TMI Blog2020 (3) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... hree 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, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 cumulatively recognize and also confer very wide powers upon RBI (i) to operate the currency and credit system of the country to its advantage (ii) to take over the management of the currency from central government (iii) to have the sole right to make and issue bank notes that would constitute legal tender at any place in India (iv) regulate the financial system of the country to its advantage (v) to have a say in the determination of inflation target in terms of the consumer price index (vi) to have complete control over banking companies (vii) to regulate and supervise the payment systems (viii) to prescribe standards and guidelines for the proper and efficient management of the payment systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking 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 - In fact, RBI cannot even be accused of not taking note of relevant considerations or taking into account irrelevant considerations. RBI has taken into account only those considerations which multinational bodies and regulators of various countries such as FATF, BIS, etc., have taken into account. This can be seen even from the earliest press release dated 24-12-2013, which is more elaborate than the impugned Circular dated 06-04-2018. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, US, Japan, Singapore, Australia, New Zealand, Canada etc., as they have developed economies capable of absorbing greater shocks. Indian economic conditions cannot be placed on par. Therefore, we will not test the correctness of the measure taken by RBI on the basis of the approach adopted by other countries, though we have, for better understanding of the complexities of the issues involved, undertaken a survey of how the regulators and courts of other countries have treated VCs. Precautionary steps taken by petitioners - HELD THAT :- I t is contended that all the issues flagged by RBI have already been addressed and that therefore, there was no necessity to disconnect the trade from the regular banking channels - But the fact of the matter is that enhanced KYC norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 conferred upon any other bank or authority. RBI by virtue of its authority, is a member of the Bank of International Settlements, which position cannot be taken over by the central government and conferred upon any other authority. 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. Article 19(1)(g) challenge Proportionality - HELD THAT:- In all cases where legislative/executive action infringing the right guaranteed under Article 19(1)(g) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividuals/ 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, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them. 1.3. Challenging the said Statement and Circular and seeking a direction to the respondents not to restrict or restrain banks and financial institutions regulated by RBI, from providing access to the banking services, to those engaged in transactions in crypto assets, the petitioners have come up with these writ petitions. The petitioner in the first writ petition is a specialized industry body known as In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular 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 Bitcoins, regarding various risks associated in dealing with such virtual currencies. 2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs. 3. Regulated entities which already provide such services shall exit the rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bile 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 matrix. 2.4. On 24-12-2013, a Press Release was issued by RBI cautioning the users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security related risks that they are exposing themselves to. The Press Release noted that the creation, trading or usage of VCs, as a medium of payment is not authorized by any central bank or monetary authority and hence may pose several risks narrated in the Press Release. 2.5. On 27-12-2013, newspapers reported the first ever raid in India by the Enforcement Directorate, of 2 Bitcoin trading firms in Ahmedabad, by name, rBitco.in and bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ganisations (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 etc. Coming to virtual currencies, the report noted the following: Virtual currencies have emerged and attracted investment in payment infrastructure built on their software protocols. These payment mechanisms seek to provide a new method for transmitting value over the internet. At the same time, virtual currency payment products and services (VCPPS) present ML/TF risks. The FATF made a preliminary assessment of these ML/TF risks in the report Virtual Currencies Key Definitions and Potential AML/CFT Risks. As part of a staged approach, the FATF has also developed Guidance focusing on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding 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 schemes, typically have some monetary characteristics such as being used as a means of payment, but are not backed by any authority. In Note 1 under the Executive Summary of the said report, it was stated as follows: although digital currencies typically do have some, but not all the characteristics of a currency, they may also have characteristics of a commodity or other asset. Their legal treatment can vary from jurisdiction to jurisdiction. (emphasis supplied) Paragraph 4 of the said report dealt with the implications for central banks, of digital currencies and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting 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 in Banking Technology (IDRBT) established by RBI in 1996 as an institution to work at the intersection of banking and technology submitted a Whitepaper on Applications of blockchain technology to banking and financial sector in India . While dealing with the applications of blockchain technology in chapter 3, the whitepaper also enlisted the advantages and disadvantages of digital currency. While the advantages indicated were (i) control and security, (ii) transparency and (iii) very low transaction cost, the disadvantages indicated were risk and vol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-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 a committee chaired by the Secretary (Department of Economic Affairs) and comprising of Secretary, Ministry of Electronic and Information Technology, Chairman, SEBI and Deputy Governor, RBI (InterMinisterial Committee) to propose specific actions to be taken in relation to VCs. 2.17. At that stage, two persons, by name, Siddharth Dalmia and Vijay Pal Dalmia came up with a writ petition in WP (C) No.1071 of 2017 under Article 32 of the Constitution of India seeking the issue of a writ of mandamus direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained 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 shield illicit activity and for money laundering and terrorist financing. 2.23. The communique issued by G-20, after the meeting of its Finance Ministers and Central Bank Governors on March 19-20, 2018 also acknowledged that technological innovation including that underlying crypto assets, has the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly. But it also noted that crypto assets do raise issues with respect to cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. 