Internet and Mobile Association of India vs. Reserve Bank of India

Facts

Reserve Bank of India (RBI)- the Respondent issued a "Statement on Developmental and Regulatory Policies" on April 5, 2018, directing the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities and (ii) to exit the relationship, if they already have one, with such individuals/business entities, dealing with or settling virtual currencies (VCs). RBI also issued a circular dated April 6, 2018, in the exercise of the powers conferred by Section 35A read with 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 (RBI Act) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

Internet and Mobile Association of India- the Petitioner represents the interests of the online and digital services industry, companies that run online crypto assets exchange platforms, the shareholders/founders of these companies, and a few individual crypto assets traders and young high-tech entrepreneurs. The petitioners challenging the said Statement and Circular and seeking a direction to the RBI not to restrict or restrain banks and financial institutions regulated by RBI, from providing access to the banking services to those engaged in transactions in crypto assets, filed the writ petitions.

Key Takeaways for Students

Legal Issue

• Whether RBI has the power to decide on Virtual Currencies?
• Whether the power was exercised properly in a manner prescribed by law?
• Whether RBI should have adopted the approach of other stakeholders?
• Whether measures on VCs taken by RBI correct?
• Whether all the issues flagged by RBI have already been addressed by the Petitioners?
• Whether RBI should have adopted different approaches towards different VCs?
• Whether a policy decision taken by RBI does not warrant any deference?
• Whether RBI's direction is reasonable in view of Article 19(1)(g) of the Constitution of India?

Holding

Power for RBI: The Reserve Bank of India was established under Act 2 of 1934 to (i) regulate the issue of bank notes, (ii) keep reserves to secure monetary stability in the country and (iii) operate the currency and credit system of the country to its advantage. RBI derives its power from the RBI Act, of 1934, and the Banking Regulation Act, of 1949. No company can carry on banking business in India unless it holds a license issued by RBI.

Mode of exercise of power: The issue of how to deal with virtual currencies has been lingering with RBI from June 2013 onwards. Therefore, the report suggested RegTech to deal with FinTech. The power Under Section 35A of the RBI Act, to issue directions is to be exercised under four contingencies namely (i) public interest (ii) interest in banking policy (iii) interest of the depositors and (iv) interest of the banking company. The expression "banking policy" is defined in Section 5(ca) to mean any policy specified by RBI (i) in the interest of the banking system (ii) in the interest of monetary stability and (iii) sound economic growth. Public interest permeates all these three areas. Section 35A(1)(a) is invoked in the impugned Circular. Therefore, the court rejected the argument that the impugned decision is a colorable exercise of power and it is vitiated by malice in law.

Wait and watch the approach of the other stakeholders: The Enforcement Directorate can step in only when actual money laundering takes place, since the statutory scheme of the Prevention of Money Laundering Act deals with a quasi-criminal procedure. SEBI can step in only when the transactions involve securities within the meaning of Section 2(h) of the Securities Contracts (Regulation) Act, 1956. CBDT will come into the picture only when the transaction is related to the sale and purchase of taxable goods/commodities. Every one of these stakeholders has a different function to perform and therefore, RBI cannot be faulted for not adopting the very same approach as that of others.

The light-touch approach of the other countries: In any case, our judicial decision cannot be colored by what other countries have done or not done. Comparative perspective helps only in relation to principles of judicial decision-making and not for testing the validity of an action taken based on the existing statutory scheme. Therefore, we will not test the correctness of the measure taken by RBI on the basis of the approach adopted by other countries, though we have, for a better understanding of the complexities of the issues involved, surveying how the regulators and courts of other countries have treated VCs.

Precautionary steps taken by Petitioners: It was contended that all the issues flagged by RBI have already been addressed and that therefore, there was no necessity to disconnect the trade from the regular banking channels. But the fact of the matter is that enhanced KYC norms may remove the anonymity of the customer, but not that of the VC. In any case, we are not experts to say whether the safety valves put in place could have addressed all issues raised by RBI.

Different types of VCs require different treatments: The very same virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the entities come up. Moreover, the question of whether anonymous VCs alone could have been banned leaving the pseudo-anonymous is for experts and not for this Court to decide. In any case, the stand taken by RBI is that they have not banned VCs. Hence, the question of whether RBI should have adopted different approaches towards different VCs does not arise. RBI's decisions do not qualify for Judicial deference: RBI is not just any other statutory authority. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution under Article 372(1) of the Constitution. The power conferred upon RBI Under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the central government, cannot be taken away. Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference is to do violence to the scheme of the Act.

Article 19(1)(g) Challenge & Proportionality: Any restriction to the freedom guaranteed Under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6). When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for the court to hold that the impugned measure by RBI is reasonable.

Final Decision Petition Allowed

Ratio

The Reserve Bank of India has the power to make decisions regarding virtual currency.