Introduction
In a landmark judgment that reshaped India’s evolving digital finance landscape, the Supreme Court of India, in Internet and Mobile Association of India v. Reserve Bank of India [(2020) 10 SCC 274], set aside the Reserve Bank of India’s (RBI) April 2018 circular which had effectively prohibited banks and financial institutions from dealing with virtual currency (VC) exchanges. The judgment was a significant affirmation of the constitutional principles of proportionality and freedom of trade, and it opened new avenues for India’s cryptocurrency ecosystem—albeit under a still-uncertain regulatory cloud.
Background
On 6 April 2018, the RBI issued a circular titled “Prohibition on dealing in Virtual Currencies”, directing all regulated entities (including banks) to not provide services to individuals or businesses dealing with virtual currencies. This included:
- Maintaining accounts of VC exchanges,
- Processing VC-related transactions,
- Providing settlement services to any individual or entity engaged in the trading or facilitation of cryptocurrencies.
This de facto banking ban on VC exchanges forced several startups to either shut down or relocate outside India. The Internet and Mobile Association of India (IAMAI), representing various stakeholders in the digital economy, filed a writ petition before the Supreme Court, challenging the RBI circular on multiple constitutional and legal grounds.
Key Legal Issues Before the Court
The Supreme Court was primarily tasked with deciding:
- Whether the RBI has the power under the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 to impose such a restriction on virtual currency-related activity;
- Whether virtual currencies fall within the regulatory purview of the RBI;
- Whether the circular infringed upon the fundamental right to practice any profession or to carry on any occupation, trade or business under Article 19(1)(g) of the Constitution of India;
- Whether the measure was proportionate in the absence of an express legislative ban on virtual currencies.
Findings of the Supreme Court
On 4 March 2020, the Supreme Court delivered its verdict, striking down the RBI circular as unconstitutional on the grounds of proportionality.
Key observations and findings of the Court include:
- Scope of RBI’s Power: The Court upheld that RBI is empowered to regulate the financial system and protect its integrity, which extends to preventing risks arising out of virtual currencies. Therefore, the RBI does have jurisdiction over entities involved in cryptocurrency transactions if they intersect with the financial system.
- Nature of Virtual Currencies: While the Court refrained from declaring virtual currencies as either legal or illegal tender, it acknowledged that cryptocurrencies represent a store of value and medium of exchange—bringing them within the ambit of financial regulation.
- Test of Proportionality: The Court found that the RBI failed to demonstrate any empirical harm caused by VC exchanges to the financial system. Importantly, it noted that no regulated entity had suffered losses or complained about virtual currencies, and the circular was issued without conducting proper impact assessment.
- Article 19(1)(g): The Court ruled that VC exchanges were engaged in a legitimate business, and the circular disproportionately infringed on their fundamental right to trade and occupation. In absence of legislative backing or demonstrated harm, the blanket restriction could not be sustained.
As a result, the RBI’s April 2018 circular was set aside, effectively allowing banks and financial institutions to resume services to VC exchanges—subject, of course, to future regulation.
Law Root Partners Commentary
This judgment marked a significant moment in India’s financial jurisprudence, particularly at the intersection of technology, innovation, and constitutional freedoms.
At Law Root Partners, our analysis of this ruling yields the following key implications:
- Judicial Review of Economic Policy is Limited but Present
- While courts traditionally defer to expert regulators on matters of economic policy, this case underscores that judicial review is permissible where regulatory action lacks proportionality or infringes constitutional rights. The RBI’s failure to present evidence of financial harm weakened its case.
- Virtual Currencies are Not Beyond Regulation
- The Supreme Court did not declare cryptocurrencies as legal tender or unregulated assets. Instead, it affirmed that while RBI can regulate financial entities, such regulation must be reasonable, proportionate, and supported by facts. In effect, VC exchanges are permitted, but not immune from regulation.
- Need for Legislative Clarity
- The decision indirectly highlighted the absence of a comprehensive legislative framework for cryptocurrencies in India. Since then, there have been regulatory developments—including taxation provisions in Budget 2022 and discussions around a Cryptocurrency Regulation Bill—but a clear law is still awaited.
- Revival and Growth of the Crypto Industry
- Post-judgment, VC exchanges and blockchain companies in India experienced a revival in investor interest and business activity. However, compliance and due diligence remain crucial for all stakeholders in this space.
Conclusion
The Supreme Court’s decision to set aside the RBI’s banking ban on virtual currency exchanges reflects a balanced approach—acknowledging regulatory authority while ensuring that such powers are exercised within constitutional limits. While the judgment provided a temporary reprieve for India’s crypto industry, it also called attention to the urgent need for dedicated legislation to address the legal status, risks, and uses of digital assets.
At Law Root Partners, we advise clients on navigating the regulatory, tax, and legal complexities associated with virtual currencies, blockchain ventures, and fintech innovation. Whether you are an exchange operator, investor, or startup founder, we are equipped to provide legally sound and business-savvy guidance in this fast-evolving domain.
