A shocker of a circular was issued by the RBI on 6th April, 2018 that jolted the Indian cryptocurrency market. The said circular was issued under Section 35A read with Section 36(1)(a) of the Banking Regulation Act, 1949. All RBI regulated entities were deemed to make declaration that they shall not deal in or carry on any activity concerning virtual currencies and shall not permit or accept any account dealing in or settling any virtual currency. However, the fallout was immediate, completely cutting off banking services to the cryptocurrency exchanges and businesses in India.
Analysis of the Case
IAMAI represents various cryptocurrency exchanges and businesses, moving the writ petition under Article 32 of the Indian Constitution to challenge the circular for its constitutional validity concerning the action taken by the RBI and the incidental effect the said action may have upon the nascent cryptocurrency industry in India.
As with the case IAMAI v. RBI, which the Supreme Court of India is considering, the tangle at play here has to do with constitutional rights, regulatory authority and genius above all that technological innovation brings into the heart of the matter. Their examination was notably very elaborate and approached matters multi-dimensionally for a comprehensive understanding of the challenges in question. It is an important moment for India as it strolls down the road of reconciling traditional financial regulations with the advent of currencies in the digital world.
The Court promptly responded to the fundamental constitutional question of whether the RBI’s circular infringed on the citizens’ freedom to carry on their businesses. That was not just a technical legal question but struck directly at the very heart of economic freedom in the digital age. For, as petitioners paint a very rosy scenario wherein the RBI circular erected around regulated entities an impenetrable wall rather than opening up greater possibilities for legitimate cryptocurrency businesses begun to flourish in India, their arguments understandably resonate with broader concerns about innovation and economic liberty in this new digital era.
More intriguing, however, were the regulatory powers being calibrated within the RBI. As the court would have to search its way through a tapestry of banking law decades old to determine whether the RBI’s mandate for financial stability could extend so far as to encompass such a complete restriction on an emergent technology, this analysis lay not only in legal interpretation but further in questions of how traditional regulatory frameworks can adapt to technological change at speed.
Perhaps the most telling of the exercises was the proportionality of the test of the Court. It did not pass at face value and required a balancing act on the part of the Court. They posed the most pertinent questions: was the RBI action targeted or adequate? Did it rationally connect to stated objectives? Was it strictly necessary? And most importantly, was there any justification for the burden reposed on businesses and innovation? This prudently came to reveal the commitment of the Court to enforcing regulatory activities as fair and reasonable as well as technically legal.
This is the judicial pronouncement that has marked the month of March 2020 for India in regulating cryptocurrencies. While virtual currencies are under the oversight of RBI, the Court felt the central bank had overstepped its boundary since it could not prove any actual prejudice that would be caused by the trading activity. It was not only a victory in the legal arena for proponents of cryptocurrency but also a very strong statement regarding the demand for evidence-driven regulation in the digital age. It is an opinion that says, in effect, that fear of the unknown cannot be allowed to justify stifling innovation.
This order, well, its aftermath spread like wildfire across India’s financial scenario within minutes of its pronouncement. This immediately restored banking relationships for severely suffering cryptocurrency exchanges and businesses. More importantly, it stamped legitimacy upon the whole cryptocurrency industry in India, a legitimacy that it had long craved for. It was not just a matter of allowing business activity but recognition that the trading of cryptocurrencies was an activity protected under constitutional rights.
The long-term impacts of the judgment are gradually coming out. It has substantially influenced the approach towards cryptocurrency regulation in India as observed from the following Digital Currency Bill 2021. On proportionality, the judgment would indeed create a framework so challenging for regulators to balance innovation with legitimate concerns of financial stability. But perhaps even more remarkably still, the order became part of global regulatory discourse; jurisdictions outside India are now consulting the Indian experience on what to do with regard to cryptocurrency.
With the IAMAI case going forward, precedents have been set very strongly that will dictate regulation on cryptocurrencies in India for years to come. The final look is toward the critical elements determining jurisprudence on the regulation of cryptocurrencies in India, that reaches a conclusion that this puts very high bars in having such regulatory interventions based on some tangible evidence instead of speculative fears. This plea underlines the need to balance protection of financial stability with promotion of innovation. Most importantly, it established that whatever regulatory measures may be taken in the future are to respect fundamental constitutional rights while addressing genuine concerns for regulation.
This case therefore stands as testament to the capacities by which legal systems may evolve with change caused by technology without having to jettison core principles of justice or proportionality. It serves not only as a legal milestone but also as an important step in the Indian journey towards embracing digital innovation with appropriate oversight.
Author-Sufian Ahmad, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.
References
- Writ Petition (Civil) No.528 of 2018
- https://www.azbpartners.com/bank/supreme-courts-judgment-on-virtual-currencies/
- https://lex-warrier.in/archives/wp-content/uploads/2020/07/Internet-and-Mobile-Association-of-India-versus-Reserve-Bank-of-India.pdf