The Cryptocurrency Judgment: A contrarian view


Effectively banned since 2018, virtual currency exchanges received a shot in the arm by the Supreme Court in Internet and Mobile Association vs. RBI.

Vide circular dated April 6, 2018, the Reserve Bank of India (RBI) had proscribed entities regulated by it from dealing in and facilitating transactions in virtual currencies. By severing the ties between virtual currency exchanges and the traditional economy, the RBI had sought to ring fence those companies trading in virtual currencies, without banning virtual currencies themselves.

The Supreme Court recognized that the RBI’s power to regulate the monetary and credit system of India extended to the regulation of virtual currencies. However, it held that a total ban on virtual currency exchanges was a disproportionate measure; and hence not a ‘reasonable restriction’ as per Article 19(2) of the Constitution.

Interestingly, the Supreme Court held that the RBI had failed to provide enough empirical data to demonstrate that virtual currencies had any adverse impact on the traditional economy.

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This essay takes a contrarian view to that of the Supreme Court. The advancement of jurisprudence to the principle of proportionality is welcome. However, Internet Mobile Association is a case in point of a court replacing its own value judgment with that of the decision maker. In this context, it is argued that the courts would benefit by adopting the ‘doctrine of margin of appreciation’, as a buffer to the test of proportionality when adjudging reasonableness.

Internet Mobile Association case

The Internet Mobile Association of India, (a not for profit organization representing the digital industry), and some companies running online crypto asset exchange platforms, approached the Supreme Court and various High Courts, challenging the RBI circular dated April 6, 2018. This circular had effectively prohibited entities regulated by it, i.e. banks, NBFCs etc., from trading in virtual currencies or facilitating such trade. Pertinently, virtual currencies themselves remained legal.

By no means was this circular a surprise. The RBI had been issuing press releases, statements, reports and guidelines since 2013, cautioning members of the public/entities regulated by it from treating virtual currencies as legal tender and from trading in them. The concerns raised by the RBI inter alia included: protection of consumers, protection of market integrity, threat to the credit system, money laundering, use of virtual currencies in terrorism finance etc.

The principal arguments advanced by the petitioners were as follows: the RBI did not have the power to regulate crypto currencies since they were neither ‘currency’ nor a ‘payment system’ but were in the nature of a tradeable commodity; in the absence of a legislative ban on cryptocurrencies, trading in them remained a legitimate business activity and the impugned circular placed an arbitrary and unconstitutional restriction on it; a total ban on trading in cryptocurrency was unreasonable as it fell foul of the principle of proportionality.

In response, the RBI argued that the anonymous nature of cryptocurrency made it susceptible to money laundering and terrorism finance; widespread use of cryptocurrency could fundamentally undermine India’s credit system and monetary stability; and the RBI had the authority to make broad-based decisions on the economic policy of the country.

Wide powers of the RBI

In its judgment, the Supreme Court recognized the wide and unique powers with which the RBI was imbued. Pertinently, the Supreme Court recognized that the expression ‘management of currency’ appearing in Section 3(1) of the RBI Act, 1934, was not confined to the management of legally recognized currency only, but also included currency which was capable of faking or playing the role of currency.

Thus, it was held that the RBI had the power to regulate virtual currencies, and that circulars/decisions of the RBI would invite due deference. In this regard, it was further noted that the RBI had been consistently issuing guidelines, statements, press releases, cautioning the public, as well as entities regulated by it, from dealing in and trading in virtual currencies.

Test of Proportionality and ‘Reasonableness’

Having held that the RBI was a specialized statutory body, which had been acting consistently and in good faith, the Supreme Court proceeded to examine whether the ban on virtual currency trading amounted to a ‘reasonable restriction’ to a fundamental right guaranteed under Article 19 (1) (g). To assess such reasonableness, the test of proportionality was deployed.

Proportionality, as a standard of judicial review, has been recognized as far back as 1952 by Justice Patanjai Shastri in State of Madras vs. VG Row, where it was held that

The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict.”

