You all must have heard that SC lifted the ban on cryptocurrencies set by RBI. But why did SC lift the ban? Does this mean they favour cryptocurrencies? Or does this means govt. wants cryptocurrencies to be legal?
Here is my little effort to make you understand that
How did SC lift the ban made by RBI. I know I am a bit late to as order came around 3 months back but have been busy lately.
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ARGUMENTS AGAINST BAN
So first let me begin the three fundamental arguments that IAMAI fought upon:
- RBI does not has power to declare activities illegal. It's parliament who does that. By banning it from banking system it classified it's contention was to make it illegal.
Argument by RBI: RBI contended that they did not declare it illegal just prohibited their participants(Banks to deal with it)
A classic rebuttal was given by IAMAI here that if this is held then RBI can easily ban anything in country just by prohibiting alcohol dealers to deal with it citing that they affect their participants in some way. That might not sound like making it illegal but what severally affect their business making it almost illegal because they can't deal in cash due to Income Tax Laws. - Second Argument was even if they had this power. Govt. Institutions have to go through an honest process to declare something illegal. Which means RBI must be getting harmed in some way or atleast would have made some mitigating measures to reduce that harm before banning it. RBI cited issues relating to law enforcement but IAMAI Rebuttled that Law enforcement does not falls under purview of RBI.
- Argument of Proportionality: Basic fundamental right of Democracy. Baning something should be done in extreme circumstances. First there should be taken some mitigating measures. This applies to banning everything. A movie, A song, A book, Alcohol etc. This was not exercised here.
FINDINGS OF SUPREME COURT
- Defining RBI's Power. Supreme court found that as per the RBI Act, 1934 & Banking Regulation Act, 1949 and the Payment and Settlement
Systems Act, 2007. RBI has been vested with powers of regulating moneys and legal tender in the Economy. So first contention was to find whether RBI had the power to regulate cryptocurrencies? Because they issued the notification of ban using these three laws itself. After a lot of brain storming from both the sides they defined the functions of RBI as follows:
Thus, 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
Once the vicinity of powers of RBI was mandated now SC went to identify what are Virtual Currencies?
- What are Cryptocurrencies/Virtual Currencies? For this there was a long discussion in the court. Wherein various sources were rattled for the definition of the VC because no Government record or any law prescribes definition of Virtual Currencies. So for this India went to search definition of VC in IMF, World Bank, EU and international institutions and then in laws prevailing in around 18 countries. Then it went to look for it's definition in cases of VC theft/ hacking etc. But Court ended up in rattling but couldn't find anything which described the framework and inbuilt procedure of cryptocurrencies rather than found definition which defines the features of cryptocurrencies. Here is what SC said:
(i) depending upon the text of the statute involved in the case and (ii) 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.
A very interesting point here was that RBI has the power to notify Cryptocurrency as "other similar Instruments" under FEMA which would have given them power to Regulate Virtual Currencies but they did not do so. So RBI can regulate cryptocurrency by notifying them as they form part of financial system. - Third contention was that can RBI only regulate VC or even ban them?: It was in this point that SC declared that RBI cannot ban VC altogether as it is already doubtful whether they come in their ambit or not. Best they can is to regulate it using various options provided.
Verdict of Supreme Court
- Then the honorable Judge of the Supreme court gave the following analysis:
1. RBI cannot be blamed for taking a proactive approach.
2. All other countries(except China) have a very light touch approach on cryptocurrencies.
3. RBI has and Can further take any precautionary steps such as mandatory registration of users, KYC etc.
4. Different types of VC require different regulations as some are fully anonymous(Monero) while some pseudo-anonymous(Bitcoin) so banning in case of fully anonymous could be a more intrusive measure.
5. Acceptance of Digital Ledger Technology and Rejection of Cryptocurrencies is a paradox
On the Arguments it gave the following Decisions
ARGUMENT 1: They said VC might not be money at this stage but with advent of time they can replace real money so they do fall under purview of RBI. Therefore what RBI did was not ultra-vires and well within it's power. Not everything can replace real money.
ARGUMENT 2: You cannot expect from RBI that they did not look into all the issues and money laundering is a thing to be regulated by RBI. So, RBI did have the powers and made reasonable process and steps also.
ARGUMENT 3: last and the Main reason why RBI ban couldn't withstand was that RBI Contended that their Banking system would suffer a harm with advent of crypto currencies or VC but Court said that till date there have been no major instances in which RBI can prove that VC have harmed their system.
Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.
These were the three contentions studied by SC before they lifted the Ban by RBI on cryptocurrencies. It must be noted that even the Supreme court said in it's order that the Counsel Ashim Sood.
PS: Source of my summary is the speaking order of Supreme Court you can see that here:
https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdfI have taken the jist of the whole order and summarized 180 page order also taken help from some interview of Counsel Himself.
I hope you guys like it
if you do I'll make another post on how the Government is trying to now ban cryptocurrencies once again.
