Author: Shibrah Aftab Khan, a law student at University of Kashmir.

Abstract

This article examines the landmark ruling in Internet and Mobile Association of India v. Reserve Bank of India (2020), in which India’s Supreme Court struck down the RBI’s cryptocurrency banking limitations. By applying the proportionality doctrine, the Court established a crucial precedent on regulatory authority limits when confronting novel financial technologies. The judgment creates a framework requiring evidence-based regulatory approaches that protect financial system integrity while respecting constitutional rights to engage in legitimate business activities. This analysis examines how the Court’s reasoning creates a balanced approach that neither abandons regulatory caution nor stifles innovation in emerging digital finance.

To the Point

On April 6, 2018, the Reserve Bank of India issued Circular RBI/2017-18/154, which prohibited RBI-regulated entities from dealing in virtual currencies or providing services that facilitate cryptocurrency transactions. The Internet and Mobile Association of India challenged this prohibition, contending it infringed on constitutional rights protected under Article 19(1)(g). While recognizing the RBI’s substantial authority in matters affecting banking system stability, the Supreme Court ultimately struck down the circular for failing to satisfy the proportionality test. Crucially, the Court determined the RBI had not presented sufficient empirical evidence demonstrating that cryptocurrency activities caused harm to regulated entities that would warrant such extensive restrictions on constitutional freedoms.

The Proof

The Court’s analysis centered on several key statutory provisions and constitutional principles:

1.  The RBI’s Statutory Authority:

• Section 3(1) of the RBI Act of 1934 outlines the central bank’s mandate as “to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”
• Section 45JA authorises the RBI to give directives to non-banking financial organisations in the public interest or to avert operations that may harm depositors’ interests.
• Section 35A of the Banking Regulation Act, 1949 authorizes the RBI to issue binding directives to banking companies in the public interest and to prevent banking affairs from being conducted in a manner detrimental to depositors’ interests.

2. Constitutional Framework:

• Article 19(1)(g) states that people have the basic right “to practise any profession, or to carry on any occupation, trade, or business.” 
• Article 19(6) allows for “reasonable restrictions” on rights “in the interests of the general public.”

3. Application of Proportionality Doctrine:

• The Court applied the four-element test established in Modern Dental College v. State of Madhya Pradesh (2016):

1. The measure restricting rights must pursue a legitimate aim
2. The measure must demonstrate a rational connection to this aim
3. The measure must be necessary, with no less restrictive alternatives available
4. The measure must be balanced, not imposing excessive burdens on affected parties

4. Evidentiary Requirements:

• The Court made the following observation: “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… we cannot hold that the impugned measure is proportionate.”
• The judgment emphasized that the RBI had not demonstrated actual damage suffered by its regulated entities due to cryptocurrency activities, stating in paragraph 6.172: “If the activity was not actually banned, but banking channels were shut for such activities… it is not clear how the banking system was protected.”

Case Laws

1. Internet and Mobile Association of India v. Reserve Bank of India (2020) SCC Online SC 275

Justice V. Ramasubramanian’s judgment established that although the RBI possesses extensive regulatory powers, these powers must be exercised within constitutional boundaries. The Court determined that the circular, while within the RBI’s statutory authority under the Banking Regulation Act and RBI Act, failed constitutional scrutiny for disproportionately restricting fundamental rights without demonstrating commensurate public benefit. The Court distinguished between the RBI’s unquestionable power to regulate and the constitutional requirement that such regulation be proportionate and evidence-based.

2. Modern Dental College and Research Centre v. State of Madhya Pradesh (2016) 7 SCC 353

This judgment provided the analytical framework for applying proportionality analysis in the Indian constitutional context. Justice Sikri’s opinion established that restrictions on fundamental rights must be evaluated through a structured proportionality assessment rather than abstract balancing. The cryptocurrency judgment extended this approach to financial regulations, requiring that regulatory restrictions demonstrate not only a legitimate purpose but also empirical necessity and proportionality.

3. Shreya Singhal v. Union of India (2015) 5 SCC 1

The Court referenced this case to emphasize that overbroad restrictions on rights cannot be justified merely because less restrictive measures might be potentially circumvented. Just as Shreya Singhal rejected the argument that specific website blocking was insufficient to combat objectionable content, the cryptocurrency judgment rejected arguments that targeted supervision of cryptocurrency exchanges would be insufficient to protect banking stability.

