2020 (3) TMI 364 - SC - Indian Laws

Prohibition on dealing in Virtual Currencies - power of RBI to deal with, regulate or even ban VCs and VCEs - entire foundation of this contention rests on the stand taken by the petitioners that VCs are not money or other legal tender, but only goods/commodities, falling outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 - HELD THAT - The impugned Circular of RBI dated 0604-2018 was issued in exercise of the powers conferred upon RBI by all these three enactments. Therefore, if virtual currencies do not fall within subject matter covered by any or all of these three enactments and over which RBI has a statutory control, then the petitioners will be right in contending that the Circular is ultra vires. Hence it is necessary (i) first to see the role historically assigned to a central bank such as RBI, the powers and functions conferred upon and entrusted to RBI and the statutory scheme of all the above three enactments and (ii) then to investigate what these virtual currencies really are. Therefore, we shall divide our discussion in this regard into two parts, the first concerning the role, powers and functions of RBI and the second concerning the identity of virtual currencies. Role assigned to, functions entrusted to and the powers conferred upon RBI as a Central Bank - HELD THAT - 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 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 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 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. Having taken note of the role of RBI as a central bank in the economy of the country, the functions entrusted to them and the powers conferred upon them under various statutes, let us undertake the exercise of fixing the identity of virtual currencies. Fixing the identity of VCs - HELD THAT - 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. As we have pointed out elsewhere, the 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 is perceived as a threat to the very existence of the central authority - RBI has the requisite power to regulate or prohibit an activity of this nature. If at all, the power is only to regulate, not prohibit - HELD THAT - In the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to 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. Mode of exercise of power - Satisfaction/Application of mind/relevant and irrelevant considerations - HELD THAT - All 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. 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 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 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 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 has given a detailed point-wise reply to the representations of the petitioners. In these representations, the 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. Malice in law/colorable exercise - HELD THAT - The power under Section 35A to issue directions is to 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 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. Wait and watch approach of the other stakeholders - HELD THAT - Enforcement Directorate can step in only when actual money laundering takes place, since the statutory scheme of Prevention of Money Laundering Act deals with a procedure which is quasi-criminal. SEBI can step in only when the transactions involve securities within the meaning of Section 2(h) of the Securities Contracts (Regulation) Act, 1956. CBDT will come into the picture only when the transaction related to the sale and purchase of taxable goods/commodities. 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. Light-touch approach of the other countries - HELD THAT - The list of countries where a ban similar to the one on hand and much more has been imposed discloses a commonality. Almost all countries in the neighborhood of India have adopted the same or similar approach (in essence India is ring fenced). In any case, our judicial decision cannot be colored by what other countries have done or not done. Comparative perspective helps only in relation to principles of judicial decision making and not for testing the validity of an action taken based on the existing statutory scheme - There can also be no comparison with the approach adopted by countries such as UK, US, Japan, Singapore, Australia, New Zealand, Canada etc., as they have developed economies capable of absorbing greater shocks. Indian economic conditions cannot be placed on par. Therefore, we will not test the correctness of the measure taken by RBI on the basis of the approach adopted by other countries, though we have, for better understanding of the complexities of the issues involved, undertaken a survey of how the regulators and courts of other countries have treated VCs. Precautionary steps taken by petitioners - HELD THAT - I t is contended that all the issues flagged by RBI have already been addressed and that therefore, there was no necessity to disconnect the trade from the regular banking channels - But the fact of the matter is that enhanced KYC norms may remove anonymity of the customer, but not that of the VC. Even the European Parliament, in the portion of its report relied upon by Shri Ashim Sood accepts that the adequacy of mandatory registration of users (as a less invasive measure), whether or not of fully anonymous or pseudo anonymous crypto currencies depends on the users compliance with the registration requirement. After pointing out that compliance will partly depend on an adequate sanctioning toolbox in the event of breach, the report wonders whether it is at all possible outside of the context of randomly bumping into it, at least when fully anonymous VCs are concerned. In any case, we are not experts to say whether the safety valves put in place could have addressed all issues raised by RBI. Different types of VCs require different treatments - HELD THAT - It is clear that the very same virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the entities come up. Moreover, the question whether anonymous 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 towards different VCs does not arise. Acceptance of DLT and rejection of VCs is a paradox - HELD THAT - It was argued that the acceptance of the Distributed Ledger Technology and the rejection of VCs is actually a contradiction in terms. This argument is based upon the various reports, both of RBI and of the Inter-Ministerial Group, to the effect that DLT is part of FinTech - The above contention, in legal terms, is about the irrationality of the impugned decision. But 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 leave it option. RBI s decisions do not qualify for Judicial deference - HELD THAT - RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by 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 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 Settlements, which position cannot be taken over by the central government and conferred upon any other authority. Though the shorter tenure and the choice given to the central government to fix the tenure, to some extent, undermines the ability of the incumbents of office to be absolutely independent, the statutory scheme nevertheless provides for independence to the institution as such. Therefore, we do not accept the argument that a policy decision taken by RBI does not warrant any deference. Article 19(1)(g) challenge Proportionality - HELD THAT - In all cases where legislative/executive action infringing the right guaranteed under Article 19(1)(g) were set at naught by this court, this court was concerned with a ban/prohibition of an activity. The question of the prohibited/banned activities having the potential to destabilize an existing system, did not arise in those cases - if a central authority like RBI, on a conspectus of various factors perceive the trend as the growth of a parallel economy and severs the umbilical cord that virtual currency has with fiat currency, the same cannot be very lightly nullified as offending Article 19(1)(g). 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. 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 - the writ petitions are allowed and the Circular dated 0604-2018 is set aside.

