Author: Asmi Basu, JIS University
To the Point
Case Citation: Internet & Mobile Assn. of India v. Reserve Bank of India, (2020) SCC Online SC 275
Judgment Date: 4 March 2020
Bench: Justices Nariman, Bose & Ramasubramanian
Core Issue: Whether RBI’s circular of 6 April 2018—prohibiting regulated entities from dealing with virtual currencies (VCs)—was ultra vires, disproportionate, and in breach of Article 19(1)(g)
Verdict: Circular quashed as unconstitutional for failing proportionality and evidence tests
Abstract
Between 2013 and 2018, RBI repeatedly cautioned on risks related to virtual currencies—such as hacking, money laundering, and fraud. On 6 April 2018, it issued a Statemen and Circular directing all RBI-regulated entities (banks, NBFCs, payment system operators) to sever ties with individuals and businesses dealing in cryptocurrencies. IAMAI (alongside digital exchanges) challenged this as an unconstitutional overreach, infringing the right to trade (Article 19(1)(g)), lacking legal basis, and failing proportionality standards.
On 4 March 2020, in a unanimous judgment, the Supreme Court:
- Affirmed RBI’s jurisdiction to regulate—but not ban—virtual currencies.
- Found the circular “ultra vires” and disproportionate due to absence of evidence. Blanket restrictions were unnecessary.
- Quashed the circular, restoring banking lines for crypto exchanges.
- Emphasized that future regulatory action must be data-backed, less intrusive, and respect constitutional rights.
Use of Legal Jargon
A quick glossary for key terms used:
- Writ Petition: A formal pleading under Article 32 challenging RBI’s directive
- Ultra Vires: Acts beyond legal authority—in this case, RBI’s circular possibly exceeded its powers
- Doctrine of Proportionality: A four-part test ensuring restrictions are suitable, necessary, minimally intrusive, and balanced
- Article 19(1)(g): Guarantees the right to pursue any profession, trade, or occupation
- Empirical Evidence: Data or factual proof—RBI lacked any to justify the ban
- System Participant: Entities governed by Payment & Settlement Systems Act; RBI can regulate their activity
- Ejusdem Generis: Legal principle used to interpret RBI powers to include virtual currencies under its purview;
The Proof
Background & RBI Actions
- RBI issued public advisories in 2013, Feb 2017, and Dec 2017 warning against VC risks .
- Followed by a statutory circular on 6 April 2018, using powers under the RBI Act, Banking Regulation Act, and PSS Act, which ordered:
- No dealing or services to any person/entity transacting VCs.
- Termination of existing relationships within 3 months.
Petitioner’s (IAMAI) Arguments
- Locus: Crypto exchanges and promoters (high-tech entrepreneurs) hold right to trade under Article 19(1)(g).
- Jurisdictional Challenge: Virtual currencies are digital commodities not legal tender outside RBI ambit.
- Fundamental Rights: Access to trade related to bank essentials; circular cut that lifeline, violating Article 19(1)(g).
- Proportionality & Evidence: RBI lacked actual data; alternatives like regulated oversight existed.
Respondent’s (RBI) Arguments
- Jurisdiction Affirmed: RBI’s responsibility includes monetary & credit systems under relevant Acts.
- Legitimacy of Measure: Aimed to protect public interest; cautioned that VCs could harm the financial system.
- No Public Harm to GMC: RBI emphasized its prophylactic regulatory duty over system participants.
Court’s Reasoning & Analysis
- Step 1: RBI’s Power & Jurisdiction
Virtual currencies—not legal tender—may still affect payment systems and financial stability, thus within RBI’s regulatory scope using ejusdem generis.
- Step 2: Proportionality Test
Legitimate Purpose: Yes—protecting regulated entities, consumers, financial system.
Rational Connection: Exists between VCs’ risks and regulating banks.
Necessity: RBI failed to prove any actual harm to banks or system participants.
Balancing: Blanket ban on all VC-related entities was excessive; less intrusive options existed (e.g. licensing, regulation, disclosures, KYC).
- Step 3: Fundamental Rights
Article 19(1)(g) protects trade; corporate entities engaged in trade affected by the ban had standing.
Access to banking is central to trade; principle from Shreya Singhal invoked—cannot restrict entire network to combat misuse.
Conclusion: Circular failed proportionality and reasonableness tests under Article 19(6); ultra vires and unconstitutional.
Case Laws Referenced
Modern Dental College & Research Centre v. State of Madhya Pradesh (2016): Introduced a structure for proportionality test.
State of Maharashtra v. Indian Hotel & Restaurant Assn. (2013): Regulatory measures must show demonstrable harm.
Shreya Singhal v. Union of India (2015): Cannot block entire systems to target misuse; principle applied here.
Puttaswamy v. Union of India (Privacy Case): Balanced approach; any rights restriction must meet necessity and balancing requirements.
Cellular Operators Association v. TRAI (2016): Regulatory decisions informed by objective evidence, not speculation.
Conclusion
RBI’s Authority Upheld, but execution Flawed: While RBI can regulate virtual currencies affecting payment systems, its circular went too far without solid data.
Proportionality & Evidence Essential: Striking down the circular stressed that constitutional rights—especially trade—cannot be curtailed without balanced, evidence-based action.
Judicial Oversight Confirmed: Courts must ensure administrative actions comply with constitutional norms.
Policy Implication: The judgment doesn’t legalize cryptocurrencies outright but restores banking access. Subsequently, trading resumed. Indian Parliament now exploring specific crypto regulation.
Future Templates: This ruling sets a precedent—regulatory measures in fintech must be transparent, targeted, proportionate, and supported by data.
FAQs
Q1. Did SC declare cryptocurrencies legal in India?
No, it only lifted RBI’s banking restriction. Crypto remains unregulated until Parliament enacts specific law.
Q2. What demands did the Court place on RBI going forward?
Any future measure must pass proportionality test, be backed by empirical data, and be the least-restrictive option.
Q3. Could RBI have regulated exchanges through supervision instead of banning?
Yes—via licensing, risk-mitigation frameworks, AML/KYC standards, rather than prohibiting all banking services.
Q4. Who held the right to challenge the circular?
Those running crypto exchanges and promoters whose professional livelihood was affected, not casual hobbyists.
Q5. What does “system participant” mean?
Banks and NBFCs in payment networks regulated by RBI under the PSS Act. The circular targeted these entities.
Q6. Are virtual currencies recognized as money by the SC?
Not legal tender, but since they function as medium of exchange and store of value, they fall within RBI’s regulatory ambit.