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 Bill, to the Department of Economic Affairs. Their primary objection to the Bill was that they are not best suited to be the regulators of crypto assets and tokens. 2.31. Next came the Annual Report of RBI for the year 20172018. It contained a separate Box II.3.2 on Cryptocurrency: Evolving challenges . The relevant portion of the same reads as follows: Though cryptocurrency may not currently pose systemic risks, its increasing popularity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2017 (seeking a ban) and WP (C) Nos. 373 and 528 of 2018 (challenging the indirect ban) came up for hearing, along with the transfer petitions, on 25-10-2018, when this Court was informed that the Union of India had already constituted a committee and that this Inter-Ministerial Committee was deliberating on the issue. Therefore, the writ petitions were adjourned to enable the Committee to come up with their recommend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 VPNs to circumvent these bans. The report dated 28-02-2019 of the Inter-Ministerial Committee finally made certain recommendations which included a complete ban on private cryptocurrencies. 2.34. It is important to note here that the report of the InterMinisterial Committee dated 28-02-2019 not only recommended a ban, but also specifically endorsed the stand taken by RBI to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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, electronic currency, digital currency etc., elude an exact and precise definition, making it impossible to identify them as belonging either to the category of legal tender solely or to the category of commodity/good or stock solely. 3.2. Any attempt to define what a virtual currency is, it appears, should follow the Vedic analysis of nega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction, 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 kept by some central authority to check that the user is entering the correct password. In Bitcoin, Satoshi harnessed the wonders of public-key cryptography to make it possible for a user let s call her Alice again to sign off on a transaction, and prove she has the private key, without anyone else ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting 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 fiat currency. Keeping this birth chart of virtual currencies in mind, let us now see how the petitioners are aggrieved by the impugned decisions of RBI, the grounds on which they challenge the same and the justification sought to be provided by RBI. 4. BACKGROUND SCORE (of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 currencies, but found nothing pernicious about them and even the attempt of the Government of India to bring a legislation banning crypto currencies, is yet to reach its logical end. V. RBI should have taken into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes 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 addition to the aforementioned legal contentions, Shri Nakul Dewan learned Senior Counsel also submitted that as a result of the impugned Circular, the virtual currency exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lative 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, operational, legal, customer protection and security related risks they were exposing themselves to. (xi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 these virtual currencies really are. Therefore, we shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 creation of a strong Central B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rld it is not possible to determine what will be suitable as a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod fixed by the central government. Sub-section (2) of Section 22 goes one step further by stipulating that on and from the date on which Chapter III comes into 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to furnish to the Bank in such form, at such intervals and within such time, such statements, information or particulars relating to the business of such financial institutions or institution, as may be specified 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions mentioned therein, on the Stock Exchanges recognised under section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). 6.29. It is important to note that Section 45W(1) contains merely an illustrative list of transactions. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company can carry on banking business in India unless it holds a license issued by RBI. Under Section 22(1), RBI has power to issue license, subject to certain terms and conditions as it may think fit to impose. 6.37. Every banking company is obliged under Section 27(1) of the Banking Regulation Act, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogether to set up clearing houses. The clearing houses developed the procedure of netting (arriving at the multilateral net settlement). But with the advent of technology, new payment systems such as MICR clearing, Electronic Funds Transfer Systems, cash-based payment systems, RTGS (real time gross settlement) etc. became popular. The development of multiple 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 sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the interests of monetary policy or efficient operation of payment systems, the size of any payment system or for any other reason, by notification, exempt from the provisions of this section. 6.46. Chapter IV of the Act specifies the regulatory and supervisory powers of RBI. Under Section 10, RBI is empowered to prescribe certain standards and guidelines for the proper and efficient management of the 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 transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing inadequately controlled; or (b) any action under clause (a) is likely to affect the payment system, the monetary policy or the credit policy of the country, the Reserve Bank may issue directions in writing to such payment system or system participant requiring it, within such time as the Reserve Bank may specify (i) to cease and desist from engaging in the act, omission or course of conduct or to ensure the system participants to cease and desist from the act, omission or course of conduct; 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommodity. There may be no difficulty in accepting the divergence of views, if those views are not driven by fear of regulation. But if someone presents it as currency to a regulator of stock market and presents it as a commodity to a regulator of money market and so on and so forth, the definition will not merely elude a proper molecular structure but also elude regulation. This is where the problem of law lies. George Friedman, the founder and Chairman of Geopolitical Futures LLC, an online publication, aptly summarized this dilemma 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be favored by some for ideological, technological or monetary policy reasons. The blockchain technology they use does have some important advantages in controlling fraud and maintaining privacy. But they also open up avenues for tax evasion and criminal activity. 