Decoding digital currency: Supreme Court verdict in Internet and Mobile Association of India v. RBI

Author: Vrinda Sharma, National Law School of India University, Bangalore

To the point

The Supreme Court’s landmark ruling in IAMAI v. RBI (2020) has greatly influenced the cryptocurrency landscape in India. The court invalidated the Reserve Bank of India (RBI) directive in April 2018 that restricts the bank and other regulatory bodies from engaging with businesses or individuals dealing with cryptocurrency. Through this decision, the court affirmed that the fundamental right to conduct business is protected under Article 19(1)(g) of the Indian Constitution. In order to make this decision, the court used the principle of proportionality. The court, while using this principle, emphasised the need for the regulatory measures to balance the promotion of technological innovation with the maintenance of financial stability. This article focuses on the legal reasoning of the court and also examines the future implications of the decision.  It also explores the future of cryptocurrency regulation in India under the current regime we have. The continuing challenge of embracing digital advancements while ensuring a strong regulatory framework in the fast-changing financial world is also highlighted in the article.

Abstract

The ruling by the Supreme Court in 2020 in IAMAI v. RBI overturned the circular given by RBI in 2018 that restricted banks from servicing any kind of cryptocurrency business. This marks a defining moment for India’s digital currency, which has not been regulated till now. This article critically examines the judgment through the lens of constitutional rights and the doctrine of proportionality. The court held that the RBI can regulate the financial systems, but it also said that the ban lacks any empirical evidence, which is required to meet the necessity test. The ruling also offers insight into the constitutional safeguards for the business enterprises navigating the decentralised financial system. Through the application of the proportionality test, this judgment contributes to the ongoing debates on balancing technological innovation with the wider public interest.

Use of legal jargon

This case of IAMAI v. RBI revolves around the complex principles of constitutional law, particularly the right to practice any profession, trade or business given under article 19(1)(g) of the Indian Constitution. This right is not absolute and has certain reasonable restrictions given in clause (6) of the article. The Supreme Court applied the test of proportionality, which is a judicial tool to determine whether state action infringes upon fundamental rights. The RBI’s directive was challenged by the IAMAI because it was exceeding its authority under the Reserve Bank of India Act, 1934 and also the Payment and Settlement Systems Act, 2007. The judgment also deals with the legal classification of virtual currency. It was questioned in the judgment whether virtual currency should be treated as commodities, securities or legal tender. Additionally, the terms like mens rea (intent), which is related to financial crimes, and stare decisis (precedents) were used in the court’s analysis of the issue at hand. The decision highlights the complexity of regulating the decentralised digital assets under a constitutional framework.

The Proof

In April 2018, the RBI issued a circular which prohibits banks and other regulatory entities from providing any service to individuals or the businesses dealing with virtual currency. The justification given by the RBI for this measure was the risk involved, such as money laundering, consumer vulnerabilities, terrorist funding and also the threats to market stability. The Internet and Mobile Association of India (IAMAI) represented the cryptocurrency exchanges and the other stakeholders. They challenged the circular in the Supreme Court while arguing that this action violates their fundamental right under Article 19(1)(g) and lacks statutory support. In 2020, the Supreme Court gave the judgment, authored by Justice V. Ramasubramian, invalidating the circular. The arguments given by the court to decide on this case are given below:

Proportionality Analysis: The court drew on the precedent in Modern Dental College v. State of Madhya Pradesh (2016) to apply the four-prong proportionality test. The test is given below:
A legitimate purpose of the state
A rational connection between the action and the objective of the government
The necessity of the restriction
A balance between the restriction and the right affected

The court held that the RBI’s goal in safeguarding financial stability is legitimate, and there was also a rational connection between the same. But the court found that the decision to outrightly ban the digital currency was neither necessary nor proportionate. The RBI was unsuccessful in providing any empirical data to show that cryptocurrency transactions harmed the regulatory entities directly. The court also mentioned that any less restrictive measures such as enhanced monitoring or licensing of the exchanges can address the concerns of RBI without even crippling the industry through such circular.

