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REPORTABLE    

IN THE SUPREME COURT OF INDIA  CIVIL ORIGINAL JURISDICTION  

Writ Petition (Civil) No.528 of 2018      

 INTERNET AND MOBILE ASSOCIATION   OF INDIA        …. Petitioner   

Versus    

RESERVE BANK OF INDIA    ... Respondent    

WITH    

Writ Petition (Civil) No.373 of 2018  

J U D G M E N T      

V. Ramasubramanian, J.     

1. THE STORY LINE:   

1.1. Reserve Bank of India (hereinafter, “RBI”) issued a  

“Statement on Developmental and Regulatory Policies” on April  

5, 2018, paragraph 13 of which directed the entities regulated by RBI  

(i) not to deal with or provide services to any individual or business  

entities dealing with or settling virtual currencies and (ii) to exit the  

relationship, if they already have one, with such individuals/  

business entities, dealing with or settling virtual currencies (VCs).

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1.2. Following the said Statement, RBI also issued a circular  

dated April 6, 2018, in exercise of the powers conferred by Section  

35A read with Section 36(1)(a) and Section 56 of the Banking  

Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank  

of India Act, 1934 (hereinafter, “RBI Act, 1934”) and Section 10(2)  

read with Section 18 of the Payment and Settlement Systems Act,  

2007, directing the entities regulated by RBI (i) not to deal in virtual  

currencies nor to provide services for facilitating any person or entity  

in dealing with or settling virtual currencies and (ii) to exit the  

relationship with such persons or entities, if they were already  

providing such services to them.   

1.3. Challenging the said Statement and Circular and seeking a  

direction to the respondents not to restrict or restrain banks and  

financial institutions regulated by RBI, from providing access to the  

banking services, to those engaged in transactions in crypto assets,  

the petitioners have come up with these writ petitions. The petitioner  

in the first writ petition is a specialized industry body known as  

‘Internet and Mobile Association of India’ which represents the  

interests of online and digital services industry. The petitioners in the  

second writ petition comprise of a few companies which run online  

crypto assets exchange platforms, the shareholders/founders of these  

companies and a few individual crypto assets traders. It must be  

stated here that the individuals who are some of the petitioners in the

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second writ petition are young high-tech entrepreneurs who have  

graduated from premier educational institutions of technology in the  

country.   

Contents of the impugned Statement and Circular of RBI:  

1.4. The Statement dated 05-04-2018 issued by RBI, impugned  

in these writ petitions, sets out various developmental and regulatory  

policy measures for the purpose of (i) strengthening regulation and  

supervision (ii) broadening and deepening financial markets (iii)  

improving currency management (iv) promoting financial inclusion  

and literacy and (v) facilitating data management. Paragraph 13 of the  

said statement which falls under the caption “currency  

management” deals directly with virtual currencies and the same  

constitutes the offending portion of the impugned Statement.  

Therefore, paragraph 13 of the impugned Statement alone is  

extracted as follows:   

13. Ring-fencing regulated entities from virtual  

currencies   

Technological innovations, including those underlying  

virtual currencies, have the potential to improve the  

efficiency and inclusiveness of the financial system.  

However, Virtual Currencies (VCs), also variously referred  

to as crypto currencies and crypto assets, raise concerns of  

consumer protection, market integrity and money  

laundering, among others.   

Reserve Bank has repeatedly cautioned users, holders  

and traders of virtual currencies, including Bitcoins,  

regarding various risks associated in dealing with such

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virtual currencies. In view of the associated risks, it has  

been decided that, with immediate effect, entities  

regulated by RBI shall not deal with or provide services to  

any individual or business entities dealing with or settling  

VCs. Regulated entities which already provide such  

services shall exit the relationship within a specified time.  

A circular in this regard is being issued separately.     

1.5. The Circular dated 06-04-2018 deals entirely with virtual  

currencies and the prohibition on dealing with the same. This  

Circular is statutory in character, issued in exercise of the powers  

conferred by (i) the Reserve Bank of India Act, 1934 (ii) the Banking  

Regulation Act, 1949 and (iii) the Payment Settlement Systems Act,  

2007. This Circular in its entirety is reproduced as follows:  

Prohibition on dealing in Virtual Currencies (VCs)    

Reserve Bank has repeatedly through its public notices on  

December 24, 2013, February 01, 2017 and December 05,  

2017, cautioned users, holders and traders of virtual  

currencies, including Bitcoins, regarding various risks  

associated in dealing with such virtual currencies.  

2. In view of the associated risks, it has been decided that,  

with immediate effect, entities regulated by the Reserve  

Bank shall not deal in VCs or provide services for  

facilitating any person or entity in dealing with or settling  

VCs. Such services include maintaining accounts,  

registering, trading, settling, clearing, giving loans against  

virtual tokens, accepting them as collateral, opening  

accounts of exchanges dealing with them and  

transfer/receipt of money in accounts relating to  

purchase/sale of VCs.  

3. Regulated entities which already provide such services  

shall exit the relationship within three months from the  

date of this circular.  

4. These instructions are issued in exercise of powers  

conferred by section 35A read with section 36(1)(a) of

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Banking Regulation Act, 1949, section 35A read with  

section 36(1)(a) and section 56 of the Banking Regulation  

Act, 1949, section 45JA and 45L of the Reserve Bank of  

India Act, 1934 and Section 10(2) read with Section 18 of  

Payment and Settlement Systems Act, 2007.  

2. THE SETTING  

2.1. The Statement dated 05-04-2018 and the Circular dated  

06-04-2018 of RBI, impugned in these writ petitions, were a  

culmination of a flurry of activities by different stakeholders,  

nationally and globally, over a period of about 5 years. Therefore, it is  

necessary to see the setting in which (or the backdrop against which)  

the impugned decisions of RBI were posited. While doing so, it will  

also be necessary to take note of the developments that have taken  

place during the pendency of these writ petitions, so that we have a  

close-up as well as aerial view of the setting.  

2.2. It was probably for the first time that RBI took note of  

technology risks in changing business environment, in their Financial  

Stability Report of June 2013. Paragraph 3.60 of this report noted  

that globally, the use of online and mobile technologies was driving  

the proliferation of virtual currencies. Therefore, the report stated that  

those developments pose challenges in the form of regulatory, legal  

and operational risks. Box 3.4 of the said report dealt specifically with  

virtual currency schemes and it started by defining virtual  

currency as a type of unregulated digital money, issued and

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controlled by its developers and used and accepted by the  

members of a specific virtual community. It was declared in Box  

3.4 of the said report that “the regulators are studying the impact of  

online payment options and virtual currencies to determine potential  

risks associated with them”.   

2.3. In June 2013, the Financial Action Task Force (hereinafter,  

“FATF”), also known by its French name, Groupe d'action financière,  

which is an inter-governmental organization founded in 1989 on the  

initiative of G-7 to develop policies to combat money laundering, came  

up with what came to be known as “New Payment Products and  

Services Guidance” (NPPS Guidance, 2013). It was actually a  

Guidance for a Risk Based Approach to Pre-paid cards, Mobile  

Payments and Internet-based Payment Services. But this Guidance  

did not define the expressions ‘digital currency’, ‘virtual currency’, or  

‘electronic money’, nor did it focus on virtual currencies, as distinct  

from internet based payment systems that facilitate transactions  

denominated in real money (such as Paypal, Alipay, Google Checkout  

etc.). Therefore, a short-term typologies project was initiated by FATF  

for promoting fuller understanding of the parties involved in  

convertible virtual currency systems and for developing a risk matrix.   

2.4. On 24-12-2013, a Press Release was issued by RBI  

cautioning the users, holders and traders of virtual currencies about  

the potential financial, operational, legal and customer protection and

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security related risks that they are exposing themselves to. The Press  

Release noted that the creation, trading or usage of VCs, as a medium  

of payment is not authorized by any central bank or monetary  

authority and hence may pose several risks narrated in the Press  

Release.  

2.5. On 27-12-2013, newspapers reported the first ever raid in  

India by the Enforcement Directorate, of 2 Bitcoin trading firms in  

Ahmedabad, by name, rBitco.in and buysellbitco.in. This was stated to  

be India's first raid on a Bitcoin trading firm and the second globally,  

after Federal Bureau of Investigation of the United States of America  

conducted a raid in October of the same year.  

2.6. Thereafter, a report titled “Virtual Currencies – Key  

Definitions and Potential AML/CFT Risks” was issued in June 2014  

by FATF, highlighting, both legitimate uses and potential risks  

associated with virtual currencies. What is of great significance about  

this FATF report is that it defined 2 important words. The FATF  

report defined ‘Virtual currency’ as a digital representation of  

value that can be traded digitally and functioning as (1) a  

medium of exchange; and/or (2) a unit of account; and/or (3) a  

store of value, but not having a legal tender status. The FATF  

report also defined ‘Cryptocurrency’ to mean a math-based,  

decentralised convertible virtual currency protected by  

cryptography by relying on public and private keys to transfer

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value from one person to another and signed cryptographically  

each time it is transferred.  

2.7. Again, in June 2015, FATF came up with a “Guidance for a  

Risk Based Approach to Virtual Currencies”, which suggested certain  

recommendations, as follows:  

A. Countries to identify, assess and understand risks and to take  

action aimed at mitigating such risks. National authorities to  

undertake a coordinated risk assessment of VC products and services  

that:   

(1) enables all relevant authorities to understand how specific  

virtual currency products and services function and impact  

regulatory jurisdictions for Anti Money Laundering (‘AML’ for  

short)/Combating the Financing of Terrorism (‘CFT’ for short)  

treatment purposes;   

(2) promote similar AML/CFT treatment for similar products and  

services having same risk profiles.   

B. Where countries are prohibiting virtual currency products and  

services, they should take into account among other things, the  

impact a prohibition would have on local and global level of money  

laundering/terrorism financing risks, including whether prohibition  

would drive such payment activities underground, where they will  

operate without AML/CFT controls.

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2.8. The FATF submitted a report in October 2015 on  

“Emerging Terrorist Financing Risks”. The report was divided into  

four parts, under the captions (i) introduction (ii) financial  

management of terrorist organisations (iii) traditional terrorist  

financing methods and techniques and (iv) emerging terrorist  

financing threats and vulnerabilities. Even while acknowledging in  

part 3 of the report that the traditional methods of moving funds  

through the banking sector happens to be the most efficient way of  

movement of funds for terrorist organisations, the report  

acknowledged the emergence of new payment products and services  

in part 4 of the report. The report took note of different methods of  

terrorist financing, such as self-funding, crowd funding, social  

network fund raising with prepaid cards etc. Coming to virtual  

currencies, the report noted the following:   

“Virtual currencies have emerged and attracted investment  

in payment infrastructure built on their software protocols.  

These payment mechanisms seek to provide a new method  

for transmitting value over the internet. At the same time,  

virtual currency payment products and services (VCPPS)  

present ML/TF risks. The FATF made a preliminary  

assessment of these ML/TF risks in the report Virtual  

Currencies Key Definitions and Potential AML/CFT Risks.  

As part of a staged approach, the FATF has also developed  

Guidance focusing on the points of intersection that provide  

gateways to the regulated financial system, in particular  

convertible virtual currency exchangers.   

Virtual currencies such as bitcoin, while representing a  

great opportunity for financial innovation, have attracted  

the attention of various criminal groups, and may pose a

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risk for TF (terrorist financing). This technology allows  

for anonymous transfer of funds internationally.  

While the original purchase of the currency may be  

visible (e.g., through the banking system), all  

following transfers of the virtual currency are  

difficult to detect. The US Secret Service has observed  

that criminals are looking for and finding virtual currencies  

that offer: anonymity for both users and transactions; the  

ability to move illicit proceeds from one country to another  

quickly; low volatility, which results in lower exchange  

risk; widespread adoption in the criminal underground;  

and reliability.   

Law enforcement agencies are also concerned about the  

use of virtual currencies (VC) by terrorist organisations.  

They have seen the use of websites affiliated with terrorist  

organisations to promote the collection of bitcoin donations.  

In addition, law enforcement has identified internet  

discussions among extremists regarding the use of VC to  

purchase arms and education of less technical extremists  

on use of VC. For example, a posting on a blog linked to  

ISIL proposed using bitcoin to fund global extremist  

efforts.” (emphasis supplied)  

In support of the above conclusions, the report also indicated a case  

study, which concerned the arrest of one Ali Shukri Ameen, who  

admitted to have had a Twitter account with 4000 followers. He  

claimed to have used his Twitter handle to provide instructions on  

how to use a virtual currency to mask the provision of funds to ISIL.  

In an article, the link to which he tweeted to his followers, it was  

elaborated how jihadists could utilize the virtual currency to fund  

their efforts. (It must be noted that the report also took note of how  

prepaid cards and other internet-based payment services could also  

be used for terror financing).  

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2.9.  The Bank of International Settlements (hereinafter, “BIS”)  

which is a body corporate established under the laws of Switzerland,  

way back in the year 1930 pursuant to an agreement signed at  

Hague on 22-01-1930 and owned by 60 Central Banks of different  

countries including RBI, has several committees, one of which is  

“Committee on Payments and Market Infrastructure” (CPMI). This  

committee started taking note of digital currencies, while dealing with  

innovations in retail payments. This committee formed a sub-group  

within the CPMI Working Group on Retail Payments, to undertake an  

analysis of digital currencies. On the basis of the findings of the sub-

group, CPMI of BIS submitted a report in November 2015 on Digital  

currencies. The sub-group identified three key aspects relating  

to the development of digital currencies one of which was that  

the assets featured in digital currency schemes, typically have  

some monetary characteristics such as being used as a means  

of payment, but are not backed by any authority. In Note 1 under  

the Executive Summary of the said report, it was stated as follows:  

“although digital currencies typically do have some, but not all  

the characteristics of a currency, they may also have  

characteristics of a commodity or other asset. Their legal  

treatment can vary from jurisdiction to jurisdiction.” (emphasis  

supplied) Paragraph 4 of the said report dealt with the “implications  

for central banks, of digital currencies and their underlying

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decentralized payment mechanisms”. In the said paragraph, the  

report indicated that “digital currencies represent a technology for  

settling peer to peer payments without trusted third parties and may  

involve a non-sovereign currency”. Though the report stated that the  

impact of digital currencies on the mainstream financial  

system is negligible as at that time, some of the implications  

indicated in the report may actually materialize if there was  

widespread adoption of digital currencies. Two risks were noted  

in the report and they were consumer protection and operational  

risks. But in so far as distributed ledger technology is concerned, the  

report was positive. However, the report cautioned that a  

widespread substitution of bank notes with digital currencies  

could lead to a decline in central banks’ non-interest paying  

liabilities and that if the adoption and use of digital currencies  

were to increase significantly, the demand for existing  

monetary aggregates and the conduct of monetary policy could  

be affected. Nevertheless, the report stated that at present, the use  

of private digital currencies is too low for these risks to materialize.   

2.10. In December 2015, the Financial Stability Report of RBI  

was issued, and it included a chapter on “Financial Sector  

Regulation”. The same dealt with the challenges posed by technology-

based innovations such as virtual currency schemes. In Box 3.1 of  

the said report, it was indicated that though the initial concerns

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over the emergence of virtual currency schemes were about the  

underlying design, episodes of excessive volatility in their value  

and their anonymous nature which goes against global money  

laundering rules rendered their very existence questionable.  

However, the report noted that the regulators and authorities need to  

keep pace with developments, as many of the world’s largest banks  

started supporting a joint effort for setting up of private blockchain  

and building an industry-wide platform for standardizing the use of  

technology.   

      2.11. In December 2016, the Financial Stability Report of RBI  

came. It took note of the rapid developments taking place in Fin Tech  

(financial technology) globally and exhorted the regulators to gear up  

to adopt technology (christened as RegTech). Paragraph 3.22 of the  

said report identified the establishment of regulatory sandboxes1 and  

innovation hubs for testing new products and services and providing  

support/guidance to regulated as well as unregulated entities. The  

report also noted that fast paced innovations such as virtual  

currencies have brought risks and concerns about data security and  

consumer protection on one hand and far reaching potential impact  

on the effectiveness of monetary policy itself on the other hand. The  

report took note of the fact that many central banks around the  

                                                 1 Regulatory sandbox refers to live testing of new products/services in a controlled/test  

regulatory environment.  

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world, had already started examining the feasibility of creating their  

own digital currencies, after fretting over them initially.    

2.12. In January 2017, the Institute for Development and  

Research in Banking Technology (IDRBT) established by RBI in 1996  

as an institution to work at the intersection of banking and  

technology submitted a Whitepaper on “Applications of blockchain  

technology to banking and financial sector in India”. While dealing  

with the applications of blockchain technology in chapter 3, the  

whitepaper also enlisted the advantages and disadvantages of digital  

currency. While the advantages indicated were (i) control and  

security, (ii) transparency and (iii) very low transaction cost, the  

disadvantages indicated were risk and volatility.   

2.13. On 01-02-2017, RBI again issued a Press Release  

cautioning users, holders and traders of virtual currencies. Closely  

on the heels of this Press Release, the Government of India, Ministry  

of Finance, constituted, in April 2017, an Inter-Disciplinary  

Committee comprising of the Special Secretary (Economic Affairs)  

and representatives of the Departments of Economic Affairs,  

Financial Services, Revenue, Home Affairs, Electronics and  

Information Technology, RBI, NITI Aayog, and State Bank of India.  

The task of the Committee was to (i) take stock of the status of VCs in  

India and globally, (ii) examine the existing global regulatory and  

legal structures and (iii) suggest measures for dealing with VCs. The

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Committee was mandated to submit a report within 3 months.  

2.14. The report of the Inter-Disciplinary Committee was  

submitted on 25-07-2017 and it contained certain recommendations  

which are as follows:      

(i) A very visible and clear warning should be issued  

through public media informing the general public that  

the Government does not consider crypto-currencies  

such as bitcoins as either coins or currencies. These are  

neither a legally valid medium of exchange nor a desirable  

way to store value. The Government also does not consider it  

desirable for people to use or invest in something which has  

no real underlying asset value.  

(ii) A very visible and clear warning should be issued,  

through public media, advising all those who have been  

offering to buy or sell these currencies, or offering a  

platform to exchange these currencies, to stop this  

forthwith.    

(iii) Those who have bought these currencies in good  

faith and are holding these should be advised to offload  

these in any jurisdiction where it is not illegal to do so.   

(iv) All consumer protection and enforcement agencies  

should be advised to take action against all those who,  

despite these warnings, indulge in buying/selling or offering  

platform for trading of these currencies, since the presumption  

would be that it is being done with illegal, fraudulent or tax  

evading intent.   

(v) If the Government agrees with the above  

recommendations, a committee should be constituted  

with members from DEA, RBI, SEBI, DoR, DoLA, Consumer  

Affairs, and MeitY, to suggest whether any further actions,  

including legislative changes, are required to make  

possession, trade and use of crypto-currencies expressly  

illegal and punishable.   

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(vi) Finally, it is clarified that none of the above  

recommendations are meant to restrict the use of  

blockchain technology for purposes other than that of  

creating or trading in crypto-currencies.  

2.15. In August 2017, Securities and Exchange Board of India  

(SEBI) established a 10-member advisory panel to examine global  

fintech developments and report on opportunities for the Indian  

securities market. The goal of the new Committee on Financial and  

Regulatory Technologies was to help prepare India to adopt fintech  

solutions and foster innovations within the country.   

2.16. On 02-11-2017, the Government of India constituted a  

committee chaired by the Secretary (Department of Economic Affairs)  

and comprising of Secretary, Ministry of Electronic and Information  

Technology, Chairman, SEBI and Deputy Governor, RBI (Inter-

Ministerial Committee) to propose specific actions to be taken in  

relation to VCs.   

2.17. At that stage, two persons, by name, Siddharth Dalmia  

and Vijay Pal Dalmia came up with a writ petition in WP (C) No.1071  

of 2017 under Article 32 of the Constitution of India seeking the  

issue of a writ of mandamus directing the respondents to declare as  

illegal and ban all virtual currencies as well as ban all websites and  

mobile applications which facilitate the dealing in virtual currencies.   

Similarly, another person, by name, Dwaipayan Bhowmick came up  

with a writ petition in WP (C) No.1076 of 2017, seeking the issue of a

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writ of mandamus directing the respondents to regulate the flow of  

Bitcoin (crypto money) and to constitute a committee of experts to  

consider the prohibition/regulation of Bitcoin and other crypto  

currencies. On 13.11.2017, this Court ordered notice in both the writ  

petitions.  

2.18. Around the same time, namely, November 2017, the Inter-

Regulatory Working Group on Fintech and Digital Banking, set up by  

RBI, pursuant to a decision taken by the Financial Stability and  

Development Council Sub-Committee way back in April 2016,  

submitted a report. This report, in paragraph 2.1.3.2, dealt with  

Digital Currencies. It defined ‘digital currencies’ to mean digital  

representations of value, issued by private developers and  

denominated in their own unit of account. The Report also stated  

that “digital currencies are not necessarily attached to a fiat  

currency, but are accepted by natural or legal persons as a  

means of exchange.”  

2.19. Thereafter, RBI issued another Press Release dated 05-

12-2017 reiterating the concerns expressed in earlier press releases.  

The Government of India, Ministry of Finance also issued a statement  

on 29-12-2017 cautioning the users, holders and traders of VCs that  

they are not recognized as legal tender and that the investors should  

avoid participating in them.   

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2.20. On 01-02-2018, the Minister of Finance, in his budget  

speech said that the Government did not consider crypto currencies  

as legal tender or coin and that all measures to eliminate the use of  

these currencies in financing illegitimate activities or as part of the  

payment system, will be taken by the Government. However, he also  

said that the Government will explore the use of blockchain  

technology proactively for ushering in digital economy.  

2.21. The Central Board of Direct Taxes (CBDT), by an Office  

Memorandum dated 05-03-2018, submitted to the Department of  

Economic Affairs, a draft scheme proposing a ban on  

cryptocurrencies. But the draft scheme advocated a step-by-step  

approach, as many persons had already invested in cryptocurrencies.  

The scheme also contained an advice to carry out legislative  

amendments before banning them.    

2.22. In the wake of a meeting of G-20 Finance Ministers and  

Central Bank Governors that was scheduled to be held in mid-March  

2018, the Financial Stability Board2 (FSB) sent out a communication  

dated 13-03-2018. It was indicated in the said communication that  

as per the initial assessment of FSB, crypto assets did not pose risks  

to global financial stability, as their combined global market value  

even at their peak, was less than 1% of global GDP. But the report  

also noted that the initial assessment was likely to change and that                                                    2 FSB was established by G-20 in April 2009, as a successor to the Financial Stability  

Forum founded in 1999 by G-7 Finance Ministers and Central Bank Governors.   

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crypto assets raised a host of issues around consumer and investor  

protection as well as their use to shield illicit activity and for money  

laundering and terrorist financing.    

2.23. The communique issued by G-20, after the meeting of its  

Finance Ministers and Central Bank Governors on March 19-20,  

2018 also acknowledged that technological innovation including  

that underlying crypto assets, has the potential to improve the  

efficiency and inclusiveness of the financial system and the  

economy more broadly. But it also noted that crypto assets do  

raise issues with respect to consumer and investor protection,  

market integrity, tax evasion, money laundering and terrorist  

financing. Though crypto assets lacked the key attributes of  

sovereign currencies, they could, at some point, have financial  

stability implications. Therefore, the communique resolved to  

implement FATF standards and to call on international standard-

setting bodies to continue their monitoring of crypto assets and their  

risks.   

2.24. On 02-04-2018, RBI sent an e-mail to the Government,  

enclosing a note on regulating crypto assets. It was with reference to  

the record of discussions of the last meeting of the Inter-Ministerial  

Committee on virtual currency. This note examined the pros and  

cons of banning and regulating cryptocurrencies and suggested that  

it had to be done, backed by suitable legal provisions.

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2.25. Immediately thereafter, the Statement dated 05-04-2018  

and the Circular dated 06-04-2018, impugned in these writ petitions  

came to be issued by RBI. It appears that at around the same time  

(April 2018), the Inter-Ministerial Committee submitted its initial  

report, (or a precursor to the report) along with a draft bill known as  

Crypto Token and Crypto Asset (Banning, Control and  

Regulation) Bill, 2018.3       

2.26. But in the meantime, a few companies which run online  

crypto assets exchange platforms together with the shareholders/  

founders of those companies and a few individual crypto assets  

traders came up with the first of the writ petitions on hand, namely  

WP (C) No. 373 of 2018, challenging the aforesaid Statement dated  

05-04-2018 and Circular dated 06-04-2018. On 01-05-2018 this writ  

petition was directed to be tagged along with the writ petitions WP (C)  

Nos. 1071 and 1076 of 2017 which sought a ban on or regulation of  

cryptocurrencies.     

2.27. On 11-05-2018, all the three writ petitions, namely WP (C)  

Nos. 1071 and 1076 of 2017 and 373 of 2018, came up for hearing.  

At that time, it was pointed out that a few High Courts were also  

seized of writ petitions concerning cryptocurrencies. Therefore, this  

Court gave liberty to RBI to move appropriate applications for  

                                                 3 The fate of the 2018 Bill is not known but a fresh bill called ‘Banning of  

Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ has been  

submitted.

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transfer of all those cases to this Court.   

2.28. Accordingly, RBI came up with transfer petitions and the  

transfer petitions were taken on Board on 17-05-2018 and a  

direction was issued that no High Court shall entertain any writ  

petition relating to the impugned Circular dated 06-04-2018. This  

Court also passed an interim order on 17-05-2018 permitting the  

petitioners in WP (C) No. 1071 of 2017 to submit a representation to  

RBI with a further direction to RBI to deal with the same in  

accordance with law.  

2.29. In the meantime, the Internet and Mobile Association of  

India came up with the second of the writ petitions on hand, namely  

WP (C) No. 528 of 2018 and notice was ordered in the said writ  

petition on 03-07-2018.  While doing so, this Court issued a direction  

to RBI to dispose of the representation, if any, already submitted by  

the Association. Accordingly, RBI considered the representation and  

issued two communications dated 06-07-2018 and 09-07-2018.  

2.30. On 23-07-2018, SEBI sent its comments on the 2018 Bill,  

to the Department of Economic Affairs. Their primary objection to the  

Bill was that they are not best suited to be the regulators of crypto  

assets and tokens.  

2.31. Next came the Annual Report of RBI for the year 2017-

2018. It contained a separate Box II.3.2 on “Cryptocurrency: Evolving  

challenges”. The relevant portion of the same reads as follows:

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“Though cryptocurrency may not currently pose systemic  

risks, its increasing popularity leading to price bubbles  

raises serious concerns for consumer and investor  

protection, and market integrity. Notably, Bitcoins lost  

nearly US$200 billion in market capitalisation in about two  

months from the peak value in December 2017. As per the  

CoinMarketCap, the overall cryptocurrency market had  

nearly touched US$800 billion in January 2018.  

The cryptocurrency eco-system may affect the  

existing payment and settlement system which  

could, in turn, influence the transmission of  

monetary policy. Furthermore, being stored in  

digital/electronic media – electronic wallets – it is prone to  

hacking and operational risks, a few instances of which  

have already been observed globally. There is no  

established framework for recourse to customer  

problems/disputes resolution as payments by  

cryptocurrencies take place on a peer-to-peer basis without  

an authorised central agency which regulates such  

payments. There exists a high possibility of its usage for  

illicit activities, including tax avoidance. The absence of  

information on counterparties in such peer-to-peer  

anonymous/ pseudonymous systems could subject users  

to unintentional breaches of anti-money laundering laws  

(AML) as well as laws for combating the financing of  

terrorism (CFT) (Committee on Payments and Market  

Infrastructures – CPMI, 2015). The Bank for  

International Settlements (BIS) has recently warned  

that the emergence of cryptocurrencies has become a  

combination of a bubble, a Ponzi scheme and an  

environmental disaster, and calls for policy  

responses (BIS, 2018). The Financial Action Task Force  

(FATF) has also observed that cryptoassets are being used  

for money laundering and terrorist financing. A globally  

coordinated approach is necessary to prevent abuses and  

to strictly limit interconnections with regulated financial  

institutions.   

On a global level, regulatory responses to cryptocurrency  

have ranged from a complete clamp down in some  

jurisdictions to a comparatively ‘light touch regulatory  

approach’. The Securities and Exchange Commission (SEC)

23    

and the Commodity Futures Trading Commission (CFTC)  

have emerged as the primary regulators of  

cryptocurrencies in the United States, where these assets  

like most other jurisdictions, do not enjoy the legal tender  

status. Asian countries have experienced oversized  

concentration of crypto players – Japan and South Korea  

account for the biggest shares of crypto asset markets in  

the world. In the case of Bitcoins, half of transactions  

worldwide are carried out in Japan. In September 2017,  

Japan approved transactions by its exchanges in  

cryptocurrencies. China’s exchanges hosted a  

disproportionately large volumes of global Bitcoin trading  

until their ban recently. […]  

Developments on this front need to be monitored as some  

trading may shift from exchanges to peer-to-peer mode,  

which may also involve increased usage of cash.  

Possibilities of migration of crypto exchange houses to dark  

pools/cash and to offshore locations, thus raising concerns  

on AML/CFT and taxation issues, require close watch.”  

(emphasis supplied)  

2.32. In this background, all the four writ petitions namely WP  

(C) Nos. 1071 and 1076 of 2017 (seeking a ban) and WP (C) Nos. 373  

and 528 of 2018 (challenging the indirect ban) came up for hearing,  

along with the transfer petitions, on 25-10-2018, when this Court  

was informed that the Union of India had already constituted a  

committee and that this Inter-Ministerial Committee was deliberating  

on the issue. Therefore, the writ petitions were adjourned to enable  

the Committee to come up with their recommendations.  

