Tax Management India. Com
                        Law and Practice: A Digital eBook ...

Category of Documents

TMI - Tax Management India. Com
Case Laws Acts Notifications Circulars Classification Forms Manuals SMS News Articles
Highlights
D. Forum
What's New

Share:      

        Home        
 

TMI Blog

Home List
← Previous Next →

2020 (3) TMI 364

..... t VCs are not money or other legal tender, but only goods/commodities, falling outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 - HELD THAT:- The impugned Circular of RBI dated 0604-2018 was issued in exercise of the powers conferred upon RBI by all these three enactments. Therefore, if virtual currencies do not fall within subject matter covered by any or all of these three enactments and over which RBI has a statutory control, then the petitioners will be right in contending that the Circular is ultra vires. Hence it is necessary (i) first to see the role historically assigned to a central bank such as RBI, the powers and functions conferred upon and entrusted to RBI and the statutory scheme of all the above three enactments and (ii) then to investigate what these virtual currencies really are. Therefore, we shall divide our discussion in this regard into two parts, the first concerning the role, powers and functions of RBI and the second concerning the identity of virtual currencies. Role assigned to, functions entrusted to and the powers conferred upon RBI as a Central Bank - HELD THAT:- The RBI Act, 1934, t .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... egulate or prohibit an activity of this nature. If at all, the power is only to regulate, not prohibit - HELD THAT:- In the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 should fail. Mode of exercise of power - Satisfaction/Application of mind/relevant and irrelevant considerations - HELD THAT:- All the sequence of events from June 2013 up to 02-04-2018 would show that RBI had been brooding over the issue for almost five years, without taking the extreme step. Therefore, RBI can hardly be held guilty of non-application of mind. If an issue had come up again and again before a statutory authority and such an authority had also issued warnings to those who are likely to be impacted, it can hardly be said that there was no application of mind. For arriving at a “satisfaction” as required by Section 35A(1) of Banking Regulation Act, 1949 and Sect .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... 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 related to the sale and purchase of taxable goods/commodities. Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others. Light-touch approach of the other countries - HELD THAT:- The list of countries where a ban similar to the one on hand and much more has been imposed discloses a commonality. Almost all countries in the neighborhood of India have adopted the same or similar approach (in essence India is ring fenced). 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 - There can also be no comparison with the approach adopted by countries such as UK, .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... oup, to the effect that DLT is part of FinTech - The above contention, in legal terms, is about the irrationality of the impugned decision. But there is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation. There is nothing like a “take it or leave it” option. RBI’s decisions do not qualify for Judicial deference - HELD THAT:- RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But 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. The sole right to issue bank notes in India, conferred by Section 22(1) cannot also be taken away and confe .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... e impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality - the writ petitions are allowed and the Circular dated 0604-2018 is set aside. - Writ Petition (Civil) Nos. 373, 528 Of 2018 - 4-3-2020 - Rohinton Fali Nariman, Aniruddha Bose And V. Ramasubramanian, JJ. JUDGMENT V. Ramasubramanian, 1. THE STORY LINE: 1.1. Reserve Bank of India (hereinafter, RBI ) issued a Statement on Developmental and Regulatory Policies on April 5, 2018, paragraph 13 of which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs). 1.2. Following the said Statement, RBI also issued a circular dated April 6, 2018, in 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 (hereinafter, RBI Act, 1934 ) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... . Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately. 1.5. The Circular dated 06-04-2018 deals entirely with virtual currencies and the prohibition on dealing with the same. This Circular is statutory in character, issued in exercise of the powers conferred by (i) the Reserve Bank of India Act, 1934 (ii) the Banking Regulation Act, 1949 and (iii) the Payment Settlement Systems Act, 2007. This Circular in its entirety is reproduced as follows: Prohibition on dealing in Virtual Currencies (VCs) Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bit .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... mmunity. It was declared in Box 3.4 of the said report that the regulators are studying the impact of online payment options and virtual currencies to determine potential risks associated with them . 2.3. In June 2013, the Financial Action Task Force (hereinafter, FATF ), also known by its French name, Groupe d'action financière, which is an inter-governmental organization founded in 1989 on the initiative of G-7 to develop policies to combat money laundering, came up with what came to be known as New Payment Products and Services Guidance (NPPS Guidance, 2013). It was actually a Guidance for a Risk Based Approach to Pre-paid cards, Mobile Payments and Internet-based Payment Services. But this Guidance did not define the expressions digital currency , virtual currency , or electronic money , nor did it focus on virtual currencies, as distinct from internet based payment systems that facilitate transactions denominated in real money (such as Paypal, Alipay, Google Checkout etc.). Therefore, a short-term typologies project was initiated by FATF for promoting fuller understanding of the parties involved in convertible virtual currency systems and for developing a risk matri .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ices having same risk profiles. B. Where countries are prohibiting virtual currency products and services, they should take into account among other things, the impact a prohibition would have on local and global level of money laundering/terrorism financing risks, including whether prohibition would drive such payment activities underground, where they will operate without AML/CFT controls. 2.8. The FATF submitted a report in October 2015 on Emerging Terrorist Financing Risks . The report was divided into four parts, under the captions (i) introduction (ii) financial management of terrorist organisations (iii) traditional terrorist financing methods and techniques and (iv) emerging terrorist financing threats and vulnerabilities. Even while acknowledging in part 3 of the report that the traditional methods of moving funds through the banking sector happens to be the most efficient way of movement of funds for terrorist organisations, the report acknowledged the emergence of new payment products and services in part 4 of the report. The report took note of different methods of terrorist financing, such as self-funding, crowd funding, social network fund raising with prepaid cards e .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... an article, the link to which he tweeted to his followers, it was elaborated how jihadists could utilize the virtual currency to fund their efforts. (It must be noted that the report also took note of how prepaid cards and other internet-based payment services could also be used for terror financing). 2.9. The Bank of International Settlements (hereinafter, BIS ) which is a body corporate established under the laws of Switzerland, way back in the year 1930 pursuant to an agreement signed at Hague on 22-01-1930 and owned by 60 Central Banks of different countries including RBI, has several committees, one of which is Committee on Payments and Market Infrastructure (CPMI). This committee started taking note of digital currencies, while dealing with innovations in retail payments. This committee formed a sub-group within the CPMI Working Group on Retail Payments, to undertake an analysis of digital currencies. On the basis of the findings of the subgroup, CPMI of BIS submitted a report in November 2015 on Digital currencies. The sub-group identified three key aspects relating to the development of digital currencies one of which was that the assets featured in digital currency scheme .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... lopments, as many of the world s largest banks started supporting a joint effort for setting up of private blockchain and building an industry-wide platform for standardizing the use of technology. 2.11. In December 2016, the Financial Stability Report of RBI came. It took note of the rapid developments taking place in Fin Tech (financial technology) globally and exhorted the regulators to gear up to adopt technology (christened as RegTech). Paragraph 3.22 of the said report identified the establishment of regulatory sandboxes1 and innovation hubs for testing new products and services and providing support/guidance to regulated as well as unregulated entities. The report also noted that fast paced innovations such as virtual currencies have brought risks and concerns about data security and consumer protection on one hand and far reaching potential impact on the effectiveness of monetary policy itself on the other hand. The report took note of the fact that many central banks around the world, had already started examining the feasibility of creating their own digital currencies, after fretting over them initially. 2.12. In January 2017, the Institute for Development and Research i .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... against all those who, despite these warnings, indulge in buying/selling or offering platform for trading of these currencies, since the presumption would be that it is being done with illegal, fraudulent or tax evading intent. (v) If the Government agrees with the above recommendations, a committee should be constituted with members from DEA, RBI, SEBI, DoR, DoLA, Consumer Affairs, and MeitY, to suggest whether any further actions, including legislative changes, are required to make possession, trade and use of crypto-currencies expressly illegal and punishable. (vi) Finally, it is clarified that none of the above recommendations are meant to restrict the use of blockchain technology for purposes other than that of creating or trading in crypto-currencies. 2.15. In August 2017, Securities and Exchange Board of India (SEBI) established a 10-member advisory panel to examine global fintech developments and report on opportunities for the Indian securities market. The goal of the new Committee on Financial and Regulatory Technologies was to help prepare India to adopt fintech solutions and foster innovations within the country. 2.16. On 02-11-2017, the Government of India constituted .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... be taken by the Government. However, he also said that the Government will explore the use of blockchain technology proactively for ushering in digital economy. 