Constitutional Safeguards: The petitioners also argued that the RBI’s circular violates their rights to engage in lawful trade under Article 19(1)(g). The court agreed with the petitioner and said that access to banking services is an indispensable part of modern commerce in today’s world. This access is similar to being the lifeline of the businesses. If access to these services is denied to these cryptocurrency enterprises, it is deemed an excessive restriction. Since this enterprise already operates in a legal grey area where they are neither regulated nor prohibited by any statute. The court further notes that the RBI’s action affects a nascent industry without showing any evidence of widespread harm.

RBI’s authority to regulate: The Supreme Court agrees with the broad powers given to the RBI under the RBI Act, 1934. It has the power to regulate the payment systems and financial instruments such as virtual currencies that function as a medium of exchange or store of value. But the preemptive prohibition of this circular was held arbitrary by the court because the RBI did not explore any other alternatives, like regulating the cryptocurrency platforms or strengthening anti-money laundering frameworks. The absence of a nuanced approach beforehand undermined the legitimacy of this ban.

Global Comparative insights: The court also looks into the regulatory approaches in other jurisdictions, such as the United States. In the US, the Commodity Futures Trading Commission classifies virtual currency as a commodity. In the United Kingdom (UK), digital assets are subject to oversight. These countries allow regulated trading, contrasting with the RBI’s blanket ban. The court also found that the approach taken by the RBI was an outlier and lacked any compliance with the global practices followed in other nations that balance innovation with risk mitigation.

Economic and social impact: The court considered the future implications of the ban and mentioned that it stifled future innovation in the field of blockchain technology. These kinds of actions deter future investment in the cryptocurrency and will further push its trading into unregulated shadow markets. It will potentially aggravate the risks that RBI wants to address through the ban. The court highlighted  the need to have a regulatory framework that can foster innovation while protecting the interest of the public.

This decision had immediate and broader consequences for the virtual currency. It allows the crypto exchange to reconnect with the banking systems and also helps in restoring investor confidence. There was a surge in the trading volumes of the virtual currency, and new players entered the market. However, this decision also presents a critical gap in the regulation of virtual currency. The lack of a comprehensive legal framework for cryptocurrency left the sector vulnerable to further regulatory changes in future. This judgment prompted the RBI and the government to reconsider their strategies towards cryptocurrency. This can help in having a law governing these currencies in the future.

Case Laws

Modern Dental College v. State of Madhya Pradesh (2016): The court cited this case to use the proportionality test within the Indian constitutional law. This test is used when the fundamental rights of the public are infringed upon by state action. This judgement held that the state action needs to be necessary, rationally connected to its purpose and has to be minimally restrictive. This test was used by the Supreme Court in this judgement to assess the legality of the RBI’s circular.

State of Maharashtra v. Indian Hotel & Restaurants Association (2013): The court in this case law held that any restriction on the fundamental rights must be reasonable and not excessive. This principle is applicable to the current ban by RBI for the cryptocurrency.

Bank Mellat v. HM Treasury (No. 2) [2013]: This case was cited by the cour in the judgment. It is a UK based decision which shows the application of proportionality in the case of financial regulations. This case also highlights the need for less invasive measures in case of state action. The reasoning in this case influences the outcome in the IAMAI case.

Anuj Garg v. Hotel Association of India (2008): This case focuses on the need for judicial scrutiny for the state action that impacts the economic freedom of the businesses. It reinforces the necessity of a proportionate regulation which is relevant for the current case.

K.S. Puttaswamy v. Union of India (2007): This case is popularly known as the privacy case. It also reinforced the idea of the judiciary’s role in scrutinising state action that violates the fundamental rights of citizens. This decision provides a wider constitutional context for the IAMAI ruling by the Supreme Court.

