Author: Gargi Koreti, ILS Pune
To the Point
The Supreme Court overturned the RBI’s 2018 ban, restoring the crypto industry’s access to formal banking. The Court acknowledged the RBI’s regulatory power but deemed the outright ban disproportionate, lacking concrete evidence of harm. This ruling is vital for India’s digital asset sector, setting a precedent that regulatory restrictions must be evidence based and legally compatible with the fundamental “right to conduct a lawful business” under Article 19(1)(g).
Use of legal jargon
The case Internet and Mobile Association of India v. RBI (2020) involved several important legal terms that shaped the Court’s reasoning. Understanding these expressions helps clarify the constitutional and regulatory principles behind the judgment.
1. Doctrine of Proportionality
This principle requires that any restriction imposed by the State on a fundamental right must be fair, necessary and the least restrictive option available. The Supreme Court used this test to examine whether the RBI’s circular reasonably limited the petitioners’ right to trade under Article 19(1)(g). Since the RBI could not justify the severity of the ban, the restriction was found disproportionate.
2. Ultra Vires
This term refers to an act done beyond the legal powers of an authority. IAMAI argued that the RBI’s circular was ultra vires its statutory powers because cryptocurrencies were neither legal tender nor explicitly regulated by any law. While the Court held that the RBI did have jurisdiction, the concept framed the constitutional challenge.
3. Reasonable Restrictions
Article 19(6) allows the State to impose limits on the right to trade if they are justified. The Court evaluated whether the RBI’s circular qualified as a reasonable restriction. Because the measure lacked evidence of actual harm, it failed this constitutional threshold.
4. De Facto Ban
Even though the RBI never explicitly outlawed cryptocurrency, the circular created conditions that made normal trading impossible. This amounted to a de facto (in practice) ban. The Court acknowledged that such indirect prohibition still requires strong justification.
5. Legitimate Expectation
This concept refers to the expectation that authorities will act fairly and consistently. Crypto exchanges claimed that, since no law prohibited cryptocurrencies, they had a legitimate expectation of being allowed to operate. The RBI’s harsh circular disrupted this expectation without proper cause.
6. Regulatory Oversight
This refers to the authority’s duty to supervise financial markets. The Court accepted that the RBI has regulatory oversight over instruments that influence monetary stability. However, oversight does not give blanket power to eliminate entire industries.
7. Judicial Review
This term describes the Court’s power to examine whether an action by a public authority violates constitutional principles. The judgment reaffirmed that even expert bodies like the RBI are not above judicial scrutiny, especially when fundamental rights are affected.
The Proof
The Supreme Court’s decision to invalidate the RBI’s 2018 circular was legally robust and well-founded, relying on strong constitutional principles and a clear assessment of facts. The judgment’s strength is built upon the following four key pillars:
Grounds for Striking Down the RBI Circular
1. Lack of Proven Harm:
The RBI failed to present any concrete evidence demonstrating that its regulated entities banks or financial institutions had incurred losses due to cryptocurrency transactions. The Court stressed that such a significant regulatory restriction demands a rational basis tied to the prevention of actual, factual harm, which the RBI could not establish.
2. Violation of the Doctrine of Proportionality (Article 19(1)(g)):
The Court applied the Doctrine of Proportionality, which dictates that any restriction on the fundamental right to trade (Article 19(1)(g)) must be the least restrictive measure necessary. Since cryptocurrency trading was not legally prohibited, the imposition of a complete banking ban was deemed an excessive and disproportionate action. The Court held that less-severe options, such as monitoring, issuing guidelines, or implementing risk-mitigation strategies, should have been explored first.
3. Excessive Use of Regulatory Authority:
While acknowledging the RBI’s power to oversee financial stability, the Court ruled that this authority does not permit arbitrary or sweeping actions. By effectively destroying the entire crypto business ecosystem without adequate justification, the RBI overstepped the reasonable boundaries of its regulatory mandate.
4. Alignment with Digital Rights Jurisprudence:
This ruling is consistent with the Court’s broader constitutional approach to protecting digital freedoms in India. Similar to the Shreya Singhal case, which struck down vague online restrictions, this judgment protected lawful digital trade from disproportionate financial controls.
Abstract
The Supreme Court’s landmark 2020 ruling in Internet and Mobile Association of India v. Reserve Bank of India fundamentally altered the regulatory status of cryptocurrency in India. The Court invalidated the RBI’s 2018 circular, which had imposed a de facto ban on the crypto industry by cutting off all banking services to exchanges and traders. This judgment holds profound significance, extending beyond the crypto sector to constitutional law, administrative law, and the confluence of finance and technology.