2.33. It appears that the Committee so constituted, submitted a  

report on 28-02-2019 indicating the action to be taken in relation to  

virtual currencies. A bill known as “Banning of Cryptocurrency and

24    

Regulation of Official Digital Currency Bill, 2019” had also been  

prepared by then to be introduced in the Lok Sabha. To this report of  

the Committee, is appended, the minutes of the discussions of the  

Committee in the meetings held on 27-11-2017, 22-02-2018, and 09-

01-2019. The contents of the report of the Inter-Ministerial  

Committee dated 28-02-2019, can be well understood only if we look  

at the Record of Discussions of the meetings of the Committee. The  

Record of Discussions held on 27-11-2017 shows that the Inter-

Ministerial Committee was of the initial view that the banning  

option was difficult to implement and that it can also drive  

some operators underground, encouraging the use of such  

currencies for illegitimate purposes. But it was generally agreed in  

the said meeting that VCs cannot be treated as currency. However, in  

the meeting held on 22-02-2018, the Deputy Governor, RBI made  

an initial intervention and argued in favour of using the  

banning option. Eventually, the other members of the Committee  

agreed, and it was resolved in the said meeting that a detailed paper  

on the option of banning VCs, including a draft law could be  

prepared and submitted by RBI and CBDT. It was also resolved to  

prepare a detailed paper within Department of Economic Affairs on  

options of regulating crypto assets. Following the same, it was  

resolved in the next meeting held on 09-01-2019 that a Standing  

Committee should be constituted to revisit certain issues. Eventually,

25    

the Inter-Ministerial Committee submitted the aforesaid report dated  

28-02-2019. The key aspects of this report are:  

i. Virtual currency is a digital representation of value that can  

be digitally traded and it can function as a medium of exchange  

and/or a unit of account and/or a store of value, though it does not  

have the status of a legal tender.    

ii. Initial Coin Offerings (hereinafter, “ICO”) are a way for  

companies to raise money by issuing digital tokens in exchange for  

fiat currency or cryptocurrency, but there is a clear risk with the  

issuance of ICOs as many of the companies are looking to raise  

money without having any tangible products. In the year 2018, as  

many as 983 ICOs were issued, through which funds to the tune of  

USD 20 billion were raised.   

iii. Virtual currencies are accorded different legal treatment by  

different countries, which range from barter transactions to mode of  

payment to legal tender. Countries like China have imposed a  

complete ban.  

iv. The mining of non-official virtual currencies is very resource-

intensive requiring enormous amounts of electricity which may prove  

to be an environmental disaster.   

v. They may also affect the ability of the Central Banks to carry  

out their mandates.   

vi. China has not only banned trading in cryptocurrencies but

26    

also used its firewall to ban crypto currency exchanges. China even  

blocked crypto currency focused accounts from WeChat and crypto-

currency related content from Baidu. However, Chinese traders use  

VPNs to circumvent these bans.  

The report dated 28-02-2019 of the Inter-Ministerial Committee  

finally made certain recommendations which included a complete  

ban on private cryptocurrencies.    

2.34. It is important to note here that the report of the Inter-

Ministerial Committee dated 28-02-2019 not only recommended  

a ban, but also specifically endorsed the stand taken by RBI to  

eliminate the interface of institutions regulated by RBI from  

crypto currencies.   

2.35. As a matter of fact, the issue of the impugned Circular by  

RBI was even taken note of by the Financial Stability Board (of G-20),  

in a document titled ‘Crypto Assets Regulators Directory’, submitted  

to G-20 Finance Ministers and Central Bank Governors in April  

2019. While acknowledging the fact that RBI does not have a legal  

mandate to directly regulate crypto assets, this Directory indicated  

that with a view to ring fence its regulated entities from the risks  

associated with VCs, RBI has issued the impugned Circular.  

2.36. In a report released in June 2019 under the caption  

‘Guidance for a risk-based approach to Virtual Assets and  

Virtual Asset Service Providers’, FATF reiterated a risk-based

27    

approach advocated in FATF 2012 and 2015 recommendations. At  

the same time, this Guidance recognized that a jurisdiction has  

the discretion to prohibit VA activities and VASPs in order to  

support other policy goals not addressed in the Guidance such  

as consumer protection, safety and soundness or monetary  

policy. But the Guidance also suggested that countries which  

prohibit VA activities or VASPs should also assess the effect that  

such prohibition may have on their money laundering and terrorist  

financing risks.   

2.37. It is also relevant to note here that the Government was  

conscious of the impugned Circular issued by RBI. This can be seen  

from the answer provided by the Minister of State in the Ministry of  

Finance, on 16-07-2019 in response to a question raised in the Rajya  

Sabha (Unstarred question no. 2591). While answering in the  

negative, the question whether the Government had banned  

cryptocurrencies in the country, the Minister of State added that RBI  

has been issuing advisories, press releases and circulars.          

2.38. On 22-07-2019, the Report of the Inter-Ministerial  

Committee, recommending a ban, along with the draft of the Bill  

“Banning of Crypto currency and Regulation of Official Digital  

Currency Bill 2019”, was hosted in the website of the Department of  

Economic Affairs. Therefore, on 08-08-2019, the first two writ  

petitions namely WP (C) Nos. 1071 and 1076 of 2017 were delinked

28    

and adjourned to January 2020, since, the prayers made in these  

two writ petitions (seeking a ban) appeared substantially answered.  

2.39. Thereafter, the present writ petitions were taken up for  

hearing and this Court passed an interim direction on 21-08-2019,  

directing the Reserve Bank of India to give a detailed point-wise reply  

to the representations dated 29-05-2018 and 30-05-2018. The reply  

already given by RBI to the representations dated 29-05-2018 and  

30-05-2018 was found by this Court to be inadequate and hence this  

direction. Accordingly, RBI gave a detailed point-wise reply on 04-09-

2019 and 18-09-2019. Thereafter, the present writ petitions were  

taken up for hearing.    

3. FLASHBACK  

3.1. The archeological excavations carried out at the (world wide  

web) sites, reveal that this digital currency civilization is just 12 years  

old (at the most, 37 years). But these excavations became necessary  

since virtual currencies, known by different names such as crypto  

assets, crypto currencies, digital assets, electronic currency, digital  

currency etc., elude an exact and precise definition, making it  

impossible to identify them as belonging either to the category of legal  

tender solely or to the category of commodity/good or stock solely.    

3.2. Any attempt to define what a virtual currency is, it  

appears, should follow the Vedic analysis of negation namely “neti,

29    

neti”. Avadhuta Gita of Dattatreya says, “by such sentences as ‘that  

thou are’, our own self or that which is untrue and composed of  

the 5 elements, is affirmed, but the sruti says ‘not this not  

that’.”4 The concept of Neti Neti is an expression of something  

inexpressible, but which seeks to capture the essence of that to  

which no other definition applies. This conundrum will squarely  

apply to crypto currencies and hence this flashback, into its genesis,  

so that its DNA is sequenced.     

3.3. Though the idea of digital cash appears to have been first  

introduced by David Lee Chaum, an American Computer Scientist  

and Cryptographer way back in 1983 in a research paper and was  

actually launched by him in 1990 through a company by name  

Digicash, the company filed for bankruptcy in 1998, with Digicash  

becoming Digi-crash. But the actual story of creation of  

cryptocurrencies began, in a more scientific way, according to  

Nathaniel Popper, the New York Times journalist,5 in 1997, when a  

British Cypherpunk6 by name Adam Back released a plan called  

hashcash, which claimed to have solved some of the problems that  

stalled the digital cash project. But this program had its  

shortcomings. Another Cypherpunk by name Nick Szabo, came up  

                                                 4 tattvamasyādivākyena  svātmā hi  pratipāditaḥ     neti neti śrutirbrūyād anṛtaṁ pāñcabhautikam-  5 From his book “Digital Gold: Bitcoin and the inside story of the Misfits and Millionaires  Trying to Reinvent Money”.  6 Cypherpunk is an activist advocating widespread use of strong cryptography and privacy  

enhancing technologies, as a route to social and political change. This word was added to  

the Oxford English Dictionary in November 2006.

30    

with a concept called bitgold, which attempted to solve hashcash’s  

shortcomings. Soon, an American by name Wei Dai came up with  

something called b-money. Hal Finney, another American created his  

own option. But all of them had a common goal, which, as revealed  

by Adam Back was as follows:  

“What we want is fully anonymous, ultra low  transaction cost, transferable units of exchange. If  

we get that going… the banks will become the  obsolete dinosaurs they deserve to become.”  

  3.4. But all these experiments continued to hit roadblocks,  

until the emergence of Satoshi Nakamoto (who still remains  

anonymous) in the world of netizens. It appears that Satoshi sent  

an e-mail in August 2008 to Adam Back attaching a white paper  

prepared by him on what was called ‘Bitcoin’. The gist of what  

Satoshi stated in his paper is indicated in simple terms, for the  

understanding of the common man, by Nathaniel Popper, in his  

book as follows:  

“Rather than relying on a central bank or company to issue  

and keep track of the money – as the existing financial  

system and Chaum’s DigiCash did – this system was set  

up so that every Bitcoin transaction, and the holdings of  

every user, would be tracked and recorded by the  

computers of all the people using the digital money, on a  

communally maintained database that would come to be  

known as the blockchain.    

The process by which this all happened had many layers,  

and it would take even experts, months to understand how  

they all worked together. But the basic elements of the  

system can be sketched out in rough terms, and were in  

Satoshi’s paper, which would become known as the

31    

Bitcoin white paper.  

According to the paper, each user of the system could have  

one or more public Bitcoin addresses – sort of like bank  

account numbers – and a private key for each address.  

The coins attached to a given address could be spent only  

by a person with the private key corresponding to the  

address. The private key was slightly different from a  

traditional password, which has to be kept by some  

central authority to check that the user is entering the  

correct password. In Bitcoin, Satoshi harnessed the  

wonders of public-key cryptography to make it possible for  

a user – let’s call her Alice again – to sign off on a  

transaction, and prove she has the private key, without  

anyone else ever needing to see or know her private key.  

Once Alice signed off on a transaction with her private key  

she would broadcast it out to all the other computers on  

the Bitcoin network. Those computers would check that  

Alice had the coins she was trying to spend. They could do  

this by consulting the public record of all Bitcoin  

transactions, which computers on the network kept a copy  

of. Once the computers confirmed that Alice’s address did  

indeed have the money she was trying to spend, the  

information about Alice’s transaction was recorded in a list  

of all recent transactions, referred to as a block, on the  

blockchain. […]  

The result of this complicated process was something that  

was deceptively simple but never previously possible: a  

financial network that could create and move money  

without a central authority. No bank, no credit card  

company, no regulators. The system was designed so that  

no one other than the holder of a private key could spend  

or take the money associated with a particular Bitcoin  

address. What’s more, each user of the system could be  

confident that, at every moment in time, there would be  

only one public, unalterable record of what everyone in the  

system owned. To believe in this, the users didn’t have to  

trust Satoshi, as the users of DigiCash had to trust David  

Chaum, or users of the dollar had to trust the Federal  

Reserve.  They just had to trust their own computers  

running the Bitcoin software, and the code Satoshi wrote,

32    

which was open source, and therefore available for  

everyone to review. If the users didn’t like something about  

the rules set down by Satoshi’s software, they could  

change the rules. People who joined the Bitcoin network  

were, quite literally, both customers and owners of both  

the bank and the mint.”  

   3.5. That Satoshi and the Cypherpunks who  

participated in the initial experiments developed Bitcoin as  

an alternative to conventional currency, to counter the  

problems of debasement of currency by central agencies, was  

made clear by Satoshi himself when he said: “The root problem  

with conventional currency is all the trust that’s required to make it  

work. The Central Bank must be trusted not to debase the currency  

but the history of fiat currencies is full of breaches of that trust.”    

3.6. What attracted people to Satoshi’s proposal, was the fact  

that while Central Banks had no restraints in unlimited printing of  

money, thereby devaluing all savings and holdings, the Bitcoin  

software had rules to ensure that the process of creating new  

coins would stop after 21 million were out in the world. When  

Martti Malmi, a student at the Helsinki University of Technology,  

joined hands with Satoshi to improvise the project and to market  

it, he formulated the philosophy in the following words:  

“Be safe from the unfair monetary policies of the  

monopolistic Central Banks and the other risks of  

centralized power over a money supply. The limited  

inflation of Bitcoin system’s money supply is

33    

distributed evenly (by CPU power) throughout the  

network, not monopolized to a banking elite.”  

3.7. Therefore, it is beyond any pale of doubt that irrespective of  

the metamorphosis (or gene mutation) it has undergone over the  

years, bitcoin, the Adam or Manu of the race of cryptocurrencies, was  

developed as an alternative to fiat currency. Keeping this birth chart  

of virtual currencies in mind, let us now see how the petitioners are  

aggrieved by the impugned decisions of RBI, the grounds on which  

they challenge the same and the justification sought to be provided  

by RBI.   

4. BACKGROUND SCORE (of the petitioners)  

4.1. The theme of the song of the petitioners in one of the writ  

petitions, as fine-tuned by Shri Ashim Sood, learned Counsel, can be  

summarized as follows:  

I. RBI has no power to prohibit the activity of trading in virtual  

currencies through VC exchanges since:  

(i) Virtual currencies are not legal tender but tradable  

commodities/digital goods, not falling within the regulatory  

framework of the RBI Act, 1934 or the Banking Regulation  

Act, 1949.  

(ii)  Virtual currencies do not even fall within the credit  

system of the country, so as to enable RBI to fall back upon  

the Preamble to the RBI Act 1934, which gives a mandate

34    

to RBI to operate the currency and credit system of the  

country to its advantage.   

(iii)  Neither the power to regulate the financial system of  

the country to its advantage conferred under Section 45JA,  

nor the power to regulate the credit system of the country  

conferred under Section 45L of the RBI Act, 1934  

exercisable in public interest and upon arriving at a  

satisfaction, is so elastic as to cover goods that do not fall  

within the purview of the financial system or credit system  

of the country.   

(iv) The power to issue directions “in the public interest”  

conferred under Section 35A(1)(a) of the Banking  

Regulation Act, 1949 and the power to caution or prohibit  

banking companies against entering into any particular  

transaction conferred under Section 36(1)(a) do not extend  

to the issue of blanket directions that would deny access by  

virtual currency exchanges, to the banking services of the  

country, as the expression “public interest” appearing in a  

particular provision in a statute should take its colour from  

the context of the statute.   

(v) The power conferred upon RBI under Section 10(2) of  

the Payment and Settlement Systems Act, 2007 to issue  

guidelines for proper and efficient management of payment

35    

systems and under Section 18 of the said Act to lay down  

policies relating to the regulation of payment systems and  

to give directions pertaining to the conduct of business  

relating to payments systems, exercisable in public interest  

upon being satisfied, is also not applicable to virtual  

currency exchanges, as the services rendered by them do  

not fall within the definition of the expression “payment  

system” under Section 2(1)(i) of the said Act.   

II. Assuming but not admitting that RBI has the power to deal with  

the activities carried on by VCEs, the mode of exercise of such power  

can be tested on certain well established parameters. They are –   

(i) application of mind/satisfaction/relevant and irrelevant  

considerations   

(ii) Malice in law/colorable exercise of power   

(iii) M.S. Gill reasoning   

(iv) Calibration/Proportionality   

III. All other stake holders such as the Department of Economic  

Affairs of the Government of India, Securities and Exchange Board of  

India, Central Board of Direct Taxes, etc., have actually recognized  

the positive and beneficial aspects of cryptocurrencies as digital  

assets and the Distributed Ledger Technology from which crypto  

currencies emanate and hence have recommended only a regulatory

36    

regime, but RBI has taken a contra position without any rational  

basis.   

IV. Many of the developed and developing economies of the world,  

multinational and international bodies and the courts of various  

countries have scanned crypto currencies, but found nothing  

pernicious about them and even the attempt of the Government of  

India to bring a legislation banning crypto currencies, is yet to reach  

its logical end.   

V. RBI should have taken into account the fact that the members of  

Petitioner association have taken necessary precautions including  

avoiding cash transactions, ensuring compliance with KYC norms, of  

their own accord and allowing peer-to-peer transactions only within  

the country.  

VI. RBI has not applied its mind to the fact that not every crypto  

currency is anonymous. The report of the European Parliament also  

classified VCs into anonymous and pseudo-anonymous. Therefore, if  

the problem sought to be addressed is anonymity of transactions, the  

same could have been achieved by resorting to the least invasive  

option of prohibiting only anonymous VCs.  

VII. It is a paradox that blockchain technology is acceptable to RBI,  

but crypto currency is not.  

VIII. The benefit of the rule of judicial deference to economic policies

37    

of the state is not available to RBI, as the impugned Circular is an  

exercise of power by a statutory body corporate and is neither a  

legislation nor an exercise of executive power. In any case, there is no  

deference in law to process but only to opinion emanating from the  

process. No study was undertaken by RBI before the impugned  

measure was taken and hence, the impugned decisions are not even  

based upon knowledge or expertise.    

IX. While regulation of a trade or business through reasonable  

restrictions imposed under a law made in the interests of the general  

public is saved by Article 19(6) of the Constitution, a total  

prohibition, especially through a subordinate legislation such as a  

directive from RBI, of an activity not declared by law to be unlawful,  

is violative of Article 19(1)(g). Whether a directive would tantamount  

to “regulation” or “prohibition”, depends upon the impact of the  

directive.   

4.2. The contentions of the petitioners in the other writ petition  

(WP (C) No. 373 of 2018), as set to tune by Shri Nakul Dewan,  

learned Senior Counsel, are:  

I. The immediate effect of the impugned Circular is to completely  

severe the ties between the virtual currency market and the formal  

Indian economy, without actually a legislative ban on the trading of  

VCs, thereby promoting cash and black-market transactions.  

II. The impugned Circular fails to take note of the difference between

38    

various VC schemes such as closed VC schemes, unidirectional flow  

VC schemes and bidirectional flow VC schemes and unreasonably  

differentiates between unidirectional flow schemes and bidirectional  

flow schemes, by targeting only bidirectional flow schemes.   

III. VCs do not qualify as money, as they do not fulfill the four  

characteristics of money namely medium of exchange, unit of  

account, store of value and constituting a final discharge of debt and  

since RBI has accepted this position, they have no power to regulate  

it.   

IV. Considering the fact that historically, money as understood in the  

social sense and money as understood in the legal sense, are  

different, the courts in different jurisdictions such as USA and  

Singapore have understood VCs to be akin to money or funds at  

times or as commodities/intangible properties at other times.   

V. The impugned Circular is manifestly arbitrary, based on non-

reasonable classification and it imposes disproportionate restrictions.   

VI. A decision to prohibit an article as res extra commercium is a  

matter of legislative policy and must arise out of an Act of legislature  

and not by a notification issued by an executive authority.   

4.3. In addition to the aforementioned legal contentions, Shri  

Nakul Dewan learned Senior Counsel also submitted that as a result  

of the impugned Circular, the virtual currency exchange (VCE) run  

by one of the petitioners in one writ petition was shut down on 30-

39    

03-2019, the VCE run by another petitioner became non-operational,  

though their website still opens and the VCE run by yet another  

petitioner by name Discidium Internet Labs Pvt. Ltd., not only  

became non-operational, but an amount of Rs. 12 crores lying in  

their account also got frozen. However, one VCE by name CoinDCX  

alone survives, by operating on a peer-to-peer (P2P) basis.   

4.4. In support of their respective contentions, Shri Ashim Sood  

and Shri Nakul Dewan, the learned counsels, relied upon a number  

of decisions of this court and other courts. We shall refer to them  

when we take up their contentions for analysis.  

5. SCRIPT (of RBI)  

5.1. RBI has filed counter-affidavit in one of these writ petitions,  

covering the entire gamut. But the response of RBI to the contentions  

of the petitioners is available not only in the counter-affidavit, but  

also in some communications issued by them pursuant to certain  

interim directions issued by this court.  

5.2. For instance, this Court passed an interim direction on 21-

08-2019, after hearing lengthy arguments, directing the Reserve  

Bank of India to give a detailed point-wise reply to the  

representations dated 29-05-2018 and 30-05-2018. Pursuant to the  

said interim direction, RBI gave a detailed point-wise reply on 04-09-

2019 and 18-09-2019. Therefore, RBI’s stand in these cases has to

40    

be culled out not only from the counter-affidavit but also from the  

orders passed/replies issued to the representations of the writ  

petitioners, during the pendency of these writ petitions.   

5.3. In brief, the response of RBI to the issues raised by the  

petitioners, as articulated by Shri Shyam Divan, learned Senior  

Counsel, can be summarized as follows:  

(i) Virtual currencies do not satisfy the criteria such as  

store of value, medium of payment and unit of account,  

required for being acknowledged as currency.  

(ii) Virtual currency exchanges do not have any formal or  

structured mechanism for handling consumer disputes/  

grievances.  

(iii) Virtual currencies are capable of being used for illegal  

activities due to their anonymity/pseudo-anonymity.   

(iv) Increased use of virtual currencies would eventually  

erode the monetary stability of the Indian currency and the  

credit system.  

(v) The impugned decision of RBI is legislative in  

character and is in the realm of an economic policy  

decision taken by an expert body warranting a hands-off  

approach from the Court.  

(vi) The impugned decision is within the range of wide  

powers conferred upon RBI under the Banking Regulation

41    

Act, 1949, the Reserve Bank of India Act, 1934 and the  

Payment and Settlement Systems Act, 2007.    

(vii) No one has an unfettered fundamental right to do  

business on the network of the entities regulated by RBI.  

(viii) The impugned decisions do not violate any of the  

rights guaranteed by Articles 14, 19 and 21 of the  

Constitution of India.  

(ix) The impugned decisions are not excessive,  

confiscatory or disproportionate in as much as RBI has  

given three months’ time to the affected parties to sever  

their relationships with the banks. This is apart from the  

repeated cautions issued to the stakeholders by RBI  

through Press Releases from the year 2013.   

(x) The ambit of the 2013 press release was much wider  

than just consumer protection. RBI cautioned users,  

holders and traders of VCs about the potential financial,  

operational, legal, customer protection and security related  

risks they were exposing themselves to.   

(xi) The host of material taken note of by RBI in their  

reports, the reports of the committees to which RBI was a  

party and the cautions repeatedly issued by RBI over a  

period of 5 years, would demonstrate the application of  

mind on the part of RBI. They also demonstrate that RBI

42    

did not proceed in haste but proceeded with great care and  

caution. Therefore, the satisfaction arrived at by them was  

too loud and clear to be ignored. The standard for  

considering the impugned Circular, is the existence of  

material and not the adequacy or sufficiency of such  

material.  

(xii) In any case, there is no complete ban on virtual  

currencies or on the use of distributed ledger technology by  

the regulated entities.   

(xiii) The impugned decisions were necessitated in public  

interest to protect the interest of consumers, the interest of  

the payment and settlement systems of the country and for  

protection of regulated entities against exposure to high  

volatility of the virtual currencies. RBI is empowered and  

duty bound to take such pre-emptive measures in public  

interest and the power to regulate includes the power to  

prohibit.   

(xiv) The impugned decisions were necessitated because in  

the opinion of RBI, VC transactions cannot be termed as a  

payment system, but only peer-to-peer transactions which  

do not involve a system provider under the Payments and  

Settlement Systems Act. Despite this, VC transactions have  

the potential to develop as a parallel system of payment.  

43    

(xv) The KYC norms followed by the VCEs are far below  

what other participants in the payments and monetary  

system follow. In any case, KYC norms are ineffective, as  

the inherent characteristic of anonymity of VCs does not  

get remedied.  

(xvi) Cross-border nature of the trade in VCs, coupled with  

the lack of accountability, has the potential to impact the  

regulated payments system managed by RBI. A large  

constituent of the VC universe does not hold membership  

of the Petitioner association or is not even accountable for  

their acts but is material and instrumental in driving the  

VC trade.  

(xvii) RBI or any other Government authority would not be  

able to curtail, limit, regulate or control the generation of  

VCs and their transactions, resulting in ever-present and  

inevitable financial risks.  

6. UNFOLDING OF THE PLOT  

6.1. In the light of the above factual matrix and the rival  

contentions, let us now see how the plot before us, unfolds.   

I. No Power at all for RBI (Ultra vires)   

6.2. The first ground of attack revolves around the power of RBI  

to deal with, regulate or even ban VCs and VCEs. The entire

44    

foundation of this contention rests on the stand taken by the  

petitioners that VCs are not money or other legal tender, but only  

goods/commodities, falling outside the purview of the RBI Act, 1934,  

Banking Regulation Act, 1949 and the Payment and Settlement  

Systems Act, 2007. In fact, the impugned Circular of RBI dated 06-

04-2018 was issued in exercise of the powers conferred upon RBI by  

all these three enactments. Therefore, if virtual currencies do not fall  

within subject matter covered by any or all of these three enactments  

and over which RBI has a statutory control, then the petitioners will  

be right in contending that the Circular is ultra vires.  

6.3. Hence it is necessary (i) first to see the role historically  

assigned to a central bank such as RBI, the powers and functions  

conferred upon and entrusted to RBI and the statutory scheme of all  

the above three enactments and (ii) then to investigate what these  

virtual currencies really are. Therefore, we shall divide our discussion  

in this regard into two parts, the first concerning the role, powers  

and functions of RBI and the second concerning the identity of  

virtual currencies.   

Role assigned to, functions entrusted to and the powers  

conferred upon RBI as a Central Bank  

6.4. The Reserve Bank of India was established under Act 2 of  

1934 for the purpose of (i) regulating the issue of bank notes, (ii)  

keeping of reserves with a view to securing monetary stability in the

45    

country and (iii) operating the currency and credit system of the  

country to its advantage. The role of a central bank such as the  

Reserve Bank in an economy is to manage (i) the currency (ii) the  

money supply and (iii) interest rates. The unique feature of a central  

bank is the monopoly that it has on increasing the monetary base in  

the state and the control it has in the printing of the national  

currency. The central bank virtually functions as “a lender of last  

resort” to banks suffering a liquidity crisis.   

6.5. Historians trace the rise of modern central banks to the  

establishment of the Bank of England under a Royal Charter granted  

on 27-07-1694 through the Tunnage Act, 1694. The establishment of  

this bank in 1694 was not actually for stimulating the economy but  

for financing the war that England had with France. The currency  

crisis of 1797 and the creation of a ratio between the gold reserves  

held by the Bank of England and the notes that the bank could  

issue, under the Bank Charter Act, 1844 brought huge changes in  

the way the central bank was supposed to function.  

6.6. In so far as India is concerned, the functions of a central  

bank were originally conferred upon the Imperial Bank of India,  

established in the year 1921, under the Imperial Bank of India Act,  

1920. The reason why and the manner in which the Imperial Bank  

was established, is quite interesting to see. At the time when the

46    

British Crown took over the control of the territories in India, after  

the Sepoy Mutiny of 1857, there were three Presidency Banks, one in  

Calcutta, another in Bombay and the third in Madras. All these three  

banks established respectively in 1809, 1840 and 1843, were  

authorized to issue notes up to certain specified limits. But this  

privilege was withdrawn in 1862 under the Paper Currency Act,  

which vested the sole right to issue notes with the Government of  

India.   

6.7. The question of absorption of the three Presidency Banks  

into a central bank came up for consideration on and off. Though the  

Chamberlain Commission, known as the Royal Commission on  

Indian Finance and Currency, appointed in 1913, felt the need for  

setting up a central bank, the proposal did not materialize. But after  

the First World War, the Presidency Banks themselves favoured an  

amalgamation. Therefore, the Imperial Bank of India Bill providing for  

the amalgamation of all the three Presidency Banks was passed in  

September 1920 and came into effect in January 1921. The trend of  

setting up central banks gained momentum internationally, after the  

International Financial Conferences held at Brussels in 1920 and at  

Genoa in 1922.   

6.8. But the maintenance of an overvalued exchange rate to  

help British exporters, gave rise to a clash between the colonial

47    

administration and Indian business interests. The Congress sought  

devaluation and hence a Royal Commission was set up in 1925 to  

examine the matter. This Royal Commission on Indian Currency and  

Finance, also known as Hilton Young Commission (to which Dr. B. R.  

Ambedkar also contributed a statement), recommended the creation  

of a strong Central Bank for India in 1926. Though a bill known as  

the Gold Standard and Reserve Bank of India Bill, 1927 to give effect  

to the recommendations was introduced in the Legislative Assembly,  

it was withdrawn on 10-02-1928. From 1930 onwards, the question  

of establishing a Reserve Bank received fresh impetus, when  

Constitutional reforms for the country were undertaken.   

6.9. The White Paper on Indian Constitutional Reforms,  

presented in March 1933, assumed that a Reserve Bank, free from  

political influence, would have to be set up and should already be  

successfully operating before the first Federal Ministry was installed.   

6.10. Subsequently, a Departmental Committee (hereinafter  

referred to, as “the India Office Committee”) was appointed in  

London by the India Office, which submitted a report dated 14-03-

1933. This report was followed up by the appointment of the “London  

Committee”, which endorsed the India Office Committee’s view that  

the Reserve Bank should be free from any political influence.  

48    

6.11. Therefore, a Bill drafted on the basis of the  

recommendations of the London Committee was introduced in  

September 1933. In 1934, the Bill was passed. The Reserve Bank of  

India commenced operations as the country’s central bank on 01-04-

1935. Under the Reserve Bank (Transfer of Public Ownership) Act,  

1948, the bank was nationalized.  

6.12. Once the historical background of the creation of RBI is  

understood, it will be easy to appreciate its role in the economy of the  

country and the functions and powers exercised by it statutorily.  

6.13. As the Preamble of the RBI Act suggests, the object of  

constitution of RBI was threefold namely (i) regulating the issue of  

bank notes (ii) keeping of reserves with a view to securing monetary  

stability in the country and (iii) operating the currency and credit  

system of the country to its advantage.  

6.14. In fact, the original Preamble of the Act contained only  

three paragraphs. But paragraphs 2 and 3 of the Preamble were  

substituted with 3 new paragraphs by Act 28 of 2016. Paragraphs 2  

and 3 of the original Preamble and paragraphs 2 to 4 substituted in  

2016, are presented in a tabular column as follows:   

49    

Paragraphs 2 and 3 as they originally  stood   

Paragraphs 2 to 4 now substituted   

AND WHEREAS in the present  disorganisation of the monetary  systems of the world it is not  possible to determine what will be  suitable as a permanent basis for the  Indian monetary system;          BUT WHEREAS it is expedient to  make temporary provision on the  basis of the existing monetary  system, and to leave the question of  the monetary standard best suited to  India to be considered when the  international monetary position has  become sufficiently clear and stable  to make it possible to frame  permanent measures;  

AND WHEREAS it is essential to have a  modern monetary policy framework to  meet the challenge of an increasingly  complex economy;             AND WHEREAS the primary  objective of the monetary policy is to  maintain price stability while keeping in  mind the objective of growth;          AND WHEREAS the monetary policy  framework in India shall be operated by  the Reserve Bank of India;  

6.15. It may be observed from the newly substituted paragraphs  

that RBI is now vested with the obligation to operate the  

monetary policy framework in India. An indication of the primary  

objective of the monetary policy is provided in paragraph 3 which  

says that the maintenance of price stability is the prime  

objective even while the objective of growth is to be kept in  

mind. Paragraph 2 recognizes the necessity to have a modern  

monetary policy framework to meet the challenge of an increasingly  

complex economy.  