Summary

Issues Involved:
1. RBI's power to regulate or prohibit virtual currencies (VCs) and VC exchanges.
2. The manner and extent of the exercise of RBI's power.
3. The impact of RBI's circular on the fundamental right to trade under Article 19(1)(g) of the Constitution.
4. The proportionality of RBI's measures.
5. The consideration of alternative measures by RBI.
6. The response of other stakeholders and countries to VCs.
7. The specific case of the freezing of Discidium Internet Labs Pvt. Ltd.'s account.

Detailed Analysis:

I. RBI's Power to Regulate or Prohibit VCs and VC Exchanges:
RBI issued a circular prohibiting its regulated entities from dealing with or providing services to individuals or businesses dealing in VCs. The petitioners argued that VCs are not legal tender but tradable commodities, falling outside the purview of the RBI Act, 1934, the Banking Regulation Act, 1949, and the Payment and Settlement Systems Act, 2007. The court held that VCs, despite not being legal tender, have the potential to function as a medium of exchange, a unit of account, and a store of value. Therefore, RBI has the power to regulate or prohibit activities involving VCs to protect the financial system.

II. Manner and Extent of Exercise of RBI's Power:
The court examined whether RBI exercised its power properly. The court found that RBI had been monitoring the developments in VCs since 2013 and had issued warnings about the risks associated with VCs. The court held that RBI's decision was not taken in haste and that there was sufficient application of mind. The court also rejected the argument that the circular was a colorable exercise of power or vitiated by malice in law.

III. Impact on Fundamental Right to Trade under Article 19(1)(g):
The court acknowledged that the impugned circular had a significant impact on the business of VC exchanges, effectively paralyzing their operations. The court held that while RBI has the power to take pre-emptive action, the measure must pass the test of proportionality. The court noted that RBI had not shown any empirical data of harm suffered by its regulated entities due to their dealings with VC exchanges.

IV. Proportionality of RBI's Measures:
The court applied the four-pronged test of proportionality: (i) proper purpose, (ii) rational connection to the purpose, (iii) no less intrusive measures, and (iv) balance between the measure's effects and the objective's importance. The court found that RBI had not considered less intrusive measures and that the circular had almost wiped out the VC exchanges without showing any actual harm to the regulated entities.

V. Consideration of Alternative Measures:
The court noted that the Inter-Ministerial Committee initially recommended regulating VCs rather than imposing a total ban. The court found that RBI had not considered alternative measures before issuing the circular. The court also noted that the European Union Parliament had suggested regulatory measures rather than an outright ban.

VI. Response of Other Stakeholders and Countries:
The court observed that other stakeholders, such as the Enforcement Directorate, SEBI, and CBDT, had not seen any grave threat from VCs. The court also noted that most countries had not imposed a total ban on VCs but had adopted a regulatory approach.

VII. Freezing of Discidium Internet Labs Pvt. Ltd.'s Account:
The court directed RBI to issue instructions to the Central Bank of India to defreeze the account of Discidium Internet Labs Pvt. Ltd. and release the funds, as RBI had not directed the bank to freeze the account.

Conclusion:
The court set aside the impugned circular on the ground of proportionality, allowing the writ petitions. The court highlighted the need for RBI to consider less intrusive measures and to show actual harm to the regulated entities before taking such drastic action.