# INTERNET AND MOBILE ASSOCIATION OF INDIA v. RESERVE BANK OF INDIA

- **Citation:** [2020] 2 S.C.R. 297
- **Court:** Supreme Court of India
- **Decided:** 2020-03-04
- **Bench:** R. F. Nariman, Aniruddha Bose, V. Ramasubramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/internet-and-mobile-association-of-india-v-reserve-bank-of-india-34231
- **Pages:** 147

## Headnote

Reserve Bank of India Act, 1934 - ss.17, 20-22, 26, 38, 45JA,
45L, 45U, 45W, 45Z-45ZO - Reserve Bank of India (RBI) issued a
"Statement on Developmental and Regulatory Policies" dtd.
05.04.18 and circular dtd. 06.04.18 respectively, which directed
the entities it regulated (i) not to deal with or provide services to
any individual/business entities dealing with/settling virtual
currencies (VCs) and (ii) to exit the relationship, if they already
have one, with such individuals/business entities - Challenged by
petitioners (a specialized industry body representing interests of
online & digital services industry; companies running online crypto
assets exchange platforms; shareholders/founders thereof and
individual crypto assets traders) inter alia on the ground that RBI has
no power to prohibit the activity of trading in VCs through Virtual
Currency Exchanges (VCEs) since they are not legal tender but
tradable commodities/digital goods, not falling within the regulatory
framework of 1934 Act or 1949 Act and that VCs do not even fall
within the credit system of the country to enable RBI under the
Preamble to 1934 Act giving it a mandate to operate the currency &
credit system of the country to its advantage - Held: After 2016
Amendment Act, RBI is now vested with the obligation to operate
the monetary policy framework in India - 1934 Act, 1949 Act and
the 2007 Act cumulatively confer very wide powers upon RBI inter
alia to operate the currency and credit system of the country to its
advantage; regulate financial system of the country to its advantage;
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
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297
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payment system, monetary policy or the credit policy of the country
and to issue directions to system providers or 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 - Depending on the text of the statute
involved in the case and 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 - Petitioners'
contention that VCs are just goods/commodities and can never be
regarded as real money and that they are carrying on an activity
over which RBI has no power statutorily, not accepted - Petitioners'
contention that the impugned decision is ultra vires is rejected -
Impugned Circular does not impose a prohibition on the use of/
trading in VCs, the prohibition is not per se against the trading in
VCs - It is against banking companies, with respect to a class of
transactions - Further, RBI cannot be held guilty of non-application
of mind when the sequence of events from June 2013 up to 02-042018 show that RBI was brooding over the issue for almost five
years - Also, the contention that the impugned Circular is vitiated
by malice in law and is a colorable exercise of power cannot be
sustained - Impugned Circular cannot be assailed on the basis of
M. S. Gill test either - It is no doubt true that RBI has very wide
powers however, the availability of power is different from the
manner and extent to which it can be exercised - RBI has not so far
found, the activities of VCEs to have actually impacted adversely,
the way the entities regulated by RBI function - 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 to hold that the impugned measure is proportionate -
Impugned Circular dtd.

## Text

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INTERNET AND MOBILE ASSOCIATION OF INDIA
v.
RESERVE BANK OF INDIA
(Writ Petition (Civil) No. 528 of 2018)
MARCH 04, 2020
[R. F. NARIMAN, ANIRUDDHA BOSE AND
V. RAMASUBRAMANIAN, JJ.]
Reserve Bank of India Act, 1934 - ss.17, 20-22, 26, 38, 45JA,
45L, 45U, 45W, 45Z-45ZO - Reserve Bank of India (RBI) issued a
"Statement on Developmental and Regulatory Policies" dtd.
