Supreme Court lifts RBI curbs on cryptocurrency business

The Supreme Court has allowed banks to provide virtual currency services, including trading, to clients, in a setback to the Reserve Bank of India’s policy decision not to allow unregulated trading in virtual currencies, also known as cryptocurencies.

The order comes on a petition filed by certain traders engaged in trading in virtual currencies, which claim the advantages of a commodity while serving as a medium of exchange and a store of value.

The apex court agreed with the claim of the petitioners in the case that virtual currencies are not money or legal tender, but commodities and therefore outside the powers of the Reserve Bank of India (RBI) to regulate.

RBI took a stand that while unregulated cryptocurrencies are not recognised as legal tender, they can be used as a medium of exchange and hence a ban on them was justified so as to safeguard the payment system in the country. 

The court, however, held the view that the exact identity of virtual currencies eludes precision.

“Some call it an exchange of value, some call it a stock and some call it a good/commodity. There may be no difficulty in accepting the divergence of views, if those views are not driven by fear of regulation”, the judgment said.

The order is expected to help restart trading in such currencies, even as the union finance ministry said it would take a decision on further action after studying the Supreme Court’s order.

While arriving at the decision, the Supreme Court also examined how virtual currencies are treated by regulators in foreign jurisdictions and under foreign laws.

The apex court seems to have agreed with the claim of the petitioners in the case that virtual currencies are not money or legal tender, but commodities and therefore outside the powers of the Reserve Bank of India (RBI) to regulate.

RBI also took a stand that while VCs are not recognised as legal tender, they can be used as a medium of exchange and hence a ban on them was justified so as to safeguard the payment system in the country. The court, at the outset, acknowledged that the exact identity of virtual currencies eludes precision. 

“Some call it an exchange of value, some call it a stock and some call it a good/commodity. There may be no difficulty in accepting the divergence of views, if those views are not driven by fear of regulation”, the judgment said.

It noted that there was unanimity of opinion among 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 a medium of exchange.

“The IMF, the FATF, the European Central Bank, the Financial Conduct Authority of the United Kingdom, the Internal Revenue Service of the United States, Department of Treasury and the Canadian Revenue Authority treat virtual currencies as digital representations of value. The European Central Bank went a step further by describing a virtual currency as a type of unregulated digital money”, the court said.

The state of Liechtenstein, the apex court said, considers virtual currencies as digital monetary units which can be exchanged for legal tender and also be used to purchase goods or services, thereby assuming the character of a legal tender. The German Federal Financial Supervisory Authority treats virtual currencies as units of account and consequently as financial instruments. Luxembourg has taken an official position that crypto currencies are actual currencies. Further, some of the states in the Unites States of America have passed laws recognizing virtual currencies as electronic medium of exchange, the apex court noted.

Thus, it was the court’s conclusion that 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 at the same time, the top court was also opined that foreign governments, statutory authorities and banking regulators are in denial that VCs do not have the status of a legal tender, as they are not backed by a central authority.

While the Supreme Court dismissed the contention of the petitioners that they are carrying on an activity over which RBI cannot exercise its regulatory powers, it ruled against RBI’s order saying it was “disproportionate” and prevented people and companies from engaging in a business which is legal in India.

BBB received a total of 37,283 scams in 2019 with employment scams ranking no.1 most risky. However, the bureau said the most notable rise in scams was that in cryptocurrency.

Cryptocurrencies, however, pose the risk of huge scams and swindling of money as it acts both as a store of value and medium of exchange while having no regulatory oversight.

Cryptocurrency scams in 2019 are reported to have caused losses of about $3,000, up from $2,100 in 2018.