ABOUT THE CASE:
Case Title: Internet and Mobile Association of India vs. Reserve Bank of India
Citation: AIR 2021 SC 2720
Date of the Judgment: 4th March, 2020
Case Type: Writ Petition (Civil)
Type of Bench: Three-judge bench
Bench Justice: V. Ramasubramanian, Aniruddha Bose, Rohinton Fali Nariman
Petitioner: Internet and Mobile Association of India
Respondent: Reserve Bank of India
Legal Provisions involved Section 35A of the Banking Regulation Act, 1949
FACTS:
- The Reserve Bank of India (RBI) released a “Statement on Developmental and Regulatory Policies” on April 5, 2018.
- In this declaration, the RBI directed all regulated organizations to:
- Avoid doing business with or providing services to any people or organizations engaged in virtual currency (VCs).
- End any connections you may have with people or organizations that are already interacting with or resolving VCs.
- On April 6, 2018, using the authority granted by:
- The Banking Regulation Act of 1949, Sections 35A, 36(1)(a), and 56.
- The RBI Act of 1934, Sections 45JA and 45L.1
- The Payment and Settlement Systems Act of 2007’s Section 10(2) read in conjunction with Section 18.2
- The RBI published a circular instructing its regulated firms to:
- Avoid trading virtual currencies or providing services that enable virtual currency trading or settlement.
- Cut off any current connections with people or organizations engaged in these kinds of activity.
- The Internet and Mobile Association of India (IAMAI), the petitioners, represented the interests of the online and digital services industry, as well as those of cryptocurrency exchange companies, their founders, and shareholders. They also included young tech entrepreneurs and individual cryptocurrency traders.
- The petitioners contested the RBI’s Statement and Circular in their writ petitions and asked for instructions to allow people and organizations engaged in bitcoin trading to resume banking access.
ISSUES RAISED:3
- Whether RBI has the power to decide on Virtual Currencies?
- Whether the power was exercised properly in a manner prescribed by law?
- Whether RBI should have adopted the approach of other stakeholders?
- Whether measures on VCs taken by RBI correct?
- Whether all the issues flagged by RBI have already been addressed by the Petitioners?
- Whether RBI should have adopted different approaches towards different VCs?
- Whether a policy decision taken by RBI does not warrant any deference?
- Whether RBI’s direction is reasonable in view of Article 19(1)(g) of the Constitution of India?
CONTENTION:
Petitioner:
- Violation of Article 19(1)(g) of the Fundamental Right to Trade
They maintained that trading virtual currency (VCs) is a valid commercial endeavor. Their firm was essentially decimated by the RBI circular of April 6, 2018, which stopped
providing banking support. They argued that it was an irrational restriction that was not protected by Article 19(6).
- Absence of a law that forbids virtual currencies
In India, VCs are not prohibited. Without any parliamentary support, the RBI’s decision amounted to an indirect ban.
- RBI Outperformed its Capacity
They argued that while the RBI has the authority to regulate “currency,” “banking,” and “payment systems,” virtual currencies are not covered by that authority. Since cryptocurrency is not legal tender, it is outside the RBI’s primary purview.
- No Evidence of Damage to Exchanges
The RBI was unable to demonstrate that VC platforms had harmed the banking system. The total shutdown of banking services was excessive even if there was no harm.
- The Proportionality Doctrine
The prohibition was excessively broad and out of proportion to the purported dangers. Rather than completely prohibiting banking assistance, the RBI may have implemented measures such as KYC and AML compliance.
Respondent:
- Regulating financial stability is within the RBI’s statutory authority
RBI used its authority under the Payment and Settlement Systems Act of 2007, the Banking Regulation Act of 1949, and the RBI Act of 1934. It asserted that safeguarding banking institutions, consumers, and monetary policy was in the public interest.
- The Dangers of Virtual Currencies
VCs can be used for illicit purposes such as tax evasion, money laundering, and financing terrorism. They posed a systemic risk due to their anonymity and lack of regulation.
- The circular was not punitive; it was preventive
The RBI did not completely forbid VCs. It simply requested that banks and NBFCs, which are regulated businesses, refrain from handling or facilitating transactions involving venture capitalists.
- Monetary Sovereignty Is at Risk from Crypto
The Indian rupee’s status as the only legal tender may be threatened if other currencies are permitted.