6.58. The petitioners claim that today virtual currency is not money or other legal tender, but good/tradable commodity and hence RBI has no role in regulating/banning the same. RBI has also taken a stand that VCs are not recognized as legal tender, but they seek to justify the impugned decisions, 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 representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty, proceeds, funds, funds or other assets, or other corresponding value. 3. European Central Bank 2012:12 A virtual currency is a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. This definition may need to be adapted in future if fundamental characteristics change. 2017:13 Absent a universally accepted definition, virtual currencies can be defined as digital representations of value which, despite not being issued by a central bank or another comparable public authority, nor being attached , subject to certain exceptions, to a fiat currency, are voluntarily accepted, by natural or legal persons, as a means of exchange, and which are stored, transferred and traded electronically, without a tangible, 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 dig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018:18 Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country s traditional currency. 7. Securities and Exchange Commission, USA Bitcoin has been described as a decentralized, peer-to-peer virtual currency that is used like money it can be exchanged for traditional currencies such as the U.S. dollar, or used to purchase goods or services, usually online. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government.19 Speaking broadly, crypto currencies purport to be items of inherent value (similar, for instance, to cash or gold) that are designed to enable purchases, sales and other financial transactions. They are intended to provide many of the same functions as long-established currencies such as the U.S. dollar, euro or Japanese yen but do not have the backing of a government or other body.20 8. Commodity Futures Trading Commission, USA Section 1a(9) of the Act (US Commodity Exchange Act) defines commodity to include, amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing: (i) property value (limited to that which is recorded on an electronic device or any other object by electronic means, and excluding the Japanese currency, foreign currencies, and Currency-Denominated Assets; the same applies in the following item) which can be used in relation to unspecified persons for the purpose of paying consideration for the purchase or leasing of goods or the receipt of provision of services and can also be purchased from and sold to unspecified persons acting as counterparties, and which can be transferred by means of an electronic data processing system; and (ii) property value which can be mutually exchanged with what is set forth in the preceding item with unspecified persons acting as counterparties, and which can be transferred by means of an electronic data processing system. 2019 amendment to this Act (to come into force from April 2020) uses the term crypto assets (angoshisan) in place of the term virtual currency . The 2019 Amendment added crypto assets to the term financial instruments for the purposes of defining underlying assets of the derivative transactions subject to derivative regulations under the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or in any other tangible or intangible device (such as SIM card or software). A Bill is under consideration that would bring virtual currencies within the ambit of proceeds of crime legislation (Proceeds of Crime Bill, 2018). Clause (2) of the Bill defines: virtual currency as a digital representation of value which can be digitally traded and functions as (a) a medium of exchange; (b) a unit of account; or (c) a store of value, that does not have legal tender status or carry any security or guarantee in any jurisdiction. currency or money means coin and paper money of any jurisdiction that is designated as legal tender or is customarily used and accepted as a medium of exchange, including virtual currency as a means of payment. 5. Estonia Money Laundering and Terrorist Financing Prevention Act, 2017 Section 3(9): cryptocurrencies (virtual currencies) are value represented in digital form that is digitally transferable, preservable, or tradable and that which natural persons or legal persons accept as a payment instrument, but that is not the legal tender of any country or funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment for all types of legal transactions, which may only be transferred electronically. 27 11. Austria Ministry of Finance Treats virtual currency as other intangible commodity .28 12. Czech Republic Vice Governor, Czech National Bank Treats virtual currency as commodity .29 13. Germany German Federal Financial Supervisory Authority The Authority qualifies virtual currencies as units of account and therefore, financial instruments . But bitcoin is considered to be crypto token by German Bundesbank (because it does not fulfil the typical functions of a currency).30 14. Luxembourg Minister of Finance Recognized before the Parliament that crypto currencies are actual currencies.31 15. Slovakia Ministry of Finance, Slovakia published guidance Virtual currencies must be treated as short term financial assets other than mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igital 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 redeemed for, fiat currency or virtual currency; or (3) digital units used as part of prepaid cards; Virtual currency A digital representation of value that can be digitally traded and functions as a medium of exchange, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al currency, by nature of its properties detailed below, is distinct from money. Virtual currency is an electronic medium of exchange that does not have all the attributes of real or fiat currencies. Virtual currencies include cryptocurrencies, such as Bitcoin and Litecoin, which are not legal tender and are not issued or backed 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttributes of a real currency. 6.60. The Bank of International Settlements, as pointed out in Part 2 of this judgment, got a sub-group within the Committee on Payments and Market Infrastructure (CPMI) to undertake an analysis of digital currencies. In a report submitted by them in November 2015, this sub-group recognized that though the use of private digital currencies was too low at that time for 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (3) a store of value. But in course of time, a fourth function namely that of being a final discharge of debt or standard of deferred payment was also added. This fourth function is acquired by money through the conferment of the legal tender status by a Government/central authority. Therefore, capitalizing on this fourth dimension/function and drawing a distinction between money as understood in the social sense and money as understood 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FEMA defines the words currency , currency notes , Indian currency and Foreign currency . We have taken note of these definitions. Interestingly, Section 2(b) of Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defines money to include a cheque, postal order, demand draft, telegraphic transfer or money order. Clause (33) of Section 65B of the Finance Act, 1994, inserted by way of Finance Act, 2012 defines money to mean legal tender, 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 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from a number of lenders, defrauding them to the tune of 700,000 BTC in funds. While SEC contended that Bitcoin investments were securities, Shavers contended that Bitcoin is not money and hence, not securities . But the Sherman Division Eastern District Court of Texas opined in SEC v. Trendon Shavers, Case No. 4: 13-Cv-416 (August 6, 2013) that: It is clear that bitcoin can be used as money. It can be used to purchase goods or services and as Shavers stated, used to pay for individual living 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connect buyers and sellers of Bitcoin option contracts. Interestingly, the defendant admitted an offer of settlement in anticipation of administrative proceedings. 