph 5.7 of the July 2018 Report ofthe European Union Parliament also addresses the issue as to whether itis best to introduce an outright ban for some aspects linked to somecrypto currencies. This paragraph reads as follows:

5.7. “Is it not best to introduce an outright ban for some aspectslinked to some cryptocurrencies?

The question arises whether some aspects relating to somecryptocurrencies should not just be banned and criminallysanctioned. To mind come the mixing process attached toDash’s feature PrivateSend and Monero’s RingCT, stealthaddresses and Kovri-project. In essence, these features aredesigned to make cryptocurrency users untraceable. But whyis such degree of anonymity truly necessary? Would allowingthis not veer too far towards criminals? Imposing ban forsuch aspects surrounding cryptocurrencies that are aimed atmaking it impossible to verify their users and criminallysanctioning these aspects seems to be in line with the Council’sconclusions of April 2018 on how to respond to maliciouscyber activities, under which that the use of ICT for maliciouspurposes is unacceptable. Whatever the answer may be, wemust again avoid being naive: even if ban would be imposed,how do we detect breach, given that the purpose of theobject of the ban just is to obscure identities? Nevertheless,it would be worthwhile to consider introducing ban. Ifauthorities then bump into the prohibited activities, they havea legal basis for prosecution, insofar not yet available.Possibly, imposing ban could also have deterrent effect.Of course, again there is the tension with data protection, butarguably in the balance of things the interest of authoritiesand society to more effectively combat money laundering,

432SUPREME COURT REPORTS

Aterrorist financing and tax evasion via well-defined specificbans outweighs the interest of persons desiring to hide theiridentities completely. In any event, imposing ban shouldalways be focused on specific aspects facilitating the illicituse of cryptocurrency too much. We are not in favour ofBgeneral bans on cryptocurrencies or barring the interactionbetween cryptocurrency business and the formal financialsector as whole, such as is the case in China for example.That would go too far in our opinion. As long as goodsafeguards are in place protecting the formal financial sectorand more in general society as whole, such as rulesCcombating money laundering, terrorist financing, tax evasionand maybe more comprehensive set of rules aiming atprotecting legitimate users (such as ordinary consumers andinvestors), that should be sufficient.” (emphasis supplied)

6.164. Thus, the ultimate recommendation made by theDEuropean Union Parliament in the paragraph extracted above, isnot to go for total ban of the interaction between crypto currencybusiness and the formal financial sector as whole. Obviously, RBIdid not consider the availability of alternatives before issuing the impugnedcircular. But by an interim direction, issued on 21-08-2019 this courtEdirected RBI to give detailed point-wise reply to the representations ofthe petitioners. Pursuant to the said order, RBI gave reply dated 04-09-2019. In the reply, RBI has dealt with every one of the contentions ofthe petitioners. The relevant portion reads as follows:

“Firstly, the RBI has not prohibited VCs in the country. TheFRBI has directed the entities regulated by it to not provide servicesto those persons or entities dealing in or settling VCs. The risksassociated with VCs that are highlighted by the RBI standsmitigated so far as the entities regulated by it are concerned. Thus,the RBI been able to ring fence the entities regulated by it frombeing involved in activities that pose reputational and financialGrisks along with other legal and operational risks. For example,VCs have been used to defraud consumers in Rs. 2000 crorescam in India whereby users were assured returns upon theirinvestment in GainBitcoin and were paid their return in anotherform of VC, whose value was much lower than that of GainBitcoin.