05.04.18 and circular dtd. 06.04.18 respectively, which directed
the entities it regulated (i) not to deal with or provide services to
any individual/business entities dealing with/settling virtual
currencies (VCs) and (ii) to exit the relationship, if they already
have one, with such individuals/business entities - Challenged by
petitioners (a specialized industry body representing interests of
online & digital services industry; companies running online crypto
assets exchange platforms; shareholders/founders thereof and
individual crypto assets traders) inter alia on the ground that RBI has
no power to prohibit the activity of trading in VCs through Virtual
Currency Exchanges (VCEs) since they are not legal tender but
tradable commodities/digital goods, not falling within the regulatory
framework of 1934 Act or 1949 Act and that VCs do not even fall
within the credit system of the country to enable RBI under the
Preamble to 1934 Act giving it a mandate to operate the currency &
credit system of the country to its advantage - Held: After 2016
Amendment Act, RBI is now vested with the obligation to operate
the monetary policy framework in India - 1934 Act, 1949 Act and
the 2007 Act cumulatively confer very wide powers upon RBI inter
alia to operate the currency and credit system of the country to its
advantage; regulate financial system of the country to its advantage;
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
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payment system, monetary policy or the credit policy of the country
and to issue directions to system providers or 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 - Depending on the text of the statute
involved in the case and 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 - Petitioners'
contention that VCs are just goods/commodities and can never be
regarded as real money and that they are carrying on an activity
over which RBI has no power statutorily, not accepted - Petitioners'
contention that the impugned decision is ultra vires is rejected -
Impugned Circular does not impose a prohibition on the use of/
trading in VCs, the prohibition is not per se against the trading in
VCs - It is against banking companies, with respect to a class of
transactions - Further, RBI cannot be held guilty of non-application
of mind when the sequence of events from June 2013 up to 02-042018 show that RBI was brooding over the issue for almost five
years - Also, the contention that the impugned Circular is vitiated
by malice in law and is a colorable exercise of power cannot be
sustained - Impugned Circular cannot be assailed on the basis of
M. S. Gill test either - It is no doubt true that RBI has very wide
powers however, the availability of power is different from the
manner and extent to which it can be exercised - RBI has not so far
found, the activities of VCEs to have actually impacted adversely,
the way the entities regulated by RBI function - 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 to hold that the impugned measure is proportionate -
Impugned Circular dtd. 06.04.18 is set aside on the ground of
proportionality - Statement dtd. 05.04.18, though challenged, is
not in the nature of a statutory direction and hence the question of
setting aside the same does not arise - Finance Act, 2016 - Banking
Regulation Act, 1949 - ss.5, 8, 21, 22, 27, 29A, 30(1B), 35AA, 35AB,
35A(1)(a), 36(1)(a), 36AA - Payment and Settlement Systems Act,
2007 - ss.2(1); 2(1)(g), (h), (i), (p) and ss.3, 4(1), 10(2), 11, 17, 18
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- Administrative Law - Subordinate Legislation - Doctrine of
Proportionality - Doctrine of Deference - Foreign Exchange
Management Act, 1999 - ss.2(h), (i), (q) - Coinage Act, 2011 -
Finance Act, 1994 - Finance Act, 2012 - Sales of Goods Act, 1930
- Central Foods and Services Tax Act, 2017 - s.2(75) - Constitution
of India - Art.19(1)(g).
Reserve Bank of India Act, 1934 - Establishment of Reserve
Bank of India - Object of - Discussed.
Reserve Bank of India Act, 1934 - Preamble to; s.45L(1) -
Held: Phrase "credit system of the country to its advantage", as
found in paragraph 1 of the Preamble, is repeated in sub-sec. (1)
of s.45L - Only difference between the two is that paragraph 1 of
the Preamble speaks about the operation of the credit system, while
s.45L (1) speaks about regulation of the credit system.
Banking Regulation Act, 1949 - Power of Reserve Bank of
India under - Discussed.
Reserve Bank of India Act, 1934 - s.3(1) - Held:
"management of the currency" appearing in s.3(1) need not
necessarily be confined to the management of what is recognized in
law to be currency but would also include what is capable of faking
or playing the role of a currency.
Payment and Settlement Systems Act, 2007 - Object of -
Discussed.
