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The use of cryptocurrency has always been a point of contention
with its legality being a mystery to public. Bitcoins are a form of
digital currency and are not considered to be legal tender.
However, these are capable of functioning as a medium of exchange
akin to money. The lack of a traditional government or bank-backed
system to regulate its use makes cryptocurrencies the target of
several concerns such as it being a conduit for black money or
anonymously funding terrorism. Despite the odds, cryptocurrencies
have gained popularity worldwide and the cryptocurrency market in
India has also been slowly gathering momentum.
Since 2013, various warnings were issued by the RBI through its
press releases regarding the potential risks of use of
cryptocurrencies to the financial system of the country. The
Inter-ministerial Committee on February 28, 2019 had also released
a report recommending certain measures in relation to
cryptocurrencies, which included a complete ban on private
cryptocurrencies. This committee had also prepared a draft bill
known as Crypto Token and Crypto Asset (Banning, Control and
Regulation) Bill, 2018 (the fate of which is currently unknown).
However, the use of cryptocurrency per se, was never banned.
In April 2018, the RBI issued a circular banning regulated
financial institutions from providing services to businesses
dealing in exchange/trading of cryptocurrencies, which put the
entire Indian cryptocurrency trading industry in turmoil. The
validity of the circular was challenged before the Supreme Court in
various writ petitions lead by crypto-trading entities. In its
decision in Internet and Mobile Association of India v. Reserve
Bank of India, the Supreme Court deliberated on cryptocurrency
and struck down the circular.
The Supreme Court analyzed the role of RBI in the economy as a
central bank to manage currency, money supply and interest rates
and recognized that the maintenance of price stability as an
objective of RBI. The Supreme Court noted that cryptocurrency is
capable of being accepted as valid payment for purchase of goods
and services, and payment systems can be regulated by the RBI.
The Supreme Court held that the RBI was within its rights to
issue the circular in fulfillment of its objective under law to
safeguard the “public interest, interests of depositors
and interests of the banking policy“. The Supreme Court
stated that “Therefore, anything that may pose a threat to
or have an impact on the financial system of the country, can be
regulated or prohibited by RBI, despite the said activity not
forming part of the credit system or payment system.” As
the circular was found to be issued in the interest of banking
policy, the depositors and of the public at large, the Supreme
Court rejected the contention that there had been excessive use of
power by RBI.
The circular was also challenged on the grounds that denial of
access to those who trade in cryptocurrency would tantamount to a
denial of their constitutional right to carry on any trade or
profession and thus would be violative of Article 19(1)(g). The
Supreme Court upheld this contention by stating that
“There can also be no quarrel with the proposition that
banking channels provide the lifeline of any business, trade or
profession.” However, the Supreme Court drew a clear
distinction between the three categories of persons those who trade
in cryptocurrency as a hobby as opposed to those who engage in
trading in cryptocurrency as their business/occupation. The Supreme
Court held that the first category who buy and sell cryptocurrency
as a mere hobby cannot base their claim on Article 19(1)(g) as it
only covers trade, occupation, profession or business. The Supreme
Court further held that the second category of citizens those who
trade in cryptocurrency cannot also claim that the circular had the
effect of completely shutting down their businesses, as they could
still continue trading in “crypto-to-crypto” pairs or use
the currencies stored in their wallets to make payments for
purchase of goods and services to those who are prepared to accept
them, within India or abroad. Therefore, it is only the third
category i.e., cryptocurrency exchanges that suffered due to the
circular, as they had no other means of survival if they were
disconnected from banking channels.
Though the RBI was held to be within its rights to issue the
circular, the factor that led to the striking down of the circular
was the lack of proof of the “proportional damage”
suffered by RBI regulated entities in dealing with businesses
operating in cryptocurrencies. The Supreme Court observed that the
circular disconnected the banking sector from cryptocurrency
exchanges despite the RBI not having found anything wrong with the
functioning of these exchanges. It was also noted that before
issuing the circular, the RBI did not explore the availability of
alternative and less intrusive measures such as regulating
cryptocurrency trading and cryptocurrency exchanges.
Though the judgment has provided temporarily relief, there is
currently an absence of definitive regulation on the cryptocurrency
market. In light of such a vacuum, it is unlikely that financial
institutions and the banking sector would be inclined towards
investing in virtual currencies. The wide scale use of
cryptocurrency also seems to be questionable, as the “Banning
of Cryptocurrency and Regulation of Official Digital Currency Bill
2019” has been proposed with the aim to ban all private
cryptocurrencies. Though the Indian Parliament is yet to approve
this bill, it would be interesting to think through the role of
digital currencies in the post COVID-19 economy.
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