2.21. The Central Board of Direct Taxes (CBDT), by an Office Memorandum dated 05-03-2018, submitted to the Department of Economic Affairs, a draft scheme proposing a ban on cryptocurrencies. But the draft scheme advocated a step-by-step approach, as many persons had already invested in cryptocurrencies. The scheme also contained an advice to carry out legislative amendments before banning them. 2.22. In the wake of a meeting of G-20 Finance Ministers and Central Bank Governors that was scheduled to be held in mid-March 2018, the Financial Stability Board2 (FSB) sent out a communication dated 13-03-2018. It was indicated in the said communication that as per the initial assessment of FSB, crypto assets did not pose risks to global financial stability, as their combined global market value even at their peak, was less than 1% of global GDP. But the report also noted that the initial assessment was likely to change and that crypto assets raised a host of issues around consumer and investor protection as well as their use to s .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... out that a few High Courts were also seized of writ petitions concerning cryptocurrencies. Therefore, this Court gave liberty to RBI to move appropriate applications for transfer of all those cases to this Court. 2.28. Accordingly, RBI came up with transfer petitions and the transfer petitions were taken on Board on 17-05-2018 and a direction was issued that no High Court shall entertain any writ petition relating to the impugned Circular dated 06-04-2018. This Court also passed an interim order on 17-05-2018 permitting the petitioners in WP (C) No. 1071 of 2017 to submit a representation to RBI with a further direction to RBI to deal with the same in accordance with law. 2.29. In the meantime, the Internet and Mobile Association of India came up with the second of the writ petitions on hand, namely WP (C) No. 528 of 2018 and notice was ordered in the said writ petition on 03-07-2018. While doing so, this Court issued a direction to RBI to dispose of the representation, if any, already submitted by the Association. Accordingly, RBI considered the representation and issued two communications dated 06-07-2018 and 09-07-2018. 2.30. On 23-07-2018, SEBI sent its comments on the 2018 Bi .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ight touch regulatory approach . The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have emerged as the primary regulators of cryptocurrencies in the United States, where these assets like most other jurisdictions, do not enjoy the legal tender status. Asian countries have experienced oversized concentration of crypto players - Japan and South Korea account for the biggest shares of crypto asset markets in the world. In the case of Bitcoins, half of transactions worldwide are carried out in Japan. In September 2017, Japan approved transactions by its exchanges in cryptocurrencies. China s exchanges hosted a disproportionately large volumes of global Bitcoin trading until their ban recently. […] Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash. Possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations, thus raising concerns on AML/CFT and taxation issues, require close watch. (emphasis supplied) 2.32. In this background, all the four writ petitions namely WP (C) Nos. 1071 and 1076 of .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... value, though it does not have the status of a legal tender. ii. Initial Coin Offerings (hereinafter, ICO ) are a way for companies to raise money by issuing digital tokens in exchange for fiat currency or cryptocurrency, but there is a clear risk with the issuance of ICOs as many of the companies are looking to raise money without having any tangible products. In the year 2018, as many as 983 ICOs were issued, through which funds to the tune of USD 20 billion were raised. iii. Virtual currencies are accorded different legal treatment by different countries, which range from barter transactions to mode of payment to legal tender. Countries like China have imposed a complete ban. iv. The mining of non-official virtual currencies is very resourceintensive requiring enormous amounts of electricity which may prove to be an environmental disaster. v. They may also affect the ability of the Central Banks to carry out their mandates. vi. China has not only banned trading in cryptocurrencies but also used its firewall to ban crypto currency exchanges. China even blocked crypto currency focused accounts from WeChat and cryptocurrency related content from Baidu. However, Chinese traders use .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... , was hosted in the website of the Department of Economic Affairs. Therefore, on 08-08-2019, the first two writ petitions namely WP (C) Nos. 1071 and 1076 of 2017 were delinked and adjourned to January 2020, since, the prayers made in these two writ petitions (seeking a ban) appeared substantially answered. 2.39. Thereafter, the present writ petitions were taken up for hearing and this Court passed an interim direction on 21-08-2019, directing the Reserve Bank of India to give a detailed point-wise reply to the representations dated 29-05-2018 and 30-05-2018. The reply already given by RBI to the representations dated 29-05-2018 and 30-05-2018 was found by this Court to be inadequate and hence this direction. Accordingly, RBI gave a detailed point-wise reply on 04-092019 and 18-09-2019. Thereafter, the present writ petitions were taken up for hearing. 3. FLASHBACK 3.1. The archeological excavations carried out at the (world wide web) sites, reveal that this digital currency civilization is just 12 years old (at the most, 37 years). But these excavations became necessary since virtual currencies, known by different names such as crypto assets, crypto currencies, digital assets, elec .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... aper is indicated in simple terms, for the understanding of the common man, by Nathaniel Popper, in his book as follows: Rather than relying on a central bank or company to issue and keep track of the money - as the existing financial system and Chaum s DigiCash did - this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain. The process by which this all happened had many layers, and it would take even experts, months to understand how they all worked together. But the basic elements of the system can be sketched out in rough terms, and were in Satoshi s paper, which would become known as the Bitcoin white paper. According to the paper, each user of the system could have one or more public Bitcoin addresses - sort of like bank account numbers - and a private key for each address. The coins attached to a given address could be spent only by a person with the private key corresponding to the address. The private key was slightly different from a traditional password, which has to be .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... trust that s required to make it work. The Central Bank must be trusted not to debase the currency but the history of fiat currencies is full of breaches of that trust. 3.6. What attracted people to Satoshi s proposal, was the fact that while Central Banks had no restraints in unlimited printing of money, thereby devaluing all savings and holdings, the Bitcoin software had rules to ensure that the process of creating new coins would stop after 21 million were out in the world. When Martti Malmi, a student at the Helsinki University of Technology, joined hands with Satoshi to improvise the project and to market it, he formulated the philosophy in the following words: Be safe from the unfair monetary policies of the monopolistic Central Banks and the other risks of centralized power over a money supply. The limited inflation of Bitcoin system s money supply is distributed evenly (by CPU power) throughout the network, not monopolized to a banking elite. 3.7. Therefore, it is beyond any pale of doubt that irrespective of the metamorphosis (or gene mutation) it has undergone over the years, bitcoin, the Adam or Manu of the race of cryptocurrencies, was developed as an alternative to fi .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... applicable to virtual currency exchanges, as the services rendered by them do not fall within the definition of the expression payment system under Section 2(1)(i) of the said Act. II. Assuming but not admitting that RBI has the power to deal with the activities carried on by VCEs, the mode of exercise of such power can be tested on certain well established parameters. They are - (i) application of mind/satisfaction/relevant and irrelevant considerations (ii) Malice in law/colorable exercise of power (iii) M.S. Gill reasoning (iv) Calibration/Proportionality III. All other stake holders such as the Department of Economic Affairs of the Government of India, Securities and Exchange Board of India, Central Board of Direct Taxes, etc., have actually recognized the positive and beneficial aspects of cryptocurrencies as digital assets and the Distributed Ledger Technology from which crypto currencies emanate and hence have recommended only a regulatory regime, but RBI has taken a contra position without any rational basis. IV. Many of the developed and developing economies of the world, multinational and international bodies and the courts of various countries have scanned crypto currenc .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ween various VC schemes such as closed VC schemes, unidirectional flow VC schemes and bidirectional flow VC schemes and unreasonably differentiates between unidirectional flow schemes and bidirectional flow schemes, by targeting only bidirectional flow schemes. III. VCs do not qualify as money, as they do not fulfill the four characteristics of money namely medium of exchange, unit of account, store of value and constituting a final discharge of debt and since RBI has accepted this position, they have no power to regulate it. IV. Considering the fact that historically, money as understood in the social sense and money as understood in the legal sense, are different, the courts in different jurisdictions such as USA and Singapore have understood VCs to be akin to money or funds at times or as commodities/intangible properties at other times. V. The impugned Circular is manifestly arbitrary, based on nonreasonable classification and it imposes disproportionate restrictions. VI. A decision to prohibit an article as res extra commercium is a matter of legislative policy and must arise out of an Act of legislature and not by a notification issued by an executive authority. 4.3. In addit .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... entually erode the monetary stability of the Indian currency and the credit system. (v) The impugned decision of RBI is legislative in character and is in the realm of an economic policy decision taken by an expert body warranting a hands-off approach from the Court. (vi) The impugned decision is within the range of wide powers conferred upon RBI under the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and the Payment and Settlement Systems Act, 2007. (vii) No one has an unfettered fundamental right to do business on the network of the entities regulated by RBI. (viii) The impugned decisions do not violate any of the rights guaranteed by Articles 14, 19 and 21 of the Constitution of India. (ix) The impugned decisions are not excessive, confiscatory or disproportionate in as much as RBI has given three months time to the affected parties to sever their relationships with the banks. This is apart from the repeated cautions issued to the stakeholders by RBI through Press Releases from the year 2013. (x) The ambit of the 2013 press release was much wider than just consumer protection. RBI cautioned users, holders and traders of VCs about the potential financial, oper .