Judicial Interpretation of Virtual Currency

Daniyal Qureshi | Symbiosis Law School Pune | 15th April 2020

Internet and Mobile Association of India v. Reserve Bank of India

FACTS

The Reserve Bank of India issued a Statement on Developmental and Regulatory Policies which directed the entities regulated by RBI not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and to exit the relationship, if they already have one, with such individuals/business entities, dealing with or settling virtual currencies (VCs). Following the said Statement, RBI also issued a circular, 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 and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and to exit the relationship with such persons or entities, if they were already providing such services to them. The Petitioner challenging the said Statement and Circular and seeking a direction to the Respondents not to restrict or restrain banks and financial institutions regulated by RBI, from providing access to the banking services, to those engaged in transactions in crypto assets.

ISSUES

• Whether the RBI is empowered to regulate Virtual Currency in the country
• Whether the RBI was correct in passing its circular dated in regulating and prohibiting the use of VC (Virtual Currency)

JUDGEMENT

In the present case the Supreme Court adjudicated upon the long standing questions as to the law of virtual currency

For the purposes of deciding the first issue the court first sought a definition of currency and money. The perused that Traditionally ‘money’ has always been defined in terms of the 3 functions or services that it provides namely (1) a medium of exchange (2) a unit of account and (3) a store of value. But in course of time, a fourth function namely that of being a final discharge of debt or standard of deferred payment was also added. This fourth function is acquired by money through the conferment of the legal tender status by a Government/central authority. Therefore, capitalizing on this fourth dimension/function and drawing a distinction between money as understood in the social sense and money as understood in the legal sense, it was contended by Shri Nakul Dewan, learned Senior Counsel, with particular reference to the book ‘Property Rights in Money’ by David Fox and the decision of the Queen’s Bench in Moss v. Hancock^[1] and the decision of the US Supreme Court in Wisconsin Central Ltd. v. United States^[2] that so long as VCs do not qualify as money either in the legal sense (not having a legal tender status) or in the social sense (not being widely accepted by a huge population as a medium of exchange), they cannot be treated as currencies within the meaning of any of the statutory enactments from which RBI draws its energy and power.

However, the court held that “we do not think that RBI’s role and power can come into play only if something has actually acquired the status of a legal tender. We do not also think that for RBI to invoke its power, something should have all the four characteristics or functions of money. Moss v. Hancock (supra), itself a century old decision (1899), relies upon the definition of ‘money’ as given by F.A. Walker in his treatise ‘Money, Trade and Industry’ (actual title of the book appears to be ‘Money in its relation to Trade and Industry’), published in 1879 to the effect that “money is that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or the credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.””

Depending upon the text of the statute involved in the case and depending upon the context, various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds. While each of these descriptions is true, none of these constitute the whole truth. Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism, (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.

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 squarely within the purview of the Reserve Bank of India. The statutory obligation that RBI has, as a central bank, 

• to operate the currency and credit system,
• to regulate the financial system and 
• to ensure the payment system of the country to be on track, would compel them naturally to address all issues that are perceived 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 statutorily. 

RBI is the sole repository of power for the management of the currency, Under Section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes Under Section 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index. Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. The impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs. Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly 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 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 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-versa, are not affected by this Circular. 

• 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 
• The consistent stand taken by RBI up to and including in their reply dated 04-09-2019 is that RBI has not prohibited VCs in the country and 
• 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 and that the same objectives can be achieved through regulatory measures.

It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of 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. While we have recognized elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.

Therefore, the Petitioners were entitled to succeed and the impugned Circular was liable to be set aside on the ground of proportionality. Accordingly, the writ petitions are allowed and the Circular was set aside. The Statement though challenged in one writ petition, was not in the nature of a statutory direction and hence the question of setting aside the same did not arise.

^[1] (1899) 2 QB 111

^[2] MANU/USSC/0079/2018