We do not agree that the Circular has the effect of forcingmembers to do deal in cash. The Circular neither directs norencourages any dealing with respect to VCs at all. After theissuance of the Circular, some of the IAMAI member VCexchanges have been operating peer to peer VC exchanges. InP2P transfers, while the exchange provides portal to match theorders of seller and buyer, the consideration would flow directlyfrom the buyer to the seller without the exchanges being anintermediary for this leg of the trade. The exchanges would onlyact as the intermediary for the storing the VCs till the time thetransfer of the consideration from the buyer to the seller iscomplete. In other words, the exchanges act as an escrow agentfor the transaction between the buyer and the seller. The buyersin the P2P transaction transfer the consideration directly to theseller’s bank account. In any case, the capital flight problemmentioned by the petitioner is not new and existed even beforethe issuance of the Circular. As mentioned earlier, the IAMAIVC exchanges allowed their customers to transfer VCs to foreignwallet addresses, even before the issuance of the Circular,exposing the customers to the risks of violating FEMA, AML/CFT guidelines.The issues highlighted by IAMAI have been considered by theRBI. The RBI, as the banking and financial regulator of Indianmarkets, assessed the risks and benefits arising from theexponential and increasing use of VCs. The potential adverseimpact of VCs on the banking sector and the digitization of theIndian payments industry, on account of the inherent nature ofVCs, is lowered as result of the Circular. The RBI stepped in aspart of its duty to carryout preventive oversight to ensure that thebanking system was not casualty on account of the growth inVC trading. The Circular became all the more necessary as theuse and trade through VCs continued to grow despite multiplecautions issued by the RBI. Further, the public should not losefaith in the Indian digital payments ecosystem as consequenceof any impact of VCs given its intrinsic nature. The focus of thedigital payments in India will be defeated should the usage ofVCs result in implications. Any unpleasant experience in usingVCs can affect the public’s trust in electronic payment systemsin general.

ABCD

AIt is in this context that the RBI had highlighted some of thepossible ways to enforce the prohibition on VCs in the RBIRepresentation, which are as follows:

(i)Initial Coin Offerings (“ICOs”) ought to be prohibitedand VC asset funds may to be allowed to be set-up and/Bor operated within the legal jurisdiction of India as alsoperform such transactions in India. ICOs that were inthe nature of multi -level marketing or pyramid schemescan be banned;

(ii)The FEMA and its regulations can be enhanced toCprevent and track remittances for the purpose ofinvesting in VCs which are flowing out of the countryunder the LRS;

(iii)Enforcement agencies can take punitive action againstentities/establishments that accept VCs as medium ofDpayment, as and when these agencies are faced withsuch instances; and

(iv)Regulators can issue warnings to the public andeducated the public to the extent possible.

One must also be alive to the issue faced by the country. IndiaEis not safe haven free from any external intrusions and terrorattacks. India is plagued by the menace of cross border terrorfinancing and money laundering. While laws have been enacted tocounter terror financing and money laundering activities, theGovernment cannot permit anything which would facilitate or haveFthe potential to facilitate such nefarious and illegal acts to incubatein the country. Any possible avenues which facilitate anonymouscross border fund transfer have to be acted upon swiftly andstringently dealt with. It is an admitted fact that VCs have beenused to purchase illegal and illicit goods ranging from guns andammunition to drugs. Therefore, the RBI’s measures under theGCircular become all the more necessary. With the Circular cominginto effect, the banking system and the RBI’s regulated entities wouldnot be facilitating persons looking to obtain VCs for illegal trades.Th additional measures taken by the RBI by way of the Circularwere necessary as, despite multiple cautions, 5 million Indian usersengaged in VC trades of INR 1 billion daily.” (emphasis supplied)H

6.165. In Annexure to their second response dated 18-09-2019,RBI has also dealt with every one of the additional safeguards proposedby one of the writ petitioners, by name, Discidium Internet Labs Pvt,Ltd. and demonstrated as to how these safeguards may not be sufficientto ring fence the regulated entities:

Safeguards proposed byResponse of RBIpetititonersDevelopment of dashboardThe technology and concept of dashboard that isand central repositoryaccessible by all the relevant government authoritiesis yet to be tested in India and cannot guarantee thatCthe same will enable authorities to mitigate risks inrelation to VCs, particularly the ones arising out ofcross border transactions or illegal and nefariousactivities. Such development would require theassociation of various government authorities atdifferent levels with implications on the roles andresponsibilities of other regulatory/enforcementDagencies and cannot be implemented by the RBI alone.Therefore, even assuming that the proposed structureis adequate enough, its implementation will entailother authorities to formulate the appropriate rulesor directions in their jurisdictions, which is beyondthe RBI's control. In any case, for such developmentto come into existence, the Government will need toEformulate and establish appropriate rules governingthe nitty gritty of the same.In addition, VCs are difficult to monitor as theiropaque nature makes it difficult to gather informationand monitor their operations. Moreover, assertingjurisdiction over particular VC transaction or marketparticipant may prove challenging for nationalFregulators in the light of the cross-border reach of thetechnology.Formation of self-Issuance and management have been function solelyregulatory organization andof the sovereign/central bank and collection ofRestricting trade of crypto-private entitites cannot be trusted to perform thisassets to white listedrole. Moreover, when such VCs become widely used,Gaddressesthe central bank's ability to control the money supplyin the economy could get adversely impacted. In fact,implications of VCs vis-a-vis consumer protection,data privacy and security were also highlighted. Itwas also acknowledged that there are severalH

[2020] 2 S.C.R.

Auncertainties around the VC, particularly with respectto how the VC is secured, the extent to which thereare measures to prevent and respond to the dramaticshifts of value; and the characterization of the sellersof such VC. Additionally, it was recognized thatthere can be implications on the US monetary policyas another ‘currency’ not under the governmentBcontrol can adversely impact the Federal Reserve'smonetary policy as the Federal Reserve would loseits monopoly on controlling inflation and inflationtargeting though manipulating cash in the system.Adoption of Aadhar basedElectronic KYC is currently permitted only for bankselectronic KYCfor individuals desirous of receiving any benefit orCsubsidy under any scheme notified under Section 7of the Aadhaar (Targeted Delivery of Financial andOther Subsidies Benefits and Services) Act, 2016 orif an individual voluntarily uses his/her Aadhaarnumber for identification purpose.Moreover, the adoption of Aadhaar based electronicDKYC may not be sufficient to address the risks statedby the RBI in the Press Releases. This is because forthe RBI to issue norms/measures that sufficientlyresolves and/or mitigated the stated risks of dealingin VCs, it has to be privy to the technicalities of thevarious types of VCs, their characteristics anddifficulties and drawbacks. There is still high levelEof uncertainty and ambiguity surrounding VCs.Regulators around the world are still in factcontemplating how to regulate initial coin offeringsand how to tax them. The RBI is keeping close tabon all such developments including the regulatorystand taken by each jurisdictions across the worldand will consider implementing the same to the extentFof its jurisdiction and in line with the policyframework that will be adopted by the Governmentof India in relation to VCs.MandatoryDILPL has failed to set out the benefit or securitycapitalisationprovided by the proposed mandatory capitalisationrequirementrequirements. In the absence of any benefitsGprescribed by DILPL, the RBI has to rely uponconjecture and surmises to assume the purportedbenefits of this suggestion. Notably, the fact thatcertain jurisdictions prescribe mandatorycapitalisation requirements does not necessarilymake the suggestion beneficial or implementable inIndia.H