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... the light of the above factual matrix and the rival contentions, let us now see how the plot before us, unfolds. I. No Power at all for RBI (Ultra vires) 6.2. The first ground of attack revolves around the power of RBI to deal with, regulate or even ban VCs and VCEs. The entire foundation of this contention rests on the stand taken by the petitioners that VCs are not money or other legal tender, but only goods/commodities, falling outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007. In fact, the impugned Circular of RBI dated 0604-2018 was issued in exercise of the powers conferred upon RBI by all these three enactments. Therefore, if virtual currencies do not fall within subject matter covered by any or all of these three enactments and over which RBI has a statutory control, then the petitioners will be right in contending that the Circular is ultra vires. 6.3. Hence it is necessary (i) first to see the role historically assigned to a central bank such as RBI, the powers and functions conferred upon and entrusted to RBI and the statutory scheme of all the above three enactments and (ii) then to investigate what .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... f India. 6.7. The question of absorption of the three Presidency Banks into a central bank came up for consideration on and off. Though the Chamberlain Commission, known as the Royal Commission on Indian Finance and Currency, appointed in 1913, felt the need for setting up a central bank, the proposal did not materialize. But after the First World War, the Presidency Banks themselves favoured an amalgamation. Therefore, the Imperial Bank of India Bill providing for the amalgamation of all the three Presidency Banks was passed in September 1920 and came into effect in January 1921. The trend of setting up central banks gained momentum internationally, after the International Financial Conferences held at Brussels in 1920 and at Genoa in 1922. 6.8. But the maintenance of an overvalued exchange rate to help British exporters, gave rise to a clash between the colonial administration and Indian business interests. The Congress sought devaluation and hence a Royal Commission was set up in 1925 to examine the matter. This Royal Commission on Indian Currency and Finance, also known as Hilton Young Commission (to which Dr. B. R. Ambedkar also contributed a statement), recommended the creati .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... permanent basis for the Indian monetary system; AND WHEREAS it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy; BUT WHEREAS it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures; AND WHEREAS the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth; AND WHEREAS the monetary policy framework in India shall be operated by the Reserve Bank of India; 6.15. It may be observed from the newly substituted paragraphs that RBI is now vested with the obligation to operate the monetary policy framework in India. An indication of the primary objective of the monetary policy is provided in paragraph 3 which says that the maintenance of price stability is the prime objective even while the objective of growth is to be kept in mind. Paragraph 2 recognizes the necessity to have a modern monetary policy framework to meet .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... force, the central government shall not issue any currency notes. 6.20. Section 26(1) makes every bank note a legal tender at any place in India in payment, which is guaranteed by the central government. Since a bank note issued by RBI is a legal tender guaranteed by the central government, the central government is also vested with the power under sub-section (2) of Section 26 to declare any series of bank notes of any denomination, to cease to be legal tender. But this can be done only on the recommendation of the Central Board of Directors of RBI. 6.21. Under Section 38, the central government is prohibited from putting into circulation any rupees, except through RBI. Similarly, RBI is also prohibited from disposing of rupee coin otherwise than for the purpose of circulation. 6.22. Chapter IIIB which contains provisions relating to nonbanking institutions (NBFCs) receiving deposits and financial institutions, contains two important provisions, one in Section 45JA and another in Section 45L. Sub section (1) of Section 45JA reads as follows: 45JA. Power of Bank to determine policy and issue directions.- (1) If the Bank is satisfied that, in the public interest or to regulate the f .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ed by the Bank by general or special order; (b) give to such institutions either generally or to any such institution in particular, directions relating to the conduct of business by them or by it as financial institutions or institution. (2) Without prejudice to the generality of the power vested in the Bank under clause (a) of sub-section (1), the statements, information or particulars to be furnished by a financial institution may relate to all or any of the following matters, namely, the paid-up capital, reserves or other liabilities, the investments whether in Government securities or otherwise, the persons to whom, and the purposes and periods for which, finance is provided and the terms and conditions, including the rates of interest, on which it is provided. (3) In issuing directions to any financial institution under clause (b) of sub-section (1), the Bank shall have due regard to the conditions in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets. 6.26. It may be seen that the phrase credit sys .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ions. This is seen by the use of the expression other instruments of like nature appearing in the above provision. 6.30. A careful scan of the RBI Act, 1934 in its entirety would show that the operation/regulation of the credit/financial system of the country to its advantage, is a thread that connects all the provisions which confer powers upon RBI, both to determine policy and to issue directions. 6.31. RBI Act, 1934 is not the only Act from which RBI derives its powers. The Banking Regulation Act, 1949 is also a source of power for RBI to do certain things. This can be seen from the Statement of Objects and Reasons for the Banking Regulation Act, 1949. One of the main features of the Bill as indicated in the Statement of Objects and Reasons was widening the powers of RBI so as to enable it to come to the aid of the banking companies in times of emergency . 6.32. Section 5 of the Banking Regulation Act, 1949 which contains the interpretation clause defines the expression banking policy under clause (ca) of Section 5. This definition reads as follows: 5(ca) banking policy means any policy which is specified from time to time by the Reserve Bank in the interest of the banking syste .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... , 1949 to submit to RBI, monthly returns in the prescribed form, showing its assets and liabilities. RBI is conferred with powers under Section 29A even to call for information about the affairs of any associate enterprise of a banking company. Under sub-section (2) of Section 29A, RBI can even cause an inspection of any associate enterprise of a banking company. A power to conduct special audit of a banking company s accounts is also conferred upon RBI under Section 30(1B). 6.38. Section 35A of Banking Regulation Act, 1949 empowers RBI to issue directions to banking companies. Such directions are binding on the banking companies. The directions under Section 35A may be issued (i) in public interest (ii) in the interest of banking policy (iii) to prevent the affairs of the banking company from being conducted in a manner prejudicial to the interests of the depositors or of the banking company itself and (iv) to secure the proper management of the banking company. Section 35A(1) reads as follows: 35A. Power of the Reserve Bank to give directions.-(1) Where the Reserve Bank is satisfied that- (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... tiple payment systems, which operated only in the realm of contracts among various stakeholders, did not have a legislative sanction. Therefore, an Act known as the Payment and Settlement Systems Act, 2007 was enacted with the object of providing for the regulation and supervision of payment systems in India and to designate RBI as the authority for that purpose. 6.42. It is seen from the Statement of Objects and Reasons of the Bill that RBI is empowered to regulate and supervise various payment and settlement systems in India including those operated by non-banks, card companies, other payment system providers and the proposed umbrella organization for retail payments. The Act further empowers RBI to (i) lay down the procedure for authorization of payment systems (ii) lay down the operation and technical standards for payment systems (iii) issue directions and guidelines to system providers (iv) call for information and furnish returns and documents from the service providers (v) audit and inspect the systems and premises of the system providers (vi) lay down the duties of the system providers and (vii) make regulations for carrying out the provisions of the Act. 6.43. Section 2(1 .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... payment systems. The Section reads as follows: 10. Power to determine standards.- (1) The Reserve Bank may, from time to time, prescribe- (a) the format of payment instructions and the size and shape of such instructions; (b) the timings to be maintained by payment systems; (c) the manner of transfer of funds within the payment system, either through paper, electronic means or in any other manner, between banks or between banks and other system participants; (d) such other standards to be complied with the payment systems generally; (e) the criteria for membership of payment systems including continuation, termination and rejection of membership; (f) the conditions subject to which the system participants shall participate in such fund transfers and the rights and obligations of the system participants in such funds. (2) Without prejudice to the provisions of sub-section (1), the Reserve Bank may, from time to time, issue such guidelines, as it may consider necessary for the proper and efficient management of the payment systems generally or with reference to any particular payment system. 6.47. Section 11 of the Act provides that any change in the system which would affect the str .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... uct; or (ii) to perform such acts as may be necessary, in the opinion of the Reserve Bank, to remedy the situation. 6.49. Section 18 of the Payment and Settlement Systems Act, 2007 further empowers RBI to issue directions to system providers or the system participants or any other person generally, to regulate the payment systems or in the interest of management or operation of any of the payment systems or in public interest. The Section reads as follows: 18. Power of Reserve Bank to give directions generally.