Conclusion

The Supreme Court decision in IAMAI v. RBI is a landmark case for India’s constitutional and judicial jurisprudence. This judgment affirms the right to engage in the trading of legitimate cryptocurrency and also acknowledges the regulatory authority of the RBI. The court applied the proportionality principle to decide upon the validity of the circular. They effectively navigate the complex balance between promoting technological advancement and mitigating risks such as money laundering and terrorist financing. This decision helped to expose the limitation of the RBI’s broad prohibition on the ban of businesses which use cryptocurrency. It encourages the regulators to adopt measures that are based on evidence and less restrictive while complying with the constitutional protections.
However, this decision does not resolve the issue completely. There is still a lack of regulatory law for cryptocurrency, which further unsettles the situation of the entire industry. It makes them vulnerable to any future decision by the RBI or the government. The Cryptocurrency and Regulation of Official Digital Currency Bill was proposed in 2021. This bill considers a ban on private cryptocurrency and promotes a central bank digital currency (CBDC), which is also called the digital rupee. Although this bill was listed for discussion in 2021. It was never passed by the parliament. It faced multiple delays due to stakeholder pushback, the need for broader consultation and global coordination. Further, the priority of the government changes towards developing a CBDC (Digital Rupee), and they impose taxation on crypto transactions through the Union Budget in 2022. The government introduces a mechanism of a 30% tax on the gains from crypto, with a 1% Tax Deducted at Source (TDS) on the transactions. This underscores the legislative gap that results in cryptocurrency being classified within a regulatory grey area.
This judgement also raised important questions regarding the role of decentralised technologies in the Indian financial system. This technology includes blockchain technology, which can be potentially used to revolutionise sectors such as healthcare, governance and supply chain management. Looking ahead, the future of cryptocurrency in India is dependent on developing a regulatory framework that can transform the potential of blockchain technology while addressing the risks associated with it. To maintain such a balanced regulatory framework, the government and the Reserve Bank of India (RBI) need to work together with different stakeholders such as cryptocurrency exchanges, technologists, investors and also the consumer protection advocates. This collaboration will help in fostering a public-private partnership to adopt blockchain technology.
Furthermore, this decision has implications that go beyond cryptocurrency, and it establishes an important precedent for how India regulates emerging technologies. As artificial intelligence, decentralised finance and other innovations transform the economy, these judgments act as a reminder that regulatory measures should be proportionate and based on evidence. As India moves forward in this complex digital age, this ruling will be a guiding principle to ensure that the technology development needs to be aligned with the core values of justice, liberty and economic freedom given in the constitution.

FAQS

Does the ruling in IAMAI v. RBI legalise cryptocurrency in India?
The ruling does not legalise the cryptocurrency explicitly, but it recognises the trading of crypto as a legitimate business activity under article 19(1)(g) of the constitution. The court overruled the prohibition of the RBI and allowed the operation of the current services, subject to any future regulation.

What is the proportionality principle, and how was it applied in the current case?
Proportionality test requires state actions to have a legitimate aim, a rational connection and necessity. The court held the ban by the RBI unnecessary as other less restrictive measures, such as regulation, could be used to address the risks.

What are the implications of this ruling for the regulation of cryptocurrency in India?
These decisions suggest balanced regulations which require the RBI and the government to develop evidence-based policies. It also lays the groundwork for discussions on the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.

Can the RBI impose another ban on cryptocurrency?
The RBI can regulate cryptocurrencies in the future, but it has to justify the restrictions they are putting with empirical data. The less invasive alternatives need to be considered as per this ruling. Any other future ban by the RBI will face judicial review for its proportionality.

What is the current status of cryptocurrency legislation in India after the IAMAI judgment?


As of June 2025, there is no comprehensive law for cryptocurrency in existence. The Cryptocurrency and Regulation of Official Digital Currency Bill 2021, has not been passed and is still under review. The 30% tax is levied on the profit generated from cryptocurrency trade with 1% TDS.

How does the IAMAI ruling impact India’s cryptocurrency sector?
This ruling allows the platforms to resume banking operations, and it also boosts the confidence of investors. But the continuing uncertainty in the regulation underscores the need for a clear legal framework.