INTERNET AND MOBILE ASSOCIATION OF INDIA v. RESERVE BANK OF INDIA

Citation: [2020] 2 S.C.R. 297; 2020 INSC 264

Court: Supreme Court of India

Bench: R.F. NARIMAN , ANIRUDDHA BOSE, V. RAMASUBRAMANIAN

Judgment date: 2020-03-04

Case summary

2020 INSC 264. Supreme Court of India judgment dated 2020-03-04. INTERNET AND MOBILE ASSOCIATION OF INDIA v. RESERVE BANK OF INDIA. Read the judgment and...

Judgment text

[2020] 2 S. C. R. 297 297 INTERNET AND MOBILE ASSOCIATION OF INDIA A v. RESERVE BANK OF INDIA (Writ Petition (Civil) No. 528 of 2018) B MARCH 04, 2020 [R. F. NARIMAN, ANIRUDDHA BOSE AND V. RAMASUBRAMANIAN, JJ. ] Reserve Bank of India Act, 1934 – ss. 17, 20-22, 26, 38, 45JA, 45L, 45U, 45W, 45Z-45ZO – Reserve Bank of India (RBI) issued a C “Statement on Developmental and Regulatory Policies” dtd. 05. 04. 18 and circular dtd. 06. 04.

18 respectively, which directed the entities it regulated (i) not to deal with or provide services to any individual/business entities dealing with/settling virtual currencies (VCs) and (ii) to exit the relationship, if they already D have one, with such individuals/business entities – Challenged by petitioners (a specialized industry body representing interests of online & digital services industry; companies running online crypto assets exchange platforms; shareholders/founders thereof and individual crypto assets traders) inter alia on the ground that RBI has no power to prohibit the activity of trading in VCs through Virtual E Currency Exchanges (VCEs) since they are not legal tender but tradable commodities/digital goods, not falling within the regulatory framework of 1934 Act or 1949 Act and that VCs do not even fall within the credit system of the country to enable RBI under the Preamble to 1934 Act giving it a mandate to operate the currency & F credit system of the country to its advantage – Held: After 2016 Amendment Act, RBI is now vested with the obligation to operate the monetary policy framework in India – 1934 Act, 1949 Act and the 2007 Act cumulatively confer very wide powers upon RBI inter alia to operate the currency and credit system of the country to its G advantage; regulate financial system of the country to its advantage; to issue directions to a payment system or a system participant which in RBI’s opinion is engaging in any act that is likely to result in systemic risk being inadequately controlled or is likely to affect the H 297 298 SUPREME COURT REPORTS [2020] 2 S.

C. R.

A payment system, monetary policy or the credit policy of the country and to issue directions to system providers or 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 – Depending on the text of the statute involved in the case and the context, various courts in different B 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 – Petitioners’ contention that VCs are just goods/commodities and can never be regarded as real money and that they are carrying on an activity C over which RBI has no power statutorily, not accepted – Petitioners’ contention that the impugned decision is ultra vires is rejected – Impugned Circular does not impose a prohibition on the use of/ trading in VCs, the prohibition is not per se against the trading in VCs – It is against banking companies, with respect to a class of D transactions – Further, RBI cannot be held guilty of non-application of mind when the sequence of events from June 2013 up to 02-04- 2018 show that RBI was brooding over the issue for almost five years – Also, the contention that the impugned Circular is vitiated by malice in law and is a colorable exercise of power cannot be sustained – Impugned Circular cannot be assailed on the basis of E M.

S. Gill test either – It is no doubt true that RBI has very wide powers however, the availability of power is different from the manner and extent to which it can be exercised – RBI has not so far found, the activities of VCEs to have actually impacted adversely, the way the entities regulated by RBI function – When the consistent F 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 to hold that the impugned measure is proportionate – Impugned Circular dtd. 06. 04. 18 is set aside on the ground of G proportionality – Statement dtd. 05. 04. 18, though challenged, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise – Finance Act, 2016 – Banking Regulation Act, 1949 – ss.

5, 8, 21, 22, 27, 29A, 30(1B), 35AA, 35AB, 35A(1)(a), 36(1)(a), 36AA – Payment and Settlement Systems Act, H 2007 – ss. 2(1); 2(1)(g), (h), (i), (p) and ss. 3, 4(1), 10(2), 11, 17, 18 INTERNET AND MOBILE ASSOCIATION OF INDIA v. 299 RESERVE BANK OF INDIA – Administrative Law – Subordinate Legislation – Doctrine of A Proportionality – Doctrine of Deference – Foreign Exchange Management Act, 1999 – ss. 2(h), (i), (q) – Coinage Act, 2011 – Finance Act, 1994 – Finance Act, 2012 – Sales of Goods Act, 1930 – Central Foods and Services Tax Act, 2017 – s. 2(75) – Constitution of India – Art. 19(1)(g). B Reserve Bank of India Act, 1934 – Establishment of Reserve Bank of India – Object of – Discussed. Reserve Bank of India Act, 1934 – Preamble to; s. 45L(1) – Held: Phrase “credit system of the country to its advantage”, as found in paragraph 1 of the Preamble, is repeated in sub-sec. (1) C of s.

45L – Only difference between the two is that paragraph 1 of the Preamble speaks about the operation of the credit system, while s. 45L (1) speaks about regulation of the credit system. Banking Regulation Act, 1949 – Power of Reserve Bank of India under – Discussed. D Reserve Bank of India Act, 1934 – s. 3(1) – Held: “management of the currency” appearing in s. 3(1) need not necessarily be confined to the management of what is recognized in law to be currency but would also include what is capable of faking or playing the role of a currency. E Payment and Settlement Systems Act, 2007 – Object of – Discussed.

Administrative Law – Colourable exercise of power & malice in law – Reserve Bank of India (RBI) issued circular directing the entities it regulated to not to deal with or provide services to any F individual/business entities dealing with/settling virtual currencies (VCs) and to exit the relationship, if they have one, with such individuals/business entities – Petitioners contended that the invocation by RBI, of ‘public interest’ as a weapon, purportedly for the benefit of users, consumers or traders of virtual currencies is a G colourable exercise of power – Held: Not tenable – Once it is conceded that RBI has powers to issue directions in public interest, it is impossible to exclude users, consumers or traders of virtual currencies from the coverage – To constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated H 300 SUPREME COURT REPORTS [2020] 2 S. C. R.