Administrative Law - Colourable exercise of power & malice
in law - Reserve Bank of India (RBI) issued circular directing the
entities it regulated to not to deal with or provide services to any
individual/business entities dealing with/settling virtual currencies
(VCs) and to exit the relationship, if they have one, with such
individuals/business entities - Petitioners contended that the
invocation by RBI, of 'public interest' as a weapon, purportedly for
the benefit of users, consumers or traders of virtual currencies is a
colourable exercise of power - Held: Not tenable - Once it is
conceded that RBI has powers to issue directions in public interest,
it is impossible to exclude users, consumers or traders of virtual
currencies from the coverage - To constitute colourable exercise of
power, the act must have been done in bad faith and the power must
have been exercised not with the object of protecting the regulated
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entities or the public in general, but with the object of hitting those
who form the target - To constitute malice in law, the act must have
been done wrongfully and willfully without reasonable or probable
cause - Impugned Circular does not fall under the category of either
of them.
Administrative Law - Statutory Authority - Power of RBI and
difference between other statutory creatures & RBI - Discussed.
Banking Regulation Act, 1949 - s.35A(1) - Reserve Bank of
India (RBI) issued circular directing the entities it regulated to not
to deal with or provide services to any individual/business entities
dealing with/settling virtual currencies (VCs) and to exit the
relationship, if they have one, with such individuals/business entities
- Plea of the petitioners that expression 'public interest' appearing
in s.35A(1)(a) cannot be given an expansive meaning - Held: Power
u/s.35A to issue directions is to be exercised under four
contingencies- (i) public interest (ii) interest of banking policy (iii)
interest of the depositors & (iv) interest of the banking company -
Expression "banking policy" is defined in s.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
s.35A(1)(a) is invoked in the impugned Circular.
Constitution of India - Art.19(1)(g) - Reserve Bank of India
(RBI) issued circular directing the entities it regulated to not to deal
with or provide services to any individual/business entities dealing
with/settling virtual currencies (VCs) and to exit the relationship, if
they have one, with such individuals/business entities - Plea of the
petitioners (a specialized industry body representing interests of
online & digital services industry; companies running online crypto
assets exchange platforms; shareholders/founders thereof and
crypto assets traders) that a total prohibition, especially through a
subordinate legislation such as a directive from RBI, of an activity
not declared by law to be unlawful, is violative of Art.19(1)(g) -
Held: Buying and selling of crypto currencies through VC
Exchanges can be by way of hobby or as a trade/business - Persons
who engage in buying and selling virtual currencies, just as a matter
of hobby cannot pitch their claim on Art.19(1)(g), for what is covered
therein are only profession, occupation, trade or business -
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Therefore hobbyists, who are one among the three categories of
citizens (hobbyists, traders in VCs and VC Exchanges), straightaway
go out of the challenge u/Art.19(1)(g) - Second and third categories
of citizens namely, those who have made the purchase and sale of
VCs as their occupation or trade, and those who are running online
platforms and VC exchanges can certainly pitch their claim on the
basis of Art.19(1)(g).
Words & Phrases - "currency", "currency notes", "Indian
currency" "money", "regulate" - Definition & Meaning of -
Discussed.
Allowing the writ petitions, the Court
HELD: 1.1 Role assigned to, functions entrusted to and
the powers conferred upon RBI as a Central Bank
Reserve Bank of India (RBI) is now vested with the
obligation to operate the monetary policy framework in India.
After the amendment under Act 28 of 2016, the very task of
operating the monetary policy framework has been conferred
exclusively upon RBI. The phrase "credit system of the country
to its advantage", as found in paragraph 1 of the Preamble, is
repeated in sub-section (1) of Section 45L. The only difference
between the two is that paragraph 1 of the Preamble speaks about
the operation of the credit system, while Section 45L (1) speaks
about regulation of the credit system. While exercising the power
to issue directions conferred by clause (b) of sub-section (1) of
Section 45L, RBI is obliged under sub-section (3) of Section 45L to
have due regard to certain things, one of them being "the effect the
business of such financial institution is likely to have on trends in
the money and capital markets". A careful scan of the RBI Act,
1934 in its entirety would show that the operation/regulation of
the credit/financial system of the country to its advantage, is a
thread that connects all the provisions which confer powers upon
RBI, both to determine policy and to issue directions. [Paras
6.15, 6.16, 6.26 and 6.30][352-C,E; 355-F-G; 356-G-H]
1.2 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
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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.
