The Supreme Court of India in Internet and Mobile Association of India v. Reserve Bank of India has lifted the ban on operating crypto-asset exchanges in India, by striking down the Reserve Bank of India’s (‘RBI’) Notification on Prohibition on dealing in Virtual Currencies (VCs) (‘Circular’).
The judgment is likely to have an impact on the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (‘Bill’) which seeks to prohibit commercial activities concerning cryptocurrency.
The Bill is a part of Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, 2019. It defines cryptocurrency as “any information or code or number or token generated through cryptographic means or otherwise” providing a digital representation of value, representing value in any business activity, exchanged with or without consideration, with the promise of inherent value in any business activity involving the risk of loss, profits or income, or functioning as a store of value or a unit of account. The Bill excludes Official Digital Currency (‘ODC’) from the definition of cryptocurrency.
The Bill seeks prohibition of cryptocurrency, and provides a framework for regulating ODCs as legal tender. There is complete prohibition on mining, generating, holding, selling, issuing, transferring and disposing cryptocurrency, except for research and experimentation purposes, with the Central Government having powers to further exempt specified activities. The Bill bans cryptocurrency as a medium of exchange or legal tender. This includes direct and indirect use in any form, including buying and selling, providing crypto related services and issuing related financial products. Existing crypto holders are also required forego any crypto assets from their possession within a period of 90 days. The Bill also provides for harsh penalties for any non-compliance.
The IAMAI Judgment
In the IAMAI case the validity of the Circular prohibiting banks, non-banking financial companies etc. from dealing in virtual currency or providing services for facilitating dealing with or settling trade in virtual currencies, was challenged.
The Supreme Court, striking down the Circular, held that it disproportionately interfered with the fundamental rights of crypto-asset exchange managers to carry on any occupation, trade or business or occupation under Article 19(1) (g) of the Constitution, by completely disconnecting them from the banking system. Observing that the Circular had almost wiped the virtual currency exchanges, the Supreme Court viewed that the doctrine of proportionality ensured that laws adopting drastically restrictive measures, such as the Circular, should be evaluated vis-à-vis public interest served, and the possibility of adopting less drastic restrictions.
The Supreme Court also observed that the RBI did not furnish any evidence of harm suffered by banks or NBFCs, by providing services to virtual currency exchanges, which in turn proved the Circular to be disproportionate. The Supreme Court held it necessary for the RBI to provide empirical data of the harm suffered by banks in their dealings with crypto-asset exchanges, before denying them access to banking facilities.
Impact on the Bill
It is likely that the legislature would try to strike a balance and keep in mind the doctrine of proportionality in any future enactments banning crypto-assets, as was observed in the judgment.
The Supreme Court in the IAMAI judgment not only relied on the proportionality test as per the judgment in Modern Dental College and Research Centre v. State of Madhya Pradesh, but also added two aspects to the same i.e. (i) identifying less drastic alternatives than complete prohibition, and (ii) providing empirical evidence of harm suffered.
With respect to identification of less drastic alternatives, the Supreme Court observed that the Bill was preceded by the Crypto-token Regulation Bill, 2018 which allowed the sale and purchase of crypto-tokens at recognized exchanges. The Supreme Court concluded that this ‘volte-face’ by the Government classifies the Circular to be a disproportionate measure.
IAMAI brought to the RBI’s notice, varying safeguards relating to trade in VCs such as developing a dashboard and a central repository, enabling trading only on white-listed addresses and the adoption of Aadhaar based e-KYC for VCs. IAMAI also discussed the possibility of a nuanced regulatory framework, differentiating between anonymous and pseudo-anonymous VCs.
It is expected that a future legislation will considers and incorporate the suggested safeguards to effectively ensure that the legal threshold established by the test of proportionality is appropriately fulfilled.
To pass the test of empirical evidence of harm the future legislation banning VCs and the underlying committee reports whould need to highlight money laundering instances and risks in dealing with cryptocurrencies. This would further require monitoring and recording VC transactions by government agencies. The anonymous peer-to-peer systems of the VC exchanges masks the identity of account holders and therefore the task would be quite difficult if not impossible. For any new legislation banning the use of cryptocurrency the government would have to do a tough and challenging job to prove that restrictions on activities concerning VCs satisfy the proportionality test, if empirical evidence of harm is mandatorily required to prove the reasonableness of such restriction.
Conclusion
The Bill is progressive as it promotes Distributed Ledger Technology and the introduction of ODC. With the latest observations of Supreme Court the legislative mindset on prohibition of trading in cryptocurrency would surely require reconsideration from the point of view of proportionality principal.
The Tech Policy & Law Review 