6.16. Therefore, it is clear that after the amendment under Act  

28 of 2016, the very task of operating the monetary policy framework  

has been conferred exclusively upon RBI.  

50    

6.17. Though the expression “monetary policy” is not defined in  

the Act, an entire chapter under the title “Monetary Policy”  

containing Sections 45Z to 45ZO was inserted as Chapter IIIF. The  

provisions of this chapter are given overriding effect upon the other  

provisions of the Act, under Section 45Z. Under Section 45ZA(1), the  

central government is empowered to determine the inflation target in  

terms of the consumer price index, once in every 5 years, in  

consultation with RBI. The policy rate required to achieve the  

inflation target is to be determined by a Monetary Policy Committee,  

constituted under Section 45ZB.   

6.18. The object of establishment of RBI is also spelt out in  

Section 3(1). It says that “a bank to be called the Reserve Bank of  

India shall be constituted for the purpose of taking over the  

management of the currency from the Central Government and  

of carrying on the business of banking in accordance with the  

provisions of this Act”.    

6.19. Chapter III of the Act enlists the central banking functions  

of RBI. Section 17 authorizes RBI to carry on and transact several  

kinds of businesses listed therein, one of which, referred in sub-

section (15) is the making and issue of bank notes. Section 20 which  

forms part of Chapter III, obliges RBI (i) to accept monies for account  

of the central government (ii) to make payments up to the amount  

standing to the credit of its account and (iii) to carry out its

51    

exchange, remittance and other banking operations including the  

management of the public debt of the Union. Under Section 21,  

the central government is obliged to entrust all its money,  

remittance, exchange and banking transactions in India with RBI.  

Under Section 22(1), RBI has the sole right to issue bank notes  

in India (however, the central government has the power under  

Section 28A(2) to issue Government of India notes of the  

denominational value of Rs. 1/-). It may also issue currency notes of  

the Government of India, on the recommendations of the Central  

Board, for a period fixed by the central government. Sub-section (2)  

of Section 22 goes one step further by stipulating that on and  

from the date on which Chapter III comes into force, the central  

government shall not issue any currency notes.    

6.20. Section 26(1) makes every bank note a legal tender at any  

place in India in payment, which is guaranteed by the central  

government. Since a bank note issued by RBI is a legal tender  

guaranteed by the central government, the central government is also  

vested with the power under sub-section (2) of Section 26 to declare  

any series of bank notes of any denomination, to cease to be legal  

tender. But this can be done only on the recommendation of the  

Central Board of Directors of RBI.   

6.21. Under Section 38, the central government is prohibited  

from putting into circulation any rupees, except through RBI.

52    

Similarly, RBI is also prohibited from disposing of rupee coin  

otherwise than for the purpose of circulation.   

6.22. Chapter IIIB which contains provisions relating to non-

banking institutions (NBFCs) receiving deposits and financial  

institutions, contains two important provisions, one in Section 45JA  

and another in Section 45L. Sub section (1) of Section 45JA reads as  

follows:  

45JA. Power of Bank to determine policy and issue  

directions.— (1) If the Bank is satisfied that, in the public  

interest or to regulate the financial system of the country to  

its advantage or to prevent the  affairs of any non-banking  

financial company being conducted in a manner  

detrimental to the interest of the depositors or in a manner  

prejudicial to the interest of the non-banking financial  

company, it is necessary or  expedient so to do, it may  

determine the policy and give directions to all or any of the  

non-banking financial companies relating to income  

recognition, accounting standards, making of proper  

provision for bad and doubtful debts, capital adequacy  

based on risk weights for assets and credit conversion  

factors for off balance-sheet items and also relating to  

deployment of funds by a non-banking financial company  

or a class of non-banking financial companies or non-

banking financial companies generally, as the case maybe,  

and such non-banking financial companies shall be bound  

to follow the policy so determined and the direction so  

issued.  

6.23. It may be seen that the aforesaid provision uses certain  

words similar to those found in paragraph 1 of the Preamble. While  

paragraph 1 of the Preamble speaks about the power of RBI to  

operate the currency and credit system of the country to its

53    

advantage, Section 45JA speaks about the power of RBI to regulate  

the financial system of the country to its advantage.   

6.24. The salient feature of Section 45JA is that it empowers  

RBI, both (i) to determine the policy and (ii) to give directions to all  

NBFCs in respect of certain matters. The concerns sought to be  

addressed by Section 45JA(1) are (i) public interest (ii) financial  

system of the country (iii) interests of the depositors and (iv)  

interests of NBFCs.   

6.25. Section 45L addresses yet another concern namely, the  

regulation of the credit system of the country to its advantage.  

Section 45L reads as follows:  

45L. Power of Bank to call for information from financial  

institutions and to give directions.—  

(1) If the Bank is satisfied for the purpose of enabling it to  

regulate the credit system of the country to its advantage it  

is necessary so to do, it may—  

(a) require financial institutions either generally or any  

group of financial institutions or financial institution in  

particular, to furnish to the Bank in such form, at such  

intervals and within such time, such statements,  

information or particulars relating to the business of such  

financial institutions or institution, as may be specified by  

the Bank by general or special order;  

(b) give to such institutions either generally or to any such  

institution in particular, directions relating to the conduct of  

business by them or by it as financial institutions or  

institution.  

(2) Without prejudice to the generality of the power vested  

in the Bank under clause (a) of sub-section (1), the  

statements, information or particulars to be furnished by a  

financial institution may relate to all or any of the following  

matters, namely, the paid-up capital, reserves or other  

liabilities, the investments whether in Government

54    

securities or otherwise, the persons to whom, and the  

purposes and periods for which, finance is provided and  

the terms and conditions, including the rates of interest, on  

which it is provided.  

(3) In issuing directions to any financial institution under  

clause (b) of sub-section (1), the Bank shall have due  

regard to the conditions in which, and the objects for  

which, the institution has been established, its statutory  

responsibilities, if any, and the effect the business of such  

financial institution is likely to have on trends in the money  

and capital markets.  

6.26. It may be seen that the phrase “credit system of the  

country to its advantage”, as found in paragraph 1 of the Preamble, is  

repeated in sub-section (1) of Section 45L. The only difference  

between the two is that paragraph 1 of the Preamble speaks  

about the operation of the credit system, while Section 45L (1)  

speaks about regulation of the credit system. While exercising  

the power to issue directions conferred by clause (b) of sub-section  

(1) of Section 45L, RBI is obliged under sub-section (3) of Section  

45L to have due regard to certain things, one of them being  

“the effect the business of such financial institution is likely to  

have on trends in the money and capital markets”.   

6.27. Chapter IIID of the Act contains provisions for the  

regulation of transactions in derivatives, money markets or  

securities, etc. The expression “money market instruments” is  

defined in clause (b) of Section 45U as follows:  

45U(b) "money market instruments" include call or notice  

money, term money, repo, reverse repo, certificate of

55    

deposit, commercial usance bill, commercial paper and  

such other debt instrument of original or initial maturity up  

to one year as the Bank may specify from time to time;       

6.28. Section 45W empowers RBI to determine the policy relating  

to interest rates or interest rate products and to give directions in  

that behalf to all or any of the agencies dealing in securities, money  

market instruments, etc., for the purpose of regulating the financial  

system of the country to its advantage. Section 45W(1) reads as  

follows:  

45W. Power to regulate transactions in derivatives, money  

market instruments, etc.—(1) The Bank may, in public  

interest, or to regulate the financial system of the country  

to its advantage, determine the policy relating to interest  

rates or interest rate products and give directions in that  

behalf to all agencies or any of them, dealing in securities,  

money market instruments, foreign exchange, derivatives,  

or other instruments of like nature as the Bank may  

specify from time to time:  

   Provided that the directions issued under this sub-

section shall not relate to the procedure for execution or  

settlement of the trades in respect of the transactions  

mentioned therein, on the Stock Exchanges recognised  

under section 4 of the Securities Contracts (Regulation) Act,  

1956 (42 of 1956).  

6.29. It is important to note that Section 45W(1) contains merely  

an illustrative list of transactions. This is seen by the use of the  

expression “other instruments of like nature” appearing in the above  

provision.    

6.30. A careful scan of the RBI Act, 1934 in its entirety would  

show that the operation/regulation of the credit/financial

56    

system of the country to its advantage, is a thread that  

connects all the provisions which confer powers upon RBI, both  

to determine policy and to issue directions.   

6.31. RBI Act, 1934 is not the only Act from which RBI derives  

its powers. The Banking Regulation Act, 1949 is also a source of  

power for RBI to do certain things. This can be seen from the  

Statement of Objects and Reasons for the Banking Regulation Act,  

1949. One of the main features of the Bill as indicated in the  

Statement of Objects and Reasons was “widening the powers of RBI  

so as to enable it to come to the aid of the banking companies in  

times of emergency”.   

6.32. Section 5 of the Banking Regulation Act, 1949 which  

contains the interpretation clause defines the expression “banking  

policy” under clause (ca) of Section 5. This definition reads as follows:  

5(ca)“ banking policy” means any policy which is specified  

from time to time by the Reserve Bank in the interest of the  

banking system or in the interest of monetary stability or  

sound economic growth, having due regard to the interests  

of the depositors, the volume of deposits and other  

resources of the bank and the need for equitable allocation  

and the efficient use of these deposits and resources;  

6.33. Since Banking Regulation Act, 1949 was issued after the  

RBI Act, 1934 and the nationalization of RBI, Section 5(ca) borrows  

certain words such as “interest of the banking system” and “interest

57    

of the monetary stability” and “economic growth” from the RBI Act,  

1934.   

6.34. Section 8 of the Banking Regulation Act, 1949 prohibits a  

banking company from directly or indirectly dealing in the buying or  

selling or bartering of goods. The Explanation to Section 8 also  

defines the word “goods”, for the purposes of Section 8. Section 8  

reads as follows:  

8 - Prohibition of trading –   

Notwithstanding anything contained in section 6 or in any  

contract, no banking company shall directly or indirectly  

deal in the buying or selling or bartering of goods, except in  

connection with the realisation of security given to or held  

by it, or engage in any trade, or buy, sell or barter goods  

for others otherwise than in connection with bills of  

exchange received for collection or negotiation or with such  

of its business as is referred to in clause (i) of sub-section  

(1) of section 6:  

PROVIDED that this section shall not apply to any such  

business as is specified in pursuance of clause (o) of sub-

section (1) of section 6.  

Explanation.--For the purposes of this section, "goods"  

means every kind of movable property, other than  

actionable claims, stocks, shares, money, bullion and  

specie, and all instruments referred to in clause (a) of sub-

section (1) of section 6.  

6.35. Section 21 empowers RBI to determine the policy in  

relation to advances to be followed by banking companies. The  

determination of policy may be in (i) public interest (ii) interests  

of depositors or (iii) interests of the banking policy. Once a policy  

is determined by RBI under Section 21(1), all banking companies are  

bound to follow the policy.  

58    

6.36. No company can carry on banking business in India  

unless it holds a license issued by RBI. Under Section 22(1), RBI has  

power to issue license, subject to certain terms and conditions as it  

may think fit to impose.   

6.37. Every banking company is obliged under Section 27(1) of  

the Banking Regulation Act, 1949 to submit to RBI, monthly returns  

in the prescribed form, showing its assets and liabilities. RBI is  

conferred with powers under Section 29A even to call for information  

about the affairs of any associate enterprise of a banking company.  

Under sub-section (2) of Section 29A, RBI can even cause an  

inspection of any associate enterprise of a banking company. A power  

to conduct special audit of a banking company’s accounts is also  

conferred upon RBI under Section 30(1B).   

6.38. Section 35A of Banking Regulation Act, 1949 empowers  

RBI to issue directions to banking companies. Such directions are  

binding on the banking companies. The directions under Section 35A  

may be issued (i) in public interest (ii) in the interest of banking  

policy (iii) to prevent the affairs of the banking company from being  

conducted in a manner prejudicial to the interests of the depositors  

or of the banking company itself and (iv) to secure the proper  

management of the banking company. Section 35A(1) reads as  

follows:

59    

35A. Power of the Reserve Bank to give directions.—(1)  

Where the Reserve Bank is satisfied that—   

(a) in the public interest; or  

(aa) in the interest of banking policy; or  

(b) to prevent the affairs of any banking company being  

conducted in a manner detrimental to the interests of the  

depositors or in a manner prejudicial to the interests of the  

banking company; or  

(c) to secure the proper management of any banking  

company generally, it  is  necessary  to  issue  directions   

to  banking  companies  generally  or  to  any  banking   

company  in particular, it may, from time to time, issue  

such directions as it deems fit, and the banking companies  

or the banking company, as the case may be, shall be  

bound to comply with such directions.  

6.39. Section 35AA and Section 35AB, inserted by the  

Amendment Act 30 of 2017 (pursuant to the enactment of Insolvency  

and Bankruptcy Code, 2016), empowers RBI respectively (i) to issue  

directions to any banking company to initiate insolvency resolution  

process, if so authorized by the central government and (ii) to issue  

directions to any banking company for the resolution of stressed  

assets.   

6.40. Section 36(1)(a) empowers RBI to caution or prohibit  

banking companies against entering into any particular transaction  

or class of transactions. Section 36(1)(a) reads follows:  

36. Further powers and functions of Reserve Bank.—(1)  

The Reserve Bank may—(a)  caution  or  prohibit  banking   

companies  generally  or  any  banking  company  in   

particular against entering into any particular transaction  

or class of transactions, and generally give advice to any  

banking company;  

60    

Part IIA and IIAB of the Banking Regulation Act, 1949 confers powers  

upon the Reserve Bank (i) under Section 36AA to remove managerial  

or other persons from office (ii) under Section 36AB to appoint  

additional directors and (iii) under Section 36ACA to order the  

supersession of the board of directors.    

6.41. For a long time, RBI drew its powers only from the  

aforesaid 2 enactments, namely RBI Act, 1934 and the Banking  

Regulation Act, 1949. But with the passage of time, as the industrial  

economy grew and several banking companies came into existence  

and a need to fast track paper-based cheque processing increased,  

the banks came together to set up clearing houses. The clearing  

houses developed the procedure of netting (arriving at the  

multilateral net settlement). But with the advent of technology, new  

payment systems such as MICR clearing, Electronic Funds Transfer  

Systems, cash-based payment systems, RTGS (real time gross  

settlement) etc. became popular. The development of multiple  

payment systems, which operated only in the realm of contracts  

among various stakeholders, did not have a legislative sanction.  

Therefore, an Act known as the Payment and Settlement Systems  

Act, 2007 was enacted with the object of providing for the regulation  

and supervision of payment systems in India and to designate RBI as  

the authority for that purpose.  

61    

6.42. It is seen from the Statement of Objects and Reasons of  

the Bill that RBI is empowered to regulate and supervise various  

payment and settlement systems in India including those operated by  

non-banks, card companies, other payment system providers and the  

proposed umbrella organization for retail payments. The Act further  

empowers RBI to (i) lay down the procedure for authorization of  

payment systems (ii) lay down the operation and technical standards  

for payment systems (iii) issue directions and guidelines to system  

providers (iv) call for information and furnish returns and documents  

from the service providers (v) audit and inspect the systems and  

premises of the system providers (vi) lay down the duties of the  

system providers and (vii) make regulations for carrying out the  

provisions of the Act.   

6.43. Section 2(1)(i) defines a “payment system”. The Section  

reads as follows:  

2(1)(i) “payment system” means a system that enables  

payment to be effected between a payer and a beneficiary,  

involving clearing, payment or settlement service or all of  

them, but does not include a stock exchange;   

     Explanation.- For the purposes of this clause, “payment  

system” includes the systems enabling credit card  

operations, debit card operations, smart card operations,  

money transfer operations or similar operations;   

6.44. Under Section 3 of the Payment and Settlement Systems  

Act, 2007 RBI is the designated authority for the regulation and  

supervision of payment systems under the Act.  

62    

6.45. Chapter III of the Act deals with “authorisation of  

payment systems”. Section 4(1) of the Payment and Settlement  

Systems Act, 2007 provides that any person other than RBI seeking  

to commence or operate a payment system shall take authorization  

from the Reserve Bank in that regard. Section 4(1) reads as follows:  

4. Payment system not to operate without authorisation.— (1) No person, other than the Reserve Bank, shall  commence or operate a payment system except under and  in accordance with an authorisation issued by the Reserve  Bank under the provisions of this Act:  Provided that nothing contained in this section shall apply  to—  (a) the continued operation of an existing payment system  on commencement of this Act for a period not exceeding six  months from such commencement, unless within such  period, the operator of such payment system obtains an  authorisation under this Act or the application for  authorisation made under section 7 of this Act is refused  by the Reserve Bank;  (b) any person acting as the duly appointed agent of  another person to whom the payment is due;  (c) a company accepting payments either from its holding  company or any of its subsidiary companies or from any  other company which is also a subsidiary of the same  holding company;  (d) any other person whom the Reserve Bank may, after  considering the interests of monetary policy or efficient  operation of payment systems, the size of any payment  system or for any other reason, by notification, exempt  from the provisions of this section.  

6.46. Chapter IV of the Act specifies the regulatory and  

supervisory powers of RBI. Under Section 10, RBI is empowered to  

prescribe certain standards and guidelines for the proper and  

efficient management of the payment systems. The Section reads as  

follows:

63    

10. Power to determine standards.—(1) The Reserve Bank  

may, from time to time, prescribe—  

(a) the format of payment instructions and the size and  

shape of such instructions;  

(b) the timings to be maintained by payment systems;  

(c) the manner of transfer of funds within the payment  

system, either through paper, electronic means or in any  

other manner, between banks or between banks and other  

system participants;  

(d) such other standards to be complied with the payment  

systems generally;  

(e) the criteria for membership of payment systems  

including continuation, termination and rejection of  

membership;  

(f) the conditions subject to which the system participants  

shall participate in such fund transfers and the rights and  

obligations of the system participants in such funds.  

(2) Without prejudice to the provisions of sub-section (1),  

the Reserve Bank may, from time to time, issue such  

guidelines, as it may consider necessary for the proper  

and efficient management of the payment systems  

generally or with reference to any particular payment  

system.  

6.47. Section 11 of the Act provides that any change in the  

system which would affect the structure or the operation of the  

payment system would require prior approval from the Reserve Bank.  

Section 11 reads as follows:  

11. Notice of change in the payment system.—(1) No  

system provider shall cause any change in the system  

which would affect the structure or the operation of the  

payment system without—  

(a) the prior approval of the Reserve Bank; and  

(b) giving notice of not less than thirty days to the system  

participants after the approval of the Reserve Bank:  

Provided that in the interest of monetary policy of the  

country or in public interest, the Reserve Bank may permit  

the system provider to make any changes in a payment  

system without giving notice to the system participants

64    

under clause (b) or requiring the system provider to give  

notice for a period longer than thirty days.  

(2) Where the Reserve Bank has any objection, to the  

proposed change for any reason, it shall communicate  

such objection to the systems provider within two weeks of  

receipt of the intimation of the proposed changes from the  

system provider.  

(3) The system provider shall, within a period of two weeks  

of the receipt of the objections from the Reserve Bank  

forward his comments to the Reserve Bank and the  

proposed changes may be effected only after the receipt of  

approval from the Reserve Bank.  

6.48. Section 17 empowers RBI to issue directions to a  

payment system or a system participant, which, in RBI’s opinion  

is engaging in any act that is likely to result in systemic risk  

being inadequately controlled or is likely to affect the payment  

system, the monetary policy or the credit policy of the country.  

The Section reads as follows:  

17. Power to issue directions.—Where the Reserve Bank is  

of the opinion that,—  

(a) a payment system or a system participant is engaging  

in, or is about to engage in, any act, omission or course of  

conduct that results, or is likely to result, in systemic risk  

being inadequately controlled; or  

(b) any action under clause (a) is likely to affect the  

payment system, the monetary policy or the credit policy of  

the country,  

the Reserve Bank may issue directions in writing to such  

payment system or system participant requiring it, within  

such time as the Reserve Bank may specify –  

(i) to cease and desist from engaging in the act, omission or  

course of conduct or to ensure the system participants to  

cease and desist from the act, omission or course of  

conduct; or  

(ii) to perform such acts as may be necessary, in the  

opinion of the Reserve Bank, to remedy the situation.

65    

6.49. Section 18 of the Payment and Settlement Systems Act,  

2007 further empowers RBI to issue directions to system  

providers or the system participants or any other person  

generally, to regulate the payment systems or in the interest of  

management or operation of any of the payment systems or in  

public interest. The Section reads as follows:  

18. Power of Reserve Bank to give directions generally.— Without prejudice to the provisions of the foregoing, the  Reserve Bank may, if it is satisfied that for the purpose of  enabling it to regulate the payment systems or in the  interest of management or operation of any of the payment  systems or in public interest, it is necessary so to do, lay  down policies relating to the regulation of payment  systems including electronic, non-electronic, domestic and  international payment systems affecting domestic  transactions and give such directions in writing as it may  consider necessary to system providers or the system  participants or any other person either generally or to any  such agency and in particular, pertaining to the conduct of  business relating to payment systems.  

6.50. Thus, the RBI Act, 1934, the Banking Regulation Act,  

1949 and the Payment and Settlement Systems Act, 2007  

cumulatively recognize and also confer very wide powers upon RBI  

(i) to operate the currency and credit system of the country to  

its advantage (ii) to take over the management of the currency  

from central government (iii) to have the sole right to make and  

issue bank notes that would constitute legal tender at any  

place in India (iv) regulate the financial system of the country  

to its advantage  (v) to have a say in the determination of

66    

inflation target in terms of the consumer price index (vi) to have  

complete control over banking companies (vii) to regulate and  

supervise the payment systems (viii) to prescribe standards and  

guidelines for the proper and efficient management of the  

payment systems (ix) to issue directions to a payment system or  

a system participant which in RBI’s opinion is engaging in any  

act that is likely to result in systemic risk being inadequately  

controlled or is likely to affect the payment system, the  

monetary policy or the credit policy of the country and (x) to  

issue directions to system providers or the system participants  

or any other person generally, to regulate the payment systems  

or in the interest of management or operation of any of the  

payment systems or in public interest.  

6.51. Having taken note of the role of RBI as a central bank in  

the economy of the country, the functions entrusted to them and the  

powers conferred upon them under various statutes, let us undertake  

the exercise of fixing the identity of virtual currencies.   

Fixing the identity of VCs  

6.52. As we have stated in Part 3 of this judgment, 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

67    

divergence of views, if those views are not driven by fear of regulation.  

But if someone presents it as currency to a regulator of stock market  

and presents it as a commodity to a regulator of money market and  

so on and so forth, the definition will not merely elude a proper  

molecular structure but also elude regulation. This is where the  

problem of law lies. George Friedman, the founder and Chairman of  

Geopolitical Futures LLC, an online publication, aptly summarized  

this dilemma as follows: “Bitcoin is neither fish nor fowl…But  

both pricing it as a commodity when no commodity exists and  

trying to make it behave as a currency, seem problematic. The  

problem is not that it is not issued by the Government nor that  

it is unregulated. The problem is that it is hard to see what it  

is.”     

6.53. It is now universally accepted that Satoshi envisioned  

a digital analog to old-fashioned gold, a new kind of  

universal money that could be owned by everyone and spent  

anywhere. It was designed to live with a cleverly constructed de-

centralized network without central authority. Satoshi himself  

defined it as “a new electronic cash system that’s fully peer-to-

peer, with no trusted third party.”  

6.54. It is true that though, at its birth, it was conceived of  

only as an alternative to money, crypto currencies assumed  

different shapes, different shades and different utility values over

68    

the past decade and more. Several international monetary  

agencies/watchdogs are dabbling to find out what these are and  

they are also divided in their opinion. For instance, in a report  

submitted on 22-01-2019 to the International Monetary Fund  

(IMF), by Jeffrey Franks, Director of its Europe Office, under the  

title ‘Cryptocurrencies and Monetary Policy’, it is pointed out as  

follows:-  

1. Money has evolved over time, to meet customary  

demands, but its basic functions such as (A) retaining a  

store of value; (B) acting as means of payment and (C)  

acting as a unit of account, have all remained the same.  

2. There are four basic characteristics of a crypto currency  

like bitcoin, they are (A) digital in nature (B) private (C)  

global and (D) run on an autonomous and de-centralized  

algorithm.   

6.55. According to the said report, there are four factors  

which lie behind the rise of crypto currencies. They are: (1) the  

development of blockchain technology (2) concerns about  

conventional money and banking, that arose out of the sub-prime  

mortgage crisis in 2008 and the unconventional monetary  

policies/quantitative easing (3) privacy concerns and (4) political  

views about the role of the Government.   

6.56. The IMF report says that crypto currencies perform  

poorly in terms of the three basic functions of currencies. While  

the store of value increased 2000% from January 2017 to  

December 2017, there was also a fall during the year 2018. As

69    

means of payment, the acceptance of crypto currencies, according  

to the IMF report is very low and a few companies such as  

Microsoft, Dish network etc. have begun to accept crypto  

currencies for limited transactions. As a unit of account, so far, no  

goods or services are priced in crypto currencies.  

6.57. On its potential impact on the monetary policies of  

governments, the IMF report says the following:-  

“But in the future, large crypto currencies holdings  

could complicate monetary policy management”   

Eventually the conclusions reached in the report are as follows:-  

 Crypto currencies today do not do a good job at fulfilling  

the main functions of money.  

 They may be favored by some for ideological, technological  

or monetary policy reasons.  

 The blockchain technology they use does have some  

important advantages in controlling fraud and maintaining  

privacy.  

 But they also open up avenues for tax evasion and  

criminal activity.  

6.58. The petitioners claim that today virtual currency is not  

money or other legal tender, but good/tradable commodity and hence  

RBI has no role in regulating/banning the same. RBI has also taken  

a stand that VCs are not recognized as legal tender, but they seek to  

justify the impugned decisions, on the ground that VCs are capable  

of being used as a medium of exchange. Therefore, it is necessary to  

see how VCs were defined (i) by regulators in different jurisdictions  

and (ii) by the governments and other statutory authorities of various

70    

countries, through statutory instruments and non-statutory  

directives and (iii) by courts of different jurisdictions.    

  DEFINITION OF VCs – BY REGULATORS  

S.  No.  

Regulator Definition of Virtual Currency  

1.  International  Monetary Fund7  

VCs are digital representations of value, issued  by private developers and denominated in their  

own unit of account.8    

VCs can be obtained, stored, accessed, and  transacted electronically, and can be used for a  

variety of purposes, as long as the transacting  parties agree to use them.     

The concept of VCs covers a wider array of  “currencies,” ranging from simple IOUs (I owe  

you) of issuers (such as Internet or mobile  coupons and airline miles), to VCs backed by  

assets such as gold,9 and “cryptocurrencies”  such as Bitcoin.    

As digital representations of value, VCs fall  within the broader category of digital currencies.  

However, they differ from other digital  currencies, such as e-money, which is a digital  

payment mechanism for (and denominated in)  fiat currency. VCs, on the other hand, are not  

denominated in fiat currency and have their own  unit of account.    

VCs fall short of the legal concept of currency or  money.     

At present, VCs do not completely fulfill the  three economic roles associated with money:  

high price volatility of VCs limits their ability to  serve as a reliable store of value; the current  

small size and limited acceptance network of  

                                                 7 Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Note, Dong  He et al., page 7, 16, 17 (January 2016) (available at  

https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf, last accessed on 27-02-

2020) – presented by IMF Managing Director, Christine Lagarde, presented at the World  

Economic Forum (https://www.ccn.com/imf-director-talks-up-virtual-currencies-and-

blockchain-tech/, last accessed on 27-02-2020).  8 Given the fast evolving nature of the industry, a universal definition has yet to emerge  

and could quickly change as the VC ecosystem continues to transform.  9 This type of VCs is backed by the combination of existing tangible assets or national  

currencies and the creditworthiness of the issuer.

71    

VCs significantly restricts their use as a medium  

of exchange; as of now, there is little evidence  that VCs are used as an independent unit of  

account.  

2.  Financial Action  Task Force  

June 2015:10  

Virtual currency is a digital representation of  value that can be digitally traded and functions  

as (1) a medium of exchange; and/or (2) a unit of  account; and/or (3) a store of value, but does not  

have legal tender status (i.e., when tendered to a  creditor, is a valid and legal offer of payment) in  

any jurisdiction. It is not issued nor guaranteed  by any jurisdiction, and fulfils the above  

functions only by agreement within the  community of users of the virtual currency.    

October 2018:11  

Virtual Asset – A virtual asset is a digital  representation of value that can be digitally  traded, or transferred, and can be used for  

payment or investment purposes. Virtual assets  do not include digital representations of fiat  

currencies, securities and other financial assets  that are already covered elsewhere in the FATF  

Recommendations.  

For the purposes of applying the FATF  Recommendations, countries should consider  

virtual assets as “property,” “proceeds,” “funds,”  “funds or other assets,” or other “corresponding  value.”   

3.  European Central  Bank  

2012:12  

A virtual currency is a type of unregulated,  digital money, which is issued and usually  controlled by its developers, and used and  

accepted among the members of a specific  virtual community. This definition may need to  

be adapted in future if fundamental  characteristics change.    

                                                 10 Guidance for a Risk-Based Approach – Virtual Currencies, FATF, page 26 (June 2015)  available at http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-

Virtual-Currencies.pdf (Last accessed on 27-02-2020).  11 Glossary of the FATF Recommendations (updated on October 2018) available at  

https://www.fatf-gafi.org/glossary/u-z/ (Last accessed on 27-02-2020).   12 Virtual Currency Schemes, European Central Bank, page 13 (October 2012) available at  

http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf (Last  

accessed on 27-02-2020).  