A entities or the public in general, but with the object of hitting those who form the target – To constitute malice in law, the act must have been done wrongfully and willfully without reasonable or probable cause – Impugned Circular does not fall under the category of either of them. B Administrative Law – Statutory Authority – Power of RBI and difference between other statutory creatures & RBI – Discussed. Banking Regulation Act, 1949 – s. 35A(1) – Reserve Bank of India (RBI) issued circular directing the entities it regulated to not to deal with or provide services to any individual/business entities C dealing with/settling virtual currencies (VCs) and to exit the relationship, if they have one, with such individuals/business entities – Plea of the petitioners that expression ‘public interest’ appearing in s. 35A(1)(a) cannot be given an expansive meaning – Held: Power u/s.

35A to issue directions is to be exercised under four contingencies- (i) public interest (ii) interest of banking policy (iii) D interest of the depositors & (iv) interest of the banking company – Expression “banking policy” is defined in s. 5(ca) to mean any policy specified by RBI (i) in the interest of the banking system (ii) in the interest of monetary stability and (iii) sound economic growth – Public interest permeates all these three areas – This is why s. 35A(1)(a) is invoked in the impugned Circular. E Constitution of India – Art.

19(1)(g) – Reserve Bank of India (RBI) issued circular directing the entities it regulated to not to deal with or provide services to any individual/business entities dealing with/settling virtual currencies (VCs) and to exit the relationship, if they have one, with such individuals/business entities – Plea of the F petitioners (a specialized industry body representing interests of online & digital services industry; companies running online crypto assets exchange platforms; shareholders/founders thereof and crypto assets traders) that a total prohibition, especially through a subordinate legislation such as a directive from RBI, of an activity G not declared by law to be unlawful, is violative of Art. 19(1)(g) – Held: Buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business – Persons who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Art.

19(1)(g), for what is covered therein are only profession, occupation, trade or business – H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 301 RESERVE BANK OF INDIA Therefore hobbyists, who are one among the three categories of A citizens (hobbyists, traders in VCs and VC Exchanges), straightaway go out of the challenge u/Art. 19(1)(g) – Second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the B basis of Art. 19(1)(g). Words & Phrases - “currency”, “currency notes”, “Indian currency” “money”, “regulate” - Definition & Meaning of – Discussed. Allowing the writ petitions, the Court C HELD: 1. 1 Role assigned to, functions entrusted to and the powers conferred upon RBI as a Central Bank Reserve Bank of India (RBI) is now vested with the obligation to operate the monetary policy framework in India.

D After the amendment under Act 28 of 2016, the very task of operating the monetary policy framework has been conferred exclusively upon RBI. The phrase “credit system of the country to its advantage”, as found in paragraph 1 of the Preamble, is repeated in sub-section (1) of Section 45L. The only difference between the two is that paragraph 1 of the Preamble speaks about E the operation of the credit system, while Section 45L (1) speaks about regulation of the credit system. While exercising the power to issue directions conferred by clause (b) of sub-section (1) of Section 45L, RBI is obliged under sub-section (3) of Section 45L to have due regard to certain things, one of them being “the effect the business of such financial institution is likely to have on trends in F the money and capital markets”.

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. [Paras G 6. 15, 6. 16, 6. 26 and 6. 30][352-C,E; 355-F-G; 356-G-H] 1. 2 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 H 302 SUPREME COURT REPORTS [2020] 2 S. C. R.

A 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 B 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 (ix) to issue directions to a payment system or a system participant which in RBI’s opinion is engaging in any act that is likely to result in C systemic risk being inadequately controlled or is likely to affect the payment system, the monetary policy or the credit policy of the country and (x) 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.

D [Para 6. 50][364-D-H] 1. 3 Fixing the identity of VCs There is unanimity of opinion among all the regulators and the governments of various countries that though virtual currencies have not acquired the status of a legal tender, they E nevertheless constitute digital representations of value and that they are capable of functioning as (i) a medium of exchange and/ or (ii) a unit of account and/or (iii) a store of value. The governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are F capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to G be.

It is as much true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency. [Paras 6. 59, 6. 62][381D-E, 382E-G] H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 303 RESERVE BANK OF INDIA 1. 4 The Court does not think that RBI’s role and power A can come into play only if something has actually acquired the status of a legal tender. The Court does not also think that for RBI to invoke its power, something should have all the four characteristics or functions of money. [Para 6. 65][384A-B] 1. 5 Depending upon the text of the statute involved in the B 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 C 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, (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. RBI was also caught in this dilemma. Nothing D prevented RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in Section 2(h) of FEMA, 1999 which defines ‘currency’ to mean “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheque, letters of credit, bills of exchange E and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank. ” After all, promissory notes, cheques, bills of exchange etc.

are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are F just goods/commodities and can never be regarded as real money. Once it is accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, there is no escape from the conclusion that the users and traders of virtual currencies carry on an activity that falls G squarely within the purview of the Reserve Bank of India. The statutory obligation that RBI has, as a central bank, (i) to operate the currency and credit system, (ii) to regulate the financial system and (iii) to ensure the payment system of the country to be on track, would compel them naturally to address all issues that are perceived H 304 SUPREME COURT REPORTS [2020] 2 S. C. R.

A as potential risks to the monetary, currency, payment, credit and financial systems of the country. If an intangible property can act under certain circumstances as money (even without faking a currency) then RBI can definitely take note of it and deal with it. Hence it is not possible to accept the contention of the petitioners that they are carrying on an activity over which RBI has no power B statutorily. [Paras 6. 85-6. 87][393G, 394A-G] 1. 6 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 C 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 D on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. The expression “management of the currency” appearing in Section 3(1) need not necessarily be confined to the management of what is recognized in law to be currency but would also include what is E capable of faking or playing the role of a currency. It is ironical that virtual currencies which took avatar (according to its creator Satoshi) to kill the demon of a central authority (such as RBI), seek from the very same central authority, access to banking services so that the purpose of the avatar is accomplished. The F very creation of digital currency/ Bitcoin was to liberate the monetary system from being a slave to the central authority and from being operated in a manner prejudicial to private interests.

Therefore, the ultra vires argument cannot be accepted when the provision of access to banking services without any interference from the central authority over a long period of time G is perceived as a threat to the very existence of the central authority. Hence, it is held that RBI has the requisite power to regulate or prohibit an activity of this nature. [Paras 6. 90, 6. 91][395D-G; 396A-B] H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 305 RESERVE BANK OF INDIA 1. 7 If at all, the power is only to regulate, not prohibit A The projection of the impugned decisions of RBI as a total prohibition of an activity altogether, may not be correct. The impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the B trading or facilitating the trading in VCs.

Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly empowers RBI to caution or prohibit banking companies against entering into certain types of transactions or class of transactions. The prohibition is not per se against the trading in VCs. It is against C banking companies, with respect to a class of transactions. The fact that the functioning of VCEs automatically gets paralyzed or crippled because of the impugned Circular, is no ground to hold that it tantamount to total prohibition. So long as those trading in VCs do not wish to convert them into fiat currency in India and so long as the VCEs do not seek to collect their service charges D or commission in fiat currency through banking channels, they will not be affected by this Circular. Admittedly, peer-to-peer transactions are still taking place, without the involvement of the banking channel.