- Without prejudice to the provisions of the foregoing, the Reserve Bank may, if it is satisfied that for the purpose of enabling it to regulate the payment systems or in the interest of management or operation of any of the payment systems or in public interest, it is necessary so to do, lay down policies relating to the regulation of payment systems including electronic, non-electronic, domestic and international payment systems affecting domestic transactions and give such directions in writing as it may consider necessary to system providers or the system participants or any other person either generally or to any such agency and in particular, pertaining to the conduct o .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... as follows: Bitcoin is neither fish nor fowl…But both pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seem problematic. The problem is not that it is not issued by the Government nor that it is unregulated. The problem is that it is hard to see what it is. 6.53. It is now universally accepted that Satoshi envisioned a digital analog to old-fashioned gold, a new kind of universal money that could be owned by everyone and spent anywhere. It was designed to live with a cleverly constructed decentralized network without central authority. Satoshi himself defined it as a new electronic cash system that s fully peer-topeer, with no trusted third party. 6.54. It is true that though, at its birth, it was conceived of only as an alternative to money, crypto currencies assumed different shapes, different shades and different utility values over the past decade and more. Several international monetary agencies/watchdogs are dabbling to find out what these are and they are also divided in their opinion. For instance, in a report submitted on 22-01-2019 to the International Monetary Fund (IMF), by Jeffrey Franks, Director of its Europe Offi .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ons, on the ground that VCs are capable of being used as a medium of exchange. Therefore, it is necessary to see how VCs were defined (i) by regulators in different jurisdictions and (ii) by the governments and other statutory authorities of various countries, through statutory instruments and non-statutory directives and (iii) by courts of different jurisdictions. DEFINITION OF VCs - BY REGULATORS S. No. Regulator Definition of Virtual Currency 1. International Monetary Fund7 VCs are digital representations of value, issued by private developers and denominated in their own unit of account.8 VCs can be obtained, stored, accessed, and transacted electronically, and can be used for a variety of purposes, as long as the transacting parties agree to use them. The concept of VCs covers a wider array of currencies, ranging from simple IOUs (I owe you) of issuers (such as Internet or mobile coupons and airline miles), to VCs backed by assets such as gold,9 and cryptocurrencies such as Bitcoin. As digital representations of value, VCs fall within the broader category of digital currencies. However, they differ from other digital currencies, such as e-money, which is a digital payment mech .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... , real-world representation. This definition of virtual currencies captures decentralised, peer-to-peer VCs - as distinct from E-money or Internet (software)-based payment schemes, which merely facilitate transactions denominated in fiat money or in central bank-issued digital currencies - which, while devoid of legal tender status, fulfil, at least to some extent, all three traditional functions of money by way of agreement within their user community. This definition does not, however, extend to centrally-issued digital currencies, such as the central bank digital currencies under consideration, at the time of writing, in several jurisdictions. European Banking Authority in 2014:14 VCs are defined as a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a FC, but is used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically. 4. European Securities and Markets Authority15 Crypto-asset: A type of private asset that depends primarily on cryptography and Distributed Ledger Technology (DLT) or similar technology as part of their perceived or inherent value...Crypto .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... livery are presently or in the future dealt in. 7 U.S.C. § 1a(9). The definition of a commodity is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.21 9. Financial Crimes Enforcement Network, Department of Treasury, USA22 Virtual currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses convertible virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency. 10. Canada Revenue Agency (CRA)23 Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset…that works as a medium of exchange for goods and services between the parties who agree to use it. CRA generally treats cryptocurrency like a commodity for purposes of Income Tax Act. Any income from transactions involving cryptocurrency is generally treated as bus .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... Malta Virtual Financial Asset Act, 2018 Article 2(2): virtual financial asset or VFA means any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not - (a)electronic money; (b)a financial instrument; or (c)a virtual token; virtual token means a form of digital medium recordation whose utility, value or application is restricted solely to the acquisition of goods or services, either solely within the DLT platform on or in relation to which it was issued or within a limited network of DLT platforms. 3. Canada Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, 2002 25 Section 1(2): virtual currency means (a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or (b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a). 4. Bahamas Payment Instruments (Oversight) Regulations, 2017 No specific legislation for crypt .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... units, which can be exchanged for legal tender, used to purchase goods or services or to preserve value and thus assume the function of legal tender. 8. Israel Supervision of Financial Services Law, 5776-2016 Section 11A (7) defines financial asset. Financial asset includes virtual currency. 26 9. Jersey (Crown dependency) Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regulations 2016 Article 4(4): Virtual currency means any currency which (whilst not itself being issued by, or legal tender in, any jurisdiction) - (a) digitally represents value; (b) is a unit of account; (c) functions as a medium of exchange; and (d) is capable of being digitally exchanged for money in any form. Article 4(5): For the avoidance of doubt, virtual currency does not include any instrument which represents or stores (whether digitally or otherwise) value that can be used only to acquire goods and services in or on the premises of, or under a commercial agreement with, the issuer of the instrument. 10. Mexico Financial Technology Institutions Law, 2018 (Chapter on Virtual Assets) It defines virtual assets as representations of value electronically registered and utilized by the public as a means .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ulation (23 CRR-NY 200)] North Carolina [Money Transmitters Act (§ 53-208.42)] Section 2(p): virtual currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual currency shall be broadly construed to include digital units of exchange that: have a centralized repository or administrator; are decentralized and have no centralized repository or administrator; or may be created or obtained by computing or manufacturing effort. Virtual currency shall not be construed to include any of the following: (1) digital units that: (i) are used solely within online gaming platforms; (ii) have no market or application outside of those gaming platforms; (iii) cannot be converted into, or redeemed for, fiat currency or virtual currency; and (iv) may or may not be redeemable for real-world goods, services, discounts, or purchases; (2) digital units that can be redeemed for goods, services, discounts, or purchases as part of a customer affinity or rewards program with the issuer and/or other designated merchants or can be redeemed for digital units in another customer affinity or rewards program, but cannot be converted into, or redee .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... d by any central bank or governmental authority. Virtual currencies are: •not backed by the United States or any other national government; •not insured by the Federal Deposit Insurance Corporation or any governmental agency; •not backed by any physical commodity, such as gold or silver; and •not legal tender for debts. Virtual currencies have legitimate purposes and can be purchased, sold, and exchanged with other types of virtual currencies or real currencies like the U.S. dollar. This can happen through various mechanisms such as exchangers, administrators, or merchants that are willing to accept virtual currencies in lieu of real currency. Convertible virtual currency is a digital representation of value that has an equivalent value in real currency, such as the United States Dollar (USD), and/or acts as a substitute for real currency. A prominent example of convertible virtual currency is Bitcoin, a form of e-currency that has been around since 2008. Virtual currency means a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... r certain risks to materialize, the widespread substitution of bank notes over a period of time, with digital currencies, could lead to a decline in non-interest paying liabilities of central banks and that the conduct of the monetary policy could be affected. 6.61. Similarly, the state of Liechtenstein considers virtual currencies as digital monetary units which can be exchanged for legal tender and also be used to purchase goods or services, thereby assuming the character of a legal tender. The German Federal Financial Supervisory Authority treats virtual currencies as units of account and consequently as financial instruments. Luxembourg has taken an official position that crypto currencies are actual currencies. Some of the states in the Unites States of America have passed laws recognizing virtual currencies as electronic medium of exchange. 6.62. It is clear from the above that the governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... in the legal sense, it was contended by Shri Nakul Dewan, learned Senior Counsel, with particular reference to the book Property Rights in Money by David Fox and the decision of the Queen s Bench in Moss v. Hancock (1899) 2 QB 111 and the decision of the US Supreme Court in Wisconsin Central Ltd v. United States, 585 US ___ 2018, 138 S. Ct. 2067 (2018) that so long as VCs do not qualify as money either in the legal sense (not having a legal tender status) or in the social sense (not being widely accepted by a huge population as a medium of exchange), they cannot be treated as currencies within the meaning of any of the statutory enactments from which RBI draws its energy and power. 6.65. But we do not think that RBI s role and power can come into play only if something has actually acquired the status of a legal tender. We do not also think that for RBI to invoke its power, something should have all the four characteristics or functions of money. Moss v. Hancock (supra), itself a century old decision (1899), relies upon the definition of money as given by F. A. Walker in his treatise Money, Trade and Industry (actual title of the book appears to be Money in its relation to Trade a .