Future of Virtual Currencies in India: A Critical Analysis of IAMAI v. RBI
[Mahima Nair and Threcy Lawrence are third year students at National Law University, Delhi.]
The monumental leap in technology has taken over the commercial sector with the advent of cryptocurrency and the blockchain technology. Still a nascent innovation in its formative years, the promise that it holds and its global outreach is worth mentioning. The question that most countries are grappling with at this juncture is whether or not such technology should be incorporated into our commercial lives. As far as India is concerned, traditional monetary instruments as well as institutions have governed its fiscal policies for centuries. With the introduction of virtual currency (VC), how can a reconciliation be sought between a well- established central banking system and the economic expansions that follow such technology?
A step in the right direction was taken by the Supreme Court of India (Court), in the recent judgment of Internet and Mobile Association of India v. RBI. The Court quashed the circular of the RBI that directed financial agencies to dissociate themselves from entities involved in virtual trading or transactions relating to VCs. Some of the concerns that led to the issuance of the Circular include the anonymity of the transactions and the protection of investors when dealing in cryptocurrencies. The major apprehension of the RBI was the inherent difficulty in tracking the source of money which has led to an increase in the number of cryptocurrency scams in the country. Still a very volatile technology, we have not had enough discussion around its shortcomings, leading to an adverse preference of this technology in the monetary circuit.
The Circular did certainly raise myriad concerns, specifically from the various stakeholders whose very sustenance was threatened. The issuance of such a blanket Circular can be attributable to the RBI’s ignorance of the novelty of this technology. VCs promise the dawn of a new era, with the usage of cutting edge technology, which was relied by investors while venturing in this field, who would now be majorly disadvantaged.
Two broad arguments of the petitioners were considered by the Court. First is in relation to the very authority of the RBI to issue such a circular since VCs should be considered as commodity. Secondly pertains to interference by the RBI with the rights of the petitioners disproportionately. The staunch stance taken by the petitioners was that VCs cannot be treated as currency in the ordinary sense, which would curtail the authority of the RBI. Therefore, there was a need to understand the meaning of VCs and determine whether it was a commodity or a legal tender. It is undeniable that the definition of currency has undergone a phenomenal change since its inception; from the usage of gold to the current status of legal tender. A careful examination of the definition of currency under Section 2(h) of FEMA 1999 leads one to the conclusion that VCs fall within the ambit of ‘other similar instruments’ as given under the said definition. Having stated that, the question that then arises is regarding the scope of power of the RBI. As the lender of the last resort, RBI already exercises an insurmountable regulatory power, because of which the Circular raises some serious concerns. The RBI unequivocally stated that they may take measures in light of public interest, wherein the power to regulate includes the power to prohibit. The Court concluded that if a systemic risk was observed by the RBI by virtue of the engagement of payment systems in potentially risk generating acts, then directions may be issued to such agencies. Furthermore, since this power can be accredited to statutes such as the RBI Act 1934 and the Banking Regulation Act 1949, the act of RBI cannot be considered to be ultra vires.
The second question before the Court was whether such a prohibition impinged on the fundamental right to trade in VCs. The petitioners made four contentions in this regard. First, they claimed that there exists a threshold of ‘satisfaction’ that has to be mandatorily met before the RBI can issue directions to further “public interest”. The Court rejected the claim, stating that the RBI had been deliberating on this issue from the year 2013, till the time the Circular was issued. Therefore, the impugned circular was issued after a thorough understanding of the implications of VCs on the economic climate of India, thereby indicating that the threshold of satisfaction has been met under the RBI Act 1934. Second, the contention of the petitioners that the exercise of power by the RBI in the present case was colourable, was opposed by the Court. They stated that in the present situation there was no freezing of accounts of certain agencies, but merely a direction to the said agencies to discontinue their service to entities engaged in VCs. Third, the petitioners relied on the case of MS Gill v. Chief Election Commissioner, which held that there was an express prohibition on any authority to do anything which may improve its case. Drawing inference from this particular ratio, the petitioners claimed that the additional submissions made by the RBI would be irrelevant, and that the initial Circular should have spoken for itself. However, the Court stated that since RBI was directed to issue a detailed reply to the representations made in the writ petitions, the additional submissions would automatically assume relevance. Fourth, the contention of the petitioners rested on the premise that denial of banking services to those activities of trade recognized by law, would be extremely disproportionate, leading to a violation of Article 19(1)(g) of the Constitution. Therefore, an understanding of whether there was an infringement of this constitutional right was necessary, and to this end, the Court relied on the case of Md. Yasin v. Town Area Committee, which makes it amply clear that the right under Article 19(1)(g) would be affected “in effect and in substance” when there is a complete stoppage of a particular business activity, owing to a certain measure that was undertaken. In addition to this, the Court examined the four tests laid down in the case of Modern Dental College and Research Centre v. State of Madhya Pradesh, which were; “the requirement of a specific purpose for the adoption of a measure by the central agency, the need for less invasive alternate measures, a rational connection between the measures adopted and the fulfillment of the specific purpose, and a relation between importance of achieving the aim and limiting the right”, which explored the concept of proportionality. After a careful analysis, the Court held that a less intrusive measure could have been adopted by the RBI. Even though there was no express prohibition to trade in VCs, by adopting this measure, there was a complete stagnation of monetary flow in this field, thereby impairing business to a large extent. In the absence of any substantial detriments of VCs to the Indian economy, the issuance of the Circular becomes disproportionate.
Although the Court has legitimatized the discussion around crypto currency by way of this judgment, if this is to be allowed to integrate into the working of the economy, certain other primary concerns will have to be clarified. There are still multitudes of uncertainties around the working of crypto currency such as anonymity, criminal activities, terrorist financing amongst many others. In addition, there is strong evidence to suggest that a lot of Bitcoin transactions have been used all around the world for illegal trading or evasion of taxes.
Admittedly, these shortcomings form an integral aspect of other sovereign currencies as well, but the pressing concern here is the lack of a proper framework to regulate the effective functioning of VCs. It is rather novel to think about how around 2 billion people in the world do not have a bank account, but about 40% of the population has access to the internet, and this number is on the rise. Therefore, there should be a check on the different ways in which VCs may be manipulated and the only way to do so is to ensure an effective legislation, and a step by step understanding of the various impacts on the economy, all of which is currently absent.
The judgment by the Court has started an effective discussion on lines that were never traversed before, and while that is indeed commendable, we need to look ahead, and anticipate the potential risks on the economy. With that in mind, VCs promise a more feasible future, especially in this era where people are connected through technology in ways previously unimaginable. Various stakeholders have posited many suggestions, particularly with regard to creating a model that can monitor and regulate cryptocurrencies, without bringing about a blanket ban of the same, which ought to be considered by the government in light of the pending bill. What we need to do is find a balance and not discourage startups from adopting this technology, and if this is ignored, India could be handicapped from exploring opportunities that cryptocurrencies have to offer. Instead of shying away from addressing these concerns, we need to be proactive and have a structured policy in place to assuage any potential concerns in the future.