RATIONALE:
- Upholding the Legal Authority of the RBI:
The RBI’s authority to oversee banks, financial institutions, and payment networks under a number of statutes was upheld by the court. These consist of:
- The Banking Regulation Act of 1949, Section 35A4
- Parts 45JA and 45L of the 1934 RBI Act
- Payment and Settlement Systems Act of 2007 Sections 10(2) and 18
Therefore, when the RBI released the 2018 circular, it was acting within its authority.
- Cryptocurrencies Are Not Prohibited:
The Court pointed out that there are no laws in India that forbid trading or using virtual currency (VCs). Without legislative support, executive action alone cannot bar companies that deal with venture capitalists (VCs) because they are not prohibited. - No Evidence of Damage:
The RBI did not offer hard proof that cryptocurrency exchanges were causing financial system damage. Banks, NBFCs, and other regulated organizations did not report any losses or hazards associated with doing business with venture capital firms. The RBI’s broad action could not be justified without a solid basis in facts. - Violation of the right to trade under Article 19(1)(g):
According to the Court, the RBI circular had a significant effect on respectable companies, particularly bitcoin exchanges. They violated their right to engage in trade and profession since their operations were essentially hampered by the complete cutoff from banking services. - The Proportionality test’s failure:
The Court used the proportionality concept, which states that any limitations on fundamental rights must be:
- Reasonable in intent
- Appropriate to accomplish that goal
- The least limiting methods
- Impact and benefit are balanced.
The third and fourth points of the RBI’s circular were not met:
- Although there were less extreme alternatives, such as regulation, it wasn’t the least restrictive measure.
- While its benefits to the financial system were unknown, it had a significant influence on cryptocurrency firms.
- Set Aside the Circular:
The Court did not state that trading cryptocurrencies is risk-free. It only declared that RBI’s move was out of proportion and without evidence. As a result, the circular from April 6, 2018, was declared unlawful and disproportionate.
DEFECTS OF LAW:
- Anti-virtual currency legislation
In India, VCs operated in a legal limbo since there was no legislation defining or regulating cryptocurrency.
- Overreach in Regulation
Without any legal support from Parliament, the RBI went beyond its authority and issued a near-ban.
- Absence of Definitions
Since there was no legal meaning for terms like “virtual currency,” it was unclear who was in charge of what.
- No Framework for Risk Mitigation
The law provided no tools—only silence—instead of controlling crypto through safeguards (like KYC/AML).
- Crypto Businesses Have No Legal Protection
Laws lacked fundamental procedural fairness, and exchanges lost their banking access without a hearing or recourse.
- Antiquated Financial Laws
The necessity for revised legislation was made clear when the RBI operated on laws that were never intended for digital assets.
INFERENCE:
Regulators must follow the Constitution
Even powerful bodies like the RBI must act within legal boundaries. The Court ruled that without a supporting law, RBI couldn’t indirectly ban crypto trading through its circular.
No law, no ban
There was no legislation in India banning virtual currencies. The RBI’s action amounted to a backdoor prohibition, which isn’t allowed under constitutional principles.
Disapproval isn’t criminality
Just because a regulator sees something as risky doesn’t make it illegal. The RBI acted on fear and assumption, not on legal grounds or evidence of wrongdoing.
Proportionality is key
The RBI’s circular failed the test of proportionality under Article 19(1)(g).
- No clear evidence of harm from crypto exchanges.
- Less invasive measures like KYC and AML could’ve been used.
- Cutting off banking access was excessive.
Impact > Risk
The harm done to crypto businesses and investors was far greater than any proven risk to the financial system. The RBI’s move was more damaging than helpful.
Courts check overreach
The judgment reinforces that the judiciary will step in when regulators overstep and hurt legitimate businesses without solid legal grounds.
Law must keep up with tech
Crypto is a fast-moving space. Bans aren’t the answer. What’s needed is smart, updated regulation—not outdated laws being stretched to cover new developments.
Bans aren’t regulation
The RBI could’ve imposed safeguards or set compliance rules. Instead, it chose to block the entire sector from banking access—an all-or-nothing move the Court rejected.
Judicial review protects trade rights
Economic freedom is part of fundamental rights. When government action threatens that without justification, courts have a duty to intervene.
Takeaway: rule of law over panic
This case isn’t just about crypto. It’s about making sure that policy decisions—even in complex areas—are lawful, fair, and balanced.
MANSI MADNANI
BHARATI VIDYAPEETH NEW LAW COLLEGE, PUNE