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... r, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other similar instrument, but shall not include any currency that is held for its numismatic value . This definition is important, for it identifies many instruments other than legal tender, which could come within the definition of money. 6.68. The Sale of Goods Act, 1930 does not define money or currency but excludes money from the definition of the word goods . The Central Goods and Services Tax Act, 2017 defines money under Section 2(75) to mean the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other instrument recognised by RBI, when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value. 6.69 In CIT v. Kasturi & Sons Ltd. (1999) 3 SCC 346), a question arose as to whether the replacement by the insurer, of an article destroyed by one of the perils as again .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... expenses. The only limitation of bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies such as the US dollar, euro, yen and Yuan. Therefore, bitcoin is a currency or form of money… 6.73. In United States v. Ulbricht, 31F. Supp. 3d 540 (2014) the United States District Court, Southern District, New York was concerned with thedefendant s motion to dismiss four counts namely (i) participation in a narcotics trafficking conspiracy (ii) a continuing criminal enterprise (iii) computer hacking conspiracy and (iv) money laundering conspiracy, for which the Grand jury returned indictment. The allegation against the defendant was that Ulbricht engaged in these offences by designing, launching and administering a website called Silk Road, as an online marketplace for illicit goods and services. According to the prosecution, Bitcoin was used to launder the proceeds. The website was available only to those using Tor (abbreviation for The Onion Router ), a free and open source software and a network that allows anonymous, untraceable internet browsing. Payments were allowed only through Bitcoin. Opposing the .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... efore the CFTC when public administrative proceedings were sought to be initiated against them. In the order accepting the offer of settlement, delivered on 02-06-2016 In the matter of BFXNA Inc, d/b/a BITFINEXCFTC Docket No. 16-19 dated 02-06-2016 CFTC recorded that Bitcoin and other virtual currencies are commodities under the relevant provisions of the statute. 6.77. In United States v. Murgio, 209 F. Supp. 3d 698 (2016) which was also before the US District Court, S.D. New York, the defendant was charged with operating Coin.mx, as an unlicensed money transmitting business. The government alleged that Murgio and his co-conspirators attempted to shield the true nature of his Bitcoin exchange business by operating through several front companies, to convince financial institutions that Coin.mx was just a members-only association of individuals interested in collectable items. Count one of the indictments was the alleged conspiracy in the operation of an unlicensed money transmitting business, punishable under 18 U. S. C. § 1960. Under Section 1960, a business must (i) transfer on behalf of public, (ii) funds and (iii) in violation of licensing and registration requirements, t .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... er a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning, the court ruled as follows: Nothing in our frame of references allows us to accurately define or describe Bitcoin……. Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects. While Bitcoins can be exchanged for items of value, they are not a commonly used means of exchange. They are accepted by some but not by all merchants or service providers. …. With such volatility they have a limited ability to act as a store of value, another important attribute of money. This court is not an expert in economics, however it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is equivalent of money. The Florida Legislature may choose to adopt statutes regulating virtual currency in future. At this time, however, attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole 6.81. But the decision of the Circuit Court was appealed to the Third District Court of .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... around the identity of virtual currencies. It was in that context that the court opined that crypto currencies satisfied the definition of property as provided by the House of Lords in National Provincial Bank v. Ainsworth [1965] 1 AC 1175 at 1248] to the effect that it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability . The court further noted that crypto currencies are not legal tender in the sense of being a regulated currency issued by a government but do have the fundamental characteristic of intangible property as being an identifiable thing of value . The decision of the Commercial Court was appealed to the Court of Appeal. While dismissing Quoine s appeal on breach of contract claim, but allowing it on breach of trust claim, the Court of Appeal held in Quoine Pte Ltd v. B2C2 Ltd [2020] SGCA (I) 02 that though crypto currencies are capable of assimilation into the general concepts of property, there are difficult questions as to the type of property that is involved. Therefore, the Court of Appeal did not take a final position on the question, since it felt that the precise .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... hird parties; and (iv) capable of some degree of permanence] set out by Lord Wilberforce in National Provincial Bank v. Ainsworth (supra), Bryan, J held in AA v. Persons Unknown that virtual currencies are neither choses in action (not embodying a right capable of being enforced in action) nor choses in possession (being virtual and incapable of being possessed). However, the court ruled that VCs can still be treated as property, by applying the 4 criteria laid down in National Provincial Bank and Law Tech Delivery Panel's Legal Statement, though it did not constitute a statement of the law. Bryan J. was convinced that the statement's detailed legal analysis of the proprietary status of cryptocurrencies was compelling and should be adopted by the court. Thus, what prevailed with the court was the definition provided by Law Tech Delivery Panel s UK Jurisdiction Task Force, which, unlike RBI, did not enjoy a statutory status, but was only an industry-led government backed initiative. 6.84. The ruling of the European Court of Justice in Skatteverket v. David Hedqvist Case C-264/14 dated 22-10-2015, was with particular reference to the identity of virtual currencies. ECJ was in .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... d men in the Anekantavada philosophy of Jainism (According to this doctrine, truth and reality are perceived differently from different points of view and no single point is the complete truth), (theory of non-absolutism that encourages acceptance of relativism and pluralism) who attempt to describe an elephant, but end up describing only one physical feature of the elephant. 6.86. RBI was also caught in this dilemma. Nothing prevented RBI from adopting a short circuit by notifying VCs under the category of other similar instruments indicated in Section 2(h) of FEMA, 1999 which defines currency to mean all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank. After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are just goods/commodities and can never be regarded as real money. 6.8 .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ion 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index. Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. The expression management of the currency appearing in Section 3(1) need not necessarily be confined to the management of what is recognized in law to be currency but would also include what is capable of faking or playing the role of a currency. 6.91. It is ironical that virtual currencies which took avatar (according to its creator Satoshi) to kill the demon of a central authority (such as RBI), seek from the very same central authority, access to banking services so that the purpose of the avatar is accomplished. As we have pointed out elsewhere, the very creation of digital currency/ Bitcoin was to liberate the monetary sy .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... and that therefore the same cannot be done through an executive fiat, omits to take note of the crucial role assigned to RBI in the economic sphere. It is true that in Godawat Pan Masala Products IP Ltd. & Anr v. Union of India (2004) 7 SCC 68), it was held that whether an article is to be prohibited as res extra commercium, is a matter of Legislative policy and must arise out of an Act of legislature and not by a mere executive notification. But we must remember that in Khoday Distilleries Ltd. v. State of Karnataka (1995) 1 SCC 574, while dealing with prohibitions on alcohol it was held that what articles and goods should be allowed to be produced, possessed, sold and consumed is to be left to the judgment of legislative and executive wisdom. 6.94. In any case, the projection of the impugned decisions of RBI as a total prohibition of an activity altogether, may not be correct. The impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs. Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly e .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... property, as opposed to public policy. This court found that the delegation made by Section 22A was uncanalised and unguided. In addition, the court found that a transaction between two persons capable of entering into contract, which does not contravene any statute, would be valid in law and that when the State of Rajasthan did not make such transactions illegal, it cannot strike at the documents recording such transactions. The court held that Section 22A cannot control the transactions which fall outside the scope of the Act, through a subordinate legislation. 6.96. But the said decision is of no assistance to the petitioners, since none of the provisions of the RBI Act or the Banking Regulation Act are under challenge before us. The delegation itself is not in question before us. Unlike the Registration Act, Section 36(1)(a) of the Banking Regulation Act, 1949 empowers RBI to specifically target transactions. Moreover, RBI s role in the economy of the country is not akin to the power of any other delegate. 6.97. While holding that price fixation may normally be a legislative act, this court pointed out in Union of India & Anr v. Cynamide India ltd. & Anr (1987) 2 SCC 7 .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... Act and that therefore they must be governed by the same principles as the statute itself. Useful reference can also be made in this regard to the following observations in ICICI Bank Ltd v. Official Liquidator of APS Star Industries Ltd (2010) 10 SCC 1: 40. When a delegate is empowered by Parliament to enact a policy and to issue directions which have a statutory force and when the delegatee (RBI) issues such guidelines (policy) having statutory force, such guidelines have got to be read as supplement to the provisions of the BR Act, 1949. The banking policy is enunciated by RBI. Such policy cannot be said to be ultra vires the Act. (emphasis supplied) 6.100. In his treatise on Administrative Law, Durga Das Basu states Ch. 4, Pg. 121, 6th Edition, 2004: The scope of judicial review is narrowed down when a statute confers discretionary power upon an executive authority to make such rules or regulations or orders as appear to him to be necessary or expedient , for carrying out the purposes of the statute or any other specified purpose. In such a case, the check of ultra vires vanishes for all practical purposes inasmuch as the determination of the necessity or expediency is taken ou .