[Para 6.50][364-D-H]
1.3 Fixing the identity of VCs
There is unanimity of opinion among all the regulators and
the governments of various countries that though virtual
currencies have not acquired the status of a legal tender, they
nevertheless constitute digital representations of value and that
they are capable of functioning as (i) a medium of exchange and/
or (ii) a unit of account and/or (iii) a store of value. The
governments and money market regulators throughout the world
have come to terms with the reality that virtual currencies are
capable of being used as real money, but all of them have gone
into the denial mode (like the proverbial cat closing its eyes and
thinking that there is complete darkness) by claiming that VCs
do not have the status of a legal tender, as they are not backed by
a central authority. But what an article of merchandise is capable
of functioning as, is different from how it is recognized in law to
be. It is as much true that VCs are not recognized as legal tender,
as it is true that they are capable of performing some or most of
the functions of real currency. [Paras 6.59, 6.62][381D-E,
382E-G]
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1.4 The Court does not think that RBI's role and power
can come into play only if something has actually acquired the
status of a legal tender. The Court does not also think that for
RBI to invoke its power, something should have all the four
characteristics or functions of money. [Para 6.65][384A-B]
1.5 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. RBI was also caught in this dilemma. Nothing
prevented RBI from adopting a short circuit by notifying VCs
under the category of "other similar instruments" indicated in
Section 2(h) of FEMA, 1999 which defines 'currency' to mean
"all currency notes, postal notes, postal orders, money orders,
cheques, drafts, travelers' cheque, letters of credit, bills of exchange
and promissory notes, credit cards or such other similar instruments
as may be notified by the Reserve Bank." After all, promissory
notes, cheques, bills of exchange etc. are also not exactly
currencies but operate as valid discharge (or the creation) of a
debt only between 2 persons or peer-to-peer. Therefore, it is not
possible to accept the contention of the petitioners that VCs are
just goods/commodities and can never be regarded as real money.
Once it is accepted that some institutions accept virtual
currencies as valid payments for the purchase of goods and
services, there is no escape from the conclusion that the users
and traders of virtual currencies carry on an activity that falls
squarely within the purview of the Reserve Bank of India. The
statutory obligation that RBI has, as a central bank, (i) to operate
the currency and credit system, (ii) to regulate the financial system
and (iii) to ensure the payment system of the country to be on track,
would compel them naturally to address all issues that are perceived
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as potential risks to the monetary, currency, payment, credit and
financial systems of the country. If an intangible property can act
under certain circumstances as money (even without faking a
currency) then RBI can definitely take note of it and deal with it.
Hence it is not possible to accept the contention of the petitioners
that they are carrying on an activity over which RBI has no power
statutorily. [Paras 6.85-6.87][393G, 394A-G]
1.6 RBI is the sole repository of power for the management
of the currency, under Section 3 of the RBI Act. RBI is also vested
with the sole right to issue bank notes under Section 22(1) and
to issue currency notes supplied to it by the Government of India
and has an important role to play in evolving the monetary policy
of the country, by participation in the Monetary Policy Committee
which is empowered to determine the policy rate required to
achieve the inflation target, in terms of the consumer price index.
Therefore, anything that may pose a threat to or have an impact
on the financial system of the country, can be regulated or
prohibited by RBI, despite the said activity not forming part of
the credit system or payment system. The expression
"management of the currency" appearing in Section 3(1) need
not necessarily be confined to the management of what is
recognized in law to be currency but would also include what is
capable of faking or playing the role of a currency. 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. 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. Hence, it is held that RBI has the requisite power to
regulate or prohibit an activity of this nature. [Paras 6.90,
6.91][395D-G; 396A-B]
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1.7 If at all, the power is only to regulate, not prohibit
The projection of the impugned decisions of RBI as a total
prohibition of an activity altogether, may not be correct. The
impugned Circular does not impose a prohibition on the use of
or the trading in VCs. It merely directs the entities regulated by
RBI not to provide banking services to those engaged in the
trading or facilitating the trading in VCs. Section 36(1)(a) of the
Banking Regulation Act, 1949 very clearly empowers RBI to
caution or prohibit banking companies against entering into
certain types of transactions or class of transactions. The
prohibition is not per se against the trading in VCs. It is against
banking companies, with respect to a class of transactions. The
fact that the functioning of VCEs automatically gets paralyzed or
crippled because of the impugned Circular, is no ground to hold
that it tantamount to total prohibition. So long as those trading in
VCs do not wish to convert them into fiat currency in India and
so long as the VCEs do not seek to collect their service charges
or commission in fiat currency through banking channels, they
will not be affected by this Circular. Admittedly, peer-to-peer
transactions are still taking place, without the involvement of
the banking channel. In fact, those actually buying and selling
VCs without seeking to convert fiat currency into VCs or viceversa, are not affected by this Circular. It is only the online
platforms which provide a space or medium for the traders to
buy and sell VCs, that are seriously affected by the Circular, since
the commission that they earn by facilitating the trade is required
to be converted into fiat currency. Interestingly, the petitioners
argue on the one hand that there is total prohibition and argue on
the other hand that the Circular does not achieve its original
object of curtailing the actual trading, though it cripples the
exchanges. If the first part of this submission is right, the latter
cannot be and if the latter part is right, the former cannot be.