72    

2017:13  

Absent a universally accepted definition, ‘virtual  currencies’ can be defined as digital  representations of value which, despite not being  

issued by a central bank or another comparable  public authority, nor being ‘attached’, subject to  

certain exceptions, to a fiat currency, are  voluntarily accepted, by natural or legal persons,  as a means of exchange, and which are stored,  

transferred and traded electronically, without a  tangible, real-world representation.     

This definition of ‘virtual currencies’ captures  decentralised, peer-to-peer VCs – as distinct  from E-money or Internet (software)-based  

payment schemes, which merely facilitate  

transactions denominated in fiat money or in  central bank-issued digital currencies – which,  while devoid of legal tender status, fulfil, at least  

to some extent, all three traditional functions of  money by way of agreement within their user  

community. This definition does not, however,  extend to centrally-issued digital currencies,  

such as the central bank digital currencies  under consideration, at the time of writing, in  

several jurisdictions.    

European Banking Authority in 2014:14  

VCs are defined as a digital representation of  value that is neither issued by a central bank or  public authority nor necessarily attached to a  

FC, but is used by natural or legal persons as a  means of exchange and can be transferred,  

stored or traded electronically.   

4.  European Securities  and Markets  

Authority15  

Crypto-asset: A type of private asset that  depends primarily on cryptography and  

Distributed Ledger Technology (DLT) or similar  technology as part of their perceived or inherent  

                                                 13 Phoebus Athanassiou, Impact of Digital Innovation on the Processing of Electronic  Payments and Contracting: An Overview of Legal Risks, Legal Working Paper Series, No.  16, European Central Bank (October 2017) available at  

https://www.ecb.europa.eu/pub/pdf/scplps/ecb.lwp16.en.pdf?344b9327fec917bd7a8fd7

0864a94f6e (Last accessed on 27-02-2020).   14 EBA Opinion on ‘virtual currencies’, page 11, 13 (July 2014) available at  

https://eba.europa.eu/sites/default/documents/files/documents/10180/657547/81409 b94-4222-45d7-ba3b-7deb5863ab57/EBA-Op-2014-

08%20Opinion%20on%20Virtual%20Currencies.pdf (Last accessed on 27-02-2020).   15 Advice - Initial Coin Offerings and Crypto-Assets (January 2019) available at  

https://www.esma.europa.eu/sites/default/files/library/esma50-157-

1391_crypto_advice.pdf (Last accessed on 27-02-2020).  

73    

value...Crypto-asset additionally means an asset  

that is not issued by a central bank.  

5.  Financial Conduct  Authority, United  

Kingdom16  

Cryptoassets are a cryptographically secured  digital representation of value or contractual  

rights that is powered by forms of DLT and can  be stored, transferred or traded electronically.     

While cryptoassets can be used as a means of  exchange, they are not considered to be a  currency or money, as both the Bank of England  

and the G20 Finance Ministers and Central  Bank Governors have previously set out. They  

are too volatile to be a good store of value, they  are not widely accepted as a means of exchange,  

and they are not used as a unit of account.  

6.  Internal Revenue  Service, Department  

of Treasury, USA  

2014:17  

“virtual currency” may be used to pay for goods  or services, or held for investment.  Virtual  currency is a digital representation of value that  

functions as a medium of exchange, a unit of  account, and/or a store of value.    

Convertible VC is treated as property for U.S.  federal tax purposes.  General tax principles that  

apply to property transactions apply to  transactions using virtual currency. VC is not  

treated as currency that could generate foreign  currency gain or loss for U.S. federal tax  

purposes.  

 2018:18  

Virtual currency, as generally defined, is a digital  representation of value that functions in the  

same manner as a country’s traditional  currency.    

7.  Securities and  Exchange  

Bitcoin has been described as a decentralized,  peer-to-peer virtual currency that is used like  

                                                 16 Guidance on Cryptoassets, Consultation Paper, CP 19/3, Financial Conduct Authority,  page 7 (January 2019) available at  

https://www.fca.org.uk/publication/consultation/cp19-03.pdf (Last accessed on 27-02- 2020) and Guidance on Cryptoassets, Feedback and Final Guidance to CP 19/3, Policy  Statement, PS19/22 (July 2019) available at  

https://www.fca.org.uk/publication/policy/ps19-22.pdf (Last accessed on 27-02-2020).   17 IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for U.S. Federal  Tax Purposes; General Rules for Property Transactions Apply (March 2014) available at  https://www.irs.gov/newsroom/irs-virtual-currency-guidance (Last accessed on 27-02-

2020) and https://www.irs.gov/pub/irs-drop/n-14-21.pdf (Last accessed on 27-02-2020).    18 IRS reminds taxpayers to report virtual currency transactions (March 2018) available at  

https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-

transactions (Last accessed on 27-02-2020).  

74    

Commission, USA money – it can be exchanged for traditional  

currencies such as the U.S. dollar, or used to  purchase goods or services, usually  

online. Unlike traditional currencies, Bitcoin  operates without central authority or banks and is  not backed by any government.19    

Speaking broadly, crypto currencies purport to  be items of inherent value (similar, for instance,  

to cash or gold) that are designed to enable  purchases, sales and other financial  

transactions.  They are intended to provide many  of the same functions as long-established  

currencies such as the U.S. dollar, euro or  Japanese yen but do not have the backing of a  

government or other body.20   

8.  Commodity Futures  Trading  

Commission, USA  

Section 1a(9) of the Act (US Commodity  Exchange Act) defines “commodity” to include,  

among other things, “all services, rights, and  interests in which contracts for future delivery  

are presently or in the future dealt in.” 7 U.S.C.  § 1a(9). The definition of a “commodity” is broad.  

See, e.g., Board of Trade of City of Chicago v.  SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982).  Bitcoin and other virtual currencies are  encompassed in the definition and properly  

defined as commodities.21  

9.  Financial Crimes  Enforcement  

Network,  Department of  

Treasury, USA22  

Virtual currency is a medium of exchange that  operates like a currency in some environments,  

but does not have all the attributes of real  currency. In particular, virtual currency does not  

have legal tender status in any jurisdiction.     

This guidance addresses “convertible” virtual  currency. This type of virtual currency either has  an equivalent value in real currency, or acts as a  

substitute for real currency.   

                                                 19 Investor Alert: Bitcoin and Other Virtual Currency-Related Investments (May 2014)  

available at https://www.sec.gov/oiea/investor-alerts- bulletins/investoralertsia_bitcoin.html (Last accessed on 27-02-2020).  20 Chairman Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings  (December 2017) available at https://www.sec.gov/news/public-statement/statement-

clayton-2017-12-11 (Last accessed on 27-02-2020).  21 In the Matter of: Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No.  15-29. 2015 WL 5535736 (September 17, 2015) available at  

https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/docu ments/legalpleading/enfcoinfliprorder09172015.pdf (Last accessed on 27-02-2020).  22 Guidance - Application of FinCEN’s Regulations to Persons Administering, Exchanging, or  Using Virtual Currencies (March 2013) available at  

https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (Last accessed on  

27-02-2020).  

75    

10. Canada Revenue  Agency (CRA)23  

Cryptocurrency is a digital representation of  value that is not legal tender. It is a digital  

asset…that works as a medium of exchange for  goods and services between the parties who  

agree to use it.    

CRA generally treats cryptocurrency like a  

commodity for purposes of Income Tax Act. Any  income from transactions involving  

cryptocurrency is generally treated as business  income or as a capital gain, depending on the  

circumstances.     

Virtual currency is digital asset that can be used  

to buy and sell goods or services. Cryptocurrency  is a blockchain-based, virtual currency. When  

cryptocurrency is used to pay for goods or  services, the rules for barter transactions apply  

for income tax purposes. A barter transaction  occurs when any two persons agree to exchange  

good or services and carry out that exchange  without legal currency. Virtual currency can also  

be bought or sold like commodity. 24  

 DEFINITIONS UNDER STATUTORY ENACTMENTS AND NON- STATUTORY DIRECTIVES OF GOVERNMENTS  

S.  No.  

Country Statutory  Enactment/  

Non-Statutory  Directive  

Section/ Article defining VC  

1.  Japan Payment  

Services Act,  2009  

Article 2(5): The term “Virtual  

Currency” as used in this Act means  any of the following:  

(i) property value (limited to that  which is recorded on an electronic  device or any other object by  

electronic means, and excluding the  Japanese currency, foreign  

currencies, and Currency- Denominated Assets; the same applies  

                                                 23 Guide for cryptocurrency users and tax professionals (Last modified on 27 June  2019) available at https://www.canada.ca/en/revenue-agency/programs/about-canada- revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html (Last  

accessed on 27-02-2020).   24 Virtual Currency (Last modified on 26 June 2019) available  at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-

cra/compliance/digital-currency.html (Last accessed on 27-02-2020).  

76    

in the following item) which can be  used in relation to unspecified  

persons for the purpose of paying  consideration for the purchase or  

leasing of goods or the receipt of  provision of services and can also be  

purchased from and sold to  unspecified persons acting as  counterparties, and which can be  

transferred by means of an electronic  data processing system; and  

(ii) property value which can be  mutually exchanged with what is set  

forth in the preceding item with  unspecified persons acting as  

counterparties, and which can be  transferred by means of an electronic  

data processing system.    

2019 amendment to this Act (to come  

into force from April 2020) uses the  

term “crypto assets (angoshisan)” in  place of the term “virtual currency”.     

The 2019 Amendment added crypto  

assets to the term “financial  instruments” for the purposes of  

defining underlying assets of the  derivative transactions subject to  

derivative regulations under the FIEA  (Financial Instruments and Exchange  Act), and therefore the same  

regulations applicable to other  derivative transactions under the  

FIEA will apply to crypto asset  derivative transactions. These  

regulations include certain conduct  regulations, such as the notice  

requirement prior to trading, and  prohibitions on making false  

statements, providing conclusive  judgements, and engaging in  

uninvited solicitation.

77    

2.  Malta Virtual  Financial Asset  Act, 2018  

Article 2(2): “virtual financial asset” or  “VFA” means any form of digital  medium recordation that is used as a  

digital medium of exchange, unit of  account, or store of value and that is  

not -  

(a)   electronic money;  

(b)   a financial instrument; or   

(c)   a virtual token;  

“virtual token” means a form of digital  

medium recordation whose  utility,   value  or  application  is  restricted   

solely  to  the acquisition  of  goods  or   services,  either  solely  within  the   

DLT platform on or in relation to  which it was issued or within a limited  

network of DLT platforms.  

3.  Canada  Proceeds of  Crime (Money  Laundering)  

and Terrorist  Financing   

Regulations,  200225  

Section 1(2): virtual currency means    

(a) a digital representation of value  

that can be used for payment or  investment purposes that is not a fiat  

currency and that can be readily  exchanged for funds or for another  

virtual currency that can be readily  exchanged for funds; or  

(b) a private key of a cryptographic  system that enables a person or entity  

to have access to a digital  representation of value referred to in  

paragraph (a).  

4.  Bahamas Payment  

Instruments  (Oversight)  

Regulations,  2017  

No specific legislation for crypto  

currencies. But according to Central  Bank, Bahamas the regulations which  

provide a framework for a system of  national electronic payment services,  

apply to crypto currencies.    

Article 2(1): electronic money or e- money means electronically stored  

monetary value as represented by a  claim on the issuer, which is issued  

on receipt of funds for the purpose of  making payment transactions and  

which is accepted as a means of  

                                                 25 As amended in June 2019, which amendment is yet to come into force.

78    

payment by persons other than the  issuer, and includes monetary value  

stored magnetically or in any other  tangible or intangible device (such as  

SIM card or software).   

A Bill is under consideration that  would bring virtual currencies within  

the ambit of proceeds of crime  legislation (Proceeds of Crime Bill,  

2018). Clause (2) of the Bill defines:  

“virtual currency” as a digital  representation of value which can be  

digitally traded and functions as – (a)  a medium of exchange; (b) a unit of  

account; or (c) a store of value, that  does not have legal tender status or  

carry any security or guarantee in any  jurisdiction.     

“currency or money” means coin and  

paper money of any jurisdiction that  is designated as legal tender or is  

customarily used and accepted as a  medium of exchange, including virtual  

currency as a means of payment.   

5.  Estonia Money  Laundering and  Terrorist  

Financing  Prevention Act,  

2017  

Section 3(9): cryptocurrencies (virtual  currencies) are value represented in  digital form that is digitally  

transferable, preservable, or tradable  and that which natural persons or  

legal persons accept as a payment  instrument, but that is not the legal  

tender of any country or funds  (banknotes or coins, scriptural money  

held by banks, or electronic money).   

6.  Latvia  Law on  Prevention of  Money  

Laundering and  Terrorism and  

Proliferation  Financing, as  

amended in  2017   

Section 1 (22): virtual currency - a  digital representation of value which  can be transferred, stored or traded  

digitally and operate as a means of  exchange, but has not been  

recognised as a legal means of  payment, cannot be recognised as a  

banknote and coin, non-cash money  and electronic money, and is not a  

monetary value accrued in the  payment instrument which is used in  

the cases referred to in Section 3,

79    

Clauses 10 and 11 of the Law on the  Payment Services and Electronic  

Money;  

7.  Liechtenstein  Due Diligence  

Act, 2009   

Article 2(1)(l): Virtual currencies shall  

be understood to be digital monetary  units, which can be exchanged for  

legal tender, used to purchase goods  or services or to preserve value and  

thus assume the function of legal  tender.  

8.  Israel  Supervision of  Financial  

Services Law,  5776-2016  

Section 11A (7) defines financial asset.  Financial asset includes virtual  

currency.26   

9.  Jersey   

(Crown  

dependency)  

Proceeds of  Crime  

(Miscellaneous  Amendments)  

(Jersey)  Regulations  

2016  

Article 4(4): ‘Virtual currency’ means  any currency which (whilst not itself  

being issued by, or legal tender in,  any jurisdiction) –  

(a)     digitally represents value;  

(b)     is a unit of account;  

(c)     functions as a medium of  exchange; and  

(d) is capable of being digitally  

exchanged for money in any form.  

Article 4(5): For the avoidance of  doubt, virtual currency does not  

include any instrument which  represents or stores (whether digitally  

or otherwise) value that can be used  only to acquire goods and services in  

or on the premises of, or under a  commercial agreement with, the  

issuer of the instrument.  

                                                 26 Regulation of Cryptocurrency Around the World – Israel, Report of The Law Library of  Congress, Global Legal Research Center (June 2018) available  at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#israel (Last accessed  

on 27-02-2020).  

80    

10. Mexico Financial  Technology  Institutions  

Law, 2018  

(Chapter on  Virtual Assets)  

It defines virtual assets as  representations of value electronically  registered and utilized by the public  

as a means of payment for all types of  legal transactions, which may only be  

transferred electronically.27  

11. Austria  Ministry of  

Finance  Treats virtual currency as ‘other  intangible commodity’.28  

12. Czech  Republic  

Vice Governor,  

Czech National  Bank  

Treats virtual currency as  ‘commodity’.29  

13. Germany German  

Federal  Financial  

Supervisory  Authority  

The Authority qualifies virtual  currencies as “units of account” and  

therefore, “financial instruments”.  

But bitcoin is considered to be crypto  

token by German Bundesbank  (because it does not fulfil the typical  

functions of a currency).30  

14. Luxembourg  Minister of  Finance  

Recognized before the Parliament that  crypto currencies are actual  currencies.31  

                                                 27 Regulation of Cryptocurrency Around the World – Mexico, Report of The Law Library of  Congress, Global Legal Research Center (June 2018) available  at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#mexico (Last  

accessed on 27-02-2020).     28 Regulation of Cryptocurrency Around the World – Austria, Report of The Law Library of  Congress, Global Legal Research Center (June 2018) available  at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#austria (Last  

accessed on 27-02-2020).   29 Regulation of Cryptocurrency Around the World – Czech Republic, Report of The Law  Library of Congress, Global Legal Research Center (June 2018) available  at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#czech (Last accessed  

on 27-02-2020).   30 Regulation of Cryptocurrency Around the World – Germany, Report of The Law Library  of Congress, Global Legal Research Center (June 2018) available  at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#germany (Last  accessed on 27-02-2020).    31 Regulation of Cryptocurrency Around the World – Luxembourg, Report of The Law  Library of Congress, Global Legal Research Center (June 2018) available  at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#luxembourg (Last  

accessed on 27-02-2020).  

81    

15. Slovakia Ministry of  Finance,  

Slovakia  published  

guidance  

Virtual currencies must be treated as  “short term financial assets other  than money”.32  

16. European  

Union  

European  

Union’s  Directive  

2018/843 of 30  May 2018 (5th  

Anti-Money  Laundering  

Directive)33  

Article 3(18): ‘Virtual Currencies’  

means a digital representation of  value that is not issued or guaranteed  

by a central bank or a public  authority, is not necessarily attached  

to a legally established currency and  does not possess a legal status of  

currency or money, but is accepted by  natural or legal persons as a means of  

exchange and which can be  transferred, stored and traded  

electronically.  

17. United  Kingdom  

HM Revenue &  Customs, UK34  

Cryptoassets (or ‘cryptocurrency’ as  they are also known) are  

cryptographically secured digital  representations of value or  

contractual rights that can be:  

 transferred  

 stored  

 traded electronically  

HMRC does not consider cryptoassets  

to be currency or money.    

Cryptocurrencies have a unique  

identity and cannot therefore be  directly compared to any other form of  

investment activity or payment  mechanism.35   

                                                 32 Regulation of Cryptocurrency Around the World – Slovakia, Report of The Law Library of  Congress, Global Legal Research Center (June 2018) available  

at https://www.loc.gov/law/help/cryptocurrency/world-survey.php#slovakia (Last  

accessed on 27-02-2020).   33 European Union’s Directive 2018/843 available at https://eur-lex.europa.eu/legal-

content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN (Last accessed on 27-02-

2020).  34 Policy paper, Cryptoassets: Tax for Individuals (December 2019) available at  

https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-

individuals (Last accessed on 27-02-2020).  35 Policy paper on Revenue and Customs Brief 9 (2014): Bitcoin and other  cryptocurrencies, HM Revenue & Customs (March 3, 2014) available at  

https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-

bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-

cryptocurrencies (Last accessed on 27-02-2020).

82    

 Bank of  England36  

The first part of the word ‘crypto’,  means ‘hidden’ or ‘secret’ reflecting  

the secure technology used to record  who owns what, and for making  

payments between users.    

The second part of the word,  

‘currency,’ tells us the reason  cryptocurrencies were designed in the  

first place: a type of electronic cash.    

But cryptocurrencies aren’t like the  cash we carry. They exist  electronically and use a peer-to-peer  

system. There is no central bank or  government to manage the system or  

step in if something goes wrong.  

18. United States  

of America  

New York  

 [BitLicense  

Regulation (23  CRR-NY 200)]  

Section 2(p): virtual currency means  any type of digital unit that is used as  a medium of exchange or a form of  

digitally stored value. Virtual currency  shall be broadly construed to include  

digital units of exchange that: have a  centralized repository or  

administrator; are decentralized and  have no centralized repository or  

administrator; or may be created or  obtained by computing or  

manufacturing effort. Virtual  currency shall not be construed to  include any of the following:    

(1) digital units that:  (i) are used solely within online  

gaming platforms;  (ii) have no market or application  

outside of those gaming platforms;  (iii) cannot be converted into, or  

redeemed for, fiat currency or  virtual currency; and  

(iv) may or may not be redeemable  for real-world goods, services,  

discounts, or purchases;    

(2) digital units that can be redeemed  for goods, services, discounts, or  

purchases as part of a customer  

                                                 36 What are cryptoassets (cryptocurrencies)? available  at https://www.bankofengland.co.uk/knowledgebank/what-are-cryptocurrencies (Last  

accessed on 27-02-2020).   

83    

affinity or rewards program with the  issuer and/or other designated  

merchants or can be redeemed for  digital units in another customer  

affinity or rewards program, but  cannot be converted into, or redeemed  

for, fiat currency or virtual currency;  or    

(3) digital units used as part of  prepaid cards;  

 North Carolina  

 [Money  

Transmitters  Act (§ 53-

208.42)]  

Virtual currency– A digital  

representation of value that can be  digitally traded and functions as a  

medium of exchange, a unit of  account, or a store of value but  only   

to  the  extent  defined  as  stored   value  under  subdivision  (19) of  this  

section, but does not have legal tender  status as recognized by the United  

States Government.  

Connecticut  

 [General  

Statutes of  Connecticut,  

Sec. 36a-596]    

“Virtual currency” means any type of  

digital unit that is used as a medium  of exchange or a form of digitally  

stored value or that is incorporated  into payment system technology.    

Virtual currency shall be construed to  include digital units of exchange that  

(A) have a centralized repository or  administrator; (B) are decentralized  

and have no centralized repository or  administrator; or (C) may be created  

or obtained by computing or  manufacturing effort.     

Virtual currency shall not be  construed to include digital units that  

are used (i) solely within online  gaming platforms with no market or  

application outside such gaming  platforms, or (ii) exclusively as part of  

a consumer affinity or rewards  program, and can be applied solely as  

payment for purchases with the issuer  or other designated merchants, but  

cannot be converted into or redeemed  for fiat currency.

84    

Florida    

[Florida Money  Laundering Act  

(Fla. Stat. §  896.101)]  

(2) (j) “Virtual currency” means a  medium of exchange in electronic or  

digital format that is not a coin or  currency of the United States or any  

other country.  

 Illinois  

 [Digital  

Currency  Regulatory  

Guidance  (2017)]37  

A digital currency is an electronic  

medium of exchange used to purchase  goods and services. A digital currency  

may also be exchanged for money. A  digital currency, by nature of its  

properties detailed below, is distinct  from money.   

Louisiana  

 [Consumer and  

Investor  Advisory on  

Virtual  Currency by  

Office of  Financial  

Institute  (2014)]38  

Virtual currency is an electronic  

medium of exchange that does not  have all the attributes of real or fiat  

currencies. Virtual currencies include  cryptocurrencies, such as Bitcoin and  

Litecoin, which are not legal tender  and are not issued or backed by any  

central bank or governmental  authority. Virtual currencies are:   

 not backed by the United States  or any other national  

government;  

 not insured by the Federal  Deposit Insurance Corporation  

or any governmental agency;  

 not backed by any physical  commodity, such as gold or  

silver; and  

 not legal tender for debts.  

Virtual currencies have legitimate  

purposes and can be purchased, sold,  and exchanged with other types of  

virtual currencies or real currencies  like the U.S. dollar. This can happen  

through various mechanisms such as  exchangers, administrators, or  

                                                 37 Digital Currency Regulatory Guidance, Illinois Department of Financial and Professional  Regulation (June 13, 2017) available at  https://www.idfpr.com/Forms/DFI/CCD/IDFPR%20-

%20Digital%20Currency%20Regulatory%20Guidance.pdf (Last accessed on 27-02-2020).  38 Office of Financial Institutions, State of Louisiana, Consumer and Investor Advisory on  Virtual Currency (August 2014) available  at http://www.ofi.state.la.us/SOCGuidanceVirtualCurrency.pdf (Last accessed on 27-02-

2020).    

85    

merchants that are willing to accept  virtual currencies in lieu of real  

currency.  

 Michigan  

[Michigan   Department of  

Treasury  Guidance  

(January  2015)]39  

Convertible virtual currency is a  

digital representation of value that  has an equivalent value in real  

currency, such as the United States  Dollar (USD), and/or acts as a  

substitute for real currency.  A  prominent example of convertible  

virtual currency is Bitcoin, a form of  e-currency that has been around  

since 2008.  

Washington  

 Uniform Money  

Services Act  (RCW 19.230.0

10)    

“Virtual currency” means a digital  

representation of value used as a  medium of exchange, a unit of  

account, or a store of value, but does  not have legal tender status as  

recognized by the United States  government. "Virtual currency" does  

not include the software or protocols  governing the transfer of the digital  representation of value or other uses  

of virtual distributed ledger systems to  verify ownership or authenticity in a  

digital capacity when the virtual  currency is not used as a medium of  

exchange.  

 Wyoming  

 Wyoming  

Money  Transmitter Act  

[W.S. 40-22- 102(a)]  

(xxii)  "Virtual currency" means any  

type of digital representation of value  that:  

(A) Is used as a medium of exchange,  unit of account or store of value; and  

(B)  Is not recognized as legal tender  by the United States government.  

6.59. It may be seen from the contents of the tables given above  

that there is unanimity of opinion among all the regulators and the  

governments of various countries that though virtual currencies have  

                                                 39 Virtual Currency, Treasury Update published by the Tax Policy Division, Michigan  Department of Treasury (Vol. 1(1), November 2015) available  at https://www.michigan.gov/documents/treasury/Tax-Policy-November2015-

Newsletter_504036_7.pdf (Last accessed on 27-02-2020).  

86    

not acquired the status of a legal tender, they nevertheless constitute  

digital representations of value and that they are capable of  

functioning as (i) a medium of exchange and/or (ii) a unit of account  

and/or (iii) a store of value. 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 Internal Revenue Service of the  

United States, Department of Treasury has recognized that a virtual  

currency can function in the same manner as a country’s traditional  

currency. The Securities and Exchange Commission, USA also  

recognizes that virtual currencies are intended to perform many of  

the same functions as long-established currencies such as US dollar,  

Euro or Japanese Yen. Yet another wing of the United States  

Department of Treasury namely Financial Crimes Enforcement  

Network calls virtual currency as a medium of exchange that  

operates like a currency in some environments, though it may not  

have all the attributes of a real currency.   

6.60. The Bank of International Settlements, as pointed out in  

Part 2 of this judgment, got a sub-group within the Committee on  

Payments and Market Infrastructure (CPMI) to undertake an analysis

87    

of digital currencies. In a report submitted by them in November  

2015, this sub-group recognized that though the use of private digital  

currencies was too low at that time for certain risks to materialize,  

the widespread substitution of bank notes over a period of time, with  

digital currencies, could lead to a decline in non-interest paying  

liabilities of central banks and that the conduct of the monetary  

policy could be affected.   

6.61. Similarly, the state of Liechtenstein 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. Some of the states in the Unites States of America have  

passed laws recognizing virtual currencies as electronic medium of  

exchange.   

6.62. It is clear from the above that the 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 all of them have gone into the denial mode (like the  

proverbial cat closing its eyes and thinking that there is complete  

darkness) by claiming that VCs do not have the status of a legal

88    

tender, as they are not backed by a central authority. But what an  

article of merchandise is capable of functioning as, is different  

from how it is recognized in law to be. It is as much true that  

VCs are not recognized as legal tender, as it is true that they  

are capable of performing some or most of the functions of real  

currency.   

6.63. The word “currency” is defined in Section 2(h) of the  

Foreign Exchange Management Act, 1999 (hereinafter, “FEMA”) to  

include “all currency notes, postal notes, postal orders, money  

orders, cheques, drafts, travelers’ cheques, letters of credit,  

bills of exchange and promissory notes, credit cards or such  

other similar instruments as may be notified by the Reserve  

Bank.” The expression “currency notes” is also defined in Section 2(i)  

of FEMA to mean and include cash in the form of coins and bank  

notes. Again, FEMA defines “Indian currency” under Section 2(q) to  

mean currency which is expressed or drawn in Indian rupees, but  

which would not include special bank notes and special one rupee  

notes issued under Section 28A of the RBI Act. But RBI has taken a  

stand in paragraph 24 of its counter-affidavit that VCs do not fit into  

the definition of the expression “currency” under Section 2(h) of  

FEMA, despite the fact that FATF, in its report on June 2014 on  

“Virtual Currencies: Key Definitions and Potential AML/CFT Risks”  

defined virtual currency to mean “digital representation of value that

89    

can be digitally traded and functions as (1) a medium of exchange;  

and/or (2) a unit of account; and/or (3) a store of value, but does not  

have legal tender status.” According to the report, legal tender  

status is acquired only when it is accepted as a valid and legal  

offer of payment when tendered to a creditor.   

6.64. Traditionally ‘money’ has always been defined in terms of  

the 3 functions or services that it provides namely (1) a medium of  

exchange (2) a unit of account and (3) a store of value. But in course  

of time, a fourth function namely that of being a final discharge of  

debt or standard of deferred payment was also added. This fourth  

function is acquired by money through the conferment of the legal  

tender status by a Government/central authority. Therefore,  

capitalizing on this fourth dimension/function and drawing a  

distinction between money as understood in the social sense and  

money as understood in the legal sense, it was contended by Shri  

Nakul Dewan, learned Senior Counsel, with particular reference to  

the book ‘Property Rights in Money’ by David Fox and the decision  

of the Queen’s Bench in Moss v. Hancock40 and the decision of the  

US Supreme Court in Wisconsin Central Ltd v. United States,41  

that so long as VCs do not qualify as money either in the legal sense  

(not having a legal tender status) or in the social sense (not being  

widely accepted by a huge population as a medium of exchange), they                                                    40 (1899) 2 QB 111  41 585 US ___ 2018, 138 S. Ct. 2067 (2018)  

90    

cannot be treated as currencies within the meaning of any of the  

statutory enactments from which RBI draws its energy and power.     

6.65. But we do not think that RBI’s role and power can  

come into play only if something has actually acquired the  

status of a legal tender. We do not also think that for RBI to  

invoke its power, something should have all the four  

characteristics or functions of money. Moss v. Hancock (supra),  

itself a century old decision (1899), relies upon the definition of  

‘money’ as given by F. A. Walker in his treatise ‘Money, Trade and  

Industry’ (actual title of the book appears to be ‘Money in its relation  

to Trade and Industry’), published in 1879 to the effect that “money  

is that which passes freely from hand to hand throughout the  

community in final discharge of debts and full payment for  

commodities, being accepted equally without reference to the character  

or the credit of the person who offers it and without the intention of the  

person who receives it to consume it or apply it to any other use than  

in turn to tender it to others in discharge of debts or payment for  

commodities.”      

