Reserve Bank of India Act, 1934 – ss.17, 20-22, 26, 38, 45JA, 45L, 45U, 45W, 45Z-45ZO – Reserve Bank of India (RBI) issued a “Statement on Developmental and Regulatory Policies” dtd. 05.04.18 and circular dtd. 06.04.18 respectively, which directed the entities it regulated (i) not to deal with or provide services to any individual/business entities dealing with/settling virtual currencies (VCs) and (ii) to exit the relationship, if they already have one, with such individuals/business entities – Challenged by petitioners (a specialized industry body representing interests of online & digital services industry; companies running online crypto assets exchange platforms; shareholders/founders thereof and individual crypto assets traders) inter alia on the ground that RBI has no power to prohibit the activity of trading in VCs through Virtual Currency Exchanges (VCEs) since they are not legal tender but tradable commodities/digital goods, not falling within the regulatory framework of 1934 Act or 1949 Act and that VCs do not even fall within the credit system of the country to enable RBI under the Preamble to 1934 Act giving it a mandate to operate the currency & credit system of the country to its advantage – Held: After 2016 Amendment Act, RBI is now vested with the obligation to operate the monetary policy framework in India – 1934 Act, 1949 Act and the 2007 Act cumulatively confer very wide powers upon RBI inter alia to operate the currency and credit system of the country to its advantage; regulate financial system of the country to its advantage; 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, monetary policy or the credit policy of the country and to issue directions to system providers or 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 – Depending on the text of the statute involved in the case and the context, various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds – Petitioners’ contention that VCs are just goods/commodities and can never be regarded as real money and that they are carrying on an activity over which RBI has no power statutorily, not accepted – Petitioners’ contention that the impugned decision is ultra vires is rejected – Impugned Circular does not impose a prohibition on the use of/ trading in VCs, the prohibition is not per se against the trading in VCs – It is against banking companies, with respect to a class of transactions – Further, RBI cannot be held guilty of non-application of mind when the sequence of events from June 2013 up to 02-04- 2018 show that RBI was brooding over the issue for almost five years – Also, the contention that the impugned Circular is vitiated by malice in law and is a colorable exercise of power cannot be sustained – Impugned Circular cannot be assailed on the basis of M. S. Gill test either – It is no doubt true that RBI has very wide powers however, the availability of power is different from the manner and extent to which it can be exercised – RBI has not so far found, the activities of VCEs to have actually impacted adversely, the way the entities regulated by RBI function – 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 not possible to hold that the impugned measure is proportionate – Impugned Circular dtd. 06.04.18 is set aside on the ground of proportionality – Statement dtd. 05.04.18, though challenged, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise – Finance Act, 2016 – Banking Regulation Act, 1949 – ss.5, 8, 21, 22, 27, 29A, 30(1B), 35AA, 35AB, 35A(1)(a), 36(1)(a), 36AA – Payment and Settlement Systems Act, 2007 – ss.2(1); 2(1)(g), (h), (i), (p) and ss.3, 4(1), 10(2), 11, 17, 18.

– Administrative Law – Subordinate Legislation – Doctrine of Proportionality – Doctrine of Deference – Foreign Exchange Management Act, 1999 – ss.2(h), (i), (q) – Coinage Act, 2011 – Finance Act, 1994 – Finance Act, 2012 – Sales of Goods Act, 1930 – Central Foods and Services Tax Act, 2017 – s.2(75) – Constitution of India – Art.19(1)(g). Reserve Bank of India Act, 1934 – Establishment of Reserve Bank of India – Object of – Discussed. Reserve Bank of India Act, 1934 – Preamble to; s.45L(1) – Held: Phrase “credit system of the country to its advantage”, as found in paragraph 1 of the Preamble, is repeated in sub-sec. (1) of s.45L – Only difference between the two is that paragraph 1 of the Preamble speaks about the operation of the credit system, while s.45L (1) speaks about regulation of the credit system. Banking Regulation Act, 1949 – Power of Reserve Bank of India under – Discussed. Reserve Bank of India Act, 1934 – s.3(1) – Held: “management of the currency” appearing in s.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. Payment and Settlement Systems Act, 2007 – Object of – Discussed. Administrative Law – Colourable exercise of power & malice in law – Reserve Bank of India (RBI) issued circular directing the entities it regulated to not to deal with or provide services to any individual/business entities dealing with/settling virtual currencies (VCs) and to exit the relationship, if they have one, with such individuals/business entities – Petitioners contended 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 – Held: Not tenable – 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 – 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 – Impugned Circular does not fall under the category of either of them. Administrative Law – Statutory Authority – Power of RBI and difference between other statutory creatures & RBI – Discussed. Banking Regulation Act, 1949 – s.35A(1) – Reserve Bank of India (RBI) issued circular directing the entities it regulated to not to deal with or provide services to any individual/business entities dealing with/settling virtual currencies (VCs) and to exit the relationship, if they have one, with such individuals/business entities – Plea of the petitioners that expression ‘public interest’ appearing in s.35A(1)(a) cannot be given an expansive meaning – Held: Power u/s.35A to issue directions is to be exercised under four contingencies- (i) public interest (ii) interest of banking policy (iii) interest of the depositors & (iv) interest of the banking company – Expression “banking policy” is defined in s.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 s.35A(1)(a) is invoked in the impugned Circular. Constitution of India – Art.19(1)(g) – Reserve Bank of India (RBI) issued circular directing the entities it regulated to not to deal with or provide services to any individual/business entities dealing with/settling virtual currencies (VCs) and to exit the relationship, if they have one, with such individuals/business entities – Plea of the petitioners (a specialized industry body representing interests of online & digital services industry; companies running online crypto assets exchange platforms; shareholders/founders thereof and crypto assets traders) that 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 Art.19(1)(g) – Held: Buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business – Persons who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Art.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 u/Art.19(1)(g) – Second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the basis of Art.19(1)(g). Words & Phrases - “currency”, “currency notes”, “Indian currency” “money”, “regulate” - Definition & Meaning of – Discussed.