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... into certain territories. The Circular is actually addressed to entities regulated by RBI and not to those who do not come within the purview of RBI s net. But the exercise of such a power by RBI, over the entities regulated by it, has caused a collateral damage to some establishments like the petitioners , who do not come within the reach of RBI s net. 6.105. The power of a statutory authority to do something has to be tested normally with reference to the persons/entities qua whom the power is exercised. The question to be addressed in such cases is whether the authority had the power to do that act or issue such a directive, qua the person to whom it is addressed. While persons who suffer a collateral damage can certainly challenge the action, such challenge will be a very weak challenge qua the availability of power. 6.106. Apart from the provisions of the RBI Act, 1934 and the Banking Regulation Act, 1949, the impugned Circular also refers to the power under Section 18 of the Payment and Settlement Systems Act, 2007. In order to buttress their contention regarding the availability of power to regulate, the petitioners refer to the definition of the expression payment system u .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... nt,- (i) by a person to a system participant; or (ii) by a system participant to another system participant; 2(1)(h) payment obligation means an indebtedness that is owned by one system participant to another system participant as a result of clearing or settlement of one or more payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions; 6.111. Therefore, in the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 should fail. II. Mode of exercise of power: Satisfaction/Application of mind/relevant and irrelevant considerations 6.112. That takes us to the next question whether the power was exercised properly in a manner prescribed by law. The argument of Shri Ashim Sood, learned Counsel for the petitioner is that assuming that RBI has the requisite power under Section 35A(1) of Banking Regulation Act, 1949 to d .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... April 2016, pursuant to which RBI set up an Inter-Regulatory Working Group on FinTech and Digital Banking. This Working Group submitted a report in November 2017, after which RBI issued a third press release on 05-12-2017. Thereafter RBI also sent a mail on 02-04-2018 to the central government, enclosing a note on regulating crypto assets. To be fair to RBI, even this note examined the pros and cons of banning and regulating crypto currencies. 6.116. All the above sequence of events from June 2013 up to 02-04-2018 would show that RBI had been brooding over the issue for almost five years, without taking the extreme step. Therefore, RBI can hardly be held guilty of non-application of mind. If an issue had come up again and again before a statutory authority and such an authority had also issued warnings to those who are likely to be impacted, it can hardly be said that there was no application of mind. For arriving at a satisfaction as required by Section 35A(1) of Banking Regulation Act, 1949 and Section 45JA and 45L of RBI Act, 1934, it was not required of RBI either to write a thesis or to write a judgement. 6.117. In fact, RBI cannot even be accused of not taking note of releva .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks. • There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws. The Reserve Bank has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations. 6.118. When a series of steps taken by a statutory authority over a period of about five years disclose in detail what triggered their action, it is not possible to see the last of the orders in the series in isolation and conclude that the satisfaction arrived at by the authority is not reflected appropriately. In any .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... s are outside the ambit of the central authority s effective sphere of control and management and also referring to the stand taken by RBI in their letter dated 04-092019 to the effect that neither VCs nor the businesses involved in providing VC based services come under the regulatory purview of RBI , it was contended by Shri Ashim Sood that the impugned Circular is a colourable exercise of power and tainted by malice in law, in as much as it seeks to achieve an object completely different from the one for which the power is entrusted. State of Punjab & Anr v. Gurdial Singh & Ors (1980) 2 SCC 471), Collector (District Magistrate) Allahabad & Anr v. Raja Ram Jaiswal (1985) 3 SCC 1), and Kalabharati Advertising v. Hemant Vimalnath Narichania & Ors (2010) 9 SCC 437 are relied upon in this regard. 6.122. But the above contention is completely misconceived. There can be no quarrel with the proposition that RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company or in public interest. If the exercise of power by RBI with a view to achieve one of these .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... aiyed Hussain Abbas Rizwi & Anr (2012) 13 SCC 61), wherein it was held that the term public interest does not have a rigid meaning and takes its colour from the statute in which it occurs (iii) the decision in Utkal Contractors & Joinery (P) Ltd. & Ors v. State of Orissa & Ors (1987) 3 SCC 279), wherein it was held that the words of a statute take their colour from the reason for it and (iv) the decision in Empress Mills v. Municipal Committee, Wardha (1958) SCR 1102), wherein it was held that general words and phrases must usually be construed as being limited to the actual object of the Act, it was contended that the expression public interest appearing in Section 35A(1)(a) of the Banking Regulation Act, 1949, cannot be given an expansive meaning. 6.125. But the said argument does not take the petitioners anywhere. As we have indicated elsewhere, the power under Section 35A to issue directions is to be exercised under four contingencies namely (i) public interest (ii) interest of 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) .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ed with the economic policies of the State, SEBI which is concerned with security contracts and CBDT which is concerned with the tax regime relating to goods and services, did not see any grave threat and that therefore RBI s reaction is knee-jerk, is not acceptable. Enforcement Directorate can step in only when actual money laundering takes place, since the statutory scheme of Prevention of Money Laundering Act deals with a procedure which is quasi-criminal. 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 related to the sale and purchase of taxable goods/commodities. Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others. IV. Light-touch approach of the other countries 6.129. The argument that most of the countries except very few like China, Vietnam, Pakistan, Nepal, Bangladesh, UAE, have not imposed a ban ( .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... er the safety valves put in place could have addressed all issues raised by RBI. VI. Different types of VCs require different treatments 6.132. Drawing our attention to a Report by the European Parliament under the caption Cryptocurrencies and Blockchain , released in July 2018, it is contended by Shri Ashim Sood, learned Counsel for the petitioners that all virtual currencies are not fully anonymous. While some, such as Dash and Monero are fully anonymous, others such as Bitcoin are pseudo-anonymous. Therefore, it is contended that banning transactions only in fully anonymous VCs could have been a better and less intrusive measure. An identical argument is advanced by Shri Nakul Dewan learned Senior Counsel for the petitioners, with reference to a report of October 2012 of the European Central Bank on Virtual Currency Schemes . According to the said Report, Virtual Currency schemes can be classified into three types, depending upon their interaction with traditional real money and real economy. They are (i) closed virtual currency schemes basically used in an online game (ii) virtual currency schemes having a unidirectional flow (usually an inflow), with a conversion rate for purc .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ributed Ledger Technology and the rejection of VCs is actually a contradiction in terms. This argument is based upon the various reports, both of RBI and of the Inter-Ministerial Group, to the effect that DLT is part of FinTech. 6.137. The above contention, in legal terms, is about the irrationality of the impugned decision. But there is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation. There is nothing like a take it or leave it option. VIII. RBI s decisions do not qualify for Judicial deference 6.138. It is contended by Shri Ashim Sood, learned Counsel for the petitioners that the impugned Circular does not have either the status of a legislation or the status of an executive action, but is only the exercise of a power conferred by statute upon a statutory body corporate. Therefore, it is his contention that the judicial rule of deference as articulated in R.K. Garg v. Union of India (1981) 4 SCC 675), BALCO Employees Union (Regd.) v. Union of India & Ors (2002) 2 SCC 333), and Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors (2019) 4 SCC 17), will not apply to the decision tak .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... al Finance and Investment Co. Ltd. v. Reserve Bank of India (supra), T. Velayudhan v. Union of India (1993) 2 SCC 582), Delhi Science Forum v. Union of India (1996) 2 SCC 405), Bhavesh D. Parish v. Union of India (2000) 5 SCC 471), Ugar Sugar Works ltd. v. Delhi Administration & Ors (2001) 3 SCC 635), BALCO Employees Union (Regd.) v. Union of India (supra), Govt. of Andhra Pradesh & Ors v. P. Laxmi Devi (2008) 4 SCC 720), Villianur Iyarkkai Padukappu Maiyam v. Union of India (2009) 7 SCC 561), D.G. of Foreign Trade v. Kanak Exports (2016) 2 SCC 226), State of J & K v. Trikuta Roller Flour Mills Pvt. Ltd. (2018) 11 SCC 260), and Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416), as the entire history of the doctrine of deference from Lochner Era has been summarized by this court in Swiss Ribbons Pvt. Ltd. v. Union of India (supra). In fact, even the learned Counsel for the petitioners is ad idem with the learned Senior Counsel for RBI that economic regulations require due judicial deference. The actual argument of the learned Counsel for the petitioners is that such deference may differ in degree from being very weak in respect of the decisio .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... tenure not exceeding five years, as the central government may fix at the time of appointment. Though the shorter tenure and the choice given to the central government to fix the tenure, to some extent, undermines the ability of the incumbents of office to be absolutely independent, the statutory scheme nevertheless provides for independence to the institution as such. Therefore, we do not accept the argument that a policy decision taken by RBI does not warrant any deference. IX. Article 19(1)(g) challenge & Proportionality 6.142. The next ground of attack is on the basis of Article 19(1)(g). Any restriction to the freedom guaranteed under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6). It is contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate. It is further contended that the right to access the banking system is actually integral to the right to carry on any trade or profession and that therefore a legislat .