The only benefit which reasonable person mayAassume is that the VC exchanges will have to be ofa minimum prescribed size and value. However,the mandatory capitalisation requirement of VCexchanges would not reduce the inherent risksinvolved in VCs. VCs transactions would continueto be anonymous and untraceable. The mandatorycapitalisation requirement does not reduce the useBof VCs in nefarious activities and illegal cross-border transactions. Further, the mandatorycapitalisation requirement does not provide anysecurity or benefit to the monetary and bankingsystem from the risks associated with VCs.CPertinently, the suggestion includes prescribing amandatory capitalisation requirement in VCs itself.Given the instability and price fluctuations of VCs,the RBI rejects any suggestion of providing asecurity or capitalisation requirement in VC itself.Additionally, the suggested mandatorycapitalisation requirement would also not reduceDthe risks to consumers arising not only from fraudbut also from the possible loss of value given thefluctuations and manipulation VCs' value.Insurance of crypto-assetsFirstly, Indian Insurance service providers are notgoverned by the RBI. Insurance providers comeEwithin the regulatory jurisdiction of the InsuranceRegulatory and Development Agency (“IRDA”).Therefore, the RBI cannot assume jurisdiction overinsurance providers by directing them to formulatetailored insurance policies for VC exchanges. It isfor the purpose of such regulatory aspects, thatthe Inter-Ministerial Committee was constituedFto study VCs. Accordingly, the RBI had, at thattime, forwarded copy of the Representation tothe Inter-Ministerial Committee for their dueconsideration.Secondly, Indian insurance providers, as mandatedby the IRDA, take cautious approach to theGinsurance policies offered by them. Therefore, theinsurance providers may not, either suo moto oron account of IRDA's directions, offer insurancepolicies to protect VCs. Further, this cautiousapproach includes various limitation or exclusionof liability clauses. Therefore, the insurance policiesmay not provide adequate cover in the event ofHAany value degradation, loss or theft of VCs. Moreover,the highly speculative and fluctuating value of VCs isa risk which ought not to be borne by the insuranceproviders, who are already suffering from the variousfinancial frauds in the Indian monetary and bankingsystem.BFormation of an investorDILPL suggests setting up an investor protection andprotection and educationeducation fund, for which the VC exchanges wouldfundtransfer all proceeds earmarked towards theircorporate social responsibility (“CSR”) obligationsunder the Companies Act, 2013. This suggestion, asper the RBI, would not protect the customers asclaimed by Discidium as the steps would beCinsufficient to provide adequate cover to customers.Notably, Discidium has not suggested that it createany additional buffer for the education and protectionof its customers but instead, has merely suggestedthat VC exchanges transfer its existing legal obligationsto create fund which would purportedly benefitcustomers.DDespite best efforts made to educate customers, theinherent risks in VCs would still remain. It is reiteratedthat VCs transactions would remain anonymous andopen to facilitating illegal activities. It is unlikely thatthe education of customers would change the intentof nefarious customers, who would continue toEconduct illicit transactions through VCs. Theanonymous nature of VCs cannot be disputed. Thetransactions in VCs are anonymous due to thepseudonymous address or user handle. For instance,the reportedly largest transfer of Bitcoins, worth nearlyUSD 1 billion,[114] took place as recently as September2019, was between anonymous accounts. Even if theFexchanges try to mitigate the risks of cyber-attacksby subscribing to insurance products, the risks arelikely to spread to sectors other than banking.Further, the utilisation of CSR funds is not regulatedor governed by the RBI. Therefore, implementationof this suggestion would require other authorities toGformulate necessary rules or directions, which isbeyond the RBI's control and would depend on thefinal law passed by the Parliament based on thecurrently pending draft Banning of Cryptocurrencyand Regulation of Official Digital Currency Bill, 2019.114https://www.vice.com/en_in/article/bjwjpd/someone-just-moved-a-billion-dollars-in-bitcoin-and-no-Hone-knows-whywhich; last accessed on September 12, 2019.

6.166. Though at the time when the impugned Circular was issued,RBI has not obviously addressed many of the issues flagged by the writpetitioners, RBI did in fact consider the issues raised by the petitioners,pursuant to the order passed by this court on 21-08-2019. RBI has alsoanalyzed in Annexure to the reply dated 18-09-2019 extracted above,the additional safeguards suggested by the petitioners, to see if the purposeof the impugned measure can be achieved through less intrusivemeasures. While exercising the power of judicial review we may notscan the response of RBI in greater detail to find out if the response tothe additional safeguards suggested by the petitioners was just imaginary.

