On 4th March, 2020, the Supreme Court of India (“SC”) in a landmark ruling, quashed a circular passed by the Reserve Bank of India (“RBI”). This circular prohibited all licensed banks, non-banking financial institutions and other entities, regulated by the RBI, from engaging in or facilitating any trade in Virtual Currencies (“VCs”). In reading down this circular as unconstitutional, on the ground of disproportionality, the SC held that while VCs have all the features of traditional form of money they have still not acquired the status of a legal tender.
Though the judgement is seen as a welcome step for the ecosystem of VCs in India, scepticism around the possibility of the over-turning of the effect of the judgement, by the RBI, still looms over the head of traders engaged in the business of operating Virtual Currency Exchanges (“VCEs”).
CAUTION TOWARDS MONEY LAUNDERING AND TERRORISM FINANCING
The judgement began by discussing the powers of the RBI and went on to hold its powers to be of a very wide nature. This was because the RBI has the ability to take not only curative but also preventive measures, in the interests of the – a) currency system; b) credit system; and c) financial system of the country, so as to ensure the economic stability of India (para. 6.50).This was buttressed by the fact that the RBI has the important sovereign duty of formulating the Monetary Policy of India.
Furthermore, the SC held that any central bank of a sovereign nation is tasked with the difficult obligation of minimising money laundering and terrorism financing; the happening of which has a high possibility in case of VCs due to their anonymous and pseudo-anonymous nature. For this, the SC significantly relied upon the Report of the Financial Action Task Force on Virtual Currencies which considered these threats to be a global problem, possibly resulting in destabilisation of monetary policies of different nations. Therefore, the overall attitude of the SC towards VCs was a cautious one; and thoughtfully shaped by the fact that internationally VCs do disrupt the payment and settlement systems, across different jurisdictions.
DEFINITION OF "MONEY" AND "VIRTUAL CURRENCY" IN DIFFERENT JURISDICTIONS
The SC acknowledged that traditional form of money has three characteristic features i.e. it – a) acts as a storage of value; b) has a unit of account; and c) acts as a medium of exchange. However, at the same time, the SC also observed that internationally there are contradictory reports that try to define and delineate the scope of VCs. Some consider VCs to have all the features of money and hence, easily substitutable by money. Whereas, others do not consider VCs to be a good substitute for money as it fails to have any of the features of traditional form of money. Thus, the main task before the SC was to define the contours of VCs, and more importantly, to determine its status in the eyes of law.
In order to resolve the issue, the SC heavily relied on the definition of VCs by – a) regulators in different jurisdictions; b) by the governments and other statutory authorities of various countries, through statutory instruments and non-statutory directives; and c) by courts of different jurisdictions (para. 6.58).
In terms of regulators, the list included the – International Monetary Fund; Financial Action Task Force; and, inter-alia, Central Banks of U.S.A., U.K., and Canada. As far as statutory and non-statutory instruments are concerned, the SC relied upon a total of 18 jurisdictions which included developed and developing nations. In terms of the common law, reliance was put upon the courts of Hong Kong, U.S.A, and U.K. Thus, the SC perused the different interpretations of VCs, and upon an analysis, found that there is commonality in defining VCs in the various global jurisdictions.
Based on this analysis, the SC went on to hold VCs to be digital representation of value which fulfil all the three features of traditional form of money. However, because of the decentralised nature of VCs i.e. because VCs are not issued by sovereign states, they do not have the status of a legal tender. In the Indian context, this means that while the RBI will not have the power to regulate VCs now because it has failed to notify them as a legal tender, the possibility of such regulation by the RBI still remains, if such a notification is made in the future. The sole ground upon which the circular was quashed was because of the absence of empirical data to show the detrimental effects of VCs upon the country’s traditional banking system (para 6.172).
Traditionally, the SC has been a court which follows the system of precedents as enshrined under Article 141 of the Indian Constitution. This is augmented by the fact that India is a dualist, instead of a monist nation-state. Therefore, the SC neither needs to, nor does, place a great deal of importance upon the trends followed at the international forums. However, this does not mean that the SC is completely insulated from the developments and evolution of jurisprudence in different jurisdictions across the globe. Previously, the SC has indeed relied upon the legal frameworks at the international level to interpret provisions in domestic law. Sometimes, the SC has gone on to even frame laws in pursuance of its international obligations.
However, this case is peculiar in having the SC to only/solely rely upon the legal framework in different global jurisdictions, and consider them to be “necessary”, to arrive at a conclusion (para. 6.58). This might possibly be because of the subject-matter of the present controversy being technology – a modern issue across the globe. This is augmented by the fact that since the law in India was not sufficiently developed at the requisite time, to deal with such type of a modern issue, the SC turned towards different global jurisdictions. Whatever the reason be, there is no doubt that it is indeed an important precedent in Indian jurisprudence which can substantially alter the way in which the SC looks at global jurisdictions for guidance in its domestic laws, especially, in deciding modern issues.
Vatsal Patel is a 4th Year law student at Institute of Law, Nirma University, Ahmedabad. He can be reached at firstname.lastname@example.org.