When RBI exercises the powers conferred upon it, both to frame
a policy and to issue directions for its enforcement, such directions
become supplemental to the Act itself. The impugned Circular is
intended to prohibit banking companies from entering into certain
territories. The Circular is actually addressed to entities
regulated by RBI and not to those who do not come within the
purview of RBI's net. But the exercise of such a power by RBI,
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over the entities regulated by it, has caused a collateral damage
to some establishments like the petitioners', who do not come
within the reach of RBI's net. The power of a statutory authority
to do something has to be tested normally with reference to the
persons/entities qua whom the power is exercised. The question
to be addressed in such cases is whether the authority had the
power to do that act or issue such a directive, qua the person to
whom it is addressed. While persons who suffer a collateral
damage can certainly challenge the action, such challenge will be
a very weak challenge qua the availability of power. [Paras 6.94,
6.99 and 6.104, 6.105][397C-G, 398A, 401-F-G, 403 A-B]
1.8 Section 18 of the Payment and Settlement Systems Act
indicates (i) what RBI can do (ii) the persons qua whom it can be
done and (iii) the object for which it can be done. In other words,
Section 18 empowers RBI (i) to lay down policies relating to the
regulation of payment systems including electronic, nonelectronic, domestic and international payment systems affecting
domestic transactions and (ii) to give such directions as it may
consider necessary. These are what RBI can do under Section
18. Coming to the second aspect, the persons qua whom the
powers under Section 18 can be exercised are (i) system providers
(ii) system participants and (iii) any other person generally or
any such agency. The expression "system provider" is defined
under Section 2(1)(q) to mean a person who operates an authorized
payment system. The expression "system participant" is defined
in Section 2(1)(p) to mean a bank or any other person participating
in a payment system, including the system provider. Other than
the expressions 'system provider' and 'system participant',
Section 18 also uses the expressions 'any other person' and 'any
such agency'. The purposes for which the power under Section
18 can be exercised, are also indicated in Section 18. They are (i)
regulation of the payment systems (ii) the interest of the
management and operation of any payment system and (iii) public
interest. The impugned Circular is primarily addressed to banks
who are "system participants" within the meaning of Section
2(1)(p). The banks certainly have a system of payment to be
effected between a payer and a beneficiary, falling thereby within
the meaning of the expression payment system. Therefore, in
the overall scheme of the Payment and Settlement Systems Act,
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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. [Paras 6.106-6.109, 6.111][402B, D-G, G-H,
403-A, D-E]
2. Mode of exercise of power:
Satisfaction/Application of mind/relevant and irrelevant
considerations
In the facts of the present case, RBI could not be held guilty
of non-application of mind. As a matter of fact, the issue as to how
to deal with virtual currencies has been lingering with RBI from
June 2013 onwards. 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 gave a detailed point-wise reply to the
representations of the petitioners. In these representations, the
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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. [Paras 6.113, 6.116-6.118][404B, 405A-D, 406GH, 407A-B]
3. Malice In Law/Colorable Exercise
The impugned Circular does not order either the freezing
or the closing of any particular account of a particular customer.