6.167. But at the same time we cannot lose sight of three importantaspects namely, (i) that RBI has not so far found, in the past 5 years ormore, the activities of VC exchanges to have actually impacted adversely,the way the entities regulated by RBI function (ii) that the consistentstand taken by RBI up to and including in their reply dated 04-09-2019 isthat RBI has not prohibited VCs in the country and (iii) that even theInter-Ministerial Committee constituted on 02-11-2017, which initiallyrecommended specific legal framework including the introduction of anew law namely, Crypto-token Regulation Bill 2018, was of the opinionthat ban might be an extreme tool and that the same objectives can beachieved through regulatory measures. Paragraph 7 of the ‘Note-precursor to report’ throws light on the same and hence it is reproducedas follows:

“Options

7. The Committee has considered various approaches toachieve the objectives and notes:

Achieving the objectives by doing nothing

i. Issuing warnings may prevent unsophisticated consumersfrom dealing in VCs but it would not deter VC service providersor those raising funds through Initial Coin Offerings (ICOs),mis-sell or run Ponzi schemes.

ii. The recourse available to customers would be inadequate.

iii. Persons who provide VC services without necessary fitand proper criteria including capital and technology wouldcontinue to pose heightened risk.

Achieving the objectives through banning

i. Consumer protection is key concern but ban might bean extreme too to address this. There are many things/activitiesthat may be harmful but they are not all banned. Problemsrelated to information asymmetry, concerns around marketBrisks, law enforcement or threat to financial system cannotbe adequately addressed through ban.

ii. ban would make dealing in VCs illegal but simultaneouslyit might decrease the ability of the law enforcement agenciesand regulators to track and stop illegal activities.

iii. Ver few countries have actually banned VCs. ban mightnot be in-step with India’s position as an important centre ofInformation Technology services.

Achieving the objectives by regulating

Di. Penalizing entities or persons who do not opt for regulationunder this Act and may choose to operate illegally maycontinue to be difficult.”

6.168. The Crypto-token Regulation Bill, 2018 initiallyrecommended by the Inter-Ministerial Committee contained proposal(i) to prohibit persons dealing with activities related to crypto tokensEfrom falsely posing these products as not being securities or investmentschemes or offering investment schemes due to gaps in the existingregulatory framework and (ii) to regulate VC exchanges and brokerswhere sale and purchase may be permitted.

6.169. The key aspects of the Crypto-token Regulation Bill, 2018,Ffound in paragraph 13 of the ‘Note-precursor to report’ shows that theInter-Ministerial Committee was fine with the idea of allowing the saleand purchase of digital crypto asset at recognized exchanges. Paragraph13 (iii) & (vii) of the ‘Note-precursor to the report’ reads as follows:

13. Key aspects are summarised below:G

(iii) The sale and purchase of digital crypto asset shall only bepermitted at recognised exchanges.

(vii) The registry of all holdings and transactions on therecognised exchanges shall be maintained at recogniseddepositories.

6.170. But within year, there was volte-face and the finalreport of the very same Inter-Ministerial Committee, submitted inFebruary 2019 recommended the imposition of total ban on privatecrypto currencies through legislation to be known as “Banning ofCryptocurrency and Regulation of Official Digital Currency Act, 2019”.The draft of the bill contained proposal to ban the mining, generation,holding, selling, dealing in, issuing, transferring, disposing of or using cryptocurrency in the territory of India. At the same time, the bill contemplated(i) the creation of digital rupee as legal tender, by the centralgovernment in consultation with RBI and (ii) the recognition of any officialforeign digital currency, as foreign currency in India.

