AmicusX brings to you another curative post on Bitcoins in India. The author in this post has analysed the very recent judgment on legalisation of bitcoins in India. The author brings to us the concept of currency management and the powers bestowed upon RBI to decide the constituents of legal tender in India.
Background of the Case
April 6, 2018, circular,[i] of Reserve Bank of India (RBI) put a moratorium put on trading with virtual currency (VC). This circular directed all the banks to stop trading in VC and ordered them to save any transaction or facility which could promote the use of crypto-currency. The circular not only struck the usage of VC but marked the end of an industry which attracted 3,00,000 customers every month, [ii] an industry which had the potential of generating more than 20,000 jobs in the much-saturated IT sector and at the same time the circular shunned off a mammoth worth of $12.4 Billion or INR 84000 Crore.[iii] In an era where tech-giants like Microsoft have started accepting cryptocurrencies as a mode of payment,[iv] where pizzas and jewelry are being exchanged against VCs,[v] and where even schools,[vi] have embraced this technology, the naysaying of RBI came much as a surprise and a setback.
But, this circular did entice two writ petitions challenging its validity. The Supreme Court’s judgment of 4th March 2020, concerning these two writs, which lifted the ban imposed by the RBI came as a big rescue and has again opened the gateway of virtual money's trade in the country. Several local crypto exchanges and NASSCOM have rejoiced the decision followed by Dr. Subramian Swami who has affirmed that crypto-currencies are inevitable and a blanket-ban was never the solution.[vii]
Unraveling the Bitcoin Judgment:
Internet and Mobile Association of India v. Reserve Bank of India
The judgment of Internet and Mobile Association of India v. RBI,[viii] marked the revival of the Bitcoin trade in India after a hiatus of approximately two years. The judgment came after two writ petitions Writ Petition (Civil) No.528 of 2018 and Writ Petition (Civil) No.373 of 2018 challenged the legitimacy of the circular before a three-judge bench comprising of Justice Rohinton Nariman, Justice Aniruddha Bose and Justice V.Ramasubramanian.
The issues which were raised in the petitions:
Both the petitions challenged the circular broadly on the following grounds:
a) bitcoins do not fulfill the characteristics of money and that they are not a legal tender but tradable commodities and thus didn’t fall within the regulatory ambit of the RBI Act, 1934 and Banking Regulations Act, 1949,
b) bitcoins do not fall within the credit system of the country and thus is outside the administrative and regulatory scope of RBI,
c) the circular is outright arbitrary as it gives no reasonable classification and disproportionately interferes with the right to trade guaranteed under Article 19(g) of the Indian Constitution.
Bitcoins: Legal Tender or Tradable Commodities?
The Supreme Court, to decide on the first issue, studies the powers conferred upon RBI along with the nature of VC i.e. to see if they are tradable commodities or not. But, while taking cognizance of the matter, the court realized that it was a lack of definition of VCs which was helping them evade the ambit of RBI.
The court then analyzed and compared the definition of a ‘crypto-currency’ given by several financial institutions including, but not limited to, European Central Bank, International Monetary Fund (IMF), Financial Action Task Force (FATF) and concluded that though crypto-currencies are not a legal tender they are capable of acting as:
(i) a medium of exchange and/or
(ii) a unit of account and/or
(iii) a store of value, thus fulfilling the characteristics of money.
Senior Counsel, Nakul Dewan, appearing for the petitioner’s, added that in recent times another characteristic of money has been added – ‘the capacity to discharge debt’, which crypto-currency is not able to perform and thus it shall not be considered as a legal tender and relied upon the decision rendered by Queen’s Bench in the case of Moss v. Hancock,[ix] to substantiate the same.
The court, by rejecting the argument, held that the judgment of Moss v. Hancock is itself a century old and the parameters recognized then can certainly not be the defining elements today as currencies change over time like gold was once a medium of exchange but has been replaced today. The court relied, to substantiate the reasoning, on Breyer J.’s dissent from Wisconsin Central Ltd v. United States,[x] which had iterated the same. It further opined that as long as there are people in India who accept cryptocurrency as a mode of payment, it falls within the ambit of the RBI and can thus be regulated upon by it.
RBI has the power of "Currency Management" in India.
The court then also rejected the second argument which claimed that bitcoins are not a part of the economy and thus can not be administered by the central bank. It held that the RBI is the sole repository of currency under section 3 of the RBI Act and interpreted the term ‘currency management’, present in section 3(1) to be inclusive of what is capable of faking or playing the role of a currency and is not restricted to what is recognized by Indian law.