All that the impugned Circular says is that RBI regulated entities
shall exit the relationship that they have with any person or entity
dealing with or settling VCs, within three months of the date of
the Circular. The regulated entities are directed not to provide
services for facilitating any person or entity in dealing with or
settling VCs. Some of the petitioners herein are individuals and
companies who run virtual currency exchanges. In case they have
other businesses, the impugned Circular does not order the
closure of their bank accounts relating to other businesses. The
prohibition under paragraph 2 of the impugned Circular is with
respect to the provision of services for facilitating any person or
entity in dealing with or settling VCs. This prohibition does not
extend either to the closing or the freezing of the accounts of the
petitioners in relation to their other ventures. There can be no
quarrel with the proposition that RBI has sufficient power to issue
directions to its regulated entities in the interest of depositors,
in the interest of banking policy or in the interest of the banking
company or in public interest. If the exercise of power by RBI
with a view to achieve one of these objectives incidentally causes
a collateral damage to one of the several activities of an entity
which does not come within the purview of the statutory authority,
the same cannot be assailed as a colourable exercise of power or
being vitiated by malice in law. To constitute colourable exercise
of power, the act must have been done in bad faith and the power
must have been exercised not with the object of protecting the
regulated entities or the public in general, but with the object of
hitting those who form the target. To constitute malice in law, the
act must have been done wrongfully and willfully without reasonable
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or probable cause. The impugned Circular does not fall under
the category of either of them. The argument that the invocation
by RBI, of 'public interest' as a weapon, purportedly for the benefit
of users, consumers or traders of virtual currencies is a colourable
exercise of power also does not hold water. Once it is conceded
that RBI has powers to issue directions in public interest, it is
impossible to exclude users, consumers or traders of virtual
currencies from the coverage. In fact, the repeated press releases
issued by RBI from 2013 onwards indicate that RBI did not want
the members of the public, which include users, consumers and
traders of VCs, even to remotely think that virtual currencies
have a legal tender status or are backed by a central authority.
Irrespective of what VCs actually do or do not do, it is an accepted
fact that they are capable of performing some of the functions of
real currencies. Therefore, if RBI takes steps to prevent the
gullible public from having an illusion as though VCs may
constitute a valid legal tender, the steps so taken, are actually
taken in good faith. The repeated warnings through press releases
from December 2013 onwards indicate a genuine attempt on the
part of RBI to safeguard the interests of the public. Therefore,
the contention that the impugned Circular is vitiated by malice in
law and that it is a colorable exercise of power, cannot be
sustained. 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. [Paras 6.120, 6.122, 6.123
and 6.125][407E-G; 408C-G; 409A-B; F-G]
4. M. S. Gill Reasoning
The impugned Circular cannot be assailed on the basis of
M. S. Gill test, for two reasons. First is that in Chairman, All
India Railway Recruitment Board v. K. Shyam Kumar & Ors,
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this court held that MS Gill test may not always be applicable
where larger public interest is involved and that in such situations,
additional grounds can be looked into for examining the validity
of an order. In Moons Technologies ltd. case this court clarified
that though there is no broad proposition that MS Gill test will
not apply where larger public interest is involved, subsequent
materials in the form of facts that have taken place after the order
in question is passed, can always be looked at in the larger public
interest, in order to support an administrative order. The second
reason why the weapon of MS Gill will get blunted in this case, is
that during the pendency of this case, this court passed an interim
order on 21-08-2019 directing RBI to give a point-wise reply to
the detailed representation made by the writ petitioners. Pursuant
to the said order, RBI gave detailed responses on 04-09-2019
and 18-09-2019. Therefore, the argument based on MS Gill test
has lost its potency. [Para 6.126][410A-D]
5. Wait and watch approach of the other stakeholders
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. [Para 6.128][411B-C]
 6. Light-touch approach of the other countries
The judicial decision of the Court 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. [Para 6.129][411E]
 7. Precautionary steps taken by petitioners
The fact of the matter is that enhanced KYC norms may
remove anonymity of the customer, but not that of the VC. The
Court is not expert to say whether the safety valves put in place
could have addressed all issues raised by RBI. [Para 6.131][412AC]
8. Different types of VCs require different treatments
The very same virtual currency can have a unidirectional
