Bench (Supreme Court of India):
Justice Rohinton Fali Nariman
Justice Aniruddha Bose
Justice V. Ramasubramanian
Date of Judgment:
March 4, 2020
Petitioner
Internet and Mobile Association of India (IMAI)
(A not-for-profit industry body representing digital companies in India, including crypto exchange platforms like WazirX and CoinDCX.)
Respondent:
Reserve Bank of India (RBI)
Facts
- The Internet and Mobile Association of India v. Reserve Bank of India case emerged during India’s rapidly expanding digital economy and where cryptocurrencies had begun to attract the attention of investors, developers and regulators.
- On 6th April 2018, The Reserve Bank of India (RBI) issued a circular that directed to all regulated entities such as banks and NBFCs to cease the dealing in virtual currencies (VCs) or providing services that facilitate any person or entity in dealing with or settling virtual currencies. This places a blanket ban on cryptocurrency exchanges, users and businesses that were dependent on fiat ramps.
- The Internet and Mobile Association of India (IMAI) is a not-for-profit industry body that represents online tech companies in India. They challenged the RBI circular before the Supreme Court under Article 32 of the Constitution. They asserted that it violated fundamental rights under Article 19(1)(g) (right to trade) and Article 14 (equality before the law).
- The Supreme Court examined this case for over two years and delivered a landmark judgement in March 2020. It struck down the RBI’S circular on the grounds of proportionality. Held that although RBI had the power to regulate, it failed to demonstrate sufficient harm caused by cryptocurrencies in order to justify total prohibition.
Issues
- Whether the RBI had the statutory authority to restrict or prohibit entities from dealing with virtual currencies?
- If virtual currencies qualify as “money”, “legal tender” or “payment systems” under the Indian Law?
- Whether the RBI’S circular violated the fundamental right of the petitioner under article 19(1)(g)?
- Whether the circular lacked empirical evidence and hence failed the test of reasonableness and non-arbitrariness under Article 14?
Contentions
Petitioner’s Contentions (IMAI)
- The petitioners argued that cryptocurrencies fell outside RBI’ jurisdiction as they were not “currencies” or “payment systems” as per the Payment and Settlement Systems Act 2007.
- By restricting the access to banking, the circular effectively shit down businesses dealing in virtual currencies. This infringed their right to practice any profession or carry out any occupation, trade or business under Article 19(1)(g).
- The RBI had not provided concrete evidence that showed harm caused by cryptocurrencies to financial institutions or the monetary systems.
- A complete banking ban was disproportionate to the supposed risks. Less intrusive measures like regulation or licensing could have been adopted.
Respondent’s Contentions (RBI)
- RBI argued that the circular issued was a measure of “caution” in order to ensure financial stability and to protect consumers from potential frauds and systemic risks associated with cryptocurrencies.
- RBI justified its actions under the Banking Regulation Act, 1949 and the RBI Act 1934. And asserted its mandate to regulate the monetary system and ensure economic stability.
- Cryptocurrencies pose a threat to anti-money laundering (AML) and counter-terrorism financing (CTF) efforts as crypto operates largely anonymous and cross-border and unregulated ecosystem.
Rationale
The Supreme Court recognized the RBI’s statutory to regulate the entities under tis control. However, it emphasized that RBI’s power to regulate did not extend to imposing a total ban until and unless the measure was reasonable and proportionate.
Proportionality Doctrine Applied
The Court applied the four-pronged proportionality test laid down in Modern Dental College and Research Centre v. State of Madhya Pradesh.
- Legitimate Goal: The RBI’s goal of protecting the monetary system was deemed legitimate.
- Suitability: The measure was so far as it aimed at preventing banks from the exposure to risks.
- Necessity: Whether a total ban was necessary or not was questioned. The Court found that less intrusive alternatives like regulation had been considered.
- Balancing: The Court concluded that the blanket prohibition had a very negative impact on cryptocurrency exchanges without even demonstrating the actual damage to the regulated entities. Thus, making it disproportionate.
Empirical Void
The Court noted that the RBI had not furnished any empirical data or objective study to establish that virtual currencies had harmed the financial system or banking institutions. And that mere apprehension of misuse could not be a legitimate basis for such an extreme measure.
Scope of Article 19(1)(g)
This judgement reinforced that the freedom to conduct nay business or profession is a fundamental right. The RBI’s actions thus, indirectly infringed the petitioners’ fundamental rights by (not directly) banning VCs, it created a situation where VC businesses were unviable.
Defects Of Law
The judgement reveals significant systemic and legal lacunae that remain unaddressed:
- Absence of Regulatory Framework
The Court’s judgment did not fill the legal vacuum surrounding cryptocurrencies. While RBI’s circular was struck down, there is a lack of a statutory framework governing VC. This means that the sector still operates in a legal grey zone. India deo s not have a specific legislation that recognizes or regulates digital assets. This continues to expose the ecosystem to future regulatory shockwaves.
- Judicial Over- Reliance and Proportionality without Normative Clarity
The Court leaned heavily on the proportionality doctrine but stopped short of laying down clear standards for the regulation of emerging technologies. Even though proportionality offers flexibility, it could set a dangerous precedent. Its application to financial policy cases risks substituting technical judgments of regulatory agencies with judicial review.
- Limited Protection Against Future Arbitrary Executive Action
The decision invalidated the 2019 circular not on the basis of that cryptocurrencies are constitutionally protected but because RBI had failed to justify the ban adequately. This opens a door for a better reasoned but equally stringent future action by RBI or the legislature. This leaves the status of crypto industry as perennially uncertain.
- Non engagement with Consumer Protection and AML Concerns
The Court did not address how a balance could be struck between encouraging innovation and protecting consumers adequately. This absence has led to increased skepticism in the banning and policy circles.
Inference
This case stands as a cautionary tale for the regulators that deal with frontier technologies. It emphasizes that the power to regulate must be exercised with both care and evidence. Especially when fundamental rights are at stake. RBI’s lack of a demonstrable harm created a scenario of executive overreach dressed in precautionary language. It shows the willingness of the judiciary to question administrative actions that lack empirical justification, even in technically complex fields like finance.
The judgment also reflects the judicial restraint of not declaring cryptocurrencies as legal tender or commodities and left that prerogative to the legislature and regulators. While doing so, the court balanced judicial review with deference to policy making but alsom highlighted the need for regulatory clarity.
Conclusion
The Internet and Mobile Association of India v. RBI case is an important case that reinforced the idea that economic freedom cannot be sacrificed just because the government has unclear concerns. Although the government did not directly support cryptocurrency, it made it clear that the RBI must show strong reasons and evidence before restricting fundamental freedoms. This is especially relevant today as technology is growing faster than laws can keep up and governments often respond with outright ban when things get too complex.
Yet the decision is not without limits. It highlights a core challenge for legal systems of “how to remain flexible and adaptive without becoming arbitrary or reactionary”. Going forward, Indian government needs to make laws that respect both technology and people’s rights. The IMAI case is not just about cryptocurrency, it’s a reminder that the courts will step in when the government is slow to act, or avoids making laws or uses its power in an unfair manner.
Shruti Vijay Naikude
Jindal Global Law School