4. K.S. Puttaswamy v. Union of India (2017) 10 SCC 1

The Court cited the privacy judgment’s proportionality analysis, which established that rights restrictions must satisfy necessity and balancing requirements. In the cryptocurrency case, the Court found that while the RBI had legitimate concerns about consumer protection and money laundering, it had failed to establish that these concerns couldn’t be addressed through less restrictive means such as regulatory supervision rather than de facto prohibition.

5. Cellular Operators Association v. TRAI (2016) 7 SCC 703

This precedent established that regulatory decisions must be grounded in objective evidence rather than speculative concerns. The Court applied this standard to scrutinize the RBI’s factual basis for restricting cryptocurrency activities, finding that the circular was based more on potential than demonstrated risks.

Legal Jargon Analysis

The Court determined that the RBI’s circular constituted a de facto prohibition rather than merely regulatory oversight of cryptocurrency trading. The RBI had exercised its delegated legislative authority under banking laws, but the Court found this implementation ultra vires as it failed to satisfy the constitutional threshold of proportionality.

The central question revolved around whether the RBI’s directive represented a reasonable restriction under Article 19(6) or an excessive curtailment of fundamental liberties. Through application of the proportionality doctrine, the Court established that regulators must present substantive evidence before restricting activities involving emerging technologies.

The ratio decidendi lies in the Court’s requirement for empirical justification of regulatory intervention. The judgment found the RBI’s approach suffered from manifest disproportionality by imposing sweeping restrictions without demonstrating corresponding public benefit, thus failing to satisfy standards of substantive due process.

This case establishes that regulatory bodies must demonstrate nexus between restrictions and harm prevention, rather than relying on speculative apprehensions. The Court found the circular possessed excessive breadth that failed narrow tailoring requirements inherent in proportionality analysis.

Conclusion

The Internet and Mobile Association of India judgment marks a pivotal development in India’s approach to regulating financial innovation. The Supreme Court has established three fundamental principles that will shape future regulatory frameworks: constitutional protections extend to novel digital business models; regulatory restrictions demand empirical justification rather than speculative concerns; and even specialized regulatory expertise remains subject to constitutional scrutiny.

This decision effectively establishes higher standards for financial regulators by mandating evidence-based approaches that safeguard system stability while accommodating innovation. The Court has rejected regulatory shortcuts, indicating that proper governance of emerging financial technologies requires engagement with demonstrated risks rather than categorical prohibitions based on potential concerns.

As India navigates the complex intersection of digital innovation and financial stability, this judgment serves as a crucial precedent requiring regulatory frameworks that are proportionate, evidence-driven, and respectful of constitutional liberties. The decision does not prevent cryptocurrency regulation; rather, it demands that such regulation be carefully calibrated and empirically justified.

The judgment’s impact extends beyond cryptocurrency to potentially influence regulatory approaches across India’s digital economy. By delineating constitutional parameters for regulation in emerging technological domains, the Court has created a framework that preserves space for innovation while allowing legitimate regulatory intervention when supported by concrete evidence of harm.

Frequently Asked Questions

1. Did the Supreme Court’s judgment effectively legalize cryptocurrencies in India?

No, the judgment does not affirmatively legalize cryptocurrencies. It invalidates the specific RBI circular that prohibited banking services to cryptocurrency businesses on grounds that the circular failed the proportionality test required for restrictions on Article 19(1)(g) rights. Cryptocurrencies remain in a regulatory gray area—neither explicitly permitted nor prohibited. The judgment allows cryptocurrency trading with banking access but does not preclude future legislation to regulate or even restrict cryptocurrency activities, provided such legislation adheres to constitutional requirements including proportionality. As the Court noted in paragraph 6.173, “RBI has the power to regulate” but must exercise this power with “proper application of mind” based on relevant considerations.