The latest iteration of the proportionality test was in Modern Dental College, where a Constitution Bench of the Supreme Court noted,

Thus, while examining as to whether the impugned provisions of the statute and Rules amount to reasonable restrictions and are brought out in the interest of the general public, the exercise that is required to be undertaken is the balancing of fundamental right to carry on occupation on the one hand and the restrictions imposed on the other hand. This is what is known as 'Doctrine of Proportionality.”

The test set out in Modern Dental College was four fold. As per the Court, a limitation of a constitutional right will be constitutionally permissible if:

(i) It is designated for a proper purpose;

ii) The measures undertaken to effectuate such a limitation are rationally connected to the fulfillment of that purpose;

(iii) The measures undertaken are necessary in that there are no alternative measures that may similarly achieve that same purpose with a lesser degree of limitation; and finally

(iv) There needs to be a proper relation ('proportionality stricto sensu' or 'balancing') between the importance of achieving the proper purpose and the social importance of preventing the limitation on the constitutional right.

While the aforesaid test was outlined in Internet Mobile Association, it was not applied. Instead, the Supreme Court relied upon State of Maharashtra v. Indian Hotel and Restaurants Association to hold that there must be at least some empirical data to evince harm suffered by the traditional economy on account of cryptocurrency. Applying this test, the Supreme Court held that a total ban on trading in virtual currencies was disproportionate and excessive. The RBI had failed to produce sufficient empirical data to establish the adverse impact of virtual currencies on the economy.

The Court reasoned that since virtual currencies themselves were legal, it would be punitive to place a ban on those who merely facilitate its trading. It also adverted to the EU Parliament July 2018 Report, (which recommended that a total ban on the linkage between cryptocurrency and the formal financial sector was not necessary), to hold that the RBI had failed to consider alternatives before placing a total ban.

It is submitted that the test set out in Modern Dental College is satisfied by the impugned circular. It was introduced for a proper purpose (protection of India’s monetary and credit system from unpredictable virtual currencies which were highly susceptible to criminal use), the measures bore a rational connection to this purpose (the impugned circular severed the link between virtual currencies and the formal economy thereby mitigating this risk), the measures were necessary for the purpose and lesser alternatives were not viable (the RBI had also considered and rejected other alternatives such as formation of an investor protection fund, insurance of crypto-assets etc.), and lastly, the said measure balanced the social objective of safeguarding India’s economy, (including consumers, investors etc.), while only prohibiting RBI regulated entities from trading in virtual currencies, as opposed to placing a total ban on virtual currency itself.

Furthermore, the reliance placed on the recommendation of the EU Parliament Report is surprising. The EU Parliament would have made its recommendation in the European context, and even then, member states were not bound by it. The fact that virtual currencies themselves are not proscribed, only goes to show that the state adopted a lesser intrusive option than a total ban on virtual currencies. The wrong the RBI had sought to remedy was the linkage between virtual currencies and the traditional economy. Hence, the prophylactic offered by it only sought to severe this link.

Furthermore, even if the RBI failed to produce sufficient empirical evidence to establish harm already caused by virtual currencies to the traditional economy, surely this did not preclude the RBI from taking pre-emptive steps to ensure that such harm doesn’t accrue in the future.

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Internet Mobile Association advances the test of proportionality as a standard of judicial review. The state will henceforth be required to substantiate its claim of purported harm suffered by way of empirical data.

It is submitted that to balance the interests of the state and to allow authorities to function seamlessly, they ought to be allowed a ‘margin of appreciation’ within which they exercise their powers. This doctrine was developed in the context of EU law, whereby member states were granted a margin of appreciation within which they were to implement EU law. Member states were allowed a ‘wide margin of appreciation’ in cases pertaining to national security, public emergency, legislative implementation of social and economic policies.

On the other hand, member states were given a narrow margin of appreciation in matters where an individual’s identity or existence was at stake, racial or ethnic discrimination, or matters pertaining to an intimate aspect of one’s private life.

In the present case, the RBI acted within its powers, consistently, and with due application of mind. As has been outlined above, the test of proportionality as set out in Modern Dental College was adequately met. Moreover, the requirement of empirical data to substantiate harm caused to the traditional economy could not preclude the RBI from taking pre-emptive measures as it thought fit.

Malvika Kalra
Malvika Kalra

The author is an Advocate-on-Record at the Supreme Court of India and a Partner at Parinam Law Associates.

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