6.76. Within a week, another entity, by name, TeraExchange LLC also submitted an offer of settlement before CFTC In the matter of TeraExchange LLC CFTC Docket No. 15-33 dated 24-09-2015. CFTC reiterated even in that case that Bitcoin is a commodity under the relevant statute. Another Bitcoin exchange, by name Bitfinex, also conceded the position, before 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay for the Bitcoins through stolen credit cards and when the transaction was about to take place, the offeror was arrested. He was charged with one count of unlawfully engaging in money services business and 2 counts of money laundering. The defendant filed motions for dismissal and the State filed motions for striking out those motions. While allowing the defendant s motion to dismiss all the 3 counts on the ground that the court will be unwilling to punish a man for selling his property to another, when his action falls under 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business concerned a payment instrument and that therefore, there was no ambiguity.) 6.82. In a completely different context, the Singapore International Commercial Court ruled in B2C2 Ltd. v. Quoine Pte Ltd. [2019] SGHC (I) 3], that virtual currency can be considered as property which is capable of being held on trust. The case arose out of a dispute between a person who traded in virtual currencies and the VC Exchange platform on which he traded. The dispute revolved more around the breach of contract and breach of trust than 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The core issue before the court was whether crypto currencies constituted a form of property capable of being the subject matter of a proprietary injunction. After referring to Fry L.J s statement in Colonial Bank v. Whinney [1885] 30 ChD], that all things personal are either in possession or in action and that the law knows no third category between the two and also after referring to the four classic criteria for property, [namely they are (i) definable; (ii) identifiable by third parties; (iii) capable in their nature of assumption by third 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 deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrencies would fall under this definition of non-traditional currencies. 6.85. Thus (i) depending upon the text of the statute involved in the case and (ii) depending upon the context, various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds. While each of these descriptions is true, none of these constitute the whole truth. Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned decision is ultra vires. 6.89. It was argued that the Preamble of the RBI Act speaks only about the role of RBI in operating the currency and credit system of the country to its advantage and that since virtual currencies may not form part of the credit system of the country as they are not recognized as currency, the invocation of the provisions of RBI Act was out of context. 6.90. But as pointed out elsewhere, RBI is the sole repository of power for the management of the currency, under Section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes under Section 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 managem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he power to check and may imply the power to prohibit under certain circumstances, as where the best or only efficacious regulation consists of suppression. It would therefore appear that the word regulation cannot have any inflexible meaning as to exclude prohibition . It has different shades of meaning and must take its colour from the context in which it is used having regard to the purpose and object of the legislation, and the Court must necessarily keep in view the mischief which the legislature seeks to remedy. 6.93. The contention that the power to prohibit something as res extra commercium is always a legislative policy 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision arose out of a challenge to the constitutional validity of Section 22A of the Registration Act, 1908 inserted by way of State Amendment by the State of Rajasthan. By the said amendment, the state government was conferred with unbridled powers to declare by notification in the official gazette, the registration of any document or class of documents as opposed to public policy. In exercise of the power so conferred, the state government issued notifications declaring the registration of an irrevocable power of attorney or a power of attorney to be in force for more than a certain period, authorizing the attorney to transfer any immovable 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 subor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be read with the regulations framed. A subordinate legislation, as is well known, when validly framed, becomes a part of the Act. 6.99. Law is well settled that when RBI exercises the powers conferred upon it, both to frame a policy and to issue directions for its enforcement, such directions become supplemental to the Act itself. In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India (1992) 2 SCC 343), this court followed the decisions in State of U.P. and Ors v. Babu Ram Upadhya AIR 1961 SC 751) and D.K.V. Prasada Rao v. Govt. of A.P. (AIR 1984 AP 75) to hold that Rules made under a statute must be treated as if they were contained in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. It must be pointed out that the power of RBI is not merely curative but also preventive. This is acknowledged by this court in Ganesh Bank of Kurunwad Ltd. Ors v. Union of India Ors. (2006) 10 SCC 645, where it was held that RBI has a right to take pre-emptive action taking into account the totality of the circumstances. It is not that when there is a run on the bank then only RBI must intervene or that it must intervene only when there are a good number of court proceedings against the bank concerned. RBI has to take into account the totality of the circumstances and has to form its opinion accordingly. 6.104. The impugned Circular is intended to prohibit banking companies from entering 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the management and operation of any payment system and (iii) public interest. 6.109. As we have pointed out elsewhere, the impugned Circular is primarily addressed to banks who are system participants within the meaning of Section 2(1)(p). The banks certainly have a system of payment to be effected between a payer and a beneficiary, falling thereby within the meaning of the expression payment system. 