In fact, those actually buying and selling VCs without seeking to convert fiat currency into VCs or vice- E versa, are not affected by this Circular. It is only the online platforms which provide a space or medium for the traders to buy and sell VCs, that are seriously affected by the Circular, since the commission that they earn by facilitating the trade is required to be converted into fiat currency. Interestingly, the petitioners argue on the one hand that there is total prohibition and argue on F the other hand that the Circular does not achieve its original object of curtailing the actual trading, though it cripples the exchanges. If the first part of this submission is right, the latter cannot be and if the latter part is right, the former cannot be. When RBI exercises the powers conferred upon it, both to frame G a policy and to issue directions for its enforcement, such directions become supplemental to the Act itself.

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, H 306 SUPREME COURT REPORTS [2020] 2 S. C. R. A 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. The power of a statutory authority to do something has to be tested normally with reference to the persons/entities qua whom the power is exercised. The question to be addressed in such cases is whether the authority had the B power to do that act or issue such a directive, qua the person to whom it is addressed. While persons who suffer a collateral damage can certainly challenge the action, such challenge will be a very weak challenge qua the availability of power. [Paras 6. 94, 6. 99 and 6. 104, 6.

105][397C-G, 398A, 401-F-G, 403 A-B] C 1. 8 Section 18 of the Payment and Settlement Systems Act indicates (i) what RBI can do (ii) the persons qua whom it can be done and (iii) the object for which it can be done. In other words, Section 18 empowers RBI (i) to lay down policies relating to the regulation of payment systems including electronic, non- D electronic, domestic and international payment systems affecting domestic transactions and (ii) to give such directions as it may consider necessary. These are what RBI can do under Section 18. Coming to the second aspect, the persons qua whom the powers under Section 18 can be exercised are (i) system providers (ii) system participants and (iii) any other person generally or E any such agency. The expression “system provider” is defined under Section 2(1)(q) to mean a person who operates an authorized payment system.

The expression “system participant” is defined in Section 2(1)(p) to mean a bank or any other person participating in a payment system, including the system provider. Other than F the expressions ‘system provider’ and ‘system participant’, Section 18 also uses the expressions ‘any other person’ and ‘any such agency’. The purposes for which the power under Section 18 can be exercised, are also indicated in Section 18. They are (i) regulation of the payment systems (ii) the interest of the management and operation of any payment system and (iii) public G interest. 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. Therefore, in the overall scheme of the Payment and Settlement Systems Act, H INTERNET AND MOBILE ASSOCIATION OF INDIA v.

307 RESERVE BANK OF INDIA 2007, it is impossible to say that RBI does not have the power to A frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 should fail. [Paras 6. 106-6. 109, 6. 111][402B, D-G, G-H, B 403-A, D-E] 2. Mode of exercise of power: Satisfaction/Application of mind/relevant and irrelevant considerations C In the facts of the present case, RBI could not be held guilty of non-application of mind. As a matter of fact, the issue as to how to deal with virtual currencies has been lingering with RBI from June 2013 onwards. The sequence of events from June 2013 up to 02-04-2018 would show that RBI had been brooding over the issue for almost five years, without taking the extreme step. D 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 E 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 F 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 G disclose in detail what triggered their action, it is not possible to see the last of the orders in the series in isolation and conclude that the satisfaction arrived at by the authority is not reflected appropriately. In any case, pursuant to an order passed by this court on 21-08-2019, RBI gave a detailed point-wise reply to the representations of the petitioners. In these representations, the H 308 SUPREME COURT REPORTS [2020] 2 S. C. R. A petitioners have highlighted all considerations that they thought as relevant. RBI has given its detailed responses on 04-09-2019 and 18-09-2019. Therefore, the contention that there was no application of mind and that relevant considerations were omitted to be taken note of, loses its vigour in view of the subsequent developments. [Paras 6. 113, 6. 116-6. 118][404B, 405A-D, 406G- B H, 407A-B] 3.

Malice In Law/Colorable Exercise The impugned Circular does not order either the freezing or the closing of any particular account of a particular customer. C All that the impugned Circular says is that RBI regulated entities shall exit the relationship that they have with any 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 D 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 E extend either to the closing or the freezing of the accounts of the petitioners in relation to their other ventures. There can be no quarrel with the proposition that RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking F company or in public interest. If the exercise of power by RBI with a view to achieve one of these objectives incidentally causes a collateral damage to one of the several activities of an entity which does not come within the purview of the statutory authority, the same cannot be assailed as a colourable exercise of power or being vitiated by malice in law. To constitute colourable exercise G of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target.

To constitute malice in law, the act must have been done wrongfully and willfully without reasonable H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 309 RESERVE BANK OF INDIA or probable cause. The impugned Circular does not fall under A the category of either of them. The argument that the invocation by RBI, of ‘public interest’ as a weapon, purportedly for the benefit of users, consumers or traders of virtual currencies is a colourable exercise of power also does not hold water. Once it is conceded that RBI has powers to issue directions in public interest, it is B impossible to exclude users, consumers or traders of virtual currencies from the coverage. In fact, the repeated press releases issued by RBI from 2013 onwards indicate that RBI did not want the members of the public, which include users, consumers and traders of VCs, even to remotely think that virtual currencies have a legal tender status or are backed by a central authority.

C Irrespective of what VCs actually do or do not do, it is an accepted fact that they are capable of performing 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 D 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. The power under Section 35A to issue directions is to E be exercised under four contingencies namely (i) public interest (ii) interest of banking policy (iii) interest of the depositors and (iv) interest of the banking company.

The expression “banking policy” is defined in Section 5(ca) to mean any policy specified by RBI (i) in the interest of the banking system (ii) in the interest of F monetary stability and (iii) sound economic growth. Public interest permeates all these three areas. This is why Section 35A(1)(a) is invoked in the impugned Circular. Therefore, the argument that the impugned decision is a colorable exercise of power and it is vitiated by malice in law is rejected. [Paras 6. 120, 6. 122, 6. 123 and 6. 125][407E-G; 408C-G; 409A-B; F-G] G 4. M. S. Gill Reasoning The impugned Circular cannot be assailed on the basis of M. S. Gill test, for two reasons. First is that in Chairman, All India Railway Recruitment Board v. K. Shyam Kumar & Ors, H 310 SUPREME COURT REPORTS [2020] 2 S. C. R. A this court held that MS Gill test may not always be applicable where larger public interest is involved and that in such situations, additional grounds can be looked into for examining the validity of an order.