6.66. But that 1879 definition cannot be accepted as perfect,  

final and everlasting, in modern times. Cross border transactions and  

technological advancements have removed many shackles created by  

old concepts (except perhaps those created by law courts). This fact  

has been recognized in the dissent of Breyer, J., in Wisconsin

91    

Central (supra) when he says “…what we view as money has  

changed over time. Cowrie shells once were such a medium but  

no longer are… our currency originally included gold, coins and  

bullion, but after 1934, gold could not be used as a medium of  

exchange… perhaps one day employees will be paid in Bitcoin  

or some other type of currency”. In the linguistic sense, Oxford  

English Dictionary has already included “property or possessions  

of any kind viewed as convertible into money” within the  

definition of money. Therefore, Breyer, J., points out in his dissent  

“So, where does this duel of definitions lead us? Some seem too  

narrow; some seem too broad; some seem indeterminate. The result is  

ambiguity”. He therefore concluded that stock options given to  

employees constitute money remuneration for the services rendered.  

But the majority proceeded on the basis that when the law was  

enacted, the term ‘money’ was not used in an expansive sense.     

6.67. Neither the RBI Act, 1934 nor the Banking Regulation  

Act, 1949 nor the Payment and Settlement Systems Act, 2007 nor the  

Coinage Act, 2011 define the words ‘currency’ or ‘money’. But FEMA  

defines the words ‘currency’, ‘currency notes’, ‘Indian currency’ and  

‘Foreign currency’. We have taken note of these definitions.  

Interestingly, Section 2(b) of Prize Chits and Money Circulation  

Schemes (Banning) Act, 1978 defines money to include a cheque,  

postal order, demand draft, telegraphic transfer or money

92    

order. Clause (33) of Section 65B of the Finance Act, 1994, inserted  

by way of Finance Act, 2012 defines ‘money’ to mean “legal tender,  

cheque, promissory note, bill of exchange, letter of credit, draft,  

pay order, traveler cheque, money order, postal or electronic  

remittance or any other similar instrument, but shall not  

include any currency that is held for its numismatic value”.  

This definition is important, for it identifies many instruments  

other than legal tender, which could come within the definition  

of money.   

6.68. The Sale of Goods Act, 1930 does not define ‘money’ or  

‘currency’ but excludes money from the definition of the word ‘goods’.  

The Central Goods and Services Tax Act, 2017 defines ‘money’ under  

Section 2(75) to mean “the Indian legal tender or any foreign  

currency, cheque, promissory note, bill of exchange, letter of  

credit, draft, pay order, traveler cheque, money order, postal or  

electronic remittance or any other instrument recognised by  

RBI, when used as a consideration to settle an obligation or  

exchange with Indian legal tender of another denomination but  

shall not include any currency that is held for its numismatic  

value.”  

93    

6.69 In CIT v. Kasturi & Sons Ltd.,42 a question arose as to  

whether the replacement by the insurer, of an article destroyed by  

one of the perils as against which coverage is provided, would be  

taken to be “money” within the meaning of Section 41(2) of the  

Income Tax Act, 1961. This court held that the word “money” used in  

Section 41(2) has to be interpreted only as actual money or cash and  

not as any other thing or benefit which could be evaluated in terms of  

money.   

6.70. In Dhampur Sugar Mills Ltd. v. Commissioner of  

Trade Tax,43 this court was concerned with the question whether  

the adjustment of price of molasses from the amount of license fee  

would amount to sale within the meaning of the U.P. Trade Tax Act,  

1948. The argument advanced was that an exchange or barter  

cannot be said to be a sale. After referring to the phrase “cash,  

deferred payment or other valuable consideration”, this court pointed  

out that “money is a legal tender, but cash is narrower than  

money.” This is for the reason that in contradistinction to cash,  

deferred payment or other valuable consideration would also come  

within the meaning of money, for the purpose of the Act.   

6.71. Just as the very concept of ‘money’ or ‘currency’ has  

changed over the years, and different jurisdictions and different  

statutes have adopted different definitions of ‘money’ and ‘currency’,                                                    42 (1999) 3 SCC 346  43 (2006) 5 SCC 624

94    

depending upon the issue sought to be addressed, the concept of VCs  

have also undergone a sea of change, with different regulators and  

statutory authorities adopting different definitions, leading to  

diametrically opposite views emerging from courts across the  

spectrum. Let us now see how courts in other jurisdictions have  

grappled with the definition of the word ‘virtual currency’.  

6.72. The Securities and Exchange Commission (SEC) of the  

United States of America prosecuted a person by name Trendon  

Shavers, who was the founder and operator of Bitcoin Savings and  

Trust (BTCST), for soliciting illicit investments in Bitcoin related  

opportunities from a number of lenders, defrauding them to the tune  

of 700,000 BTC in funds. While SEC contended that Bitcoin  

investments were securities, Shavers contended that Bitcoin is not  

money and hence, not ‘securities’. But the Sherman Division Eastern  

District Court of Texas opined in SEC v. Trendon Shavers,44 that: “It  

is clear that bitcoin can be used as money. It can be used to purchase  

goods or services and as Shavers stated, used to pay for individual  

living expenses. The only limitation of bitcoin is that it is limited to  

those places that accept it as currency. However, it can also be  

exchanged for conventional currencies such as the US dollar, euro, yen  

and Yuan. Therefore, bitcoin is a currency or form of money…”  

                                                 44 Case No. 4: 13-Cv-416 (August 6, 2013)

95    

6.73. In United States v. Ulbricht,45 the United States District  

Court, Southern District, New York was concerned with the  

defendant’s motion to dismiss four counts namely (i) participation in  

a narcotics trafficking conspiracy (ii) a continuing criminal enterprise  

(iii) computer hacking conspiracy and (iv) money laundering  

conspiracy, for which the Grand jury returned indictment. The  

allegation against the defendant was that Ulbricht engaged in these  

offences by designing, launching and administering a website called  

Silk Road, as an online marketplace for illicit goods and services.  

According to the prosecution, Bitcoin was used to launder the  

proceeds. The website was available only to those using Tor  

(abbreviation for ‘The Onion Router’), a free and open source software  

and a network that allows anonymous, untraceable internet  

browsing. Payments were allowed only through Bitcoin. Opposing the  

money laundering charge, Ulbricht contended that the use of Bitcoin  

did not involve a legally cognizable financial transaction. But the  

court held “Bitcoins carry value-that is their purpose and function-and  

act as a medium of exchange. Bitcoins may be exchanged for legal  

tender, be it US dollars, euros or some other currency”.    

6.74. The decision in Ulbricht (supra) was closely followed by  

another decision of the same court in United States v. Faiella.46  

This was also a case where the defendants were charged with the                                                    45 31F. Supp. 3d 540 (2014)  46 39F. Supp. 3d 544 (2014)

96    

operation of an underground market in the virtual currency bitcoin  

via the website Silk Road. Faiella moved the District court to dismiss  

count one of the indictments namely that of operating an unlicensed  

money transmitting business in violation of a particular statute. The  

contention of the defendant was (i) that Bitcoin does not qualify as  

money (ii) that operating a Bitcoin exchange does not constitute  

“transmitting” of money and (iii) that he is not a money transmitter.  

While rejecting the motion, the court held “bitcoin clearly qualifies as  

money or funds under the plain meaning definitions. Bitcoin can be  

easily purchased in exchange for ordinary currency, acts as a  

denominator of value and is used to conduct financial transactions.”  

The decision in Trendon Shavers (supra) was relied upon.   

6.75. While the district courts of USA took the view that virtual  

currency can be used as money, the Commodity Futures Trading  

Commission (CFTC) took a view in In re Coinflip, Inc,47 that virtual  

currencies are “commodities”. This was in relation to the initiation of  

public administrative proceedings to determine whether the  

defendant was engaged in violation of the provisions of Commodity  

Exchange Act and the Commission’s Regulations by operating an  

online facility named Derivabit offering to connect buyers and sellers  

of Bitcoin option contracts. Interestingly, the defendant admitted an  

offer of settlement in anticipation of administrative proceedings.   

                                                 47 CFTC Docket No. 15-29 dated 17-09-2015

97    

6.76. Within a week, another entity, by name, TeraExchange  

LLC also submitted an offer of settlement before CFTC In the matter  

of TeraExchange LLC.48 CFTC reiterated even in that case that  

Bitcoin is a commodity under the relevant statute. Another Bitcoin  

exchange, by name Bitfinex, also conceded the position, before the  

CFTC when public administrative proceedings were sought to be  

initiated against them. In the order accepting the offer of settlement,  

delivered on 02-06-2016 In the matter of BFXNA Inc, d/b/a  

BITFINEX,49 CFTC recorded that Bitcoin and other virtual currencies  

are commodities under the relevant provisions of the statute.   

6.77. In United States v. Murgio,50 which was also before the  

US District Court, S.D. New York, the defendant was charged with  

operating Coin.mx, as an unlicensed money transmitting business.  

The government alleged that Murgio and his co-conspirators  

attempted to shield the true nature of his Bitcoin exchange business  

by operating through several front companies, to convince financial  

institutions that Coin.mx was just a members-only association of  

individuals interested in collectable items. Count one of the  

indictments was the alleged conspiracy in the operation of an  

unlicensed money transmitting business, punishable under 18 U. S.  

C. § 1960. Under Section 1960, a business must (i) transfer on behalf  

                                                 48 CFTC Docket No. 15-33 dated 24-09-2015  49 CFTC Docket No. 16-19 dated 02-06-2016  50 209 F. Supp. 3d 698 (2016)

98    

of public, (ii) funds and (iii) in violation of licensing and registration  

requirements, to qualify as an unlicensed money transmitting  

business. The court concluded that Bitcoins are funds within the  

plain meaning of the term, as the word “funds” would mean  

pecuniary resources, generally accepted as a medium of exchange or  

means of payment. Interestingly, the defendant’s contention that  

Bitcoin is a commodity as held by CFTC was rejected by the court.   

6.78. However, despite the opinion of other District courts in  

four previous cases, the United States District Court, Eastern district  

of New York held in a preliminary hearing for injunctive relief, in  

Commodity Futures Trading Commission v. Patrick McDonnell 51  

(Memorandum and order), that virtual currencies are commodities  

within the meaning of the Commodity Exchange Act. But it is seen  

from the order that there was no ‘currency versus commodity’ debate  

in the entire order.      

6.79. A similar view was taken by United States District Court,  

District of Massachusetts in Commodity Futures Trading  

Commission v. My Big Coin Pay, Inc. et al.,52 holding that since  

there is futures trading in virtual currencies, they constitute  

‘commodity’ within the meaning of the Statute.   

                                                 51 18-Cv-361 dated 03-06-2018  52 18-Cv-10077-RWZ dated 26-09-2018

99    

6.80. State of Florida v. Michell Abner Espinoza,53 is an  

interesting case which came up before the Eleventh Judicial Circuit  

in and for Miami-Dade County, Florida. In that case, a Detective of  

the Miami Police department teamed up with a Special Agent of the  

Miami Electronic Crimes Task Force of the United States Secret  

Service to initiate an investigation into virtual currencies. After  

getting in touch with a person who advertised the sale of Bitcoins in  

an online platform run by a peer-to-peer Bitcoin exchange by name  

Localbitcoins.com, the team organized an undercover operation in  

December 2013/January 2014. The Detective offered to pay for the  

Bitcoins through stolen credit cards and when the transaction was  

about to take place, the offeror was arrested. He was charged with  

one count of unlawfully engaging in money services business and 2  

counts of money laundering. The defendant filed motions for  

dismissal and the State filed motions for striking out those motions.  

While allowing the defendant’s motion to dismiss all the 3 counts on  

the ground that the court will be unwilling to punish a man for  

selling his property to another, when his action falls under a statute  

that is so vaguely written that even legal professionals have difficulty  

finding a singular meaning, the court ruled as follows:  

“Nothing in our frame of references allows us to accurately  

define or describe Bitcoin……. Bitcoin may have some  

attributes in common with what we commonly refer to as  

                                                 53 F 14-2923 decided on 22-07-2016

100    

money, but differ in many important aspects. While  

Bitcoins can be exchanged for items of value, they are not  

a commonly used means of exchange. They are accepted  

by some but not by all merchants or service providers. ….  

With such volatility they have a limited ability to act as a  

store of value, another important attribute of money. This  

court is not an expert in economics, however it is very  

clear, even to someone with limited knowledge in the area,  

that Bitcoin has a long way to go before it is equivalent of  

money. The Florida Legislature may choose to adopt  

statutes regulating virtual currency in future. At this time,  

however, attempting to fit the sale of Bitcoin into a  

statutory scheme regulating money services businesses is  

like fitting a square peg in a round hole”         

6.81. But the decision of the Circuit Court was appealed to the  

Third District Court of Appeal, State of Florida. By an opinion  

rendered on 30-01-2019, reported as State of Florida v. Michell  

Abner Espinoza54 the Court of Appeal reversed the decision of the  

Circuit Court and held, after referring to the June 2014 Report of  

FATF titled “Virtual currencies: key definitions and potential  

AML/CFT risks” that given the plain language of the Florida  

statutes governing money service businesses and the nature of  

bitcoin and how it functions, Espinoza was acting both as a  

payment instrument seller and engaging in the business of a  

money transmitter. The Court of Appeal pointed out that the  

definition of a “payment instrument” included “a cheque, draft,  

warrant, money order, travelers’ cheque, electronic instrument or other  

instrument, payment of money or monetary value, whether or not  

                                                 54 264 So. 3d 1055 (2019)  

101    

negotiable”. The phrase “money services business” was defined in the  

statute to include any person who acts as a payment instrument  

seller. Since the expression monetary value means a medium of  

exchange, whether or not redeemable in currency, the court  

concluded that VCs are payment instruments and hence a person  

dealing with the same is in money services business. Though Bitcoin  

does not expressly fall within the definition of “currency” found in the  

statute, the court concluded that Bitcoin would certainly fall under  

the definition of a payment instrument. The Court of Appeal took  

note of the fact that several restaurants in the Miami area accepted  

Bitcoins as a form of payment and hence Bitcoin functions as a  

medium of exchange. (What is important to note about this decision  

is that it dealt with a penal statute. This is why the Circuit court  

followed the cautionary approach, not to allow a citizen to be  

prosecuted on the basis of conjectures about what is a money  

services business. But the Court of Appeal found on fundamentals  

that the business concerned a payment instrument and that  

therefore, there was no ambiguity.)   

6.82. In a completely different context, the Singapore  

International Commercial Court ruled in B2C2 Ltd. v. Quoine Pte  

Ltd.,55 that virtual currency can be considered as property which is  

capable of being held on trust. The case arose out of a dispute  

                                                 55 [2019] SGHC (I) 3

102    

between a person who traded in virtual currencies and the VC  

Exchange platform on which he traded. The dispute revolved more  

around the breach of contract and breach of trust than around the  

identity of virtual currencies. It was in that context that the court  

opined that crypto currencies satisfied the definition of ‘property’ as  

provided by the House of Lords in National Provincial Bank v.  

Ainsworth56 to the effect that it must be “definable, identifiable by  

third parties, capable in its nature of assumption by third parties, and  

have some degree of permanence or stability”. The court further noted  

that “crypto currencies are not legal tender in the sense of being a  

regulated currency issued by a government but do have the  

fundamental characteristic of intangible property as being an  

identifiable thing of value”. The decision of the Commercial Court was  

appealed to the Court of Appeal. While dismissing Quoine’s appeal on  

breach of contract claim, but allowing it on breach of trust claim, the  

Court of Appeal held in Quoine Pte Ltd v. B2C2 Ltd57 that though  

crypto currencies are capable of assimilation into the general  

concepts of property, there are difficult questions as to the type of  

property that is involved. Therefore, the Court of Appeal did not take  

a final position on the question, since it felt that the precise nature of  

the property right involved, was not clear.   

                                                 56 [1965] 1 AC 1175 at 1248  57 [2020] SGCA (I) 02

103    

6.83. In a very recent decision, in AA v. Persons Unknown &  

others Re Bitcoin,58 the English High Court ruled that Bitcoin is  

property. But this decision was on the basis of the definition adopted  

by UK Jurisdictional Taskforce of the Law Tech Delivery Panel, in its  

“Legal Statement on the Status of Cryptoassets and Smart  

Contracts”, that crypto assets constitute property under English law.  

The facts out of which this decision arose, were peculiar. The IT  

system of a Canadian insurance company was hacked through a  

malware called Bitpaymer, which encrypted all the data of the  

company. A ransom equivalent of US $ 950,000 in Bitcoin was  

demanded by the hackers for decryption. After negotiations through a  

specialist intermediary by name Incident Response Company, the  

insurance company paid the ransom into a wallet and retrieved the  

data with the decryption tools provided by the hackers. Thereafter  

the insurance company engaged the services of a blockchain  

investigation outfit known as Chainalysis Inc., which found that of  

the total of 109.25 Bitcoins transferred as ransom, 13.25 Bitcoins  

(worth approximately US $ 120,000 at the time) had been converted  

into an untraceable fiat currency. The remaining 96 Bitcoins had  

been transferred to a “wallet” linked to a Virtual Currency exchange  

known as Bitfinex (registered in the British Virgin Islands). The  

insurance company then sued the VC Exchange before the High  

                                                 58 [2019] EWHC 3556 (Comm)

104    

Court and sought ancillary disclosure orders to know the identity of  

persons who held the Bitcoins in the wallet of the exchange. The  

company also sought a proprietary injunction. Interestingly, the  

Court agreed to hear the application in private and protect the  

identity of the insurer which got hacked, for they feared retaliatory  

copycat attacks. The core issue before the court was whether crypto  

currencies constituted a form of property capable of being the subject  

matter of a proprietary injunction. After referring to Fry L.J’s  

statement in  Colonial Bank v. Whinney,59 that all things personal  

are either in possession or in action and that the law knows no third  

category between the two and also after referring to the four classic  

criteria for property, [namely they are (i) definable; (ii) identifiable by  

third parties; (iii) capable in their nature of assumption by third  

parties; and (iv) capable of some degree of permanence] set out by  

Lord Wilberforce in National Provincial Bank v. Ainsworth (supra),  

Bryan, J held in AA v. Persons Unknown that virtual currencies are  

neither choses in action (not embodying a right capable of being  

enforced in action) nor choses in possession (being virtual and  

incapable of being possessed). However, the court ruled that VCs can  

still be treated as property, by applying the 4 criteria laid down in  

National Provincial Bank and Law Tech Delivery Panel's Legal  

Statement, though it did not constitute a statement of the law. Bryan  

                                                 59 [1885] 30 ChD

105    

J. was convinced that the statement's detailed legal analysis of the  

proprietary status of cryptocurrencies was “compelling” and should  

be adopted by the court. Thus, what prevailed with the court was  

the definition provided by Law Tech Delivery Panel’s UK  

Jurisdiction Task Force, which, unlike RBI, did not enjoy a  

statutory status, but was only an industry-led government  

backed initiative.  

6.84. The ruling of the European Court of Justice in  

Skatteverket v. David Hedqvist,60 was with particular reference to  

the identity of virtual currencies. ECJ was in this case asked to  

decide a reference from Supreme Administrative Court, Sweden on  

whether transactions to exchange a traditional currency for the  

‘Bitcoin’ virtual currency or vice versa, which Mr. Hedqvist wished to  

perform through a company, were subject to value added tax. The  

opinion of the court was to the effect that:  

(i) Bitcoin with bidirectional flow which will be exchanged for  

traditional currencies in the context of exchange transactions cannot  

be categorized as tangible property since virtual currency has no  

purpose other than to be a means of payment.   

(ii) VC transactions do not fall within the concept of the supply of  

goods as they consist of exchange of different means of payment and  

hence, they constitute supply of services.   

                                                 60 Case C-264/14 dated 22-10-2015

106    

(iii) Bitcoin virtual currency being a contractual means of payment  

could not be regarded as a current account or a deposit account, a  

payment or a transfer, and unlike debt, cheques and other negotiable  

instruments (referred to in Article 135(1)(d) of the EU VAT Directive),  

Bitcoin is a direct means of payment between the operators that  

accept.   

(iv) Bitcoin virtual currency is neither a security conferring a property  

right nor a security of a comparable nature.  

(v) The transactions in issue were entitled to exemption from payment  

of VAT as they fell under the category of transactions involving  

‘currency [and] bank notes and coins used as legal tender’.   

(vi) Article 135(1)(e) EU Council VAT Directive 2006/112/EC is  

applicable to non-traditional currencies i.e., to currencies other  

than those that are legal tender in one or more countries in so  

far as those currencies have been accepted by the parties to a  

transaction as an alternative to legal tender and have no  

purpose other than to be a means of payment.   

The court accordingly concluded that virtual currencies would  

fall under this definition of non-traditional currencies.   

6.85. Thus (i) depending upon the text of the statute involved in  

the case and (ii) depending upon the context, various courts in  

different jurisdictions have identified virtual currencies to  

belong to different categories ranging from property to

107    

commodity to non-traditional currency to payment instrument  

to money to funds. While each of these descriptions is true, none of  

these constitute the whole truth. Every court which attempted to fix  

the identity of virtual currencies, merely acted as the 4 blind men in  

the Anekantavada philosophy of Jainism,61 (theory of non-absolutism  

that encourages acceptance of relativism and pluralism) who attempt  

to describe an elephant, but end up describing only one physical  

feature of the elephant.   

6.86. RBI was also caught in this dilemma. Nothing prevented  

RBI from adopting a short circuit by notifying VCs under the category  

of “other similar instruments” indicated in Section 2(h) of FEMA,  

1999 which defines ‘currency’ to mean “all currency notes, postal  

notes, postal orders, money orders, cheques, drafts, travelers’ cheque,  

letters of credit, bills of exchange and promissory notes, credit cards or  

such other similar instruments as may be notified by the Reserve  

Bank.” After all, promissory notes, cheques, bills of exchange etc. are  

also not exactly currencies but operate as valid discharge (or the  

creation) of a debt only between 2 persons or peer-to-peer. Therefore,  

it is not possible to accept the contention of the petitioners that VCs  

are just goods/commodities and can never be regarded as real  

money.   

                                                 61 According to this doctrine, truth and reality are perceived differently from different  

points of view and no single point is the complete truth.  

108    

6.87. Once we are clear about the above confusion, and once it  

is accepted that some institutions accept virtual currencies as valid  

payments for the purchase of goods and services, there is no escape  

from the conclusion that the users and traders of virtual currencies  

carry on an activity that falls squarely within the purview of the  

Reserve Bank of India. The statutory obligation that RBI has, as  

a central bank, (i) to operate the currency and credit system, (ii)  

to regulate the financial system and (iii) to ensure the payment  

system of the country to be on track, would compel them  

naturally to address all issues that are perceived as potential  

risks to the monetary, currency, payment, credit and financial  

systems of the country. If an intangible property can act under  

certain circumstances as money (even without faking a currency)  

then RBI can definitely take note of it and deal with it. Hence it is not  

possible to accept the contention of the petitioners that they are  

carrying on an activity over which RBI has no power statutorily.   

6.88. In Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of  

India,62 this court pointed out that “Reserve Bank of India is an  

expert body to which the responsibility of monitoring the economic  

system of the country is entrusted, under various enactments like the  

RBI Act, 1934, the Banking Regulation Act, 1949.” Therefore, (i) in the  

teeth of the statutory scheme of these enactments (ii) from the way  

                                                 62 (2015) 4 SCC 770

109    

different courts and regulators of different jurisdictions have treated  

VCs and (iii) from the very characteristics of VCs, it is clear that they  

have the potential to interfere with the matters that RBI has the  

power to restrict or regulate. Hence, we have no hesitation in  

rejecting the first contention of the petitioners that the impugned  

decision is ultra vires.     

6.89. It was argued that the Preamble of the RBI Act speaks  

only about the role of RBI in operating the currency and credit  

system of the country to its advantage and that since virtual  

currencies may not form part of the credit system of the country as  

they are not recognized as currency, the invocation of the provisions  

of RBI Act was out of context.   

6.90. But as pointed out elsewhere, RBI is the sole repository of  

power for the management of the currency, under Section 3 of the  

RBI Act. RBI is also vested with the sole right to issue bank notes  

under Section 22(1) and to issue currency notes supplied to it by the  

Government of India and has an important role to play in evolving  

the monetary policy of the country, by participation in the Monetary  

Policy Committee which is empowered to determine the policy rate  

required to achieve the inflation target, in terms of the consumer  

price index. Therefore, anything that may pose a threat to or  

have an impact on the financial system of the country, can be  

regulated or prohibited by RBI, despite the said activity not

110    

forming part of the credit system or payment system. The  

expression “management of the currency” appearing in Section 3(1)  

need not necessarily be confined to the management of what is  

recognized in law to be currency but would also include what is  

capable of faking or playing the role of a currency.   

6.91. It is ironical that virtual currencies which took avatar  

(according to its creator Satoshi) to kill the demon of a central  

authority (such as RBI), seek from the very same central authority,  

access to banking services so that the purpose of the avatar is  

accomplished. As we have pointed out elsewhere, the very creation of  

digital currency/ Bitcoin was to liberate the monetary system from  

being a slave to the central authority and from being operated in a  

manner prejudicial to private interests. Therefore, the ultra vires  

argument cannot be accepted when the provision of access to  

banking services without any interference from the central authority  

over a long period of time is perceived as a threat to the very  

existence of the central authority. Hence, we hold that RBI has the  

requisite power to regulate or prohibit an activity of this nature.  

If at all, the power is only to regulate, not prohibit  

6.92. The next contention that if at all, RBI is conferred only  

with the power to regulate, but not to prohibit, as seen from the  

express language of Section 45JA of the RBI Act, does not appeal to  

us. In Star India Pvt. ltd. v. Dept. of Industrial Policy and

111    

Promotion and Ors.,63 this court opined that the word “regulate” has  

a very broad meaning including the power to prohibit. The following  

passage from K. Ramanathan v. State of Tamil Nadu64 was quoted  

in Star India (supra):   

19. It has often been said that the power to regulate does  

not necessarily include the power to prohibit, and  

ordinarily the word “regulate” is not synonymous with the  

word “prohibit”. This is true in a general sense and in the  

sense that mere regulation is not the same as absolute  

prohibition. At the same time, the power to regulate carries  

with it full power over the thing subject to regulation and in  

absence of restrictive words, the power must be regarded  

as plenary over the entire subject. It implies the power to  

rule, direct and control, and involves the adoption of a rule  

or guiding principle to be followed, or the making of a rule  

with respect to the subject to be regulated. The power to  

regulate implies the power to check and may imply the  

power to prohibit under certain circumstances, as where  

the best or only efficacious regulation consists of  

suppression. It would therefore appear that the word  

“regulation” cannot have any inflexible meaning as to  

exclude “prohibition”. It has different shades of meaning  

and must take its colour from the context in which it is  

used having regard to the purpose and object of the  

legislation, and the Court must necessarily keep in view  

the mischief which the legislature seeks to remedy.  

6.93. The contention that the power to prohibit something as  

res extra commercium is always a legislative policy and that therefore  

the same cannot be done through an executive fiat, omits to take  

note of the crucial role assigned to RBI in the economic sphere. It is  

true that in Godawat Pan Masala Products IP Ltd. & Anr v. Union  

                                                 63 (2019) 2 SCC 104  64 1985 (2) SCC 116

112    

of India,65 it was held that whether an article is to be prohibited  

as res extra commercium, is a matter of Legislative policy and  

must arise out of an Act of legislature and not by a mere  

executive notification. But we must remember that in Khoday  

Distilleries Ltd. v. State of Karnataka,66 while dealing with  

prohibitions on alcohol it was held that what articles and goods  

should be allowed to be produced, possessed, sold and consumed is  

to be left to the judgment of legislative and executive wisdom.   

6.94. In any case, the projection of the impugned decisions of  

RBI as a total prohibition of an activity altogether, may not be  

correct. The impugned Circular does not impose a prohibition on the  

use of or the trading in VCs. It merely directs the entities regulated  

by RBI not to provide banking services to those engaged in the  

trading or facilitating the trading in VCs. Section 36(1)(a) of the  

Banking Regulation Act, 1949 very clearly empowers RBI to caution  

or prohibit banking companies against entering into certain types of  

transactions or class of transactions. The prohibition is not per se  

against the trading in VCs. It is against banking companies, with  

respect to a class of transactions. The fact that the functioning of  

VCEs automatically gets paralyzed or crippled because of the  

impugned Circular, is no ground to hold that it tantamount to total  

prohibition. So long as those trading in VCs do not wish to convert                                                    65 (2004) 7 SCC 68  66 (1995) 1 SCC 574

113    

them into fiat currency in India and so long as the VCEs do not seek  

to collect their service charges or commission in fiat currency  

through banking channels, they will not be affected by this Circular.  

Admittedly, peer-to-peer transactions are still taking place, without  

the involvement of the banking channel. In fact, those actually  

buying and selling VCs without seeking to convert fiat currency into  

VCs or vice-versa, are not affected by this Circular. It is only the  

online platforms which provide a space or medium for the traders to  

buy and sell VCs, that are seriously affected by the Circular, since  

the commission that they earn by facilitating the trade is required to  

be converted into fiat currency. Interestingly, the petitioners argue on  

the one hand that there is total prohibition and argue on the other  

hand that the Circular does not achieve its original object of  

curtailing the actual trading, though it cripples the exchanges. If the  

first part of this submission is right, the latter cannot be and if the  

latter part is right, the former cannot be.          

6.95. The reliance placed in this regard by the petitioners on  

the decision of this court in State of Rajasthan v. Basant Nahata67  

may not be appropriate. The said decision arose out of a challenge to  

the constitutional validity of Section 22A of the Registration Act,  

1908 inserted by way of State Amendment by the State of Rajasthan.  

By the said amendment, the state government was conferred with  

                                                 67 (2005) 12 SCC 77

114    

unbridled powers to declare by notification in the official gazette, the  

registration of any document or class of documents as opposed to  

public policy. In exercise of the power so conferred, the state  

government issued notifications declaring the registration of an  

irrevocable power of attorney or a power of attorney to be in force for  

more than a certain period, authorizing the attorney to transfer any  

immovable property, as opposed to public policy. This court found  

that the delegation made by Section 22A was uncanalised and  

unguided. In addition, the court found that a transaction between  

two persons capable of entering into contract, which does not  

contravene any statute, would be valid in law and that when the  

State of Rajasthan did not make such transactions illegal, it cannot  

strike at the documents recording such transactions. The court held  

that Section 22A cannot control the transactions which fall outside  

the scope of the Act, through a subordinate legislation.   