6.110. It may also be relevant to take note of the definition of the expressions payment instruction and payment obligation appearing in clauses (g) and (h) of subsection (1) of Section 2 which read as follows: 2(1)(g) payment instruction means any instrument, authorisation or order in any form, including electronic means, to effect a payment,- (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 ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o took note of the risks associated with virtual currencies qua data security and consumer protection. The report also recorded concerns about far reaching potential impact of the effectiveness of monetary policy itself. Therefore, the report suggested RegTech to deal with FinTech. 6.114. IDRBT, established by RBI to work at the intersection of banking and technology submitted a white paper in January 2017, which enlisted the advantages as well as disadvantages of digital currencies. This white paper was taken note of by RBI in the Financial Stability Report of June 2017. In the meantime, RBI issued a press release on 01-02-2017 once again cautioning the users, holders and traders of virtual currencies. 6.115. The sub-committee of the Financial Stability and Development Council took a decision in 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 examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the ewallet could result in the permanent loss of the VCs held in them. Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc. There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value. It 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 ille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person or entity dealing with or settling VCs, within three months of the date of the Circular. The regulated entities are directed not to provide services for facilitating any person or entity in dealing with or settling VCs. Some of the petitioners herein are individuals and companies who run virtual currency exchanges. In case they have other businesses, the impugned Circular does not order the closure of their bank accounts relating to other businesses. The prohibition under paragraph 2 of the impugned Circular is with respect to the provision of services for facilitating any person or entity in dealing with or settling VCs. This prohibition does not extend either to the closing or the freezing of the accounts of the petitioners in relation to their other ventures. 6.121. Taking clue from the averment contained in the counteraffidavit of RBI to the effect that VCs 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g some of the functions of real currencies. Therefore, if RBI takes steps to prevent the gullible public from having an illusion as though VCs may constitute a valid legal tender, the steps so taken, are actually taken in good faith. The repeated warnings through press releases from December 2013 onwards indicate a genuine attempt on the part of RBI to safeguard the interests of the public. Therefore, the contention that the impugned Circular is vitiated by malice in law and that it is a colorable exercise of power, cannot be sustained. 6.124. Relying upon (i) the decision in Meerut Development Authority v. Assn. Management Studies Anr (2009) 6 SCC 171), wherein it was held that the term public interest must be understood and interpreted in the light of the entire scheme, purpose and object of the enactment (ii) the decision in Bihar Public Service Commission v. Saiyed 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case, this court passed an interim order on 21-082019 directing RBI to give a point-wise reply to the detailed representation made by the writ petitioners. Pursuant to the said order, RBI gave detailed responses on 04-09-2019 and 18-09-2019. Therefore, the argument based on MS Gill test has lost its potency. Calibration/Proportionality 6.127. The next argument is that the impugned measure is extreme and that it will not pass the test of proportionality. For the purpose of convenience, we shall take up this argument together with the argument revolving around Article 19(1)(g) while dealing with the reasonableness of the restriction. III. Wait and watch approach of the other stakeholders 6.128. The argument that other stakeholders such as the Enforcement Directorate which is concerned with money laundering, the Department of Economic Affairs which is concerned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that all the issues flagged by RBI have already been addressed and that therefore, there was no necessity to disconnect the trade from the regular banking channels. But the fact of the matter is that enhanced KYC norms may remove anonymity of the customer, but not that of the VC. Even the European Parliament, in the portion of its report relied upon by Shri Ashim Sood accepts that the adequacy of mandatory registration of users (as a less invasive measure), whether or not of fully anonymous or pseudo anonymous crypto currencies depends on the users compliance with the registration requirement. After pointing out that compliance will partly depend on an adequate sanctioning toolbox in the event of breach, the report wonders whether it is at all possible outside of the context of randomly bumping into it, at least when fully anonymous VCs are concerned. In any case, we are not experts to say whether 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Second life , where users create avatars (digital characters), which can be customized. Second life has its own economy where users can buy and sell goods and services from and to each other. But they first need to purchase Linden dollars using fiat currency. Later they can also sell Linden dollars in return for fiat currency. Therefore, it is clear that the very same virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the entities come up. Moreover, the question whether anonymous VCs alone could have been banned leaving the pseudo-anonymous, is for experts and not for this Court to decide. In any case, the stand taken by RBI is that they have not banned VCs. Hence, the question whether RBI should have adopted different approaches towards different VCs does not arise. VII. Acceptance of DLT and rejection of VCs is a paradox 6.136. It was argued that the acceptance of the Distributed 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 abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in India and (vi) under Section 38, to get rupees into circulation only through it, to the exclusion of the central government. Therefore, RBI cannot be equated to any other statutory body that merely serves its master. It is specifically empowered to do certain things to the exclusion of even the central government. Therefore, to place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the Act. 6.140. On the primary question of switching over to judicial silent mode or hands off mode , qua economic legislation, it is not necessary to catalogue all the decisions of this court such as State of Gujarat Anr v. Shri Ambica Mills Ltd. Anr (1974) 4 SCC 656), G.K.Krishnan v. Tamil Nadu (1975) 1 SCC 375), R. K. Garg v. Union of India (supra), State of M.P. v. Nandlal Jaiswal (1986) 4 SCC 566), P.M. Ashwathanarayana Setty v. State of Karnataka (1989) Supp (1) SCC 696), Peerless General 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 Sug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d tenure is granted to the Board of Governors, so that they are not bogged down by political expediencies. In the United States of America, the Chairman of the Federal Reserve is the second most powerful person next only to the President. Though the President appoints the seven-member Board of Governors of the Federal Reserve, in consultation with the Senate, each of them is appointed for a fixed tenure of fourteen years. Only one among those seven is appointed as Chairman for a period of four years. As a result of the fixed tenure of 14 years, all the members of Board of Governors survive in office more than three governments. Even the European Central Bank headquartered in Frankfurt has a President, VicePresident and four members, appointed for a period of eight years in consultation with the European Parliament. World-wide, central authorities/banks are ensured an independence, but unfortunately Section 8(4) of the RBI Act, 1934 gives a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictions in the interest of the general public and a less drastic restriction will not ensure the interest of the general public. 