In Moons Technologies ltd. case this court clarified that though there is no broad proposition that MS Gill test will not apply where larger public interest is involved, subsequent B materials in the form of facts that have taken place after the order in question is passed, can always be looked at in the larger public interest, in order to support an administrative order. The second reason why the weapon of MS Gill will get blunted in this case, is that during the pendency of this case, this court passed an interim C order on 21-08-2019 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. [Para 6. 126][410A-D] D 5.

Wait and watch approach of the other stakeholders Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others. [Para 6. 128][411B-C] E 6. Light-touch approach of the other countries The judicial decision of the Court cannot be colored by what other countries have done or not done. Comparative perspective helps only in relation to principles of judicial decision making F and not for testing the validity of an action taken based on the existing statutory scheme. [Para 6. 129][411E] 7. Precautionary steps taken by petitioners The fact of the matter is that enhanced KYC norms may remove anonymity of the customer, but not that of the VC. The G Court is not expert to say whether the safety valves put in place could have addressed all issues raised by RBI. [Para 6. 131][412A- C] 8.

Different types of VCs require different treatments H The very same virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the INTERNET AND MOBILE ASSOCIATION OF INDIA v. 311 RESERVE BANK OF INDIA entities come up. Moreover, the question whether anonymous A 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 tow ards different VCs does not arise. [Para B 6. 135][413E-F] 9. Acceptance of DLT and rejection of VCs is a paradox There is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection of a by-product of such innovation. There is nothing like a “take it or C leave it” option. [Para 6. 137][413H, A] 10.

RBI’s decisions do not qualify for Judicial deference RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get D liberated even from its creator.

This is why it is given a mandate – (i) under the Preamble of the RBI Act 1934, to operate the currency and credit system of the country to its advantage and to operate the monetary policy framework in the country (ii) under Section 3(1), to take over the management of the currency from the central government (iii) under Section 20, to undertake to E accept monies for account of the central government, to make payments up to the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union (iv) under Section 21(1), to have all the money, remittance, F exchange and banking transactions in India of the central government entrusted with it (v) under Section 22(1), to have the sole right to issue bank notes 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 G 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. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by H 312 SUPREME COURT REPORTS [2020] 2 S. C. R. A virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But the power conferred upon RBI under Section 3(1) of the RBI Act, 1934 to B 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 C Settlements, which position cannot be taken over by the central government and conferred upon any other authority. Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act. In fact, all countries have central banks/ D authorities, which, technically have independence from the government of the country. To ensure such independence, a fixed tenure is granted to the Board of Governors, so that they are not bogged down by political expediencies. Therefore, the argument that a policy decision taken by RBI does not warrant any deference cannot be accepted. [Paras 6. 139, 6. 141][414-D-G; 416-B-E, H] E 11.

1 Article 19(1)(g) challenge & Proportionality The buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business. The distinction between the two is that there may or may not exist a profit motive in the former, while it would, in the latter. Persons F who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Article 19(1)(g), for what is covered therein are only profession, occupation, trade or business. Therefore hobbyists, who are one among the three categories of citizens (hobbyists, traders in VCs and VC G Exchanges), straightaway go out of the challenge under Article 19(1)(g). The second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the basis of Article H INTERNET AND MOBILE ASSOCIATION OF INDIA v.

313 RESERVE BANK OF INDIA 19(1)(g). Technically speaking, the second category of citizens A cannot claim that the impugned decision of RBI has the effect of completely shutting down their trade or occupation. Citizens who have taken up the trade of buying and selling virtual currencies are not prohibited by the impugned Circular (i) either from trading in crypto-to-crypto pairs (ii) or in using the currencies stored in B their wallets, to make payments for purchase of goods and services to those who are prepared to accept them, within India or abroad. Virtual currencies cannot be stored anywhere, in the real sense of the term, as they do not exist in any physical shape or form. What is actually stored is the private keys, which can be used to access the public address and transaction signatures. C 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 D 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 E 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. 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. Most of the wallets except perhaps F desktop wallet, have great mobility and have transcended borders.

Therefore, despite the fact that the users and traders of virtual currencies are also prevented by the impugned Circular from accessing the banking services, the impugned Circular has not paralyzed many of the other ways in which crypto currencies can still find their way to or through the market. Persons who G have suffered a deadly blow from the impugned Circular are only those running VC exchanges and not even those who are trading in VCs. [Paras 6. 147– 6. 154][419-F-H; 420-A-H; 421-A-D] H 314 SUPREME COURT REPORTS [2020] 2 S. C. R. A 11. 2 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 18-09-2019 extracted above, the additional B 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 the Court may not scan the response of RBI in greater detail to find out if the response to the additional safeguards suggested by the C petitioners was just imaginary.

But at the same time the Court 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 D is that RBI has not prohibited VCs in the country and (iii) that even the Inter-Ministerial Committee constituted on 02-11-2017, which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool E and that the same objectives can be achieved through regulatory measures.

The Crypto-token Regulation Bill, 2018 initially recommended by the Inter-Ministerial Committee contained a proposal (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes F due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted. 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 G was fine with the idea of allowing the sale and purchase of digital crypto asset at recognized exchanges.

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 H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 315 RESERVE BANK OF INDIA Cryptocurrency and Regulation of Official Digital Currency Act, A 2019”. The draft of the bill contained a proposal to ban the mining, generation, holding, selling, dealing in, issuing, transferring, disposing of or using crypto currency in the territory of India. At the same time, the bill contemplated (i) the creation of a digital rupee as a legal tender, by the central government in consultation B with RBI and (ii) the recognition of any official foreign digital currency, as foreign currency in India.

In case the said enactment (2019) had come through, there would have been an official digital currency, for the creation and circulation of which, RBI/central government would have had a monopoly. But that situation had not arisen. The position as on date is that VCs are not banned, C but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function D and (ii) despite the fact that VCs are not banned. The concern of RBI is and it ought to be, about the entities regulated by it.

Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/co-operative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the E interface that the VC exchanges had with any of them. It is not the case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exchanges. It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of F the 3 enactments indicated earlier, but also in view of the special place and role that it has in the economy of the country. These powers can be exercised both in the form of preventive as well as curative measures. But the availability of power is different from the manner and extent to which it can be exercised.

