Bench Strength
The Judgement of this case is given by 3 judge division bench comprising justice Rohinton Fati Nariman, Justice S. Ravindra Bhat, and Justice V. Ramasubramanian.

Area Of Law
This case revolves around Banking regulation laws and fundamental rights mentioned under section 19(1)(g) of the Constitution of India. It also include payment settlement system act and Reserve Bank of India Act.

Ratio Decendi
RBI has very wide powers not only in view of the statutory scheme of the 3 enactments that are payment settlement system act, Reserve Bank of India act, Banking regulation act, 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.

Facts:

1. Reserve Bank of India (hereinafter, "RBI") issued a "Statement on Developmental and Regulatory Policies" on April 5, 2018, paragraph 13 of which directed the entities regulated by RBI:
   
   1. not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and
   2. to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).
       
2. Following the said Statement, RBI also issued a circular dated April 6, 2018, in the 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
   
   1. not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and
   2. to exit the relationship with such persons or entities, if they were already providing such services to them.
   Challenging the said Statement and Circular and seeking a direction to the respondents not to restrict or restrain banks and financial institutions regulated by RBI, from providing access to the banking services to those engaged in transactions in crypto assets, the petitioners have come up with these writ petitions.
    
3. The petitioner in the writ petition is a specialized industry body known as 'The Internet and Mobile Association of India' which represents the interests of the online and digital services industry. The petitioners in the second writ petition comprise 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 3-second writ petition are young high-tech entrepreneurs who have graduated from premier educational institutions of technology in the country.
    
4. Contents of the impugned Statement and Circular of RBI:
   The Statement dated 05-04-2018 issued by RBI, impugned in these writ petitions, sets out various developmental and regulatory policy measures for:
   
   1. strengthening regulation and supervision
   2. broadening and deepening financial markets
   3. improving currency management
   4. promoting financial inclusion and literacy and
   5. facilitating data management.
5. 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 alone is extracted.
    
6. 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 Currencies (VCs), also variously referred to as cryptocurrencies and crypto assets, raise concerns about consumer protection, market integrity, and money laundering, among others. Reserve Bank has repeatedly cautioned users, holders, and traders of virtual currencies, including Bitcoins, regarding various risks associated with dealing with such 4 virtual currencies. Given 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 entities dealing with or settling VCs. Regulated entities that already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately.
    
7. The Circular dated 06-04-2018 deals entirely with virtual currencies and the prohibition on dealing with the same. This Circular is statutory in character, issued in the exercise of the powers conferred by the Reserve Bank of India Act, of 1934, the Banking Regulation Act, of 1949, and the Payment Settlement Systems Act, of 2007.
   
   This Circular in its entirety is produced as follows:
   
   1. Prohibition on dealing in Virtual Currencies (VCs) Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017, and December 05, 2017, cautioned users, holders, and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
       
   2. Given the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them, and transferring/receipt money in accounts relating to the purchase/sale of VCs.
       
   3. Regulated entities that already provide such services shall exit the relationship within three months from the date of this circular.
       
   4. These instructions are issued in the exercise of powers conferred by section 35A read with section 36(1)(a) of 5 Banking Regulation Act, 1949, section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949, 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.
       
8. It was mentioned in the circular issued by the RBI regarding the regulation of virtual currencies that these currencies are unmonitored and have to be monitored and regulated by strict norms. RBI issued regulatory norms in the exercise of the power conferred by section 35 A with section 36(1)(a) of the Banking regulation act, 1949, section 45JA and 45L of the Reserve bank of India Act, 1949, and section18 of the Payment and Settlement Systems Act, 2007.

Petitioner's Argument

1. The petitioner contended that RBI does not have the power to prohibit the trading of virtual currency as virtual currency is not a legal tender but a commodity which does not come under the realm of the Reserve bank of India act 1934 or the banking regulation act 1949. The petitioner added that since the virtual currency does not constitute the credit system of the country, the RBI has no authority to regulate it to its advantage.
2. Further, the petitioner stated that many national and international economies of the world had tested cryptocurrency and have not found any concerning issue. Various stakeholders like the department of economy Affairs of government of India, the central board of direct taxes and securities, and the exchange board of India have recognized virtual currency as an important asset of the economy.
3. According to the counsel, the circular had no legal basis as it put a full ban on the virtual currency which would violate article 19(G)(1) of the Indian constitution that regulates trade and business with reasonable restriction. Therefore, without any legal provision, the orders would merely amount to a violation of the fundamental right of the individual.
4. The petitioner in his second writ stated that without any proper law, such legislation would have a severe impact on the economy which might result in a black market. It also stated that the RBI has failed to recognize different types of virtual currency schemes and since virtual currency lacks a medium of exchange, store of value, or unit of accounts, and constitutes a final discharge of debt, it cannot be recognized as money and hence RBI has no power to regulate it.

Respondent's Argument

1. RBI countering the issues raised by the petitioner the bank said that it has the power to regulate virtual currency under the Reserve bank of India 1934, the banking regulation act 1949, and the payment and settlement act 2007. They stated that not only does virtual currency have no structural mechanism for handling customer disputes but also it can be used illegally due to anonymity.
2. They further added that the impugned decision of the RBI has a legal basis to it. It does not violate any fundamental rights guaranteed under articles 14, 19, and 21 in the Indian constitution as:
   
   1. The entities regulated by RBI have no absolute rights and;
   2. There is no complete ban on the virtual currency
3. The respondent said that the circular is not disproportionate as the RBI gave their entities three months to terminate their ties dealing with virtual currency. Besides, throughout five years the bank has been issuing warnings to the stakeholder about the threats and risks related to virtual currency. RBI stated that the action was issued in the public interest and was decided with due care.
4. Moreover, RBI stated that though virtual currency cannot be recognized as a currency and does not come under the ambit of the payment system, it still has the potential to become a parallel system of payment, therefore it gives RBI the authority to regulate the virtual currency in the matter of public interest.

Decision Of The Court
The decision of the majority is as follows:

1. RBI has the necessary power to regulate or prohibit the activity of dealing in virtual currencies through virtual currency exchanges. It derives these powers from the Reserve Bank of India act and the Banking Regulation of India act, of 1949.
2. On considering the Payment and Settlement Systems Act, 2007, RBI has the power to issue directions to system participants concerning transactions that are categorized as payment obligation/payment instruction. RBI has applied its mind sufficiently and there was no omission of relevant considerations on its part.
3. Acting in bad faith and exercising power to harm those in target is necessary for an act to qualify as a colourable exercise of power. An act done wilfully and wrongfully without a reasonable cause qualifies as malice in law. Since the impugned circular does not show signs of any of the above, it does not fall under either of the two categories.
4. The other stakeholders such as the Enforcement Directorate, the Department of Economic Affairs, SEBI, and CBDT have different functions and consider issues from different points of view. Therefore, RBI cannot be blamed for adopting an approach that is different from that of these stakeholders

Author's Viewpoint
According to me, the judgment given is in correspondence with the existing laws and statutes. Regulation imposed by the RBI through its circular is prohibitory in nature and decreases the scope of a growing market of digital or virtual currencies. In place of banning all transactions or fully prohibiting the use of unmonitored transaction tokens, the RBI can lay down some regulations to have better watch on the transaction.

Case laws cited in the case are correctly interpreted and are used under the doctrine of precedent to give a judgment that is constitutional and mandated by the law.


Circulars published by the RBI were beyond their power and cannot be exercised to lay down certain regulations which were in bona fide intention of RBI, but were unconstitutional.