6.143. The parameters laid down in Md. Faruk are unimpeachable. While testing the validity of a law imposing a restriction on the carrying on of a business or a profession, the court must, as formulated in Md. Faruk, attempt an evaluation of (i) its direct and immediate impact upon of the fundamental rights of the citizens affected thereby (ii) the larger public interest sought to be ensured in the light of the object sought to be achieved (iii) the necessity to restrict the citizens freedom (iv) the inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public and (v) the possibility of achieving the same object by imposing a less drastic restraint. 6.144. There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, 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, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of money laundering laws (iii) curbing the menace of financing of terrorism and (iv) safeguarding of the existing monetary/payment/credit system from being polluted. But hitting the target directly, is not within the domain of RBI and hence the impugned Circular purportedly seeks to protect only the regulated entities, by ring-fencing them. In the process, it has hit VC Exchanges and not the actual trading of VCs, though as a consequence, the volume of transactions in VCs (perhaps through VCEs alone) is stated to have come down. People who wish to buy and sell VCs can still do so merrily, without using the medium of a VC Exchange and without seeking to convert the virtual currencies into fiat currency. It is in this context that the contention revolving around Article 19(1)(g) has to be examined. 6.147. In order to test the validity of the impugned action on the touchstone of Article 19(1)(g), we may have to understand the fundamental distinction between (i) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dress and transaction signatures. 6.151. The software program in which the private and public keys of those who own virtual currencies is stored, is called a digital wallet. There are different types of wallets namely (i) paper wallet which is essentially a document that contains a public address for receiving the currency and a private key which allows the owner to spend or transfer the virtual currencies stored in the address (ii) mobile wallet, which is a tool which runs as an app on the smartphone, where the private keys are stored, enabling the owner to make payments in crypto currencies directly from the phone (iii) web wallet, in which the private keys are stored on a server which is constantly online (iv) desktop wallet, in which private keys are stored in the hard drive and (v) hardware wallet, where the private keys are stored in a hardware device such as pen drive. 6.152. All the above types of wallets except the desktop wallet allow a great degree of flexibility, 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. Simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market was approximately 20 lakhs and the average daily trade volume was at least ₹ 150 crores, at the time when the writ petition was filed. Therefore, if a central authority like RBI, on a conspectus of various factors perceive the trend as the growth of a parallel economy and severs the umbilical cord that virtual currency has with fiat currency, the same cannot be very lightly nullified as offending Article 19(1)(g). 6.156. But nevertheless, the measure taken by RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g). On the question of proportionality, the learned Counsel for the petitioners relies upon the four-pronged test summed up in the opinion of the majority in Modern Dental College and Research Centre v. State of Madhya Pradesh (2016) 7 SCC 353). These four tests are (i) that the measure is designated for a proper purpose (ii) that the measures are 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 achie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l directions, to all persons or a description of persons operating in the financial sector. But certain procedural safeguards are provided in paragraph 14(2) as well as paragraph 9(6). Under paragraph 14(2), a general direction issued to persons operating in the financial sector, must be laid before the Parliament and will cease to have effect if not approved by a resolution of each House of Parliament before the end of 28 days. Under paragraph 9(6), the requirements imposed by a direction, either in the form of customer due diligence or in the form of ongoing monitoring or in the form of systematic reporting or in the form of limiting or ceasing business, should be proportionate, having regard to the advice given by the Financial Action Task Force or having regard to the reasonable belief that the Treasury has about the risks of terrorist financing or money laundering activities or the development of radiological, biological, nuclear or chemical weapons. In addition to these procedural safeguards, Section 63 of the 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. Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eader from a common law tradition. In R v Ministry of Agriculture, Fisheries and Food, ex p Fedesa and others (Case C-331/88) [1990] ECR I-4023, the European Court of Justice stated (para 13): The Court has consistently held that the principle of proportionality is one of the general principles of Community law. By virtue of that principle, the lawfulness of the prohibition of an economic activity is subject to the condition that the prohibitory measures are appropriate and necessary in order to achieve the objectives legitimately pursued by the legislation in question; when there is a choice between several appropriate measures recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued. The intensity with which the test is applied that is to say, the degree of weight or respect given to the assessment of the primary decision-maker - depends upon the context. 70. As I have mentioned, proportionality is also a concept applied by the European Court of Human 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly mirrored that of the Strasbourg court. In accordance with the analytical approach to legal reasoning characteristic of the common law, a more clearly structured approach has generally been adopted, derived from case law under Commonwealth constitutions and Bills of Rights, including in particular the Canadian Charter of Fundamental Rights and Freedoms of 1982. The three-limb test set out by Lord Clyde in De Freitas v Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing [1999] 1 AC 69, 80 has been influential: whether: (i) the legislative objective is sufficiently important to justify limiting a fundamental right; (ii) the measures designed to meet the legislative objective are rationally connected to it; and (iii) the means used to impair the right or freedom are no more than is necessary to accomplish the objective. De Freitas was a Privy Council case concerned with fundamental rights under the constitution of Antigua and Barbuda, and the dictum drew on South African, Canadian and Zimbabwean authority. The three criteria have however an affinity to those formulated by the Strasbourg court in cases concerned with the requirement und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in greater detail than Lord Sumption, but there is no difference of substance. In essence, the question at step four is whether the impact of the rights infringement is disproportionate to the likely benefit of the impugned measure. 