6.171. In case the said enactment (2019) had come through, therewould have been an official digital currency, for the creation andcirculation of which, RBI/central government would have had monopoly.But that situation had not arisen. The position as on date is that VCs arenot banned, but the trading in VCs and the functioning of VC exchangesare sent to comatose by the impugned Circular by disconnecting theirlifeline namely, the interface with the regular banking sector. What isworse is that this has been done (i) despite RBI not finding anythingwrong about the way in which these exchanges function and (ii) despitethe fact that VCs are not banned.6.172. As we have pointed out earlier, the concern of RBI is andit ought to be, about the entities regulated by it. Till date, RBI has notcome out with stand that any of the entities regulated by it namely, thenationalized banks/scheduled commercial banks/co-operative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, onaccount of the interface that the VC exchanges had with any of them.As held by this court in State of Maharashtra v. Indian Hotel andRestaurants Association,[115] there must have been at least some

Aempirical data about the degree of harm suffered by the regulated entities(after establishing that they were harmed). It is not the case of RBI thatany of the entities regulated by it has suffered on account of the provisionof banking services to the online platforms running VC exchanges.

6.173. It is no doubt true that RBI has very wide powers not onlyBin 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 economyof the country. These powers can be exercised both in the form ofpreventive as well as curative measures. But the availability of power isdifferent from the manner and extent to which it can be exercised. Whilewe have recognized elsewhere in this order, the power of RBI to take aCpre-emptive action, we are testing in this part of the order theproportionality of such measure, for the determination of which RBIneeds to show at least some semblance of any damage suffered by itsregulated entities. But there is none. When the consistent stand of RBIis that they have not banned VCs and when the Government of India isDunable to take call despite several committees coming up with severalproposals including two draft bills, both of which advocated exactlyopposite positions, it is not possible for us to hold that the impugnedmeasure is proportionate.

7. CLIMAX

7.1. Therefore, in the light of the above discussion, the petitionersare entitled to succeed and the impugned Circular dated 06-04-2018 isliable to be set aside on the ground of proportionality. Accordingly, thewrit petitions are allowed and the Circular dated 06-04-2018 is set aside.The Statement dated 05-04-2018, though challenged in one writ petition,Fis not in the nature of statutory direction and hence the question ofsetting aside the same does not arise.

7.2. There is still one more issue left. It is the freezing of theaccount of Discidium Internet Labs Pvt. Ltd., which is petitioner no. 6 inWP (C) No. 373 of 2018. This company seems to have had an amountGof Rs. 12,05,36,667.83/- in current account no. 3677101984 with theCentral Bank of India, Worli, Mumbai. When the petitioner made arequest on 21-05-2018 to close the account and issue demand draft,the Central Bank replied that they had referred the matter to their higherauthorities/regulators. Therefore, petitioner no. 6 has come up with anapplication in I.A. No. 110424 of 2019 for appropriate directions.H

7.3. RBI has filed reply to this application conceding that it hadnot directed the bank to freeze the account. It is specifically stated inparagraph 12 of the affidavit-in-reply of RBI that they did not issue anydirection to the Central Bank of India to freeze the account. However,RBI has taken stand that the prayer for release of the amount does notarise out of or incidental to the main writ petition.

7.4. But we think that the lukewarm response of RBI in this regardis wholly unjustified. Admittedly, the activities carried on by the petitionerno. 6 were not declared as unlawful. It is the positive case of RBI thatthey did not in fact freeze the accounts of petitioner no. 6. Therefore,RBI is obliged to direct the Central Bank of India to defreeze the accountand release the funds. Hence, RBI is directed to issue instructionsforthwith to the Central Bank of India, Worli branch, to defreeze thecurrent account no. 3677101984 of petitioner no. 6 in WP (C) No. 373of 2018 and to release the funds lying in the account to the companytogether with interest at the rate applicable. There will be no order as tocosts.

7.5. Before drawing the curtains down, we are bound to record,as in every artistic display, our appreciation for the skillful manner inwhich Shri Ashim Sood, learned Counsel, led the attack on the impugnedCircular, but for which, the climax could not have had nail biting finish.

Divya Pandey

Petitions allowed.