When the consistent stand of RBI is that they have not banned VCs G 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. [Paras 6. 166 – 6. 173][439-A-E; 440-E-F; 441-C- H G; 442-A-D] 316 SUPREME COURT REPORTS [2020] 2 S. C. R. A 12. Therefore, 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 06-04-2018 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 B the question of setting aside the same does not arise. 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. Admittedly, the activities carried on by the said petitioner were not declared as unlawful. It is the positive C case of RBI that they did not in fact freeze the accounts of petitioner no. 6. Therefore, RBI is obliged to direct the Central Bank of India to defreeze the account and release the funds. Hence, RBI is directed to issue instructions forthwith to the Central Bank of India, Worli branch, to defreeze the current account no. 3677101984 of petitioner no. 6 in WP (C) No. 373 of D 2018 and to release the funds lying in the account to the company together with interest at the rate applicable. [Paras 7. 1 – 7. 4][442E-H, 443A-C] Shri Sitaram Sugar Co. Ltd. & Anr v. Union of India & Ors. (1990) 3 SCC 223 : [1990] 1 SCR 909; E Jayantilal Amrit Lal Shodhan v. F. N. Rana AIR 1964 SC 648 : [1964] SCR 294 – followed. M S Gill v. The Chief Election Commissioner (1978) 1 SCC 405 : [1978] 2 SCR 272; State of Rajasthan v.

Basant Nahata (2005) 12 SCC 77 : [2005] 3 Suppl. F SCR 1 – held inapplicable. CIT v. Kasturi & Sons Ltd. (1999) 3 SCC 346 : [1999] 1 SCR 1207; Dhampur Sugar Mills Ltd. v. Commissioner of Trade Tax (2006) 5 SCC 624 : [2006] 2 Suppl. SCR 673; Keshavlal Khemchand & Sons Pvt. G Ltd. v. Union of India (2015) 4 SCC 770 : [2015] 2 SCR 51; Star India Pvt. ltd. v. Dept. of Industrial Policy and Promotion and Ors. (2019) 2 SCC 104 : [2018] 14 SCR 128; Khoday Distilleries Ltd. v. State of Karnataka (1995) 1 SCC 574 : [1994] 4 Suppl. SCR 477; St. Johns Teachers Training Institute v. Regional Director, H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 317 RESERVE BANK OF INDIA NCTE (2003) 3 SCC 321 : [2003] 1 SCR 975; Udai A Singh Dagar v. Union of India (2007) 10 SCC 306 : [2007] 6 SCR 707; Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India (1992) 2 SCC 343 [1992] 1 SCR 406; ICICI Bank Ltd v.

Official Liquidator of APS Star Industries Ltd (2010) 10 SCC 1 B : [2010] 12 SCR 644; Ganesh Bank of Kurunwad Ltd. & Ors v. Union of India & Ors. (2006) 10 SCC 645 : [2006] 5 Suppl. SCR 437; Chairman, All India Railway Recruitment Board v. K. Shyam Kumar & Ors. (2010) 6 SCC 614 : [2010] 6 SCR 291; PRP Exports & Ors v. Chief Secretary, Government of Tamil Nadu & Ors. C (2014) 13 SCC 692 : [2013] 16 SCR 1107; Moons Technologies Ltd. & Ors v. Union of India & Ors. (2019) SCC Online SC 624; State of Maharashtra v. Indian Hotel and Restaurants Association (2013) 8 SCC 519 : [2013] 7 SCR 654 – relied on. D K. Ramanathan v. State of Tamil Nadu 1985 (2) SCC 116 : [1985] 2 SCR 1028; Godawat Pan Masala Products IP Ltd. & Anr v. Union of India (2004) 7 SCC 68 : [2004] 3 Suppl. SCR 239; Union of India & Anr v. Cynamide India Ltd. & Anr (1987) 2 SCC 720 : [1987] E 2 SCR 841; State of U. P. and Ors v. Babu Ram Upadhya AIR 1961 SC 751 : [1961] SCR 679; D. K. V. Prasada Rao v. Govt. of A. P.

AIR 1984 AP 75; State of Punjab & Anr v. Gurdial Singh & Ors. (1980) 2 SCC 471 : [1980] 1 SCR 1071; Collector (District Magistrate) Allahabad & Anr v. Raja Ram Jaiswal (1985) 3 SCC 1 F : [1985] 3 SCR 995; Kalabharati Advertising v. Hemant Vimalnath Narichania & Ors (2010) 9 SCC 437 : [2010] 10 SCR 971; Meerut Development Authority v. Assn. Management Studies & Anr. (2009) 6 SCC 171 : [2009] 6 SCR 663; Bihar Public Service Commission v. Saiyed G Hussain Abbas Rizwi & Anr. (2012) 13 SCC 61 : [2012] 11 SCR 1032; Utkal Contractors & Joinery (P) Ltd. & Ors v. State of Orissa & Ors. (1987) 3 SCC 279 : [1987] 3 SCR 317; Empress Mills v. Municipal Committee, Wardha (1958) SCR 1102; R. K. Garg v. Union of India (1981) 4 SCC 675 : [1982] 1 SCR 947; BALCO H 318 SUPREME COURT REPORTS [2020] 2 S. C. R. A Employees’ Union (Regd. ) v. Union of India & Ors, (2002) 2 SCC 333 : [2001] 5 Suppl. SCR 511; Swiss Ribbons Pvt. Ltd. & Anr v.

Union of India & Ors, (2019) 4 SCC 17 : [2019] 3 SCR 535; State of Gujarat & Anr v. Shri Ambica Mills Ltd. & Anr. (1974) 4 SCC 656 : [1974] 3 SCR 760; G. K. Krishnan v. Tamil Nadu (1975) B 1 SCC 375 : [1975] 2 SCR 715; State of M. P. v. Nandlal Jaiswal (1986) 4 SCC 566 : [1987] 1 SCR 1; P. M. Ashwathanarayana Setty v. State of Karnataka (1989) Supp (1) SCC 696 : [1988] 3 Suppl. SCR 155; T. Velayudhan v. Union of India (1993) 2 SCC 582 : C [1993] 1 SCR 832; Delhi Science Forum v. Union of India (1996) 2 SCC 405 : [1996] 2 SCR 767; Bhavesh D. Parish v. Union of India (2000) 5 SCC 471 : [2000] 1 Suppl. SCR 291; Ugar Sugar Works Ltd. v. Delhi Administration & Ors. (2001) 3 SCC 635 : [2001] 2 SCR 630; Govt. of Andhra Pradesh & Ors v. P. Laxmi D Devi (2008) 4 SCC 720 : [2008] 3 SCR 330; Villianur Iyarkkai Padukappu Maiyam v. Union of India (2009) 7 SCC 561 : [2009] 9 SCR 225; D. G. of Foreign Trade v. Kanak Exports (2016) 2 SCC 226 : [2015] 15 SCR 287; State of J & K v.