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ss, trade or profession. This is especially so in the light of the restrictions on cash transactions contained in Sections 269SS and 269T of the Income Tax Act, 1961. When currency itself has undergone a metamorphosis over the centuries, from stone to metal to paper to paperless and we have ushered into the digital age, cashless transactions (not penniless transactions) require banking channels. Therefore, the moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, resulting in the trade or business getting automatically shut down. Hence, the burden of showing that larger public interest warranted such a serious restriction bordering on prohibition, is heavily on RBI. 6.145. In the counter-affidavit filed in WP (C) No. 528 of 2018, RBI has raised 2 fundamental objections in this regard. The first is that corporate bodies/entities who have come up with the challenge are not citizens and hence, not entitled to maintain a challenge under Article 19(1)(g). This objection may hold good in respect of the writ petition filed by Internet and Mobile Association of India, which is described by them as a not-for-profit associa .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ) the purchase and sale of virtual currencies by and between two individuals or entities and (ii) the business of online exchanges that provide certain services such as the facility of buying and selling of virtual currencies, the storing or securing of the virtual currencies in what are known as wallets and the conversion of virtual currencies into fiat currency and vice versa. The buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business. The distinction between the two is that there may or may not exist a profit motive in the former, while it would, in the latter. 6.148. Persons who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Article 19(1)(g), for what is covered therein are only profession, occupation, trade or business. Therefore hobbyists, who are one among the three categories of citizens (hobbyists, traders in VCs and VC Exchanges), straightaway go out of the challenge under Article 19(1)(g). 6.149. The second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platfor .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... y, in that they can be accessed from anywhere in the world. For instance, paper wallets are printed in the form of QR codes that can be scanned, and a transaction completed by using the private keys. Similarly, mobile wallets run as an app on the smartphone and hence they allow a person to use the crypto currency stored in the wallet for buying anything, even while travelling abroad, provided the vendor accepts payments in crypto currencies. Paper wallets and mobile wallets can also be used to draw fiat currency from virtual currency ATMs available in countries like USA, Canada, Switzerland, etc. 6.153. In other words, most of the wallets except perhaps desktop wallet, have great mobility and have transcended borders. Therefore, despite the fact that the users and traders of virtual currencies are also prevented by the impugned Circular from accessing the banking services, the impugned Circular has not paralyzed many of the other ways in which crypto currencies can still find their way to or through the market. 6.154. Persons who have suffered a deadly blow from the impugned Circular are only those running VC exchanges and not even those who are trading in VCs. Persons trading in V .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... re rationally connected to the fulfillment of the purpose (iii) that there are no alternative less invasive measures and (iv) that there is a proper relation between the importance of achieving the aim and the importance of limiting the right. The court in the said case held that a mere ritualistic incantation of money laundering or black money does not satisfy the first test and that alternative methods should have been explored. 6.157. Let us now see whether the impugned Circular would fail the four-pronged test. In fact, the Privy Council originally set forth in Elloy de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing [1999] 1 AC 69], only a three-fold test namely (i) whether the legislative policy is sufficiently important to justify limiting a fundamental right (ii) whether the measures designed to meet the legislative objective are rationally connected to it and (iii) whether the means used to impair the right or freedom are no more than is necessary to accomplish the objective. These three tests came to be known as De Freitas test. But a fourth test namely the need to balance the interests of society with those of individuals and group .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... he aforesaid Act provided for a remedy to a person affected by any such decision of the Treasury, to apply to the High Court or in Scotland, to the Court of Session. Section 63(3) specifically recognized the application of the principles of judicial review, to the applications filed against such measures. 6.159. It is in the context of those specific statutory prescriptions for judicial review available in UK (unlike in India) that Bank Mellat challenged the Treasury s decision. The challenge was both on procedural and substantive grounds. By a majority of 6 to 3, the Supreme Court of the United Kingdom allowed the appeal of the Bank on procedural grounds. On the substantive grounds, the appeal of the Bank was allowed by a majority of 5 to 4. 6.160. Lord Reed who wrote a dissent both on the procedural grounds and the substantive grounds, traced the history of the doctrine of proportionality as follows: 68. The idea that proportionality is an aspect of justice can be traced back via Aquinas to the Nicomachean Ethics and beyond. The development of the concept in modern times as a standard in public law derives from the Enlightenment, when the relationship between citizens and their r .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... man Rights. As the court has often stated, inherent in the whole of the Convention is a search for a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual s fundamental rights (see eg Sporrong and Lönnroth v Sweden (1982) 5 EHRR 35, para 69). The court has described its approach to striking such a balance in different ways in different contexts, and in practice often approaches the matter in a relatively broad-brush way. In cases concerned with A1P1, for example, the court has often asked whether the person concerned had to bear an individual and excessive burden (see eg James v United Kingdom (1986) 8 EHRR 123, para 50). The intensity of review varies considerably according to the right in issue and the context in which the question arises. Unsurprisingly, given that it is an international court, its approach to proportionality does not correspond precisely to the various approaches adopted in contracting states. 71. An assessment of proportionality inevitably involves a value judgment at the stage at which a balance has to be struck between the importance of the objective pursued and the value of th .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... three criteria have however an affinity to those formulated by the Strasbourg court in cases concerned with the requirement under articles 8 to 11 that an interference with the protected right should be necessary in a democratic society (eg Jersild v Denmark (1994) Publications of the ECtHR Series A No 298, para 31), provided the third limb of the test is understood as permitting the primary decisionmaker an area within which its judgment will be respected. 73. The De Freitas formulation has been applied by the House of Lords and the Supreme Court as a test of proportionality in a number of cases under the Human Rights Act. It was however observed in Huang v Secretary of State for the Home Department [2007] UKHL 11; [2007] 2 AC 167, para 19 that the formulation was derived from the judgment of Dickson CJ in R v Oakes [1986] 1 SCR 103, and that a further element mentioned in that judgment was the need to balance the interests of society with those of individuals and groups. That, it was said, was an aspect which should never be overlooked or discounted. That this aspect constituted a fourth criterion was noted by Lord Wilson, with whom Lord Phillips and Lord Clarke agreed, in R (Agu .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... is unaware of the relevant practicalities and indifferent to considerations of cost. To allow the legislature a margin of appreciation is also essential if a federal system such as that of Canada, or a devolved system such as that of the United Kingdom, is to work, since a strict application of a least restrictive means test would allow only one legislative response to an objective that involved limiting a protected right. 76. In relation to the fourth criterion, there is a meaningful distinction to be drawn (as was explained by McLachlin CJ in Alberta v Hutterian Brethren of Wilson Colony [2009] 2 SCR 567, para 76) between the question whether a particular objective is in principle sufficiently important to justify limiting a particular right (step one), and the question whether, having determined that no less drastic means of achieving the objective are available, the impact of the rights infringement is disproportionate to the likely benefits of the impugned measure (step four). 6.161. Despite the fact that the Iranian bank succeeded by a greater majority on procedural grounds and by a thin majority on the substantive grounds, a common thread is seen, both, in the opinion of th .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ected to make to the direction s objective. (v) By contrast, the minority were satisfied that, in view of the wide margin of appreciation given to the Treasury in these matters, the direction was rationally connected to the objective and was proportionate. 6.162. We cannot and need not go as far as the majority had gone in Bank Mellat. U.K. has a statute where standards of procedure for judicial review are set out and the majority decision was on the application of those standards. But even by our own standards, we are obliged to see if there were less intrusive measures available and whether RBI has at least considered these alternatives. On the question of availability of alternatives, the July 2018 report of the European Union Parliament (titled Cryptocurrencies and Blockchain ) is relied upon by Shri Ashim Sood. The relevant portion (in paragraph 5.4) reads as follows: In this respect we also note that some cryptocurrencies that are now on the market, such as Dash and Monero, are fully anonymous, whereas others, such as Bitcoin and the like are pseudo-anonymous, basically meaning that if great effort is made and complex techniques are deployed, it is possible for authorities to .