or bidirectional flow depending upon the scheme with which the
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entities come up. Moreover, the question whether anonymous
VCs alone could have been banned leaving the pseudoanonymous, 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. [Para
6.135][413E-F]
9. Acceptance of DLT and rejection of VCs is a paradox
There is nothing irrational about the acceptance of a
technological advancement/innovation, but the rejection of a byproduct of such innovation. There is nothing like a "take it or
leave it" option. [Para 6.137][413H, A]
10. RBI's decisions do not qualify for Judicial deference
RBI is not just like any other statutory body created by an
Act of legislature. It is a creature, created with a mandate to get
liberated even from its creator. This is why it is given a mandate
- (i) under the Preamble of the RBI Act 1934, to operate the
currency and credit system of the country to its advantage and to
operate the monetary policy framework in the country (ii) under
Section 3(1), to take over the management of the currency from
the central government (iii) under Section 20, to undertake to
accept monies for account of the central government, to make
payments up to the amount standing to the credit of its account
and to carry out its exchange, remittance and other banking
operations, including the management of the public debt of the
Union (iv) under Section 21(1), to have all the money, remittance,
exchange and banking transactions in India of the central
government entrusted with it (v) under Section 22(1), to have
the sole right to issue bank notes in India and (vi) under Section
38, to get rupees into circulation only through it, to the exclusion
of the central government. Therefore, RBI cannot be equated to
any other statutory body that merely serves its master. It is
specifically empowered to do certain things to the exclusion of
even the central government. Therefore, to place its decisions
at a pedestal lower than that of even an executive decision, would
do violence to the scheme of the Act. The RBI Act, 1934 is a
pre-constitutional legislation, which survived the Constitution by
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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. Therefore,
to say that it is just like any other statutory authority whose
decisions cannot invite due deference, is to do violence to the
scheme of the Act. In fact, all countries have central banks/
authorities, which, technically have independence from the
government of the country. To ensure such independence, a fixed
tenure is granted to the Board of Governors, so that they are not
bogged down by political expediencies. Therefore, the argument
that a policy decision taken by RBI does not warrant any deference
cannot be accepted. [Paras 6.139, 6.141][414-D-G; 416-B-E, H]
11.1 Article 19(1)(g) challenge & Proportionality
The buying and selling of crypto currencies through VC
Exchanges can be by way of hobby or as a trade/business. The
distinction between the two is that there may or may not exist a
profit motive in the former, while it would, in the latter. Persons
who engage in buying and selling virtual currencies, just as a
matter of hobby cannot pitch their claim on Article 19(1)(g), for
what is covered therein are only profession, occupation, trade or
business. Therefore hobbyists, who are one among the three
categories of citizens (hobbyists, traders in VCs and VC
Exchanges), straightaway go out of the challenge under Article
19(1)(g). The second and third categories of citizens namely, those
who have made the purchase and sale of VCs as their occupation
or trade, and those who are running online platforms and VC
exchanges can certainly pitch their claim on the basis of Article
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19(1)(g). Technically speaking, the second category of citizens
cannot claim that the impugned decision of RBI has the effect of
completely shutting down their trade or occupation. Citizens who
have taken up the trade of buying and selling virtual currencies
are not prohibited by the impugned Circular (i) either from trading
in crypto-to-crypto pairs (ii) or in using the currencies stored in
their wallets, to make payments for purchase of goods and
services to those who are prepared to accept them, within India
or abroad. Virtual currencies cannot be stored anywhere, in the
real sense of the term, as they do not exist in any physical shape
or form. What is actually stored is the private keys, which can be
used to access the public address and transaction signatures.
The software program in which the private and public keys of
those who own virtual currencies is stored, is called a digital wallet.
There are different types of wallets namely (i) paper wallet which
is essentially a document that contains a public address for
receiving the currency and a private key which allows the owner
to spend or transfer the virtual currencies stored in the address
(ii) mobile wallet, which is a tool which runs as an app on the
smartphone, where the private keys are stored, enabling the
owner to make payments in crypto currencies directly from the
phone (iii) web wallet, in which the private keys are stored on a
server which is constantly online (iv) desktop wallet, in which
private keys are stored in the hard drive and (v) hardware wallet,
where the private keys are stored in a hardware device such as
pen drive.