Trikuta Roller Flour Mills Pvt. E Ltd. (2018) 11 SCC 260 : [2017] 9 SCR 642; Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416; Md. Yasin v. Town Area Committee (1952) SCR 572; Bennett Coleman & Co. v. Union of India (1972) 2 SCC 788 : [1973] 2 SCR 757; Md. Faruk v. State of Madhya Pradesh & Ors (1969) 1 SCC F 853 : [1970] 1 SCR 156; Modern Dental College and Research Centre v. State of Madhya Pradesh. (2016) 7 SCC 353 : [2016] 3 SCR 579– referred to. Moss v. Hancock (1899) 2 QB 111; Wisconsin Central Ltd v. United States 585 US 2018, 138 S. Ct. 2067 G (2018); SEC v. Trendon Shavers Case No. 4: 13-Cv- 416 (August 6, 2013) United States v. Ulbricht 31F. Supp. 3D 540 (2014); United States v. Faiella 39F. Supp. 3D 544 (2014); In re Coinflip Inc CFTC Docket No. 15-29 dated 17-09-2015; In the matter of TeraExchange H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 319 RESERVE BANK OF INDIA LLC. CFTC Docket No.

15-33 dated 24-09-2015; In A the matter of BFXNA Inc, d/b/a BITFINEX CFTC Docket No. 16-19 dated 02-06-2016; United States v. Murgio 209 F. Supp. 3D 698 (2016); Commodity Futures Trading Commission v. Patrick McDonnell 18- Cv-361 dated 03-06-2018; Commodity Futures Trading B Commission v. My Big Coin Pay, Inc. et al. 18-Cv-10077- RWZ dated 26-09-2018; State of Florida v. Michell Abner Espinoza F 14-2923 decided on 22-07-2016 ; State of Florida v. Michell Abner Espinoza 264 So. 3D 1055 (2019); B2C2 Ltd. v. Quoine Pte Ltd. [2019] SGHC (I) 3; National Provincial Bank v. Ainsworth [1965] 1 C AC 1175 at 1248; Quoine Pte Ltd v. B2C2 Ltd [2020] SGCA (I) 02; AA v. Persons Unknown & others Re Bitcoin [2019] EWHC 3556 (Comm); Colonial Bank v. Whinney [1885] 30 ChD; Skatteverket v. David Hedqvist Case C-264/14 dated 22-10-2015; Elloy de D Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing [1999] 1 AC 69; Huang v.

Secretary of State for the Home Department [2007] UKHL 11; Bank Mellat v. HM Treasury (No. 2) [2013] UKSC 39; Illinois Elections Bd v. Socialist Workers Party (1979) 440 US 173 – E referred to. “Digital Gold: Bitcoin and the inside story of the Misfits and Millionaires Trying to Reinvent Money”- Book by Nathaniel Popper; and Virtual Currency, Treasury Update published by the Tax Policy Division, Michigan Department of Treasury (Vol. 1(1), F November 2015) – referred to. Case Law Reference [1999] 1 SCR 1207 relied on Para 6. 69 [2006] 2 Suppl. SCR 673 relied on Para 6. 70 G [2015] 2 SCR 51 relied on Para 6. 88 [2018] 14 SCR 128 relied on Para 6. 92 [1985] 2 SCR 1028 referred to Para 6. 92 [2004] 3 Suppl. SCR 239 referred to Para 6. 93 H 320 SUPREME COURT REPORTS [2020] 2 S. C. R. A [1994] 4 Suppl. SCR 477 relied on Para 6. 93 [2005] 3 Suppl. SCR 1 held inapplicable Para 6. 95 [1987] 2 SCR 841 referred to Par 6. 97 [2003] 1 SCR 975 relied on Para 6.

98 B [2007] 6 SCR 707 relied on Para 6. 98 [1992] 1 SCR 406 relied on Para 6. 99 [1961] SCR 679 referred to Para 6. 99 AIR 1984 AP 75 referred to Para 6. 99 C [2010] 12 SCR 644 relied on Para 6. 99 [1964] SCR 294 followed Para 6. 101 [1990] 1 SCR 909 followed Para 6. 102 [2006] 5 Suppl. SCR 437 relied on Para 6. 103 D [1980] 1 SCR 1071 referred to Para 6. 121 [1985] 3 SCR 995 referred to Para 6. 121 [2010] 10 SCR 971 referred to Para 6. 121 [2009] 6 SCR 663 referred to Para 6. 124 E [2012] 11 SCR 1032 referred to Para 6. 124 [1987] 3 SCR 317 referred to Para 6. 124 [1958] SCR 1102 referred to Para 6. 124 [1978] 2 SCR 272 held inapplicable Para 6. 126 F [2010] 6 SCR 291 relied on Para 6. 126 [2013] 16 SCR 1107 relied on Para 6. 126 [1982] 1 SCR 947 referred to Para 6. 138 G [2001] 5 Suppl. SCR 511 referred to Para 6. 138 [2019] 3 SCR 535 referred to Para 6. 138 [1974] 3 SCR 760 referred to Para 6. 140 [1975] 2 SCR 715 referred to Para 6. 140 H INTERNET AND MOBILE ASSOCIATION OF INDIA v.

321 RESERVE BANK OF INDIA [1987] 1 SCR 1 referred to Para 6. 140 A [1988] 3 Suppl. SCR 155 referred to Para 6. 140 [1993] 1 SCR 832 referred to Para 6. 140 [1996] 2 SCR 767 referred to Para 6. 140 B [2000] 1 Suppl. SCR 291 referred to Para 6. 140 [2001] 2 SCR 630 referred to Para 6. 140 [2008] 3 SCR 330 referred to Para 6. 140 [2009] 9 SCR 225 referred to Para 6. 140 C [2015] 15 SCR 287 referred to Para 6. 140 [2017] 9 SCR 642 referred to Para 6. 140 (2019) 8 SCC 416 referred to Para 6. 140 [1952] SCR 572 referred to Para 6. 142 D [1973] 2 SCR 757 referred to Para 6. 142 [1970] 1 SCR 156 referred to Para 6. 142 [2016] 3 SCR 579 referred to Para 6. 156 [2013] 7 SCR 654 relied on Para 6. 172 E CIVIL ORIGINAL JURISDICTION: Writ Petition (Civil) No. 528 of 2018. [UNDER ARTICLE 32 OF THE CONSTITUTION OF INDIA] With F Writ Petition (Civil) No. 373 of 2018. Nakul Dewan, Shyam Divan, Sr. Advs. , Ashim Sood, Jaideep Reddy, Alipak Banerjee, Pradhuman Gohil, Mrs. Taruna Singh Gohil, Ms.