75. In relation to the third of these criteria, Dickson CJ made clear in R v Edwards Books and Art Ltd [1986] 2 SCR 713, 781-782 that the limitation of the protected right must be one that it was reasonable for the legislature to impose , and that the courts were not called upon to substitute judicial opinions for legislative ones as to the place at which to draw a precise line . This approach is unavoidable, if there is to be any real prospect of a limitation on rights being justified: as Blackmun J once observed, a judge would be unimaginative indeed if he could not come up with something a little less drastic or a little less restrictive in almost any situation, and thereby enable himself to vote to strike legislation down (Illinois Elections Bd v Socialist Workers Party (1979) 440 US 173, 188 189); especially, one might add, if he is unaware of the relevant practicalities and indifferent to considerations of cost. To allow the legislature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of proportionality, the majority struck down the ban imposed by the UK Treasury. The highlights of the decision, as formulated by the court itself, read as follows: (i) The essential question before the court was whether the interruption of Bank Mellat s commercial dealings in the UK bore some rational and proportionate relationship to the statutory purpose of hindering the pursuit by Iran of its nuclear weapons programmes. (ii) For the majority, there were two particular difficulties with the direction, namely (a) it did not explain or justify the singling out Bank Mellat; and (b) the justification was not one which Ministers advanced before Parliament, and was in some respects inconsistent with it. (iii) The risk, according to the majority, was not specific to Bank Mellat but an inherent risk of banking, and the risk posed by Bank Mellat s access to those markets was no different from that posed by other comparable banks. (iv) Singling out Bank Mellat, according to the court, was arbitrary and irrational, and disproportionate to any contribution which it could rationally be expected to make to the direction s objective. (v) By contrast, the minority wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue as to whether it is best to introduce an outright ban for some aspects linked to some crypto currencies. This paragraph reads as follows: 5.7. Is it not best to introduce an outright ban for some aspects linked to some cryptocurrencies? The question arises whether some aspects relating to some cryptocurrencies should not just be banned and criminally sanctioned. To mind come the mixing process attached to Dash's feature PrivateSend and Monero's RingCT, stealth addresses and Kovri-project. In essence, these features are designed to make cryptocurrency users untraceable. But why is such degree of anonymity truly necessary? Would allowing this not veer too far towards criminals? Imposing a ban for such aspects surrounding cryptocurrencies that are aimed at making it impossible to verify their users and criminally sanctioning these aspects seems to be in line with the Council's conclusions of April 2018 on how to respond to malicious cyber activities, under which that the use of ICT for malicious purposes is unacceptable. Whatever the answer may be, we must again avoid being naive: even if a ban would be imposed, how do we detect a breach, given that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the RBI been able to ring fence the entities regulated by it from being involved in activities that pose reputational and financial risks along with other legal and operational risks. For example, VCs have been used to defraud consumers in a ₹ 2000 crore scam in India whereby users were assured returns upon their investment in GainBitcoin and were paid their return in another form of VC, whose value was much lower than that of GainBitcoin. We do not agree that the Circular has the effect of forcing members to do deal in cash. The Circular neither directs nor encourages any dealing with respect to VCs at all. After the issuance of the Circular, some of the IAMAI member VC exchanges have been operating peer to peer VC exchanges. In P2P transfers, while the exchange provides a portal to match the orders of a seller and buyer, the consideration would flow directly from the buyer to the seller without the exchanges being an intermediary for this leg of the trade. The exchanges would only act as the intermediary for the storing the VCs till the time the transfer of the consideration from the buyer to the seller is complete. In other words, the exchanges act as an escrow agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncies are faced with such instances; and (iv) Regulators can issue warnings to the public and educated the public to the extent possible. One must also be alive to the issue faced by the country. India is not a safe haven free from any external intrusions and terror attacks. India is plagued by the menace of cross border terror financing and money laundering. While laws have been enacted to counter terror financing and money laundering activities, the Government cannot permit anything which would facilitate or have the potential to facilitate such nefarious and illegal acts to incubate in the country. Any possible avenues which facilitate anonymous cross border fund transfer have to be acted upon swiftly and stringently dealt with. It is an admitted fact that VCs have been used to purchase illegal and illicit goods ranging from guns and ammunition to drugs. Therefore, the RBI s measures under the Circular become all the more necessary. With the Circular coming into effect, the banking system and the RBI s regulated entities would not be facilitating persons looking to obtain VCs for illegal trades. Th additional measures taken by the RBI by way of the Circular were necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould get adversely impacted. In fact, implications of VCs vis-a-vis consumer protection, data privacy and security were also highlighted. It was also acknowledged that there are several uncertainties around the VC, particularly with respect to how the VC is secured, the extent to which there are measures to prevent and respond to the dramatic shifts of value; and the characterization of the sellers of such a VC. Additionally, it was recognized that there can be implications on the US monetary policy as another currency not under the government control can adversely impact the Federal Reserve s monetary policy as the Federal Reserve would lose its monopoly on controlling inflation and inflation targeting though manipulating cash in the system. Adoption of Aadhar based electronic KYC Electronic KYC is currently permitted only for banks for individuals desirous of receiving any benefit or subsidy under any scheme notified under Section 7 of the Aadhaar (Targeted Delivery of Financial and Other Subsidies Benefits and Services) Act, 2016 or if an individual voluntarily uses his/her Aadhaar number for identification purpose. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he suggested mandatory capitalisation requirement would also not reduce the risks to consumers arising not only from fraud but also from the possible loss of value given the fluctuations and manipulation VCs value. Insurance of crypto-assets Firstly, Indian Insurance service providers are not governed by the RBI. Insurance providers come within the regulatory jurisdiction of the Insurance Regulatory and Development Agency ( IRDA ). Therefore, the RBI cannot assume jurisdiction over insurance providers by directing them to formulate tailored insurance policies for VC exchanges. It is for the purpose of such regulatory aspects, that the Inter-Ministerial Committee was constituted to study VCs. Accordingly, the RBI had, at that time, forwarded a copy of the Representation to the InterMinisterial Committee for their due consideration. Secondly, Indian insurance providers, as mandated by the IRDA, take a cautious approach to the insurance policies offered by them. Therefore, the insurance providers may not, either suo moto or on account of IRDA s directions, offer insurance policies to protect VCs. Further, this cautious appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly pending draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. 6.166. Though at the time when the impugned Circular was issued, RBI has not obviously addressed many of the issues flagged by the writ petitioners, RBI did in fact consider the issues raised by the petitioners, pursuant to the order passed by this court on 21-08-2019. RBI has also analyzed in Annexure B to the reply dated 18-092019 extracted above, the additional safeguards suggested by the petitioners, to see if the purpose of the impugned measure can be achieved through less intrusive measures. While exercising the power of judicial review we may not scan the response of RBI in greater detail to find out if the response to the additional safeguards suggested by the petitioners was just imaginary. 6.167. But at the same time we cannot lose sight of three important aspects namely, (i) that RBI has not so far found, in the past 5 years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function (ii) that the consistent stand taken by RBI up to and including in their reply dated 04-09-2019 is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e VC exchanges and brokers where sale and purchase may be permitted. 6.169. The key aspects of the Crypto-token Regulation Bill, 2018, found in paragraph 13 of the Note-precursor to report shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of digital crypto asset at recognized exchanges. Paragraph 13 (iii) (vii) of the Note-precursor to the report reads as follows: 13. Key aspects are summarised below: (i) (ii) (iii) The sale and purchase of digital crypto asset shall only be permitted at recognised exchanges. (iv) (v) (vi) (vii) The registry of all holdings and transactions on the recognised exchanges shall be maintained at recognised depositories. 6.170. But within a year, there was a volte-face and the final report of the very same Inter-Ministerial Committee, submitted in February 2019 recommended the imposition of a total ban on private crypto currencies through a legislation to be known as Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019 . The draft of the bill contained a proposal to ban the mining, generation, holding, selling, dealing in, issuing, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate. 7. CLIMAX 7.1. Therefore, in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality. Accordingly, the writ petitions are allowed and the Circular dated 0604-2018 is set aside. The Statement dated 05-04-2018, though challenged in one writ petition, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise. 7.2. There is still one more issue left. It is the freezing of the account of Discidium Internet Labs Pvt. Ltd., which is petitioner no. 6 in WP (C) No. 373 of 2018. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;divākyena svātmā hi pratipāditaḥ neti neti śrutirbrūyād anṛtaṁ pā cabhautikam5 From his book Digital Gold: Bitcoin and the inside story of the Misfits and Millionaires Trying to Reinvent Money . 6 Cypherpunk is an activist advocating widespread use of strong cryptography and privacy enhancing technologies, as a route to social and political change. This word was added to the Oxford English Dictionary in November 2006. 7 Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Note, Dong He et al., page 7, 16, 17 (January 2016) (available at https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf, last accessed on 27-02-2020) presented by IMF Managing Director, Christine Lagarde, presented at the World Economic Forum (https://www.ccn.com/imf-director-talks-up-virtual-currencies-andblockchain-tech/, last accessed on 27-02-2020). 8 Given the fast evolving nature of the industry, a universal definition has yet to emerge and could quickly change as the VC ecosystem continues to transform. 9 This type of VCs is backed by the combination of existing tangible assets or national currencies and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Last accessed on 27-02-2020). 19 Investor Alert: Bitcoin and Other Virtual Currency-Related Investments (May 2014) available at https://www.sec.gov/oiea/investor-alertsbulletins/investoralertsia_bitcoin.html (Last accessed on 27-02-2020). 20 Chairman Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings (December 2017) available at https://www.sec.gov/news/public-statement/statementclayton-2017-12-11 (Last accessed on 27-02-2020). 21 In the Matter of: Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29. 2015 WL 5535736 (September 17, 2015) available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (Last accessed on 27-02-2020). 22 Guidance - Application of FinCEN s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (March 2013) available at https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (Last accessed on 27-02-2020). 23 Guide for cryptocurrency users and tax professionals (Last modified on 27 June 2019) available at https://www.canada.ca/en/revenue-agency/programs/about-canadarevenue-agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (December 2019) available at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-forindividuals (Last accessed on 27-02-2020). 35 Policy paper on Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies, HM Revenue Customs (March 3, 2014) available athttps://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-thercryptocurrencies (Last accessed on 27-02-2020). 36 What are cryptoassets (cryptocurrencies)? Available at https://www.bankofengland.co.uk/knowledgebank/what-are-cryptocurrencies (Last accessed on 27-02-2020). 37 Digital Currency Regulatory Guidance, Illinois Department of Financial and Professional Regulation (June 13, 2017) available at https://www.idfpr.com/Forms/DFI/CCD/IDFPR%20-%20Digital%20Currency%20Regulatory%20Guidance.pdf (Last accessed on 27-02-2020). 38 Office of Financial Institutions, State of Louisiana, Consumer and Investor Advisory on Virtual Currency (August 2014) available at http://www.ofi.state.la.us/SOCGuidanceVirtualCurrency.pdf (Last accessed on 27-02-2020). 39 Virtual Currency, Treasury Update publ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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