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... osed, how do we detect a breach, given that the purpose of the object of the ban just is to obscure identities? Nevertheless, it would be worthwhile to consider introducing a ban. If authorities then bump into the prohibited activities, they have a legal basis for prosecution, insofar not yet available. Possibly, imposing a ban could also have a deterrent effect. Of course, again there is the tension with data protection, but arguably in the balance of things the interest of authorities and society to more effectively combat money laundering, terrorist financing and tax evasion via well-defined specific bans outweighs the interest of persons desiring to hide their identities completely. In any event, imposing a ban should always be focused on specific aspects facilitating the illicit use of cryptocurrency too much. We are not in favour of general bans on cryptocurrencies or barring the interaction between cryptocurrency business and the formal financial sector as a whole, such as is the case in China for example. That would go too far in our opinion. As long as good safeguards are in place protecting the formal financial sector and more in general society as a whole, such as rules .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... exchanges act as an escrow agent for the transaction between the buyer and the seller. The buyers in the P2P transaction transfer the consideration directly to the seller s bank account. In any case, the capital flight problem mentioned by the petitioner is not new and existed even before the issuance of the Circular. As mentioned earlier, the IAMAI VC exchanges allowed their customers to transfer VCs to foreign wallet addresses, even before the issuance of the Circular, exposing the customers to the risks of violating FEMA, AML/CFT guidelines. The issues highlighted by IAMAI have been considered by the RBI. The RBI, as the banking and financial regulator of Indian markets, assessed the risks and benefits arising from the exponential and increasing use of VCs. The potential adverse impact of VCs on the banking sector and the digitization of the Indian payments industry, on account of the inherent nature of VCs, is lowered as a result of the Circular. The RBI stepped in as part of its duty to carryout preventive oversight to ensure that the banking system was not a casualty on account of the growth in VC trading. The Circular became all the more necessary as the use and trade throug .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ary as, despite multiple cautions, 5 million Indian users engaged in VC trades of INR 1 billion daily. (emphasis supplied) 6.165. In Annexure B to their second response dated 18-092019, RBI has also dealt with every one of the additional safeguards proposed by one of the writ petitioners, by name, Discidium Internet Labs Pvt, Ltd. and demonstrated as to how these safeguards may not be sufficient to ring fence the regulated entities: Safeguards proposed by petitioners Response of RBI Development of a dashboard and central repository The technology and concept of a dashboard that is accessible by all the relevant government authorities is yet to be tested in India and cannot guarantee that the same will enable authorities to mitigate risks in relation to VCs, particularly the ones arising out of cross border transactions or illegal and nefarious activities. Such a development would require the association of various government authorities at different levels with implications on the roles and responsibilities of other regulatory / enforcement agencies and cannot be implemented by the RBI alone. Therefore, even assuming that the proposed structure is adequate enough, its implementatio .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... stated risks of dealing in VCs, it has to be privy to the technicalities of the various types of VCs, their characteristics and difficulties and drawbacks. There is still a high level of uncertainty and ambiguity surrounding VCs. Regulators around the world are still in fact contemplating how to regulate initial coin offerings and how to tax them. The RBI is keeping a close tab on all such developments including the regulatory stand taken by each jurisdictions across the world and will consider implementing the same to the extent of its jurisdiction and in line with the policy framework that will be adopted by the Government of India in relation to VCs. Mandatory capitalisation requirement DILPL has failed to set out the benefit or security provided by the proposed mandatory capitalisation requirements. In the absence of any benefits prescribed by DILPL, the RBI has to rely upon conjecture and surmises to assume the purported benefits of this suggestion. Notably, the fact that certain jurisdictions prescribe mandatory capitalisation requirements does not necessarily make the suggestion beneficial or implementable in India. The only benefit which a reasonable person may assume is th .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... of an investor DILPL suggests setting up an investor protection and education fund, for which the VC exchanges would protection and education fund transfer all proceeds earmarked towards their corporate social responsibility ( CSR ) obligations under the Companies Act, 2013. This suggestion, as per the RBI, would not protect the customers as claimed by Discidium as the steps would be insufficient to provide adequate cover to customers. Notably, Discidium has not suggested that it create any additional buffer for the education and protection of its customers but instead, has merely suggested that VC exchanges transfer its existing legal obligations to create a fund which would purportedly benefit customers. Despite best efforts made to educate customers, the inherent risks in VCs would still remain. It is reiterated that VCs transactions would remain anonymous and open to facilitating illegal activities. It is unlikely that the education of customers would change the intent of nefarious customers, who would continue to conduct illicit transactions through VCs. The anonymous nature of VCs cannot be disputed. The transactions in VCs are anonymous due to the pseudonymous address or use .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ves and notes: Achieving the objectives by doing nothing i. Issuing warnings may prevent unsophisticated consumers from dealing in VCs but it would not deter VC service providers or those raising funds through Initial Coin Offerings (ICOs), mis-sell or run Ponzi schemes. ii. The recourse available to customers would be inadequate. iii. Persons who provide VC services without necessary fit and proper criteria including capital and technology would continue to pose a heightened risk. Achieving the objectives through banning i. Consumer protection is a key concern but a ban might be an extreme too to address this. There are many things/activities that may be harmful but they are not all banned. Problems related to information asymmetry, concerns around market risks, law enforcement or threat to financial system cannot be adequately addressed through a ban. ii. A ban would make dealing in VCs illegal but simultaneously it might decrease the ability of the law enforcement agencies and regulators to track and stop illegal activities. iii. Ver few countries have actually banned VCs. A ban might not be in-step with India s position as an important centre of Information Technology services. .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned. 6.172. As we have pointed out earlier, the concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them. As held by this court in State of Maharashtra v. Indian Hotel and Restaurants Association (2013) 8 SCC 519), there must have been at least some empirical data about the degree of harm suffered by the regulated entities (after establishing that they were harmed). It is not the case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exch .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... sue any direction to the Central Bank of India to freeze the account. However, RBI has taken a stand that the prayer for release of the amount does not arise out of or incidental to the main writ petition. 7.4. But we think that the lukewarm response of RBI in this regard is wholly unjustified. Admittedly, the activities carried on by the petitioner no. 6 were not declared as unlawful. It is the positive case of RBI that they did not in fact freeze the accounts of petitioner no. 6. Therefore, RBI is obliged to direct the Central Bank of India to defreeze the account and release the funds. Hence, RBI is directed to issue instructions forthwith to the Central Bank of India, Worli branch, to defreeze the current account no. 3677101984 of petitioner no. 6 in WP (C) No. 373 of 2018 and to release the funds lying in the account to the company together with interest at the rate applicable. There will be no order as to costs. 7.5. Before drawing the curtains down, we are bound to record, as in every artistic display, our appreciation for the skillful manner in which Shri Ashim Sood, learned Counsel, led the attack on the impugned Circular, but for which, the climax could not have had a nai .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... Legal Risks, Legal Working Paper Series, No. 16, European Central Bank (October 2017) available at https://www.ecb.europa.eu/pub/pdf/scplps/ecb.lwp16.en.pdf?344b9327fec917bd7a8fd7 0864a94f6e (Last accessed on 27-02-2020). 14 EBA Opinion on virtual currencies , page 11, 13 (July 2014) available at https://eba.europa.eu/sites/default/documents/files/documents/10180/657547/81409 b94-4222-45d7-ba3b-7deb5863ab57/EBA-Op-2014-08%20Opinion%20on%20Virtual%20Currencies.pdf (Last accessed on 27-02-2020). 15 Advice - Initial Coin Offerings and Crypto-Assets (January 2019) available at https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf (Last accessed on 27-02-2020). 16 Guidance on Cryptoassets, Consultation Paper, CP 19/3, Financial Conduct Authority, page 7 (January 2019) available at https://www.fca.org.uk/publication/consultation/cp19-03.pdf (Last accessed on 27-02-2020) and Guidance on Cryptoassets, Feedback and Final Guidance to CP 19/3, Policy Statement, PS19/22 (July 2019) available at https://www.fca.org.uk/publication/policy/ps19-22.pdf (Last accessed on 27-02-2020). 17 IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for U.S. .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#mexico (Last accessed on 27-02-2020). 28 Regulation of Cryptocurrency Around the World - Austria, Report of The Law Library of Congress, Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#austria (Last accessed on 27-02-2020). 29 Regulation of Cryptocurrency Around the World - Czech Republic, Report of The Law Library of Congress, Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#czech (Last accessed on 27-02-2020). 30 Regulation of Cryptocurrency Around the World - Germany, Report of The Law Library of Congress, Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#germany (Last accessed on 27-02-2020). 31 Regulation of Cryptocurrency Around the World - Luxembourg, Report of The Law Library of Congress, Global Legal Research Center (June 2018) available at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#luxembourg (Last accessed on 27-02-2020). 32 Regulation of Cryptocurrency Around the World - Slovakia, Report of The .....

X X X X X X X

Full Text of the Document

X X X X X X X

 

 

← Previous Next →

 

 

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || Database || Members || Refer Us ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.
|| Blog || Site Map - Recent || Site Map ||