Ranu Purohit, Ms. Senu Nizar, Arman Pratap Singh, Aditya Kumar, Brijesh Ujjainwal, Rhythm Buaria, Ms. Payal Chanda, Mayank Pandey, G Avinash Menon, Ms. Tanya Dayal, Rohan Andrew Naik, V. P. Singh, Raghav Seth, Ms. Sayobani Banu, Shivam, Bharat Makker, Harpreet Singh Ajmani, Ms. Shraddha Deshmukh, Rajat Nair, Mrs. Anil Katiyar, Advs. for the appearing parties. H 322 SUPREME COURT REPORTS [2020] 2 S. C. R. A The Judgment of the Court was delivered by V. RAMASUBRAMANIAN, J. 1. THE STORY LINE: 1. 1. Reserve Bank of India (hereinafter, “RBI”) issued a “Statement on Developmental and Regulatory Policies” on April 5, B 2018, paragraph 13 of which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs). C 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 D 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 E 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 ‘Internet and Mobile Association of India’ which represents the interests of online and digital F services industry. The petitioners in the second writ petition comprise of a few companies which run online crypto assets exchange platforms, the shareholders/founders of these companies and a few individual crypto assets traders. It must be stated here that the individuals who are some of the petitioners in the second writ petition are young high-tech G entrepreneurs who have graduated from premier educational institutions of technology in the country.

Contents of the impugned Statement and Circular of RBI: 1. 4. The Statement dated 05-04-2018 issued by RBI, impugned in these writ petitions, sets out various developmental and regulatory policy H measures for the purpose of (i) strengthening regulation and supervision INTERNET AND MOBILE ASSOCIATION OF INDIA v. 323 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J. ] (ii) broadening and deepening financial markets (iii) improving currency A management (iv) promoting financial inclusion and literacy and (v) facilitating data management. Paragraph 13 of the said statement which falls under the caption “currency management” deals directly with virtual currencies and the same constitutes the offending portion of the impugned Statement. Therefore, paragraph 13 of the impugned Statement B alone is extracted as follows: 13.

Ring-fencing regulated entities from virtual currencies Technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual C Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others. Reserve Bank has repeatedly cautioned users, holders and D traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business E entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately. 1. 5.

The Circular dated 06-04-2018 deals entirely with virtual currencies and the prohibition on dealing with the same. This Circular is F 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 enirety is reproduced as follows: Prohibition on dealing in Virtual Currencies (VCs) G 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. H 324 SUPREME COURT REPORTS [2020] 2 S. C. R. A 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 B 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 relationship within three months from the date of this C circular. 4.

These instructions are issued in exercise of powers conferred by section 35A read with section 36(1)(a) of Banking Regulation Act, 1949, section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949, D section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007. 2. THE SETTING 2. 1. The Statement dated 05-04-2018 and the Circular dated E 06-04-2018 of RBI, impugned in these writ petitions, were a culmination of a flurry of activities by different stakeholders, nationally and globally, over a period of about 5 years. Therefore, it is necessary to see the setting in which (or the backdrop against which) the impugned decisions of RBI were posited. While doing so, it will also be necessary to take F note of the developments that have taken place during the pendency of these writ petitions, so that we have a close-up as well as aerial view of the setting. 2. 2.

It was probably for the first time that RBI took note of technology risks in changing business environment, in their Financial G Stability Report of June 2013. Paragraph 3. 60 of this report noted that globally, the use of online and mobile technologies was driving the proliferation of virtual currencies. Therefore, the report stated that those developments pose challenges in the form of regulatory, legal and operational risks. Box 3. 4 of the said report dealt specifically with virtual currency schemes and it started by defining virtual currency as a H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 325 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J. ] type of unregulated digital money, issued and controlled by its A developers and used and accepted by the members of a specific virtual community. It was declared in Box 3. 4 of the said report that “the regulators are studying the impact of online payment options and virtual currencies to determine potential risks associated with them”.

B 2. 3. In June 2013, the Financial Action Task Force (hereinafter, “FATF”), also known by its French name, Groupe d’action financière, which is an inter-governmental organization founded in 1989 on the initiative of G-7 to develop policies to combat money laundering, came up with what came to be known as “New Payment Products and C Services Guidance” (NPPS Guidance, 2013). It was actually a Guidance for a Risk Based Approach to Pre-paid cards, Mobile Payments and Internet-based Payment Services. But this Guidance did not define the expressions ‘digital currency’, ‘virtual currency’, or ‘electronic money’, nor did it focus on virtual currencies, as distinct from internet based payment systems that facilitate transactions denominated in real money D (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 E 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 F 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 buysellbitco. in.

This was stated to be India’s first raid on a Bitcoin trading firm and the second globally, G after Federal Bureau of Investigation of the United States of America conducted a raid in October of the same year. 2. 6. Thereafter, a report titled “Virtual Currencies – Key Definitions and Potential AML/CFT Risks” was issued in June 2014 by FATF, highlighting, both legitimate uses and potential risks associated H 326 SUPREME COURT REPORTS [2020] 2 S. C. R. A with virtual currencies. What is of great significance about this FATF report is that it defined 2 important words. The FATF report defined ‘Virtual currency’ as a digital representation of value that can be traded digitally and functioning as (1) a medium of exchange; and/ or (2) a unit of account; and/or (3) a store of value, but not having a legal tender status.

The FATF report also defined ‘Cryptocurrency’ B to mean a math-based, decentralised convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred. 2. 7. Again, in June 2015, FATF came up with a “Guidance for a C Risk Based Approach to Virtual Currencies”, which suggested certain recommendations, as follows: A. Countries to identify, assess and understand risks and to take action aimed at mitigating such risks.

National authorities to undertake a coordinated risk assessment of VC products and services that: D (1) enables all relevant authorities to understand how specific virtual currency products and services function and impact regulatory jurisdictions for Anti Money Laundering (‘AML’ for short)/Combating the Financing of Terrorism (‘CFT’ for short) treatment purposes; (2) promote similar AML/CFT treatment for similar products and E services having same risk profiles. B. Where countries are prohibiting virtual currency products and services, they should take into account among other things, the impact a prohibition would have on local and global level of money laundering/ terrorism financing risks, including whether prohibition would drive such F payment activities underground, where they will operate without AML/ CFT controls. 2. 8. The FATF submitted a report in October 2015 on "Emerging Terrorist Financing Risks".

The report was divided into four parts, under the captions (i) introduction (ii) financial management of terrorist G organisations (iii) traditional terrorist financing methods and techniques and (iv) emerging terrorist financing threats and vulnerabilities. Even while acknowledging in part 3 of the report that the traditional methods of moving funds through the banking sector happens to be the most efficient way of movement of funds for terrorist organisations, the report H acknowledged the emergence of new payment products and services in INTERNET AND MOBILE ASSOCIATION OF INDIA v. 327 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J. ] part 4 of the report. The report took note of different methods of terrorist A 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 B 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 C and Potential AML/CFT Risks. As part of a staged approach, the FATF has also developed Guidance focusing on the points of intersection that provide gateways to the regulated financial system, in particular convertible virtual currency exchangers. Virtual currencies such as bitcoin, while representing a great D opportunity for financial innovation, have attracted the attention of various criminal groups, and may pose a risk for TF (terrorist financing).