The historical context is crucial,India had maintained a cautious stance on virtual currencies, with RBI warnings dating back to 2013, culminating in the decision to prohibit banks from dealing with crypto entities. The key issues before the Court centered on the RBI’s jurisdiction over virtual currencies, whether the ban infringed on the fundamental right to trade under Article 19(1)(g), and if the measure satisfied the constitutional test of proportionality.
A central focus of the analysis is the Court’s acknowledgment of the RBI’s broad regulatory power, coupled with the assertion that such authority must be exercised proportionately, responsibly and with supporting evidence. Critically, the judgment highlighted that no existing statute had formally outlawed cryptocurrencies. Furthermore, the RBI failed to provide evidence of actual harm to its regulated entities, rendering the circular constitutionally excessive and unsustainable.
The decision has broader implications for India’s digital rights jurisprudence, linking to cases on economic freedoms, the overregulation of online spaces and emerging technologies. The article examines the immediate impact on investor confidence and cryptocurrency exchanges, as well as the impetus the ruling created for a formal legislative framework. While the judgment restored banking access for crypto businesses, it effectively shifted the responsibility for creating clear, definitive legislation to lawmakers in a rapidly evolving digital economy. Ultimately, the case serves as a pivotal precedent, showcasing how courts navigate the balance between innovation, economic liberty and financial stability in a modern, technology-driven society.
Case Laws
1. Internet and Mobile Association of India v. RBI (2020)
The Supreme Court struck down RBI’s 2018 banking ban on cryptocurrency, calling it disproportionate and unsupported by evidence.
2. RBI v. Peerless General Finance (1987)
The Court held that RBI’s regulatory powers must be reasonable and guided by public interest. Useful to show that RBI cannot impose arbitrary restrictions.
3. Modern Dental College v. State of MP (2016)
This case laid down the proportionality test, which was used to evaluate RBI’s circular in the crypto case.
4. K.S. Puttaswamy v. Union of India (2017)
Recognised the right to privacy as a fundamental right. Helpful for linking crypto, data, and digital privacy concerns.
5. Shreya Singhal v. Union of India (2015)
Struck down Section 66A for vague restrictions on digital activity. Supports arguments about avoiding overbroad regulation in the digital space.
Conclusion
The Supreme Court’s 2020 ruling in the Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India (RBI) case marked a decisive legal victory for the Indian cryptocurrency sector.The Court’s Landmark Conclusion
The Supreme Court annulled the RBI’s April 6, 2018 circular, which had effectively barred banks and other regulated entities from engaging with cryptocurrency businesses.
Core Rationale: Disproportionate Restriction
The judgment centered on the principle of proportionality, concluding that the RBI’s total prohibition was an unreasonable and excessive restriction on the fundamental right to trade and business, protected under Article 19(1)(g) of the Indian Constitution.
The Court’s decision was based on three key findings:
Failure to Demonstrate Harm: The RBI, despite its regulatory expertise, could not provide sufficient evidence proving that regulated entities (banks) had suffered any tangible adverse impact from dealing in virtual currencies.
Excessive Measure: In the absence of proven harm, the Court deemed a complete and debilitating ban to be an excessive measure, noting that less restrictive regulatory alternatives were available.
Lack of Legal Basis: The Court emphasized that since no Parliamentary Act had legally prohibited cryptocurrency itself, the RBI’s circular constituted a de facto ban without the necessary legal foundation or justification.
Significance of the Ruling
The conclusion had profound implications, shifting the landscape for the cryptocurrency industry in India:
Reactivation of the Market: The ban was immediately lifted, enabling Indian cryptocurrency exchanges and businesses to legally resume banking relationships, which revitalized the domestic crypto market.
Constitutional Legitimacy: The judgment constitutionally established the business of trading in virtual currencies as a legitimate trade, entitled to protection under fundamental rights.
Mandate for Regulation Over Prohibition: The ruling served as a clear directive to the RBI and the government, emphasizing that future policy should focus on regulating virtual currencies rather than imposing outright prohibition.
FAQs
1. Did the Supreme Court legalise cryptocurrency?
No. The Court only struck down the RBI’s banking restriction. Crypto trading was never illegal.
2. Can RBI regulate cryptocurrencies?
Yes. The Court confirmed RBI’s authority to regulate activities affecting financial stability.
3. Why was the 2018 circular struck down?
Because it was disproportionate, lacked evidence of harm, and unfairly restricted the right to trade.
4. What happened after the judgment?
Exchanges resumed INR deposits and withdrawals, and the crypto industry revived.
5. Does the judgment prevent future bans?
No. Parliament can legislate on cryptocurrencies, but any restriction must meet constitutional standards.
6. Are VCs considered legal tender?
No. They are not legal tender but can be traded as digital assets.
