Summary
The Supreme Court set aside RBI’s 6 April 2018 circular disconnecting virtual-currency businesses from regulated banking services because the restriction was disproportionate. RBI possessed regulatory and preventive powers extending to risks posed by virtual currencies, despite their lack of legal-tender status. Nevertheless, the circular effectively disabled exchanges without demonstrated harm to regulated entities, while virtual currencies themselves remained unbanned. RBI was also directed to secure release of one petitioner’s frozen bank funds with applicable interest.
Issues
- Whether RBI had statutory power to restrict banking services concerning virtual currencies.
- Whether the circular was invalid for want of application of mind, colourable exercise of power or disproportionality.
- Whether the petitioner’s frozen bank funds should be released.
Provisions considered
- Sections 35A(1) and 36(1)(a), Banking Regulation Act, 1949Support directions in the identified public and banking interests and restrictions on particular transactions or classes of transactions. (¶¶ 6.38, 6.40, 6.94, 6.125)
- Sections 45JA(1) and 45L, Reserve Bank of India Act, 1934Support policy and directions concerning financial and credit-system regulation; absence of legal-tender status does not exclude relevant risks. (¶¶ 6.22, 6.25, 6.30, 6.87, 6.88)
- Sections 10(2) and 18, Payment and Settlement Systems Act, 2007Support guidelines and directions to regulated system participants, including banks; the exchanges’ own classification does not defeat that power. (¶¶ 6.46, 6.49, 6.107, 6.108, 6.109, 6.111)
Held
- Virtual currencies can perform functions of money without possessing legal-tender status. Their potential effect on monetary, payment, credit and financial systems brings the associated risks within RBI’s statutory remit. The ultra vires challenge failed. (¶¶ 6.62, 6.65, 6.85, 6.87, 6.88, 6.90, 6.91)
- RBI may take preventive measures and its regulatory powers can include prohibition in the statutory context. The circular addressed regulated entities and restricted banking transactions, rather than itself banning possession or trading of virtual currencies. (¶¶ 6.92, 6.94, 6.96, 6.103, 6.104, 6.105, 6.111)
- The sequence of reports and warnings showed application of mind. The challenges alleging irrelevant considerations, colourable exercise and malice in law failed; RBI’s court-directed subsequent responses also addressed the petitioners’ representations. Its economic policy decisions warrant due judicial deference. (¶¶ 6.113, 6.116, 6.117, 6.118, 6.122, 6.125, 6.126, 6.139, 6.141)
- The companies’ shareholders and promoters joined the challenge, permitting examination under Article 19(1)(g). Denial of banking access effectively shut down exchanges, requiring RBI to justify that serious restriction by reference to the larger public interest and proportionality. (¶¶ 6.142, 6.143, 6.144, 6.145, 6.146, 6.154, 6.156)
- Notwithstanding RBI’s consideration of suggested safeguards and its preventive powers, no damage or adverse effect to regulated entities from their interface with exchanges had been shown. Against that absence, the disabling restriction was disproportionate while virtual currencies remained unbanned and government proposals took opposing positions. (¶¶ 6.164, 6.165, 6.166, 6.167, 6.171, 6.172, 6.173, 7.1)
- The 5 April 2018 statement was not a statutory direction requiring quashing. As RBI disclaimed any direction freezing the petitioner’s account and its activities were not declared unlawful, RBI had to instruct the bank to release the funds with applicable interest. (¶¶ 7.1, 7.2, 7.3, 7.4)
Result
Writ petitions allowed; RBI circular dated 6 April 2018 set aside on proportionality grounds. RBI directed forthwith to instruct Central Bank of India, Worli, to defreeze Discidium Internet Labs’ specified current account and release its funds with applicable interest. No costs.