This technology allows for anonymous transfer of funds internationally. While the original purchase of the currency may be visible (e. g. , through the banking system), all following transfers of the virtual currency are E difficult to detect. The US Secret Service has observed that criminals are looking for and finding virtual currencies that offer: anonymity for both users and transactions; the ability to move illicit proceeds from one country to another quickly; low volatility, which results in lower exchange risk; widespread F adoption in the criminal underground; and reliability. Law enforcement agencies are also concerned about the use of virtual currencies (VC) by terrorist organisations. They have seen the use of websites affiliated with terrorist organisations to promote the collection of bitcoin donations.

In addition, G law enforcement has identified internet discussions among extremists regarding the use of VC to purchase arms and education of less technical extremists on use of VC. For example, a posting on a blog linked to ISIL proposed using bitcoin to fund global extremist efforts. " (emphasis supplied) H 328 SUPREME COURT REPORTS [2020] 2 S. C. R. A In support of the above conclusions, the report also indicated a case study, which concerned the arrest of one Ali Shukri Ameen, who admitted to have had a Twitter account with 4000 followers. He claimed to have used his Twitter handle to provide instructions on how to use a virtual currency to mask the provision of funds to ISIL. In an article, the link to which he tweeted to his followers, it was elaborated how jihadists B could utilize the virtual currency to fund their efforts. (It must be noted that the report also took note of how prepaid cards and other internet-based payment services could also be used for terror financing).

2. 9. The Bank of International Settlements (hereinafter, “BIS”) which is a body corporate established under the laws of Switzerland, C way back in the year 1930 pursuant to an agreement signed at Hague on 22-01-1930 and owned by 60 Central Banks of different countries including RBI, has several committees, one of which is “Committee on Payments and Market Infrastructure” (CPMI). This committee started taking note of digital currencies, while dealing with innovations in retail payments. This committee formed a sub-group within the CPMI Working Group on D Retail Payments, to undertake an analysis of digital currencies. On the basis of the findings of the sub-group, 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, E 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 F 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 their underlying decentralized payment mechanisms”. In the said paragraph, the report indicated that “digital currencies represent a technology for settling peer to peer payments without trusted third parties and may involve a non-sovereign G currency”.

Though the report stated that the impact of digital currencies on the mainstream financial system is negligible as at that time, some of the implications indicated in the report may actually materialize if there was widespread adoption of digital currencies. Two risks were noted in the report and they were consumer H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 329 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J. ] protection and operational risks. But in so far as distributed ledger A technology is concerned, the report was positive. However, the report cautioned that a widespread substitution of bank notes with digital currencies could lead to a decline in central banks’ non-interest paying liabilities and that if the adoption and use of digital currencies were to increase significantly, the demand for existing monetary B aggregates and the conduct of monetary policy could be affected.

Nevertheless, the report stated that at present, the use of private digital currencies is too low for these risks to materialize. 2. 10. In December 2015, the Financial Stability Report of RBI was issued, and it included a chapter on “Financial Sector Regulation”. The same dealt with the challenges posed by technology-based innovations C such as virtual currency schemes. In Box 3. 1 of the said report, it was indicated that though the initial concerns over the emergence of virtual currency schemes were about the underlying design, episodes of excessive volatility in their value and their anonymous nature which goes against global money laundering rules rendered their D very existence questionable. However, the report noted that the regulators and authorities need to keep pace with developments, as many of the world’s largest banks started supporting a joint effort for setting up of private blockchain and building an industry-wide platform for standardizing the use of technology. E 2.

11. In December 2016, the Financial Stability Report of RBI came. It took note of the rapid developments taking place in Fin Tech (financial technology) globally and exhorted the regulators to gear up to adopt technology (christened as RegTech). Paragraph 3. 22 of the said 1 report identified the establishment of regulatory sandboxes and innovation hubs for testing new products and services and providing support/guidance F 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 G feasibility of creating their own digital currencies, after fretting over them initially.

1 Regulatory sandbox refers to live testing of new products/services in a controlled/test regulatory environment. H 330 SUPREME COURT REPORTS [2020] 2 S. C. R. A 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 B 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 volatility. 2. 13. On 01-02-2017, RBI again issued a Press Release cautioning users, holders and traders of virtual currencies.

Closely on the heels of C this Press Release, the Government of India, Ministry of Finance, constituted, in April 2017, an Inter-Disciplinary Committee comprising of the Special Secretary (Economic Affairs) and representatives of the Departments of Economic Affairs, Financial Services, Revenue, Home Affairs, Electronics and Information Technology, RBI, NITI Aayog, and State Bank of India. The task of the Committee was to (i) take stock of D the status of VCs in India and globally, (ii) examine the existing global regulatory and legal structures and (iii) suggest measures for dealing with VCs. The Committee was mandated to submit a report within 3 months. 2. 14.

The report of the Inter-Disciplinary Committee was submitted E on 25-07-2017 and it contained certain recommendations which are as follows: (i) A very visible and clear warning should be issued through public media informing the general public that the Government does not consider crypto-currencies such as F bitcoins as either coins or currencies. These are neither a legally valid medium of exchange nor a desirable way to store value. The Government also does not consider it desirable for people to use or invest in something which has no real underlying asset value. G (ii) A very visible and clear warning should be issued, through public media, advising all those who have been offering to buy or sell these currencies, or offering a platform to exchange these currencies, to stop this forthwith. H INTERNET AND MOBILE ASSOCIATION OF INDIA v. 331 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.

] (iii) Those who have bought these currencies in good faith A and are holding these should be advised to offload these in any jurisdiction where it is not illegal to do so. (iv) All consumer protection and enforcement agencies should be advised to take action against all those who, despite these warnings, indulge in buying/selling or offering platform for B trading of these currencies, since the presumption would be that it is being done with illegal, fraudulent or tax evading intent. (v) If the Government agrees with the above recommendations, a committee should be constituted with members from DEA, C RBI, SEBI, DoR, DoLA, Consumer Affairs, and MeitY, to suggest whether any further actions, including legislative changes, are required to make possession, trade and use of crypto-currencies expressly illegal and punishable.

(vi) Finally, it is clarified that none of the above D 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. E 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) F and comprising of Secretary, Ministry of Electronic and Information Technology, Chair

Source: Supreme Court of India. Dataset: Dattam Labs. CC BY 4.0. Text extracted automatically; compare with the source PDF for layout and accuracy.