6.96. But the said decision is of no assistance to the  

petitioners, since none of the provisions of the RBI Act or the  

Banking Regulation Act are under challenge before us. The delegation  

itself is not in question before us. Unlike the Registration Act, Section  

36(1)(a) of the Banking Regulation Act, 1949 empowers RBI to  

specifically target transactions. Moreover, RBI’s role in the economy  

of the country is not akin to the power of any other delegate.     

115    

6.97. While holding that price fixation may normally be a  

legislative act, this court pointed out in Union of India & Anr v.  

Cynamide India ltd. & Anr:68   

“…with the proliferation of delegated legislation, there is a  

tendency for the line between legislation and  

administration to vanish into an illusion. Administrative,  

quasi-judicial decisions tend to merge in legislative activity  

and, conversely, legislative activity tends to fade into and  

present an appearance of an administrative or quasi-

judicial activity. Any attempt to draw a distinct line  

between legislative and administrative functions, it has  

been said, is ‘difficult in theory and impossible in practice’.  

... The distinction between the two has usually been  

expressed as ‘one between the general and the particular’.  

‘A legislative act is the creation and promulgation of  

a general rule of conduct without reference to  

particular cases; an administrative act is the  

making and issue of a specific direction or the  

application of a general rule to a particular case in  

accordance with the requirements of policy’.  

‘Legislation is the process of formulating a general rule of  

conduct without reference to particular cases and usually  

operating in future; administration is the process of  

performing particular acts, of issuing particular orders or of  

making decisions which apply general rules to particular  

cases’.” (emphasis supplied)  

6.98. On the effect and force of delegated legislation, this court  

held in St. Johns Teachers Training Institute v. Regional  

Director, NCTE:69   

“The regulations made under power conferred by the  

statute are supporting legislation and have the force and  

effect, if validly made, as an Act passed by the competent  

legislature.”.   

                                                 68 (1987) 2 SCC 720  69 (2003) 3 SCC 321

116    

Similar views were expressed in Udai Singh Dagar v. Union of  

India,70 when the court held:“...a legislative Act must be read with the  

regulations framed. A subordinate legislation, as is well known, when  

validly framed, becomes a part of the Act.”  

 6.99. Law is well settled that when RBI exercises the powers  

conferred upon it, both to frame a policy and to issue directions for  

its enforcement, such directions become supplemental to the Act  

itself. In Peerless General Finance and Investment Co. Ltd. v.  

Reserve Bank of India,71 this court followed the decisions in State  

of U.P. and Ors v. Babu Ram Upadhya72 and D.K.V. Prasada Rao  

v. Govt. of A.P.73 to hold that Rules made under a statute must be  

treated as if they were contained in the Act and that therefore they  

must be governed by the same principles as the statute itself. Useful  

reference can also be made in this regard to the following  

observations in ICICI Bank Ltd v. Official Liquidator of APS Star  

Industries Ltd:74   

“40. When a delegate is empowered by Parliament to enact  

a policy and to issue directions which have a statutory  

force and when the delegatee (RBI) issues such guidelines  

(policy) having statutory force, such guidelines have got to  

be read as supplement to the provisions of the BR Act,  

1949. The “banking policy” is enunciated by RBI. Such  

policy cannot be said to be ultra vires the Act.” (emphasis  

supplied)    

                                                 70 (2007) 10 SCC 306  71 (1992) 2 SCC 343  72 AIR 1961 SC 751  73 AIR 1984 AP 75  74 (2010) 10 SCC 1

117    

6.100. In his treatise on Administrative Law, Durga Das Basu75  

states:   

The scope of judicial review is narrowed down when a  

statute confers discretionary power upon an executive  

authority to make such rules or regulations or orders ‘as  

appear to him to be necessary’ or ‘expedient’, for carrying  

out the purposes of the statute or any other specified  

purpose. In such a case, the check of ultra vires  

vanishes for all practical purposes inasmuch as the  

determination of the necessity or expediency is  

taken out of the hands of the Courts and the only  

ground upon which Courts may interfere is that the  

authority acted mala fide or never applied his mind  

to the matter, or applied an irrelevant principle in  

making a statutory order. (emphasis supplied)  

6.101. In Jayantilal Amrit Lal Shodhan v. F.N. Rana,76 the  

majority pointed out that there can be no assumption that the  

legislative functions are exclusively performed by the legislature,  

executive functions by the executive and judicial functions by the  

judiciary alone. The court indicated that the Constitution has not  

made an absolute or rigid division of functions between the three  

agencies of the state and that at times the exercise of legislative or  

judicial functions are entrusted to the executive. A very important  

observation made by the Constitution Bench in Jayantilal (supra)  

was as follows:   

“…..in addition to these quasi-judicial and quasi-legislative  

functions, the executive has also been empowered by  

statute to exercise functions which are legislative and  

judicial in character and in certain instances, powers are  

                                                 75 Ch. 4, Pg. 121, 6th Edition, 2004  76 AIR 1964 SC 648

118    

exercised which appear to partake at the same moment of  

legislative, executive and judicial characteristics.”  

6.102. In Shri Sitaram Sugar Co. Ltd. & Anr v. Union of  

India & Ors,77 the Constitution bench of this court held that  

whether an order is characterized as legislative or administrative or  

quasi-judicial or whether it is a determination of law or fact, the  

judgment of the expert body entrusted with power is generally treated  

as final and the judicial function is exhausted when it is found to  

have “warrant in the record” and a rational basis in law.   

6.103. It must be pointed out that the power of RBI is not  

merely curative but also preventive. This is acknowledged by this  

court in Ganesh Bank of Kurunwad Ltd. & Ors v. Union of India  

& Ors.,78 where it was held that RBI has a right to take pre-emptive  

action taking into account the totality of the circumstances.   

 “It is not that when there is a run on the bank then only  

RBI must intervene or that it must intervene only when  

there are a good number of court proceedings against the  

bank concerned. RBI has to take into account the totality of  

the circumstances and has to form its opinion accordingly.”  

6.104. The impugned Circular is intended to prohibit banking  

companies from entering into certain territories. The Circular is  

actually addressed to entities regulated by RBI and not to those who  

do not come within the purview of RBI’s net. But the exercise of such  

a power by RBI, over the entities regulated by it, has caused a  

                                                 77 (1990) 3 SCC 223  78 (2006) 10 SCC 645

119    

collateral damage to some establishments like the petitioners’, who do  

not come within the reach of RBI’s net.   

6.105. The power of a statutory authority to do something has  

to be tested normally with reference to the persons/entities qua  

whom the power is exercised. The question to be addressed in such  

cases is whether the authority had the power to do that act or issue  

such a directive, qua the person to whom it is addressed. While  

persons who suffer a collateral damage can certainly challenge the  

action, such challenge will be a very weak challenge qua the  

availability of power.  

6.106. Apart from the provisions of the RBI Act, 1934 and the  

Banking Regulation Act, 1949, the impugned Circular also refers to  

the power under Section 18 of the Payment and Settlement Systems  

Act, 2007. In order to buttress their contention regarding the  

availability of power to regulate, the petitioners refer to the definition  

of the expression “payment system” under Section 2(1)(i) of the said  

Act and contend that VCEs do not operate any payment system and  

that since the power to issue directions under Section 18 is only to  

regulate the payment systems, the invocation of the said power to  

something that does not fall within the purview of payment system, is  

arbitrary.   

6.107. But Section 18 of the Payment and Settlement Systems  

Act indicates (i) what RBI can do (ii) the persons qua whom it can be

120    

done and (iii) the object for which it can be done. In other words,  

Section 18 empowers RBI (i) to lay down policies relating to the  

regulation of payment systems including electronic, non-electronic,  

domestic and international payment systems affecting domestic  

transactions and (ii) to give such directions as it may consider  

necessary. These are what RBI can do under Section 18. Coming to  

the second aspect, the persons qua whom the powers under Section  

18 can be exercised are (i) system providers (ii) system participants  

and (iii) any other person generally or any such agency. The  

expression “system provider” is defined under Section 2(1)(q) to mean  

a person who operates an authorized payment system. The  

expression “system participant” is defined in Section 2(1)(p) to mean  

a bank or any other person participating in a payment system,  

including the system provider. Other than the expressions ‘system  

provider’ and ‘system participant’, Section 18 also uses the  

expressions ‘any other person’ and ‘any such agency’.  

6.108. It is true that the purposes for which the power under  

Section 18 can be exercised, are also indicated in Section 18. They  

are (i) regulation of the payment systems (ii) the interest of the  

management and operation of any payment system and (iii) public  

interest.   

6.109. As we have pointed out elsewhere, the impugned  

Circular is primarily addressed to banks who are “system

121    

participants” within the meaning of Section 2(1)(p). The banks  

certainly have a system of payment to be effected between a payer  

and a beneficiary, falling thereby within the meaning of the  

expression payment system.   

6.110. It may also be relevant to take note of the definition of  

the expressions “payment instruction” and “payment obligation”  

appearing in clauses (g) and (h) of subsection (1) of Section 2 which  

read as follows:  

2(1)(g) “payment instruction” means any instrument,  

authorisation or order in any form, including electronic  

means, to effect a payment,—  

(i) by a person to a system participant; or  

(ii) by a system participant to another system participant;  

2(1)(h) “payment obligation” means an indebtedness that  

is owned by one system participant to another system  

participant as a result of clearing or settlement of one or  

more payment instructions relating to funds, securities or  

foreign exchange or derivatives or other transactions;  

6.111. Therefore, in the overall scheme of the Payment and  

Settlement Systems Act, 2007, it is impossible to say that RBI does  

not have the power to frame policies and issue directions to banks  

who are system participants, with respect to transactions that will fall  

under the category of payment obligation or payment instruction, if  

not a payment system. Hence, the argument revolving around Section  

18 should fail.   

122    

II. Mode of exercise of power:  

Satisfaction/Application of mind/relevant and irrelevant  

considerations  

6.112. That takes us to the next question whether the power  

was exercised properly in a manner prescribed by law. The argument  

of Shri Ashim Sood, learned Counsel for the petitioner is that  

assuming that RBI has the requisite power under Section 35A(1) of  

Banking Regulation Act, 1949 to do what it has done, the necessary  

sine qua non is the “satisfaction”. Section 35A(1) of the Banking  

Regulation Act, 1949 as well as Section 45JA and 45L of the RBI Act,  

1934 empower RBI to issue directions “if it is satisfied” about the  

existence of certain parameters. Satisfaction can be arrived at only by  

(i) gathering facts (ii) sifting relevant material from those which are  

irrelevant and (iii) forming an opinion about the cause and  

connection between relevant material and the decision proposed to be  

taken. In respect of each of these requirements, the learned Counsel  

relied upon certain judicial precedents.  

6.113. But we do not think that in the facts of the present case,  

we could hold RBI guilty of non-application of mind. As a matter of  

fact, the issue as to how to deal with virtual currencies has been  

lingering with RBI from June 2013 onwards, when the Financial  

Stability Report took note of the challenges posed by virtual  

currencies in the form of regulatory, legal and operational risks. The

123    

Financial Stability Report of June 2013 led to a press release dated  

24-12-2013 cautioning the users, holders and traders of virtual  

currencies about the potential financial, operational, legal and  

consumer protection and security related risks associated with  

virtual currencies. Then came the Financial Stability Report of  

December 2015 which raised concerns about excessive volatility in  

the value of VCs and their anonymous nature which went against  

global money laundering rules rendering their very existence  

questionable. The Financial Stability Report of December 2016 also  

took note of the risks associated with virtual currencies qua data  

security and consumer protection. The report also recorded concerns  

about far reaching potential impact of the effectiveness of monetary  

policy itself. Therefore, the report suggested RegTech to deal with  

FinTech.   

6.114. IDRBT, established by RBI to work at the intersection of  

banking and technology submitted a white paper in January 2017,  

which enlisted the advantages as well as disadvantages of digital  

currencies. This white paper was taken note of by RBI in the  

Financial Stability Report of June 2017. In the meantime, RBI issued  

a press release on 01-02-2017 once again cautioning the users,  

holders and traders of virtual currencies.   

6.115. The sub-committee of the Financial Stability and  

Development Council took a decision in April 2016, pursuant to

124    

which RBI set up an Inter-Regulatory Working Group on FinTech and  

Digital Banking. This Working Group submitted a report in November  

2017, after which RBI issued a third press release on 05-12-2017.  

Thereafter RBI also sent a mail on 02-04-2018 to the central  

government, enclosing a note on regulating crypto assets. To be fair  

to RBI, even this note examined the pros and cons of banning and  

regulating crypto currencies.   

6.116. All the above sequence of events from June 2013 up to  

02-04-2018 would show that RBI had been brooding over the issue  

for almost five years, without taking the extreme step. Therefore, RBI  

can hardly be held guilty of non-application of mind. If an issue had  

come up again and again before a statutory authority and such an  

authority had also issued warnings to those who are likely to be  

impacted, it can hardly be said that there was no application of mind.  

For arriving at a “satisfaction” as required by Section 35A(1) of  

Banking Regulation Act, 1949 and Section 45JA and 45L of RBI Act,  

1934, it was not required of RBI either to write a thesis or to write a  

judgement.   

6.117. In fact, RBI cannot even be accused of not taking note of  

relevant considerations or taking into account irrelevant  

considerations. RBI has taken into account only those considerations  

which multinational bodies and regulators of various countries such  

as FATF, BIS, etc., have taken into account. This can be seen even

125    

from the earliest press release dated 24-12-2013, which is more  

elaborate than the impugned Circular dated 06-04-2018. The press  

release dated 24-12-2013 reads as follows:  

RBI cautions users of Virtual Currencies against  

Risks  

The Reserve Bank of India has today cautioned the users,  

holders and traders of Virtual currencies (VCs), including  

Bitcoins, about the potential financial, operational, legal,  

customer protection and security related risks that they  

are exposing themselves to.  

The Reserve Bank has mentioned that it has been looking  

at the developments relating to certain electronic records  

claimed to be “Decentralised Digital Currency” or “Virtual  

Currency” (VCs), such as, Bitcoins, litecoins, bbqcoins,  

dogecoins etc., their usage or trading in the country and  

the various media reports in this regard.  

The creation, trading or usage of VCs including Bitcoins, as  

a medium for payment are not authorised by any central  

bank or monetary authority. No regulatory approvals,  

registration or authorisation is stated to have been  

obtained by the entities concerned for carrying on such  

activities. As such, they may pose several risks to their  

users, including the following:  

• VCs being in digital form are stored in digital/electronic  

media that are called electronic wallets. Therefore, they  

are prone to losses arising out of hacking, loss of  

password, compromise of access credentials, malware  

attack etc. Since they are not created by or traded through  

any authorised central registry or agency, the loss of the e-

wallet could result in the permanent loss of the VCs held in  

them.  

• Payments by VCs, such as Bitcoins, take place on a  

peer-to-peer basis without an authorised central agency  

which regulates such payments. As such, there is no  

established framework for recourse to customer problems /  

disputes / charge backs etc.  

• There is no underlying or backing of any asset for VCs.  

As such, their value seems to be a matter of speculation.

126    

Huge volatility in the value of VCs has been noticed in the  

recent past. Thus, the users are exposed to potential losses  

on account of such volatility in value.  

• It is reported that VCs, such as Bitcoins, are being  

traded on exchange platforms set up in various  

jurisdictions whose legal status is also unclear. Hence, the  

traders of VCs on such platforms are exposed to legal as  

well as financial risks.  

• There have been several media reports of the usage of  

VCs, including Bitcoins, for illicit and illegal activities in  

several jurisdictions. The absence of information of  

counterparties in such peer-to-peer anonymous/  

pseudonymous systems could subject the users to  

unintentional breaches of anti-money laundering and  

combating the financing of terrorism (AML/CFT) laws.  

The Reserve Bank has also stated that it is presently  

examining the issues associated with the usage, holding  

and trading of VCs under the extant legal and regulatory  

framework of the country, including Foreign Exchange and  

Payment Systems laws and regulations.    

6.118. When a series of steps taken by a statutory authority  

over a period of about five years disclose in detail what triggered their  

action, it is not possible to see the last of the orders in the series in  

isolation and conclude that the satisfaction arrived at by the  

authority is not reflected appropriately. In any case, pursuant to an  

order passed by this court on 21-08-2019, RBI has given a detailed  

point-wise reply to the representations of the petitioners. In these  

representations, the petitioners have highlighted all considerations  

that they thought as relevant. RBI has given its detailed responses on  

04-09-2019 and 18-09-2019. Therefore, the contention that there  

was no application of mind and that relevant considerations were

127    

omitted to be taken note of, loses its vigour in view of the subsequent  

developments.   

Malice in law/colorable exercise  

6.119. Drawing our attention to a reply given by RBI dated 26-

04-2017 to a query under the Right to Information Act, and the reply  

given by Minister of State for Finance in response to a question  

raised in the Lok Sabha (Unstarred Question No. 2113) on 28-07-

2017, wherein RBI took a position that they had no power to freeze  

the accounts either of defaulting companies or of shell companies, it  

was contended by Shri Ashim Sood, that the impugned Circular goes  

contrary to the position so taken officially, as the Circular has the  

effect of closing the accounts of VCEs and that therefore it was hit by  

arbitrariness and caprice.  

6.120. But the above argument arises out of a misconception  

about the purport of the impugned Circular. The impugned Circular  

does not order either the freezing or the closing of any particular  

account of a particular customer. All that the impugned Circular says  

is that RBI regulated entities shall exit the relationship that they  

have with any person or entity dealing with or settling VCs, within  

three months of the date of the Circular. The regulated entities are  

directed not to provide services for facilitating any person or entity in  

dealing with or settling VCs. Some of the petitioners herein are  

individuals and companies who run virtual currency exchanges. In

128    

case they have other businesses, the impugned Circular does not  

order the closure of their bank accounts relating to other businesses.  

The prohibition under paragraph 2 of the impugned Circular is with  

respect to the provision of services for facilitating any person or entity  

in dealing with or settling VCs. This prohibition does not extend  

either to the closing or the freezing of the accounts of the petitioners  

in relation to their other ventures.   

6.121. Taking clue from the averment contained in the counter-

affidavit of RBI to the effect that “VCs are outside the ambit of the  

central authority’s effective sphere of control and management” and  

also referring to the stand taken by RBI in their letter dated 04-09-

2019 to the effect that “neither VCs nor the businesses involved in  

providing VC based services come under the regulatory purview of  

RBI”, it was contended by Shri Ashim Sood that the impugned  

Circular is a colourable exercise of power and tainted by malice in  

law, in as much as it seeks to achieve an object completely different  

from the one for which the power is entrusted. State of Punjab &  

Anr v. Gurdial Singh & Ors,79 Collector (District Magistrate)  

Allahabad & Anr v. Raja Ram Jaiswal,80 and Kalabharati  

Advertising v. Hemant Vimalnath Narichania & Ors81 are relied  

upon in this regard.   

                                                 79 (1980) 2 SCC 471  80 (1985) 3 SCC 1  81 (2010) 9 SCC 437

129    

6.122. But the above contention is completely misconceived.  

There can be no quarrel with the proposition that RBI has sufficient  

power to issue directions to its regulated entities in the interest of  

depositors, in the interest of banking policy or in the interest of the  

banking company or in public interest. If the exercise of power by RBI  

with a view to achieve one of these objectives incidentally causes a  

collateral damage to one of the several activities of an entity which  

does not come within the purview of the statutory authority, the  

same cannot be assailed as a colourable exercise of power or being  

vitiated by malice in law. To constitute colourable exercise of power,  

the act must have been done in bad faith and the power must have  

been exercised not with the object of protecting the regulated entities  

or the public in general, but with the object of hitting those who form  

the target. To constitute malice in law, the act must have been done  

wrongfully and willfully without reasonable or probable cause. The  

impugned Circular does not fall under the category of either of them.   

6.123. The argument that the invocation by RBI, of ‘public  

interest’ as a weapon, purportedly for the benefit of users, consumers  

or traders of virtual currencies is a colourable exercise of power also  

does not hold water. Once it is conceded that RBI has powers to issue  

directions in public interest, it is impossible to exclude users,  

consumers or traders of virtual currencies from the coverage. In fact,  

the repeated press releases issued by RBI from 2013 onwards

130    

indicate that RBI did not want the members of the public, which  

include users, consumers and traders of VCs, even to remotely think  

that virtual currencies have a legal tender status or are backed by a  

central authority. Irrespective of what VCs actually do or do not do, it  

is an accepted fact that they are capable of performing some of the  

functions of real currencies. Therefore, if RBI takes steps to prevent  

the gullible public from having an illusion as though VCs may  

constitute a valid legal tender, the steps so taken, are actually taken  

in good faith. The repeated warnings through press releases from  

December 2013 onwards indicate a genuine attempt on the part of  

RBI to safeguard the interests of the public. Therefore, the contention  

that the impugned Circular is vitiated by malice in law and that it is  

a colorable exercise of power, cannot be sustained.   

6.124. Relying upon (i) the decision in Meerut Development  

Authority v. Assn. Management Studies & Anr,82 wherein it was  

held that the term “public interest” must be understood and  

interpreted in the light of the entire scheme, purpose and object of  

the enactment (ii) the decision in Bihar Public Service Commission   

v. Saiyed Hussain Abbas Rizwi & Anr,83 wherein it was held that  

the term “public interest” does not have a rigid meaning and takes its  

colour from the statute in which it occurs (iii) the decision in Utkal  

                                                 82 (2009) 6 SCC 171  83 (2012) 13 SCC 61

131    

Contractors & Joinery (P) Ltd. & Ors v. State of Orissa & Ors,84  

wherein it was held that the words of a statute take their colour from  

the reason for it and (iv) the decision in Empress Mills v. Municipal  

Committee, Wardha,85 wherein it was held that general words and  

phrases must usually be construed as being limited to the actual  

object of the Act, it was contended that the expression ‘public  

interest’ appearing in Section 35A(1)(a) of the Banking Regulation  

Act, 1949, cannot be given an expansive meaning.  

6.125. But the said argument does not take the petitioners  

anywhere. As we have indicated elsewhere, the power under Section  

35A to issue directions is to be exercised under four contingencies  

namely (i) public interest (ii) interest of banking policy (iii) interest of  

the depositors and (iv) interest of the banking company. The  

expression “banking policy” is defined in Section 5(ca) to mean  

any policy specified by RBI (i) in the interest of the banking  

system (ii) in the interest of monetary stability and (iii) sound  

economic growth. Public interest permeates all these three  

areas. This is why Section 35A(1)(a) is invoked in the impugned  

Circular. Therefore, we reject the argument that the impugned  

decision is a colorable exercise of power and it is vitiated by malice in  

law.  

                                                   84 (1987) 3 SCC 279  85 (1958) SCR 1102

132    

M. S. Gill Reasoning  

6.126. The impugned Circular cannot be assailed on the basis  

of M. S. Gill86 test, for two reasons. First is that in Chairman, All  

India Railway Recruitment Board v. K. Shyam Kumar & Ors,87  

this court held that MS Gill test may not always be applicable where  

larger public interest is involved and that in such situations,  

additional grounds can be looked into for examining the validity of an  

order. This was followed in PRP Exports & Ors v. Chief Secretary,  

Government of Tamil Nadu & Ors.88 In 63 Moons Technologies  

ltd. & Ors v. Union of India & Ors,89 this court clarified that  

though there is no broad proposition that MS Gill test will not apply  

where larger public interest is involved, subsequent materials in the  

form of facts that have taken place after the order in question is  

passed, can always be looked at in the larger public interest, in order  

to support an administrative order. The second reason why the  

weapon of MS Gill will get blunted in this case, is that during the  

pendency of this case, this court passed an interim order on 21-08-

2019 directing RBI to give a point-wise reply to the detailed  

representation made by the writ petitioners. Pursuant to the said  

order, RBI gave detailed responses on 04-09-2019 and 18-09-2019.  

Therefore, the argument based on MS Gill test has lost its potency.   

                                                 86 M S Gill v. The Chief Election Commissioner, (1978) 1 SCC 405  87 (2010) 6 SCC 614  88 (2014) 13 SCC 692  89 (2019) SCC Online SC 624

133    

Calibration/Proportionality  

6.127. The next argument is that the impugned measure is  

extreme and that it will not pass the test of proportionality. For the  

purpose of convenience, we shall take up this argument together with  

the argument revolving around Article 19(1)(g) while dealing with the  

reasonableness of the restriction.   

III. Wait and watch approach of the other stakeholders    

6.128. The argument that other stakeholders such as the  

Enforcement Directorate which is concerned with money laundering,  

the Department of Economic Affairs which is concerned with the  

economic policies of the State, SEBI which is concerned with security  

contracts and CBDT which is concerned with the tax regime relating  

to goods and services, did not see any grave threat and that therefore  

RBI’s reaction is knee-jerk, is not acceptable. Enforcement Directorate  

can step in only when actual money laundering takes place, since the  

statutory scheme of Prevention of Money Laundering Act deals with a  

procedure which is quasi-criminal. SEBI can step in only when the  

transactions involve securities within the meaning of Section 2(h) of  

the Securities Contracts (Regulation) Act, 1956. CBDT will come into  

the picture only when the transaction related to the sale and  

purchase of taxable goods/commodities. Every one of these  

stakeholders has a different function to perform and are entitled to  

have an approach depending upon the prism through which they are

134    

obliged to look at the issue. Therefore, RBI cannot be faulted for not  

adopting the very same approach as that of others.   

IV. Light-touch approach of the other countries  

6.129. The argument that most of the countries except very few  

like China, Vietnam, Pakistan, Nepal, Bangladesh, UAE, have not  

imposed a ban (total or partial) may not take the petitioners  

anywhere. The list of countries where a ban similar to the one on  

hand and much more has been imposed discloses a commonality.  

Almost all countries in the neighborhood of India have adopted the  

same or similar approach (in essence India is ring fenced). In any  

case, our judicial decision cannot be colored by what other countries  

have done or not done. Comparative perspective helps only in relation  

to principles of judicial decision making and not for testing the  

validity of an action taken based on the existing statutory scheme.  

6.130. There can also be no comparison with the approach  

adopted by countries such as UK, US, Japan, Singapore, Australia,  

New Zealand, Canada etc., as they have developed economies capable  

of absorbing greater shocks. Indian economic conditions cannot be  

placed on par. Therefore, we will not test the correctness of the  

measure taken by RBI on the basis of the approach adopted by other  

countries, though we have, for better understanding of the  

complexities of the issues involved, undertaken a survey of how the  

regulators and courts of other countries have treated VCs.  

135    

V. Precautionary steps taken by petitioners  

6.131. The next contention of the petitioners is that the VC  

exchanges run by them have already put in place certain best  

practices such as (i) avoidance of cash transactions (ii) enhanced KYC  

norms and (iii) confining their services only to persons within India.  

Therefore, it is contended that all the issues flagged by RBI have  

already been addressed and that therefore, there was no necessity to  

disconnect the trade from the regular banking channels. But the fact  

of the matter is that enhanced KYC norms may remove anonymity of  

the customer, but not that of the VC. Even the European  

Parliament, in the portion of its report relied upon by Shri Ashim  

Sood accepts that the adequacy of mandatory registration of  

users (as a less invasive measure), whether or not of fully  

anonymous or pseudo anonymous crypto currencies depends on  

the users’ compliance with the registration requirement. After  

pointing out that compliance will partly depend on an adequate  

sanctioning toolbox in the event of breach, the report wonders  

whether it is at all possible outside of the context of randomly  

bumping into it, at least when fully anonymous VCs are concerned. In  

any case, we are not experts to say whether the safety valves put in  

place could have addressed all issues raised by RBI.  

136    

VI. Different types of VCs require different treatments  

6.132. Drawing our attention to a Report by the European  

Parliament under the caption ‘Cryptocurrencies and Blockchain’,  

released in July 2018, it is contended by Shri Ashim Sood, learned  

Counsel for the petitioners that all virtual currencies are not fully  

anonymous. While some, such as Dash and Monero are fully  

anonymous, others such as Bitcoin are pseudo-anonymous.  

Therefore, it is contended that banning transactions only in fully  

anonymous VCs could have been a better and less intrusive measure.  

An identical argument is advanced by Shri Nakul Dewan learned  

Senior Counsel for the petitioners, with reference to a report of  

October 2012 of the European Central Bank on “Virtual Currency  

Schemes”. According to the said Report, Virtual Currency schemes  

can be classified into three types, depending upon their interaction  

with traditional real money and real economy. They are (i) closed  

virtual currency schemes basically used in an online game (ii) virtual  

currency schemes having a unidirectional flow (usually an inflow),  

with a conversion rate for purchasing the virtual currency which can  

subsequently be used to buy virtual goods and services, but  

exceptionally also to buy real goods and services and (iii) virtual  

currency schemes having a bidirectional flow, where they act like any  

other convertible currency with two exchange rates (buy and sell)

137    

which can subsequently be used to buy virtual goods and services as  

well as real goods and services.   

6.133. Let us first deal with Shri Nakul Dewan’s submission. In  

the very same October 2012 Report of the European Central  

Bank, it is accepted that virtual currencies (i) resemble money  

and (ii) necessarily come with their own dedicated retail  

payment systems. These two aspects are indicated in the Report to  

be covered by the term “Virtual Currency Scheme”.   

6.134. But the entire premise on which the petitioners have  

developed their case is that they are neither money nor constitute a  

payment system. Therefore, if the Report of the European Central  

Bank is to be accepted, it should be accepted in total and cannot be  

selectively taken.   

6.135. The examples provided in the October 2012 Report of the  

European Central Bank show that there are VC Schemes set up by  

entities such as Nintendo, in which consumers can purchase points  

online by using a credit card or in retail stores by purchasing a  

Nintendo points card which cannot be converted back to real money.  

The Report also shows that one VC by name Linden Dollars is issued  

in a virtual world called “Second life”, where users create avatars  

(digital characters), which can be customized. Second life has its own  

economy where users can buy and sell goods and services from and  

to each other. But they first need to purchase Linden dollars using

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fiat currency. Later they can also sell Linden dollars in return for fiat  

currency. Therefore, it is clear that the very same virtual currency can  

have a unidirectional or bidirectional flow depending upon the  

scheme with which the entities come up. Moreover, the question  

whether anonymous VCs alone could have been banned leaving the  

pseudo-anonymous, is for experts and not for this Court to decide. In  

any case, the stand taken by RBI is that they have not banned VCs.  

Hence, the question whether RBI should have adopted different  

approaches towards different VCs does not arise.   