2. What regulatory authority does the RBI retain over cryptocurrency activities after this judgment?

Despite invalidating the circular, the Court affirmed the RBI’s extensive regulatory authority over matters affecting monetary and banking stability. The RBI maintains significant powers, including issuing targeted guidelines regarding cryptocurrency transactions, implementing know-your-customer and anti-money laundering requirements for cryptocurrency interfaces with the banking system, and addressing specific documented risks through tailored regulatory measures (provided they satisfy proportionality requirements). The judgment modifies how this authority must be exercised—requiring evidence-based restrictions rather than preventive prohibitions when constitutional rights are implicated. As the Court observed in paragraph 6.110, the RBI’s “power of regulation” remains intact, but must be exercised within constitutional constraints.

3. How does this judgment influence future development of blockchain technology in India?

The judgment creates a more conducive environment for blockchain innovation by establishing that business models utilizing emerging technologies enjoy constitutional protection against disproportionate regulatory restrictions. By requiring regulators to demonstrate actual rather than hypothetical harm before imposing restrictions, the Court has provided space for technological experimentation and development. This constitutional framework will likely encourage investment in blockchain technology by reducing regulatory uncertainty and arbitrary intervention risks. However, comprehensive legislation specifically addressing blockchain and cryptocurrency activities remains necessary for complete regulatory clarity. The judgment effectively creates a transitional framework protecting innovation while awaiting more detailed legislative guidance, as acknowledged in paragraph 6.177 where the Court noted the lack of statutory definitions and regulatory clarity for virtual currencies.

References

Primary Sources

1. Internet and Mobile Association of India v. Reserve Bank of India, (2020) SCC Online SC 275

Link: https://www.scconline.com/blog/post/2020/03/04/internet-and-mobile-association-of-india-vs-reserve-bank-of-india-2020/

2. Reserve Bank of India, “Prohibition on dealing in Virtual Currencies”, Circular RBI/2017-18/154, April 6, 2018

Link: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0

3. Banking Regulation Act, 1949

Link: https://www.indiacode.nic.in/handle/123456789/1493

4. Payment and Settlement Systems Act, 2007

Link: https://www.indiacode.nic.in/handle/123456789/2044

5. Reserve Bank of India Act, 1934

Link: https://www.indiacode.nic.in/handle/123456789/2245

6. The Constitution of India, 1950

Link: https://legislative.gov.in/constitution-of-india

Secondary Sources

7. LiveLaw, “Supreme Court Strikes Down RBI Circular Prohibiting Banks From Providing Services To Crypto Currency Traders”, March 4, 2020

Link: https://www.livelaw.in/top-stories/supreme-court-strikes-down-rbi-circular-crypto-currency-153664

8. Financial Express, “SC ruling on cryptocurrency: Why it’s a win-win situation for investors, exchanges”, March 5, 2020

Link: https://www.financialexpress.com/market/sc-ruling-on-cryptocurrency-why-its-a-win-win-situation-for-investors-exchanges/1886080/

9. Coindesk, “India’s Supreme Court Lifts Banking Ban on Crypto Exchanges”, March 4, 2020

Link: https://www.coindesk.com/markets/2020/03/04/indias-supreme-court-lifts-banking-ban-on-crypto-exchanges/

10. Vidhi Centre for Legal Policy, “Regulating Cryptocurrencies in India: Analyzing the Supreme Court’s Judgment”, April 2020

Link: https://vidhilegalpolicy.in/research/regulating-cryptocurrencies-in-india-analyzing-the-supreme-courts-judgment/

11. Justice M.V. Rao, “Constitutional Limits on Financial Regulation: The Proportionality Principle”, Banking Law Review (2021) Vol. 18, pp. 45-67

Link: https://www.jstor.org/stable/j.ctv1qv3k68.10 (Note: Access may require subscription or institutional login.)

12. Kumar, S., “Financial Regulation and Constitutional Rights: The Cryptocurrency Case”, Indian Journal of Constitutional Law (2020) Vol. 9, pp. 103-124

Link: https://www.nalsar.ac.in/ijcl/volume-9-2020

13. Prasad, V., “Proportionality in Financial Regulation: Lessons from the Virtual Currency Judgment”, National Law Review (2021) Vol. 11, pp. 78-96

Link: https://www.natlawreview.com/article/proportionality-financial-regulation-lessons-virtual-currency-judgment