Cryptocurrency Legalized

Oct 15, 2020

Virtual currency is a type of unregulated digital currency, which is issued and controlled usually by its developers as opposed to being issued by the central banks and used by the members of that community. As it is unregulated, it experiences a considerable amount of change in the pricing value as the trading force behind this is only customer sentiment or feelings. In India, The central bank or The Reserve Bank of India (RBI) had passed a circular on April 6, 2018, prohibiting banks and entities regulated by it from providing services about virtual currencies.

The three-judge bench of the Supreme Court of India consisting of V.Rama Subramanian, Ravindra Bhat and Justice R.F Nariman held the ban by The Reserve Bank of India in case of cryptocurrencies to be Unreasonable and illegal, and the ban was lifted on March 4. The petition was filed by the Internet and Mobile Association of India (IAMAI) seeking to challenge the order passed by RBI in which the RBI stated that the circular issued by the central bank in July 2018 said that entities regulated by RBI are prohibited from "providing any service about virtual currencies, including those of transfer or receipt of money in accounts relating to the purchase or sale of virtual currencies". However, it had not banned virtual currencies. Still, while deciding the matter, the Court looked at the draft bill which had been proposed but not passed namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. The Court held that the stand of the legislature could not be gauged from this bill as the bill, on the one hand, imposed criminal liabilities on the users of cryptocurrencies and criminalized certain activities like mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. On the other hand, the bill paved the way for the government to introduce its digital currency, namely "Digital Rupee," by the Central Bank. The Court also emphasized that The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-Ministerial Committee contained proposals

  1. To prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and
  2. To regulate VC exchanges and brokers where sale and purchase may be permitted. The key aspects of the Crypto-token Regulation Bill, 2018, found in paragraph 13 of the "Note-precursor to report" shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of a digital crypto asset at recognized exchanges. Therefore, the intention and the stand of the legislature remain unclear on the matter of cryptocurrencies.

The Court first determined the reason for the prohibition of cryptocurrency on the part of The RBI to which the RBI's Legal counsel had argued that it might disrupt existing financial institutions. As detailed during the January hearings, IAMAI "s lawful advice had contended under the steady gaze of the Court that RBI had itself neglected to investigate the issue before choosing to make a move satisfactorily.

The Court had held that the RBI had failed to justify how cryptocurrencies would harm the financial institutions. There should be some evidence as to show the degree of harm suffered by the regulated entities( claiming they were harmed) otherwise it was an ambiguous order as the government, on one hand, sought to criminalize the trading of cryptocurrencies. On the other, it seeks to introduce its digital currency which goes to show that the government is itself confused as regards to this bill.

The court, before passing the judgment in favour of cryptocurrencies, applied the doctrine of proportionality. The Principle Doctrine of Proportionality includes the following-

  • Whether the relative merits of different objectives or interests were appropriately weighted or "fairly balanced"?
  • Whether the measure in question was in the circumstances excessively restrictive or inflicted an unnecessary burden on affected persons

The Supreme Court held that the RBI needs to satisfy the above conditions and show any resemblance of any damage that is suffered by the entities regulated by it and since RBI could not produce any material which could prove the veracity in its statements; The order was quashed, and the judgment was ruled in favour of cryptocurrencies.

It will be a welcome change for cryptocurrencies and other blockchain technology in the Indian market.