However, the court did uphold the third contention raised which question the proportionality of the circular. The Apex court took cognizance of the proportionality test laid down in College and Research Centre v. State of Madhya Pradesh,[xi] which demanded the application of a rule or policy which had no less intrusive alternatives. The court also pinpointed that even the Inter-Ministerial Committee constituted on 02-11-2017 was apprehensive of imposing a total ban on the use of crypto-currencies and had suggested penalizing the offenders rather than instituting a blanket ban. The court also held that the pre-emptive power conferred on RBI could have only been used if it would have been able to show a loss/damage suffered due to trade of bitcoins by any of the entities regulated by it but surprisingly there was none. Hence, the act of imposing a blanket ban was held to be disproportionate and was righteously set aside.
There are many insights and takeaways found in this judgment. The very interpretation of ‘currency management’ has affirmed that RBI can take action regarding any foreign element acting as a currency and bringing detriment to the economy. Further, the court shall also be lauded for upholding the proportionality theory, given how rarely the Apex court respects its own precedents.[xii]
With this judgment, India has joined the kitty of countries like the USA , Canada, Switzerland, the European Union, etc. wherein bitcoins are accepted against goods albeit not recognized as a legal tender. But, questions including, but not limited to, whether India will identify Bitcoins as commodities, like in Canada,[xiii] and tax them accordingly and will it implement mandatory KYC-norms for all the traders of crypto-currency, as observed in South Korea,[xiv] and will it follow the footsteps of Venezuela in recognizing cryptocurrency as a legal tender,[xv] remain unanswered.
One needs to acknowledge that even though the Supreme Court has given a clean-chit to bitcoins, comprehensive legislation or guidelines regarding bitcoins are desperately awaited.
References: [i] Available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0 (Last Accessed on 12th April 2020 at 11:58 PM). [ii] Manvi Kapur, India’s crypto investors feel virtual coins are key to more jobs and economic revival, available at https://qz.com/india/1831686/indians-say-bitcoin-other-cryptocurrencies-key-for-economy-jobs/ (Last Accessed on 12th April 2020 at 12:00 PM). [iii] As per a survey done by CREBACO Global, available at https://eng.ambcrypto.com/india-set-to-lose-12-9-billion-worth-of-market-if-they-proceed-to-ban-crypto/ (Last accessed on 13th April 13, 2020 at 9:39 PM). [iv] More information available at https://cointelegraph.com/tags/microsoft (Last accessed on 13th April 13, 2020 at 11:08 PM) [v] Jinia Shawdagor, Retailers Around the World That Accept Crypto, From Pizza to Travel , available at https://cointelegraph.com/news/retailers-around-the-world-that-accept-crypto-from-pizza-to-travel (Last accessed on 13th April 13, 2020 at 11:18 PM) [vi] Private Schools for Kids Are Now Accepting Bitcoin for Tuition, available at https://news.bitcoin.com/private-schools-kids-accepting-bitcoin-tuition/ (Last accessed on 13th April 13, 2020 at 11:28 PM) [vii] Bitcoin Legal in India: Exchanges Resume INR Banking Service After Supreme Court Verdict Allows Cryptocurrency, available at https://news.bitcoin.com/bitcoin-legal-india-supreme-court-verdict-cryptocurrency/ (Last accessed on 14th April 14, 2020 at 5:00 PM) [viii]https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf (Last Accessed on 14th April 2020 at 2:36 PM) [ix] (1899) 2 QB 111 [x] 138 S. Ct. 2067 (2018) [xi] (2016) 7 SCC 353 [xii] Suhrith Parthasarathy, The Supreme Court’s Cryptocurrency Judgment, available at https://indconlawphil.wordpress.com/2020/03/10/guest-post-the-supreme-courts-cryptocurrency-judgment/amp/?__twitter_impression=true (Last accessed on 14th April 14, 2020 at 8:00 PM). [xiii] More information available on https://www.loc.gov/law/help/cryptocurrency/world-survey.php#canada(Last accessed on 14th April 21, 2020 at 8:00 PM). [xiv] More information available on https://www.loc.gov/law/help/cryptocurrency/world-survey.php#korea (Last accessed on 14th April 21, 2020 at 8:01 PM). [xv] The Petro Is Legal Tender, But It Still Lacks A Working Wallet, available at https://www.btcnn.com/the-petro-is-legal-tender/ (Last accessed on 14th April 21, 2020 at 8:11 PM). This post is written by Rajas Salpekar, interning with AmicusX.