VII. Acceptance of DLT and rejection of VCs is a paradox   

6.136. It was argued that the acceptance of the Distributed  

Ledger Technology and the rejection of VCs is actually a contradiction  

in terms. This argument is based upon the various reports, both of  

RBI and of the Inter-Ministerial Group, to the effect that DLT is part  

of FinTech.   

6.137. The above contention, in legal terms, is about the  

irrationality of the impugned decision. But there is nothing irrational  

about the acceptance of a technological advancement/innovation, but  

the rejection of a by-product of such innovation. There is nothing like  

a “take it or leave it” option.  

VIII. RBI’s decisions do not qualify for Judicial deference  

6.138. It is contended by Shri Ashim Sood, learned Counsel for  

the petitioners that the impugned Circular does not have either the

139    

status of a legislation or the status of an executive action, but is only  

the exercise of a power conferred by statute upon a statutory body  

corporate. Therefore, it is his contention that the judicial rule of  

deference as articulated in R.K. Garg v. Union of India,90 BALCO  

Employees’ Union (Regd.) v. Union of India & Ors,91 and Swiss  

Ribbons Pvt. Ltd. & Anr v. Union of India & Ors,92 will not apply to  

the decision taken by a statutory body like RBI. If, a legislation  

relating to economic matters is placed at the highest pedestal, an  

executive decision with regard to similar matters will be placed only at  

a lower pedestal and the decision taken by a statutory body may not  

even be entitled to any such deference or reverence.   

6.139. But given the scheme of the RBI Act, 1934 and the  

Banking Regulation Act, 1949, the above argument appears only to  

belittle the role of RBI. RBI is not just like any other statutory body  

created by an Act of legislature. It is a creature, created with a  

mandate to get liberated even from its creator. This is why it is given a  

mandate – (i) under the Preamble of the RBI Act 1934, to operate the  

currency and credit system of the country to its advantage and to  

operate the monetary policy framework in the country (ii) under  

Section 3(1), to take over the management of the currency from the  

central government (iii) under Section 20, to undertake to accept  

                                                 90 (1981) 4 SCC 675  91 (2002) 2 SCC 333  92 (2019) 4 SCC 17

140    

monies for account of the central government, to make payments up  

to the amount standing to the credit of its account and to carry out  

its exchange, remittance and other banking operations, including the  

management of the public debt of the Union (iv) under Section 21(1),  

to have all the money, remittance, exchange and banking  

transactions in India of the central government entrusted with it (v)  

under Section 22(1), to have the sole right to issue bank notes in  

India and (vi) under Section 38, to get rupees into circulation only  

through it, to the exclusion of the central government. Therefore, RBI  

cannot be equated to any other statutory body that merely serves its  

master. It is specifically empowered to do certain things to the  

exclusion of even the central government. Therefore, to place its  

decisions at a pedestal lower than that of even an executive decision,  

would do violence to the scheme of the Act.   

6.140. On the primary question of switching over to judicial  

“silent mode” or “hands off mode”, qua economic legislation, it is not  

necessary to catalogue all the decisions of this court such as State of  

Gujarat & Anr v. Shri Ambica Mills Ltd. & Anr,93 G.K.Krishnan v. Tamil  

Nadu,94 R. K. Garg v. Union of India (supra), State of M.P. v. Nandlal  

Jaiswal,95 P.M. Ashwathanarayana Setty v. State of Karnataka,96  

Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of  

                                                 93 (1974) 4 SCC 656  94 (1975) 1 SCC 375  95 (1986) 4 SCC 566  96 (1989) Supp (1) SCC 696

141    

India (supra), T. Velayudhan v. Union of India,97 Delhi Science Forum  

v. Union of India,98 Bhavesh D. Parish v. Union of India,99 Ugar Sugar  

Works ltd. v. Delhi Administration & Ors,100 BALCO Employees’ Union  

(Regd.) v. Union of India (supra), Govt. of Andhra Pradesh & Ors v. P.  

Laxmi Devi,101 Villianur Iyarkkai Padukappu Maiyam v. Union of  

India,102 D.G. of Foreign Trade v. Kanak Exports,103 State of J & K v.  

Trikuta Roller Flour Mills Pvt. Ltd.,104 and Pioneer Urban Land and  

Infrastructure Ltd. v. Union of India,105 as the entire history of the  

doctrine of deference from Lochner Era has been summarized by this  

court in Swiss Ribbons Pvt. Ltd. v. Union of India (supra). In fact,  

even the learned Counsel for the petitioners is ad idem with the  

learned Senior Counsel for RBI that economic regulations require due  

judicial deference. The actual argument of the learned Counsel for the  

petitioners is that such deference may differ in degree from being very  

weak in respect of the decision of a statutory authority, to being very  

strong in respect of a legislative enactment.   

6.141. But as we have pointed out above, RBI is not just any  

other statutory authority. It is not like a stream which cannot be  

greater than the source. The RBI Act, 1934 is a pre-constitutional  

                                                 97 (1993) 2 SCC 582  98 (1996) 2 SCC 405  99 (2000) 5 SCC 471  100 (2001) 3 SCC 635  101 (2008) 4 SCC 720  102 (2009) 7 SCC 561  103 (2016) 2 SCC 226  104 (2018) 11 SCC 260  105 (2019) 8 SCC 416

142    

legislation, which survived the Constitution by virtue of Article 372(1)  

of the Constitution. The difference between other statutory  

creatures and RBI is that what the statutory creatures can do,  

could as well be done by the executive. The power conferred  

upon the delegate in other statutes can be tinkered with,  

amended or even withdrawn. But the power conferred upon RBI  

under Section 3(1) of the RBI Act, 1934 to take over the  

management of the currency from the central government,  

cannot be taken away. The sole right to issue bank notes in India,  

conferred by Section 22(1) cannot also be taken away and conferred  

upon any other bank or authority. RBI by virtue of its authority, is a  

member of the Bank of International Settlements, which position  

cannot be taken over by the central government and conferred upon  

any other authority. Therefore, to say that it is just like any other  

statutory authority whose decisions cannot invite due deference, is to  

do violence to the scheme of the Act. In fact, all countries have  

central banks/authorities, which, technically have independence  

from the government of the country. To ensure such independence, a  

fixed tenure is granted to the Board of Governors, so that they are  

not bogged down by political expediencies. In the United States of  

America, the Chairman of the Federal Reserve is the second most  

powerful person next only to the President. Though the President  

appoints the seven-member Board of Governors of the Federal

143    

Reserve, in consultation with the Senate, each of them is appointed  

for a fixed tenure of fourteen years. Only one among those seven is  

appointed as Chairman for a period of four years. As a result of the  

fixed tenure of 14 years, all the members of Board of Governors  

survive in office more than three governments. Even the European  

Central Bank headquartered in Frankfurt has a President, Vice-

President and four members, appointed for a period of eight years in  

consultation with the European Parliament. World-wide, central  

authorities/banks are ensured an independence, but unfortunately  

Section 8(4) of the RBI Act, 1934 gives a tenure not exceeding five  

years, as the central government may fix at the time of appointment.  

Though the shorter tenure and the choice given to the central  

government to fix the tenure, to some extent, undermines the ability  

of the incumbents of office to be absolutely independent, the  

statutory scheme nevertheless provides for independence to the  

institution as such. Therefore, we do not accept the argument that a  

policy decision taken by RBI does not warrant any deference.  

IX. Article 19(1)(g) challenge & Proportionality  

6.142. The next ground of attack is on the basis of Article  

19(1)(g). Any restriction to the freedom guaranteed under Article  

19(1)(g) should pass the test of reasonableness in terms of Article  

19(6). It is contended by the petitioners that since access to banking  

is the equivalent of the supply of oxygen in any modern economy, the

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denial of such access to those who carry on a trade which is not  

prohibited by law, is not a reasonable restriction and that it is also  

extremely disproportionate. It is further contended that the right to  

access the banking system is actually integral to the right to carry on  

any trade or profession and that therefore a legislation, subordinate  

or otherwise whose effect or impact severely impairs the right to carry  

on a trade or business, not prohibited by law, would be violative of  

Article 19(1)(g). Reliance is placed in this regard on the decisions of  

this court in (i) Md. Yasin v. Town Area Committee,106 where it was  

held that the right under Article 19(1)(g) is affected when “in effect  

and in substance”, the impugned measures brought about a total  

stoppage of business, both, in a commercial sense and from a  

practical point of view, even though there was no prohibition in form  

and (ii) Bennett Coleman & Co. v. Union of India,107 where this  

court held that the impact and not the object of the measure will  

determine whether or not, a fundamental right is violated. It is further  

contended, on the strength of the decision in Md. Faruk v. State of  

Madhya Pradesh & Ors,108 that the imposition of restriction on the  

exercise of a fundamental right may be in the form of control or  

prohibition and that when the exercise of a fundamental right is  

prohibited, the burden of proving that a total ban on the exercise of  

                                                 106 (1952) SCR 572  107 (1972) 2 SCC 788  108 (1969) 1 SCC 853

145    

the right alone may ensure the maintenance of the general public  

interest, lies heavily upon the state. It was held in the said decision  

that a law which directly infringes the right guaranteed under Article  

19(1)(g) may be upheld only if it is established that it seeks to impose  

reasonable restrictions in the interest of the general public and a less  

drastic restriction will not ensure the interest of the general public.   

6.143. The parameters laid down in Md. Faruk are  

unimpeachable. While testing the validity of a law imposing a  

restriction on the carrying on of a business or a profession, the court  

must, as formulated in Md. Faruk, attempt an evaluation of (i) its  

direct and immediate impact upon of the fundamental rights of the  

citizens affected thereby (ii) the larger public interest sought to be  

ensured in the light of the object sought to be achieved (iii) the  

necessity to restrict the citizens’ freedom (iv) the inherent pernicious  

nature of the act prohibited or its capacity or tendency to be harmful  

to the general public and (v) the possibility of achieving the same  

object by imposing a less drastic restraint.   

6.144. There can also be no quarrel with the proposition that  

banking channels provide the lifeline of any business, trade or  

profession. This is especially so in the light of the restrictions on cash  

transactions contained in Sections 269SS and 269T of the Income  

Tax Act, 1961. When currency itself has undergone a metamorphosis  

over the centuries, from stone to metal to paper to paperless and we

146    

have ushered into the digital age, cashless transactions (not penniless  

transactions) require banking channels. Therefore, the moment a  

person is deprived of the facility of operating a bank account, the  

lifeline of his trade or business is severed, resulting in the trade or  

business getting automatically shut down. Hence, the burden of  

showing that larger public interest warranted such a serious  

restriction bordering on prohibition, is heavily on RBI.    

6.145. In the counter-affidavit filed in WP (C) No. 528 of 2018,  

RBI has raised 2 fundamental objections in this regard. The first is  

that corporate bodies/entities who have come up with the challenge  

are not ‘citizens’ and hence, not entitled to maintain a challenge  

under Article 19(1)(g). This objection may hold good in respect of the  

writ petition filed by Internet and Mobile Association of India, which is  

described by them as a not-for-profit association of corporate entities  

who are in the trade. But this objection may not hold good in respect  

of the other writ petition, as the companies running VC exchanges  

have not come up alone. The shareholders and promoters have come  

up with the second writ petition along with those entities and hence  

the challenge under Article 19(1)(g) cannot be said to be not  

maintainable.     

6.146. The second objection of RBI is that there is no  

fundamental right to purchase, sell, transact and/or invest in VCs  

and that therefore, the petitioners cannot invoke Article 19(1)(g). But

147    

this contention is liable to be rejected outright for two reasons  

namely, (i) that at least some of the petitioners are not claiming any  

right to purchase, sell or transact in VCs, but claiming a right to  

provide a platform for facilitating an activity (of trading in VCs  

between individuals/entities who want to buy and sell VCs) which is  

not yet prohibited by law and (ii) that in any case the impugned  

Circular does not per se prohibit the purchase or sale of VCs. This is  

why it is contended by the learned Counsel for the petitioners, that  

what is hit by the impugned Circular is not the actual target. The  

actual target of the impugned Circular, as seen from various  

communications and committee reports that preceded the same, is  

the trade in VCs. The object of hitting at trading in VCs, is to ensure  

(i) consumer protection (ii) prevention of violation of money laundering  

laws (iii) curbing the menace of financing of terrorism and (iv)  

safeguarding of the existing monetary/payment/credit system from  

being polluted. But hitting the target directly, is not within the  

domain of RBI and hence the impugned Circular purportedly seeks to  

protect only the regulated entities, by ring-fencing them. In the  

process, it has hit VC Exchanges and not the actual trading of VCs,  

though as a consequence, the volume of transactions in VCs (perhaps  

through VCEs alone) is stated to have come down. People who wish to  

buy and sell VCs can still do so merrily, without using the medium of  

a VC Exchange and without seeking to convert the virtual currencies

148    

into fiat currency. It is in this context that the contention revolving  

around Article 19(1)(g) has to be examined.  

6.147. In order to test the validity of the impugned action on the  

touchstone of Article 19(1)(g), we may have to understand the  

fundamental distinction between (i) the purchase and sale of virtual  

currencies by and between two individuals or entities and (ii) the  

business of online exchanges that provide certain services such as the  

facility of buying and selling of virtual currencies, the storing or  

securing of the virtual currencies in what are known as wallets and  

the conversion of virtual currencies into fiat currency and vice versa.  

The buying and selling of crypto currencies through VC Exchanges  

can be by way of hobby or as a trade/business. The distinction  

between the two is that there may or may not exist a profit motive in  

the former, while it would, in the latter.   

6.148. Persons who engage in buying and selling virtual  

currencies, just as a matter of hobby cannot pitch their claim on  

Article 19(1)(g), for what is covered therein are only profession,  

occupation, trade or business. Therefore hobbyists, who are one  

among the three categories of citizens (hobbyists, traders in VCs and  

VC Exchanges), straightaway go out of the challenge under Article  

19(1)(g).  

6.149. The second and third categories of citizens namely, those  

who have made the purchase and sale of VCs as their occupation or

149    

trade, and those who are running online platforms and VC exchanges  

can certainly pitch their claim on the basis of Article 19(1)(g).  

Technically speaking, the second category of citizens cannot claim  

that the impugned decision of RBI has the effect of completely  

shutting down their trade or occupation. Citizens who have taken up  

the trade of buying and selling virtual currencies are not prohibited  

by the impugned Circular (i) either from trading in crypto-to-crypto  

pairs (ii) or in using the currencies stored in their wallets, to make  

payments for purchase of goods and services to those who are  

prepared to accept them, within India or abroad. As a matter of fact,  

reports/articles in online journals suggest (i) that a few eateries such  

as Kolonial, a vintage themed pizzeria in Mumbai’s Worli area,  

Suryawanshi restaurant in Indiranagar, Bengaluru and Suri Andhra  

Mess in Taramani, Chennai were accepting payments in virtual  

currencies (Mumbai and Chennai eateries are now closed and the one  

in Bangalore has stopped accepting) and (ii) that there are few  

intermediaries which accept payments in Bitcoins for gift cards which  

in turn facilitate online shopping from popular sites.   

6.150. An important aspect to be taken note of is that virtual  

currencies cannot be stored anywhere, in the real sense of the term,  

as they do not exist in any physical shape or form. What is actually  

stored is the private keys, which can be used to access the public  

address and transaction signatures.  

150    

6.151. The software program in which the private and public  

keys of those who own virtual currencies is stored, is called a digital  

wallet. There are different types of wallets namely (i) paper wallet  

which is essentially a document that contains a public address for  

receiving the currency and a private key which allows the owner to  

spend or transfer the virtual currencies stored in the address (ii)  

mobile wallet, which  is a tool which runs as an app on the  

smartphone, where the private keys are stored, enabling the owner to  

make payments in crypto currencies directly from the phone (iii) web  

wallet, in which the private keys are stored on a server which is  

constantly online (iv) desktop wallet, in which private keys are  

stored in the hard drive and (v) hardware wallet, where the private  

keys are stored in a hardware device such as pen drive.     

6.152. All the above types of wallets except the desktop wallet  

allow a great degree of flexibility, in that they can be accessed from  

anywhere in the world. For instance, paper wallets are printed in the  

form of QR codes that can be scanned, and a transaction completed  

by using the private keys. Similarly, mobile wallets run as an app on  

the smartphone and hence they allow a person to use the crypto  

currency stored in the wallet for buying anything, even while  

travelling abroad, provided the vendor accepts payments in crypto  

currencies. Paper wallets and mobile wallets can also be used to draw  

fiat currency from virtual currency ATMs available in countries like

151    

USA, Canada, Switzerland, etc.   

6.153. In other words, most of the wallets except perhaps  

desktop wallet, have great mobility and have transcended borders.  

Therefore, despite the fact that the users and traders of virtual  

currencies are also prevented by the impugned Circular from  

accessing the banking services, the impugned Circular has not  

paralyzed many of the other ways in which crypto currencies can still  

find their way to or through the market.   

6.154. Persons who have suffered a deadly blow from the  

impugned Circular are only those running VC exchanges and not  

even those who are trading in VCs. Persons trading in VCs, even now  

have different options, some of which we have discussed above  

(wizards may have many more options). But the VC exchanges do not  

appear to have found out any other means of survival (at least as of  

now) if they are disconnected from the banking channels.  

6.155. In all cases where legislative/executive action infringing  

the right guaranteed under Article 19(1)(g) were set at naught by this  

court, this court was concerned with a ban/prohibition of an activity.  

The question of the prohibited/banned activities having the potential  

to destabilize an existing system, did not arise in those cases. The  

pleadings contained in the first writ petition filed by the Association,  

would show that three companies who are members of the Internet  

and Mobile Association of India, had a combined total of

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approximately 17 lakhs verified users throughout India. These  

companies held a combined total of approximately Rs. 1365 crores of  

user funds in trust. The approximate monthly transaction volume of  

just these three companies was around Rs. 5000 crores. Even  

according to the petitioner, the crypto asset industry is estimated to  

have a market capitalization of approximately 430 billion US dollars  

globally. India is estimated to contribute between 2 and 10% based on  

varied estimates. It is admitted in WP (C) No. 373 of 2018 that the  

total number of investors in Indian crypto market was approximately  

20 lakhs and the average daily trade volume was at least Rs. 150  

crores, at the time when the writ petition was filed. Therefore, if a  

central authority like RBI, on a conspectus of various factors perceive  

the trend as the growth of a parallel economy and severs the  

umbilical cord that virtual currency has with fiat currency, the same  

cannot be very lightly nullified as offending Article 19(1)(g).  

6.156. But nevertheless, the measure taken by RBI should pass  

the test of proportionality, since the impugned Circular has almost  

wiped the VC exchanges out of the industrial map of the country,  

thereby infringing Article 19(1)(g). On the question of proportionality,  

the learned Counsel for the petitioners relies upon the four-pronged  

test summed up in the opinion of the majority in Modern Dental

153    

College and Research Centre v. State of Madhya Pradesh.109  

These four tests are (i) that the measure is designated for a proper  

purpose (ii) that the measures are rationally connected to the  

fulfillment of the purpose (iii) that there are no alternative less  

invasive measures and (iv) that there is a proper relation between the  

importance of achieving the aim and the importance of limiting the  

right. The court in the said case held that a mere ritualistic  

incantation of “money laundering” or “black money” does not satisfy  

the first test and that alternative methods should have been explored.   

6.157. Let us now see whether the impugned Circular would fail  

the four-pronged test. In fact, the Privy Council originally set forth in  

Elloy de Freitas v. Permanent Secretary of Ministry of  

Agriculture, Fisheries, Lands and Housing,110 only a three-fold  

test namely (i) whether the legislative policy is sufficiently important  

to justify limiting a fundamental right (ii) whether the measures  

designed to meet the legislative objective are rationally connected to it  

and (iii) whether the means used to impair the right or freedom are no  

more than is necessary to accomplish the objective. These three tests  

came to be known as De Freitas test. But a fourth test namely “the  

need to balance the interests of society with those of individuals and  

groups” was added by the House of Lords in Huang v. Secretary of  

                                                 109 (2016) 7 SCC 353  110 [1999] 1 AC 69

154    

State for the Home Department.111 These four tests were more  

elaborately articulated by the Supreme Court of United Kingdom in  

Bank Mellat v. HM Treasury (No. 2).112    

6.158. Bank Mellat (supra) is an important decision to be  

taken note of, as it concerned almost an identical measure by which  

Her Majesty’s Treasury restricted access to the UK’s financial markets  

by a major Iranian commercial bank on account of its alleged  

connection with Iran’s nuclear program. This was done by the  

Treasury by way of a direction under Schedule 7 of the Counter  

Terrorism Act, 2008, requiring all persons operating in the financial  

sector not to have any commercial dealings with Bank Mellat.  

Schedule 7 of the Act dealt with “terrorist financing and money  

laundering”. This Schedule 7 has several parts, Part 1 providing  

“conditions for giving a direction”, Part 2 indicating the “persons to  

whom a direction may be given”, Part 3 laying down the requirements  

that may be imposed by a direction, Part 4 containing “procedural  

provisions and licensing”, Part 5 dealing with enforcement and  

information powers, Part 6 dealing with civil penalties, Part 7 listing  

out the offences and Part 8 containing supplemental provisions.  

Paragraph 14 of Schedule 7 of the said Act enables the Treasury to  

issue general directions, to all persons or a description of persons  

operating in the financial sector. But certain procedural safeguards                                                    111 [2007] UKHL 11  112 [2013] UKSC 39

155    

are provided in paragraph 14(2) as well as paragraph 9(6). Under  

paragraph 14(2), a general direction issued to persons operating in  

the financial sector, must be laid before the Parliament and will cease  

to have effect if not approved by a resolution of each House of  

Parliament before the end of 28 days. Under paragraph 9(6), the  

requirements imposed by a direction, either in the form of customer  

due diligence or in the form of ongoing monitoring or in the form of  

systematic reporting or in the form of limiting or ceasing business,  

should be proportionate, having regard to the advice given by the  

Financial Action Task Force or having regard to the reasonable belief  

that the Treasury has about the risks of terrorist financing or money  

laundering activities or the development of radiological, biological,  

nuclear or chemical weapons. In addition to these procedural  

safeguards, Section 63 of the aforesaid Act provided for a remedy to a  

person affected by any such decision of the Treasury, to apply to the  

High Court or in Scotland, to the Court of Session. Section 63(3)  

specifically recognized the application of the principles of judicial  

review, to the applications filed against such measures.   

6.159. It is in the context of those specific statutory  

prescriptions for judicial review available in UK (unlike in India) that  

Bank Mellat challenged the Treasury’s decision. The challenge was  

both on procedural and substantive grounds. By a majority of 6 to 3,  

the Supreme Court of the United Kingdom allowed the appeal of the

156    

Bank on procedural grounds. On the substantive grounds, the appeal  

of the Bank was allowed by a majority of 5 to 4.   

6.160. Lord Reed who wrote a dissent both on the procedural  

grounds and the substantive grounds, traced the history of the  

doctrine of proportionality as follows:   

68. The idea that proportionality is an aspect of justice can  

be traced back via Aquinas to the Nicomachean Ethics and  

beyond. The development of the concept in modern times  

as a standard in public law derives from the  

Enlightenment, when the relationship between citizens and  

their rulers came to be considered in a new way, reflected  

in the concepts of the social contract and of natural rights.  

As Blackstone wrote in his Commentaries on the Laws of  

England, 9th (1783), Vol 1, p 125, the concept of civil liberty  

comprises “natural liberty so far restrained by human  

laws (and not farther) as is necessary and expedient for  

the general advantage of the public”. The idea that the  

state should limit natural rights only to the minimum  

extent necessary developed in Germany into a public law  

standard known as Verhältnismäßigkeit, or  

proportionality. From its origins in German administrative  

law, where it forms the basis of a rigorously structured  

analysis of the validity of legislative and administrative  

acts, the concept of proportionality came to be adopted in  

the case law of the European Court of Justice and the  

European Court of Human Rights. From the latter, it  

migrated to Canada, where it has received a particularly  

careful and influential analysis, and from Canada it  

spread to a number of other common law jurisdictions.   

69. Proportionality has become one of the general  

principles of EU law, and appears in article 5(4) of the  

Treaty on European Union (“TEU”). The test is expressed in  

more compressed and general terms than in German or  

Canadian law, and the relevant jurisprudence is not  

always clear, at least to a reader from a common law  

tradition. In R v Ministry of Agriculture, Fisheries and  

Food, ex p Fedesa and others (Case C-331/88) [1990] ECR

157    

I-4023, the European Court of Justice stated (para 13):   

“The Court has consistently held that the principle of  

proportionality is one of the general principles of  

Community law. By virtue of that principle, the lawfulness  

of the prohibition of an economic activity is subject to the  

condition that the prohibitory measures are appropriate  

and necessary in order to achieve the objectives  

legitimately pursued by the legislation in question; when  

there is a choice between several appropriate measures  

recourse must be had to the least onerous, and the  

disadvantages caused must not be disproportionate to the  

aims pursued.”   

The intensity with which the test is applied – that is to say,  

the degree of weight or respect given to the assessment of  

the primary decision-maker - depends upon the context.   

70. As I have mentioned, proportionality is also a concept  

applied by the European Court of Human Rights. As the  

court has often stated, inherent in the whole of the  

Convention is a search for a fair balance between the  

demands of the general interest of the community and the  

requirements of the protection of the individual’s  

fundamental rights (see eg Sporrong and Lönnroth v  

Sweden (1982) 5 EHRR 35, para 69). The court has  

described its approach to striking such a balance in  

different ways in different contexts, and in practice often  

approaches the matter in a relatively broad-brush way. In  

cases concerned with A1P1, for example, the court has  

often asked whether the person concerned had to bear an  

individual and excessive burden (see eg James v United  

Kingdom (1986) 8 EHRR 123, para 50). The intensity of  

review varies considerably according to the right in issue  

and the context in which the question arises.  

Unsurprisingly, given that it is an international court, its  

approach to proportionality does not correspond precisely  

to the various approaches adopted in contracting states.   

71. An assessment of proportionality inevitably involves a  

value judgment at the stage at which a balance has to be  

struck between the importance of the objective pursued  

and the value of the right intruded upon. The principle  

does not however entitle the courts simply to substitute

158    

their own assessment for that of the decision-maker. As I  

have noted, the intensity of review under EU law and the  

Convention varies according to the nature of the right at  

stake and the context in which the interference occurs.  

Those are not however the only relevant factors. One  

important factor in relation to the Convention is that the  

Strasbourg court recognises that it may be less well placed  

than a national court to decide whether an appropriate  

balance has been struck in the particular national context.  

For that reason, in the Convention case law the principle of  

proportionality is indissolubly linked to the concept of the  

margin of appreciation. That concept does not apply in the  

same way at the national level, where the degree of  

restraint practised by courts in applying the principle of  

proportionality, and the extent to which they will respect  

the judgment of the primary decision maker, will depend  

upon the context, and will in part reflect national traditions  

and institutional culture. For these reasons, the approach  

adopted to proportionality at the national level cannot  

simply mirror that of the Strasbourg court.   

72. The approach to proportionality adopted in our  

domestic case law under the Human Rights Act has not  

generally mirrored that of the Strasbourg court. In  

accordance with the analytical approach to legal reasoning  

characteristic of the common law, a more clearly structured  

approach has generally been adopted, derived from case  

law under Commonwealth constitutions and Bills of  

Rights, including in particular the Canadian Charter of  

Fundamental Rights and Freedoms of 1982. The three-limb  

test set out by Lord Clyde in De Freitas v Permanent  

Secretary of Ministry of Agriculture, Fisheries, Lands and  

Housing [1999] 1 AC 69, 80 has been influential:   

“whether: (i) the legislative objective is sufficiently  

important to justify limiting a fundamental right; (ii) the  

measures designed to meet the legislative objective are  

rationally connected to it; and (iii) the means used to  

impair the right or freedom are no more than is necessary  

to accomplish the objective.”   

De Freitas was a Privy Council case concerned with  

fundamental rights under the constitution of Antigua and

159    

Barbuda, and the dictum drew on South African,  

Canadian and Zimbabwean authority. The three criteria  

have however an affinity to those formulated by the  

Strasbourg court in cases concerned with the requirement  

under articles 8 to 11 that an interference with the  

protected right should be necessary in a democratic society  

(eg Jersild v Denmark (1994) Publications of the ECtHR  

Series A No 298, para 31), provided the third limb of the  

test is understood as permitting the primary decision-

maker an area within which its judgment will be  

respected.   

73. The De Freitas formulation has been applied by the  

House of Lords and the Supreme Court as a test of  

proportionality in a number of cases under the Human  

Rights Act. It was however observed in Huang v Secretary  

of State for the Home Department [2007] UKHL 11; [2007]  

2 AC 167, para 19 that the formulation was derived from  

the judgment of Dickson CJ in R v Oakes [1986] 1 SCR  

103, and that a further element mentioned in that  

judgment was the need to balance the interests of society  

with those of individuals and groups. That, it was said,  

was an aspect which should never be overlooked or  

discounted. That this aspect constituted a fourth criterion  

was noted by Lord Wilson, with whom Lord Phillips and  

Lord Clarke agreed, in R (Aguilar Quila) v Secretary of  

State for the Home Department [2011] UKSC 45; [2012] 1  

AC 621, para 45.   

74. The judgment of Dickson CJ in Oakes provides the  

clearest and most influential judicial analysis of  

proportionality within the common law tradition of legal  

reasoning. Its attraction as a heuristic tool is that, by  

breaking down an assessment of proportionality into  

distinct elements, it can clarify different aspects of such an  

assessment, and make value judgments more explicit. The  

approach adopted in Oakes can be summarised by saying  

that it is necessary to determine (1) whether the objective  

of the measure is sufficiently important to justify the  

limitation of a protected right, (2) whether the measure is  

rationally connected to the objective, (3) whether a less  

intrusive measure could have been used without  

unacceptably compromising the achievement of the

160    

objective, and (4) whether, balancing the severity of the  

measure’s effects on the rights of the persons to whom it  

applies against the importance of the objective, to the  

extent that the measure will contribute to its achievement,  

the former outweighs the latter. The first three of these are  

the criteria listed by Lord Clyde in De Freitas, and the  

fourth reflects the additional observation made in Huang. I  

have formulated the fourth criterion in greater detail than  

Lord Sumption, but there is no difference of substance. In  

essence, the question at step four is whether the impact of  

the rights infringement is disproportionate to the likely  

benefit of the impugned measure.   

75. In relation to the third of these criteria, Dickson CJ  

made clear in R v Edwards Books and Art Ltd [1986] 2  

SCR 713, 781-782 that the limitation of the protected right  

must be “one that it was reasonable for the legislature to  

impose”, and that the courts were “not called upon to  

substitute judicial opinions for legislative ones as to the  

place at which to draw a precise line”. This approach is  

unavoidable, if there is to be any real prospect of a  

limitation on rights being justified: as Blackmun J once  

observed, a judge would be unimaginative indeed if he  

could not come up with something a little less drastic or a  

little less restrictive in almost any situation, and thereby  

enable himself to vote to strike legislation down (Illinois  

Elections Bd v Socialist Workers Party (1979) 440 US 173,  

188 189); especially, one might add, if he is unaware of  

the relevant practicalities and indifferent to considerations  

of cost. To allow the legislature a margin of appreciation is  

also essential if a federal system such as that of Canada,  

or a devolved system such as that of the United Kingdom,  

is to work, since a strict application of a “least restrictive  

means” test would allow only one legislative response to  

an objective that involved limiting a protected right.   

76. In relation to the fourth criterion, there is a meaningful  

distinction to be drawn (as was explained by McLachlin CJ  

in Alberta v Hutterian Brethren of Wilson Colony [2009] 2  

SCR 567, para 76) between the question whether a  

particular objective is in principle sufficiently important to  

justify limiting a particular right (step one), and the  

question whether, having determined that no less drastic

161    

means of achieving the objective are available, the impact  

of the rights infringement is disproportionate to the likely  

benefits of the impugned measure (step four).   

6.161. Despite the fact that the Iranian bank succeeded by a  

greater majority on procedural grounds and by a thin majority on the  

substantive grounds, a common thread is seen, both, in the opinion  

of the majority and in the opinion of the minority. Firstly, it was  

agreed even by the majority that cases which lay in the areas of  

foreign policy and national security were once regarded as unsuitable  

for judicial scrutiny, but they have been opened up by the express  

terms of the 2008 Act, because they may engage the rights of  

designated persons or others under the European Convention on  

Human Rights. Therefore, there was unanimity of opinion that  

any assessment of rationality and proportionality must  

recognize that the nature of the issue required the Treasury to  

be allowed a large margin of judgment. Even Lord Sumption who  

wrote the lead judgment for the majority agreed that “the making of  

Government and legislative policy cannot be turned into a  

judicial process”. An interesting statement made by Blackmun J in  

Illinois Elections Bd v. Socialist Workers Party113  was quoted by  

Lord Reed in his dissent which reads “a judge would be  

unimaginative indeed if he could come up with something a  

little less drastic or a little less restrictive in almost any  

                                                 113 (1979) 440 US 173

162    

situation and thereby enable himself to vote to strike legislation  

down”. In essence, there was unanimity of opinion on the fact that a  

margin of appreciation should certainly be allowed to the decision-

maker. But on the ground of proportionality, the majority struck  

down the ban imposed by the UK Treasury. The highlights of the  

decision, as formulated by the court itself, read as follows:  

(i) The essential question before the court was whether the  

interruption of Bank Mellat’s commercial dealings in the UK bore  

some rational and proportionate relationship to the statutory purpose  

of hindering the pursuit by Iran of its nuclear weapons programmes.   

(ii) For the majority, there were two particular difficulties with the  

direction, namely (a) it did not explain or justify the singling out Bank  

Mellat; and (b) the justification was not one which Ministers advanced  

before Parliament, and was in some respects inconsistent with it.   

(iii) The risk, according to the majority, was not specific to Bank  

Mellat but an inherent risk of banking, and the risk posed by Bank  

Mellat’s access to those markets was no different from that posed by  

other comparable banks.   

(iv) Singling out Bank Mellat, according to the court, was arbitrary  

and irrational, and disproportionate to any contribution which it  

could rationally be expected to make to the direction’s objective.   

(v) By contrast, the minority were satisfied that, in view of the wide  

margin of appreciation given to the Treasury in these matters, the

163    

direction was rationally connected to the objective and was  

proportionate.   

6.162. We cannot and need not go as far as the majority had  

gone in Bank Mellat. U.K. has a statute where standards of  

procedure for judicial review are set out and the majority decision was  

on the application of those standards. But even by our own  

standards, we are obliged to see if there were less intrusive measures  

available and whether RBI has at least considered these alternatives.  

On the question of availability of alternatives, the July 2018 report of  

the European Union Parliament (titled ‘Cryptocurrencies and  

Blockchain’) is relied upon by Shri Ashim Sood. The relevant portion  

(in paragraph 5.4) reads as follows:   

“In this respect we also note that some cryptocurrencies  

that are now on the market, such as Dash and Monero, are  

fully anonymous, whereas others, such as Bitcoin and the  

like are pseudo-anonymous, basically meaning that if  

great effort is made and complex techniques are deployed,  

it is possible for authorities to find out users' identities.  

These fully anonymous cryptocurrencies are designed to  

stay in the dark and outside of the scope of authorities.  

After AMLD5 (Fifth Anti-Money Laundering Directive of the  

European union) this will no longer be possible to the  

fullest extent: the cryptocurrency users that want to  

convert their cryptocurrency into fiat currency via a virtual  

currency exchange or hold their portfolio via a custodian  

wallet provider, will be subject to customer due diligence.  

But, as aforementioned, there is still a whole world outside  

of these new obliged entities under AMLD5. It goes without  

saying that this may sound particularly interesting for  

criminals seeking for new ways to launder money, finance  

terrorists or evade taxes. If a legislator does not want to  

outright ban these cryptocurrencies - and for not imposing

164    

such a ban a good argument is that cash is also fully  

anonymous and lawful - the only way to find out who uses  

them is to require users to register mandatorily. For  

reasons of proportionality it could then be  

considered to make the registration subject to a  

materiality threshold.” (emphasis supplied)  

6.163. The discussion in paragraph 5.7 of the July 2018 Report  

of the European Union Parliament also addresses the issue as to  

whether it is best to introduce an outright ban for some aspects  

linked to some crypto currencies. This paragraph reads as follows:  

5.7. “Is it not best to introduce an outright ban for some  

aspects linked to some cryptocurrencies?   

The question arises whether some aspects relating to some  

cryptocurrencies should not just be banned and criminally  

sanctioned. To mind come the mixing process attached to  

Dash's feature PrivateSend and Monero's RingCT, stealth  

addresses and Kovri-project. In essence, these features are  

designed to make cryptocurrency users untraceable. But  

why is such degree of anonymity truly necessary? Would  

allowing this not veer too far towards criminals? Imposing  

a ban for such aspects surrounding cryptocurrencies that  

are aimed at making it impossible to verify their users and  

criminally sanctioning these aspects seems to be in line  

with the Council's conclusions of April 2018 on how to  

respond to malicious cyber activities, under which that the  

use of ICT for malicious purposes is unacceptable.  

Whatever the answer may be, we must again avoid being  

naive: even if a ban would be imposed, how do we detect a  

breach, given that the purpose of the object of the ban just  

is to obscure identities? Nevertheless, it would be  

worthwhile to consider introducing a ban. If  

authorities then bump into the prohibited activities,  

they have a legal basis for prosecution, insofar not  

yet available. Possibly, imposing a ban could also  

have a deterrent effect. Of course, again there is the  

tension with data protection, but arguably in the balance  

of things the interest of authorities and society to more  

effectively combat money laundering, terrorist financing

165    

and tax evasion via well-defined specific bans outweighs  

the interest of persons desiring to hide their identities  

completely.  In any event, imposing a ban should always  

be focused on specific aspects facilitating the illicit use of  

cryptocurrency too much. We are not in favour of  

general bans on cryptocurrencies or barring the  

interaction between cryptocurrency business and the  

formal financial sector as a whole, such as is the  

case in China for example. That would go too far in  

our opinion. As long as good safeguards are in place  

protecting the formal financial sector and more in  

general society as a whole, such as rules combating  

money laundering, terrorist financing, tax evasion  

and maybe a more comprehensive set of rules aiming  

at protecting legitimate users (such as ordinary  

consumers and investors), that should be sufficient.”   

(emphasis supplied)  

6.164. Thus, the ultimate recommendation made by the  

European Union Parliament in the paragraph extracted above,  

is not to go for a total ban of the interaction between crypto  

currency business and the formal financial sector as a whole.  

Obviously, RBI did not consider the availability of alternatives before  

issuing the impugned circular. But by an interim direction, issued on  

21-08-2019 this court directed RBI to give a detailed point-wise reply  

to the representations of the petitioners. Pursuant to the said order,  

RBI gave a reply dated 04-09-2019. In the reply, RBI has dealt with  

every one of the contentions of the petitioners. The relevant portion  

reads as follows:   

“Firstly, the RBI has not prohibited VCs in the  

country. The RBI has directed the entities regulated by it  

to not provide services to those persons or entities dealing  

in or settling VCs. The risks associated with VCs that are

166    

highlighted by the RBI stands mitigated so far as the  

entities regulated by it are concerned. Thus, the RBI been  

able to ring fence the entities regulated by it from being  

involved in activities that pose reputational and financial  

risks along with other legal and operational risks. For  

example, VCs have been used to defraud consumers in a  

Rs. 2000 crore scam in India whereby users were assured  

returns upon their investment in GainBitcoin and were  

paid their return in another form of VC, whose value was  

much lower than that of GainBitcoin.   

We do not agree that the Circular has the effect of forcing  

members to do deal in cash. The Circular neither directs  

nor encourages any dealing with respect to VCs at all.  

After the issuance of the Circular, some of the IAMAI  

member VC exchanges have been operating peer to peer  

VC exchanges. In P2P transfers, while the exchange  

provides a portal to match the orders of a seller and buyer,  

the consideration would flow directly from the buyer to the  

seller without the exchanges being an intermediary for this  

leg of the trade. The exchanges would only act as the  

intermediary for the storing the VCs till the time the  

transfer of the consideration from the buyer to the seller is  

complete. In other words, the exchanges act as an escrow  

agent for the transaction between the buyer and the seller.  

The buyers in the P2P transaction transfer the  

consideration directly to the seller’s bank account. In any  

case, the capital flight problem mentioned by the petitioner  

is not new and existed even before the issuance of the  

Circular. As mentioned earlier, the IAMAI VC exchanges  

allowed their customers to transfer VCs to foreign wallet  

addresses, even before the issuance of the Circular,  

exposing the customers to the risks of violating FEMA,  

AML/CFT guidelines.   

The issues highlighted by IAMAI have been considered by  

the RBI. The RBI, as the banking and financial regulator of  

Indian markets, assessed the risks and benefits arising  

from the exponential and increasing use of VCs. The  

potential adverse impact of VCs on the banking sector and  

the digitization of the Indian payments industry, on  

account of the inherent nature of VCs, is lowered as a

167    

result of the Circular. The RBI stepped in as part of its duty  

to carryout preventive oversight to ensure that the banking  

system was not a casualty on account of the growth in VC  

trading. The Circular became all the more necessary as the  

use and trade through VCs continued to grow despite  

multiple cautions issued by the RBI. Further, the public  

should not lose faith in the Indian digital payments  

ecosystem as a consequence of any impact of VCs given its  

intrinsic nature. The focus of the digital payments in India  

will be defeated should the usage of VCs result in  

implications. Any unpleasant experience in using VCs can  

affect the public’s trust in electronic payment systems in  

general.  

It is in this context that the RBI had highlighted some of  

the possible ways to enforce the prohibition on VCs in the  

RBI Representation, which are as follows:  

(i) Initial Coin Offerings (“ICOs”) ought to be prohibited and  

VC asset funds may to be allowed to be set-up and/or  

operated within the legal jurisdiction of India as also  

perform such transactions in India. ICOs that were in  

the nature of multi -level marketing or pyramid schemes  

can be banned;   

(ii) The FEMA and its regulations can be enhanced to  

prevent and track remittances for the purpose of  

investing in VCs which are flowing out of the country  

under the LRS;  

(iii) Enforcement agencies can take punitive action against  

entities/establishments that accept VCs as a medium of  

payment, as and when these agencies are faced with  

such instances; and   

(iv)  Regulators can issue warnings to the public and  

educated the public to the extent possible.   

One must also be alive to the issue faced by the country.  

India is not a safe haven free from any external intrusions  

and terror attacks. India is plagued by the menace of cross  

border terror financing and money laundering. While laws  

have been enacted to counter terror financing and money  

laundering activities, the Government cannot permit  

anything which would facilitate or have the potential to  

facilitate such nefarious and illegal acts to incubate in the

168    

country. Any possible avenues which facilitate anonymous  

cross border fund transfer have to be acted upon swiftly  

and stringently dealt with. It is an admitted fact that VCs  

have been used to purchase illegal and illicit goods ranging  

from guns and ammunition to drugs. Therefore, the RBI’s  

measures under the Circular become all the more  

necessary. With the Circular coming into effect, the  

banking system and the RBI’s regulated entities would not  

be facilitating persons looking to obtain VCs for illegal  

trades. Th additional measures taken by the RBI by way  

of the Circular were necessary as, despite multiple  

cautions, 5 million Indian users engaged in VC trades of  

INR 1 billion daily.” (emphasis supplied)  

6.165. In Annexure B to their second response dated 18-09-

2019, RBI has also dealt with every one of the additional safeguards  

proposed by one of the writ petitioners, by name, Discidium Internet  

Labs Pvt, Ltd. and demonstrated as to how these safeguards may not  

be sufficient to ring fence the regulated entities:   

Safeguards  

proposed by  petitioners  

Response of RBI  

Development of  

a dashboard and  

central  

repository  

The technology and concept of a dashboard that is  

accessible by all the relevant government authorities  

is yet to be tested in India and cannot guarantee that  

the same will enable authorities to mitigate risks in  

relation to VCs, particularly the ones arising out of  

cross border transactions or illegal and nefarious  

activities. Such a development would require the  

association of various government authorities at  

different levels with implications on the roles and  

responsibilities of other regulatory / enforcement  

agencies and cannot be implemented by the RBI  

alone. Therefore, even assuming that the proposed  

structure is adequate enough, its implementation will  

entail other authorities to formulate the appropriate  

rules or directions in their jurisdictions, which is

169    

beyond the RBI’s control. In any case, for such a  

development to come into existence, the Government  

will need to formulate and establish appropriate rules  

governing the nitty gritty of the same.   

In addition, VCs are difficult to monitor as their  

opaque nature makes it difficult to gather information  

and monitor their operations. Moreover, asserting  

jurisdiction over a particular VC transaction or  

market participant may prove challenging for  

national regulators in the light of the cross- border  

reach of the technology.    

Formation of a  

self-regulatory  

organization and  

Restricting trade  

of crypto-assets  

to white listed  

addresses  

Issuance and management have been a function  

solely of the sovereign / central bank and a collection  

of private entities cannot be trusted to perform this  

role. Moreover, when such VCs become widely used,  

the central bank’s ability to control the money supply  

in the economy could get adversely impacted.  In fact,  

implications of VCs vis-a-vis consumer protection,  

data privacy and security were also highlighted. It  

was also acknowledged that there are several  

uncertainties around the VC, particularly with  

respect to how the VC is secured, the extent to which  

there are measures to prevent and respond to the  

dramatic shifts of value; and the characterization of  

the sellers of such a VC. Additionally, it was  

recognized that there can be implications on the US  

monetary policy as another ‘currency’ not under the  

government control can adversely impact the  Federal  

Reserve’s monetary policy as the Federal Reserve  

would lose its monopoly on controlling inflation and  

inflation targeting though manipulating cash in the  

system.    

Adoption of  

Aadhar based  

electronic KYC  

Electronic KYC is currently permitted only for banks  

for individuals desirous of receiving any benefit or  

subsidy under any scheme notified under Section 7  

of the Aadhaar (Targeted Delivery of Financial and  

Other Subsidies Benefits and Services) Act, 2016 or if  

an individual voluntarily uses his/her Aadhaar  

number for identification purpose.   

Moreover, the adoption of Aadhaar based electronic

170    

KYC may not be sufficient to address the risks stated  

by the RBI in the Press Releases. This is because for  

the RBI to issue norms/measures that sufficiently  

resolves and/or mitigated the stated risks of dealing  

in VCs, it has to be privy to the technicalities of the  

various types of VCs, their characteristics and  

difficulties and drawbacks. There is still a high level  

of uncertainty and ambiguity surrounding VCs.  

Regulators around the world are still in fact  

contemplating how to regulate initial coin offerings  

and how to tax them. The RBI is keeping a close tab  

on all such developments including the regulatory  

stand taken by each jurisdictions across the world  

and will consider implementing the same to the  

extent of its jurisdiction and in line with the policy  

framework that will be adopted by the Government of  

India in relation to VCs.  

Mandatory  

capitalisation  

requirement   

DILPL has failed to set out the benefit or security  

provided by the proposed mandatory capitalisation  

requirements. In the absence of any benefits  

prescribed by DILPL, the RBI has to rely upon  

conjecture and surmises to assume the purported  

benefits of this suggestion. Notably, the fact that  

certain jurisdictions prescribe mandatory  

capitalisation requirements does not necessarily  

make the suggestion beneficial or implementable in  

India.   

The only benefit which a reasonable person may  

assume is that the VC exchanges will have to be of a  

minimum prescribed size and value. However, the  

mandatory capitalisation requirement of VC  

exchanges would not reduce the inherent risks  

involved in VCs. VCs transactions would continue to  

be anonymous and untraceable. The mandatory  

capitalisation requirement does not reduce the use of  

VCs in nefarious activities and illegal cross-border  

transactions. Further, the mandatory capitalisation  

requirement does not provide any security or benefit  

to the monetary and banking system from the risks  

associated with VCs.  

171    

Pertinently, the suggestion includes prescribing a  

mandatory capitalisation requirement in VCs itself.  

Given the instability and price fluctuations of VCs,  

the RBI rejects any suggestion of providing a security  

or capitalisation requirement in VC itself.  

Additionally, the suggested mandatory capitalisation  

requirement would also not reduce the risks to  

consumers arising not only from fraud but also from  

the possible loss of value given the fluctuations and  

manipulation VCs’ value.   

Insurance of  

crypto-assets  

Firstly, Indian Insurance service providers are not  

governed by the RBI. Insurance providers come  

within the regulatory jurisdiction of the Insurance  

Regulatory and Development Agency (“IRDA”).  

Therefore, the RBI cannot assume jurisdiction over  

insurance providers by directing them to formulate  

tailored insurance policies for VC exchanges. It is for  

the purpose of such regulatory aspects, that the  

Inter-Ministerial Committee was constituted to study  

VCs. Accordingly, the RBI had, at that time,  

forwarded a copy of the Representation to the Inter-

Ministerial Committee for their due consideration.   

Secondly, Indian insurance providers, as mandated  

by the IRDA, take a cautious approach to the  

insurance policies offered by them. Therefore, the  

insurance providers may not, either suo moto or on  

account of IRDA’s directions, offer insurance policies  

to protect VCs. Further, this cautious approach  

includes various limitation or exclusion of liability  

clauses. Therefore, the insurance policies may not  

provide adequate cover in the event of any value  

degradation, loss or theft of VCs. Moreover, the highly  

speculative and fluctuating value of VCs is a risk  

which ought not to be borne by the insurance  

providers, who are already suffering from the various  

financial frauds in the Indian monetary and banking  

system.   

Formation of an  

investor  

DILPL suggests setting up an investor protection and  

education fund, for which the VC exchanges would

172    

protection and  

education fund  

transfer all proceeds earmarked towards their  

corporate social responsibility (“CSR”) obligations  

under the Companies Act, 2013. This suggestion, as  

per the RBI, would not protect the customers as  

claimed by Discidium as the steps would be  

insufficient to provide adequate cover to customers.  

Notably, Discidium has not suggested that it create  

any additional buffer for the education and protection  

of its customers but instead, has merely suggested  

that VC exchanges transfer its existing legal  

obligations to create a fund which would purportedly  

benefit customers.     

Despite best efforts made to educate customers, the  

inherent risks in VCs would still remain. It is  

reiterated that VCs transactions would remain  

anonymous and open to facilitating illegal activities.  

It is unlikely that the education of customers would  

change the intent of nefarious customers, who would  

continue to conduct illicit transactions through VCs.  

The anonymous nature of VCs cannot be disputed.  

The transactions in VCs are anonymous due to the  

pseudonymous address or user handle. For instance,  

the reportedly largest transfer of Bitcoins, worth  

nearly USD 1 billion,114 took place as recently as  

September 2019, was between anonymous accounts.  

Even if the exchanges try to mitigate the risks of  

cyber-attacks by subscribing to insurance products,  

the risks are likely to spread to sectors other than  

banking.     

Further, the utilisation of CSR funds is not regulated  

or governed by the RBI. Therefore, implementation of  

this suggestion would require other authorities to  

formulate necessary rules or directions, which is  

beyond the RBI’s control and would depend on the  

final law passed by the Parliament based on the  

currently pending draft Banning of Cryptocurrency  

and Regulation of Official Digital Currency Bill, 2019.  

                                                 114 https://www.vice.com/en_in/article/bjwjpd/someone-just-moved-a-billion-dollars-in-

bitcoin-and-no-one-knows-whywhich; last accessed on September 12, 2019.

173    

6.166. Though at the time when the impugned Circular was  

issued, RBI has not obviously addressed many of the issues flagged  

by the writ petitioners, RBI did in fact consider the issues raised by  

the petitioners, pursuant to the order passed by this court on 21-08-

2019. RBI has also analyzed in Annexure B to the reply dated 18-09-

2019 extracted above, the additional safeguards suggested by the  

petitioners, to see if the purpose of the impugned measure can be  

achieved through less intrusive measures. While exercising the power  

of judicial review we may not scan the response of RBI in greater  

detail to find out if the response to the additional safeguards  

suggested by the petitioners was just imaginary.   

6.167. But at the same time we cannot lose sight of three  

important aspects namely, (i) that RBI has not so far found, in the  

past 5 years or more, the activities of VC exchanges to have actually  

impacted adversely, the way the entities regulated by RBI function (ii)  

that the consistent stand taken by RBI up to and including in their  

reply dated 04-09-2019 is that RBI has not prohibited VCs in the  

country and (iii) that even the Inter-Ministerial Committee  

constituted on 02-11-2017, which initially recommended a specific  

legal framework including the introduction of a new law namely,  

Crypto-token Regulation Bill 2018, was of the opinion that a ban  

might be an extreme tool and that the same objectives can be  

achieved through regulatory measures. Paragraph 7 of the ‘Note-

174    

precursor to report’ throws light on the same and hence it is  

reproduced as follows:   

“Options  

7. The Committee has considered various approaches to  

achieve the objectives and notes:  

Achieving the objectives by doing nothing   

i. Issuing warnings may prevent unsophisticated  

consumers from dealing in VCs but it would not deter VC  

service providers or those raising funds through Initial  

Coin Offerings (ICOs), mis-sell or run Ponzi schemes.   

ii. The recourse available to customers would be  

inadequate.   

iii. Persons who provide VC services without necessary fit  

and proper criteria including capital and technology would  

continue to pose a heightened risk.     

Achieving the objectives through banning   

i. Consumer protection is a key concern but a ban might  

be an extreme too to address this. There are many  

things/activities that may be harmful but they are not all  

banned. Problems related to information asymmetry,  

concerns around market risks, law enforcement or threat  

to financial system cannot be adequately addressed  

through a ban.   

ii. A ban would make dealing in VCs illegal but  

simultaneously it might decrease the ability of the law  

enforcement agencies and regulators to track and stop  

illegal activities.   

iii. Ver few countries have actually banned VCs. A ban  

might not be in-step with India’s position as an important  

centre of Information Technology services.     

Achieving the objectives by regulating   

i. Penalizing entities or persons who do not opt for  

regulation under this Act and may choose to operate  

illegally may continue to be difficult.”  

6.168. The Crypto-token Regulation Bill, 2018 initially  

recommended by the Inter-Ministerial Committee contained a

175    

proposal (i) to prohibit persons dealing with activities related to  

crypto tokens from falsely posing these products as not being  

securities or investment schemes or offering investment schemes due  

to gaps in the existing regulatory framework and (ii) to regulate VC  

exchanges and brokers where sale and purchase may be permitted.   

6.169. The key aspects of the Crypto-token Regulation Bill,  

2018, found in paragraph 13 of the ‘Note-precursor to report’ shows  

that the Inter-Ministerial Committee was fine with the idea of  

allowing the sale and purchase of digital crypto asset at recognized  

exchanges. Paragraph 13 (iii) & (vii) of the ‘Note-precursor to the  

report’ reads as follows:  

13. Key aspects are summarised below:  

(i)…  

(ii)…  

(iii) The sale and purchase of digital crypto asset shall only  

be permitted at recognised exchanges.  

(iv)…  

(v)…  

(vi)…  

(vii) The registry of all holdings and transactions on the  

recognised exchanges shall be maintained at recognised  

depositories.  

6.170. But within a year, there was a volte-face and the final  

report of the very same Inter-Ministerial Committee, submitted in  

February 2019 recommended the imposition of a total ban on private  

crypto currencies through a legislation to be known as “Banning of  

Cryptocurrency and Regulation of Official Digital Currency Act,

176    

2019”. The draft of the bill contained a proposal to ban the mining,  

generation, holding, selling, dealing in, issuing, transferring,  

disposing of or using crypto currency in the territory of India. At the  

same time, the bill contemplated (i) the creation of a digital rupee as  

a legal tender, by the central government in consultation with RBI  

and (ii) the recognition of any official foreign digital currency, as  

foreign currency in India.   

6.171. In case the said enactment (2019) had come through,  

there would have been an official digital currency, for the creation  

and circulation of which, RBI/central government would have had a  

monopoly. But that situation had not arisen. The position as on date  

is that VCs are not banned, but the trading in VCs and the  

functioning of VC exchanges are sent to comatose by the impugned  

Circular by disconnecting their lifeline namely, the interface with the  

regular banking sector. What is worse is that this has been done (i)  

despite RBI not finding anything wrong about the way in which these  

exchanges function and (ii) despite the fact that VCs are not banned.     

6.172. As we have pointed out earlier, the concern of RBI is and  

it ought to be, about the entities regulated by it. Till date, RBI has  

not come out with a stand that any of the entities regulated by it  

namely, the nationalized banks/scheduled commercial banks/co-

operative banks/NBFCs has suffered any loss or adverse effect  

directly or indirectly, on account of the interface that the VC

177    

exchanges had with any of them. As held by this court in State of  

Maharashtra v. Indian Hotel and Restaurants Association,115  

there must have been at least some empirical data about the degree  

of harm suffered by the regulated entities (after establishing that they  

were harmed). It is not the case of RBI that any of the entities  

regulated by it has suffered on account of the provision of banking  

services to the online platforms running VC exchanges.   

6.173. It is no doubt true that RBI has very wide powers not  

only in view of the statutory scheme of the 3 enactments indicated  

earlier, but also in view of the special place and role that it has in the  

economy of the country. These powers can be exercised both in the  

form of preventive as well as curative measures. But the availability  

of power is different from the manner and extent to which it can be  

exercised. While we have recognized elsewhere in this order, the  

power of RBI to take a pre-emptive action, we are testing in this part  

of the order the proportionality of such measure, for the  

determination of which RBI needs to show at least some semblance of  

any damage suffered by its regulated entities. But there is none.  

When the consistent stand of RBI is that they have not banned VCs  

and when the Government of India is unable to take a call despite  

several committees coming up with several proposals including two  

draft bills, both of which advocated exactly opposite positions, it is  

                                                 115 (2013) 8 SCC 519

178    

not possible for us to hold that the impugned measure is  

proportionate.   

7. CLIMAX   

7.1. Therefore, in the light of the above discussion, the  

petitioners are entitled to succeed and the impugned Circular dated  

06-04-2018 is liable to be set aside on the ground of proportionality.  

Accordingly, the writ petitions are allowed and the Circular dated 06-

04-2018 is set aside. The Statement dated 05-04-2018, though  

challenged in one writ petition, is not in the nature of a statutory  

direction and hence the question of setting aside the same does not  

arise.  

7.2. There is still one more issue left. It is the freezing of the  

account of Discidium Internet Labs Pvt. Ltd., which is petitioner no. 6  

in WP (C) No. 373 of 2018. This company seems to have had an  

amount of Rs. 12,05,36,667.83/- in current account no. 3677101984  

with the Central Bank of India, Worli, Mumbai.  When the petitioner  

made a request on 21-05-2018 to close the account and issue a  

demand draft, the Central Bank replied that they had referred the  

matter to their higher authorities/regulators. Therefore, petitioner  

no. 6 has come up with an application in I.A. No. 110424 of 2019 for  

appropriate directions.

179    

7.3. RBI has filed a reply to this application conceding that it  

had not directed the bank to freeze the account. It is specifically  

stated in paragraph 12 of the affidavit-in-reply of RBI that they did  

not issue any direction to the Central Bank of India to freeze the  

account. However, RBI has taken a stand that the prayer for release  

of the amount does not arise out of or incidental to the main writ  

petition.   

7.4. But we think that the lukewarm response of RBI in this  

regard is wholly unjustified. Admittedly, the activities carried on by  

the petitioner no. 6 were not declared as unlawful. It is the positive  

case of RBI that they did not in fact freeze the accounts of petitioner  

no. 6. Therefore, RBI is obliged to direct the Central Bank of India to  

defreeze the account and release the funds. Hence, RBI is directed to  

issue instructions forthwith to the Central Bank of India, Worli  

branch, to defreeze the current account no. 3677101984 of petitioner  

no. 6 in WP (C) No. 373 of 2018 and to release the funds lying in the  

account to the company together with interest at the rate applicable.  

There will be no order as to costs.   

7.5. Before drawing the curtains down, we are bound to record,  

as in every artistic display, our appreciation for the skillful manner in  

which Shri Ashim Sood, learned Counsel, led the attack on the

180    

impugned Circular, but for which, the climax could not have had a  

nail biting finish.    

…..…………....................J  

  (Rohinton Fali Nariman)  

…..…………....................J  

   (Aniruddha Bose)  

.…..………......................J  

                      (V. Ramasubramanian)  New Delhi  

MARCH  04, 2020.