Crypto-Trading’s Tryst with Destiny

[Megha Mittal is an Associate with Vinod Kothari & Co.]

Amidst apprehensions of crypto-trading being a highly volatile and risk-concentric venture, the Supreme Court, in its order dated 4 March 2020 observed that the Reserve Bank of India (RBI), a staunch critic of cryptocurrencies, failed to present any empirical evidence substantiating cryptocurrency’s negative impact on the banking and credit sector in India. On the basis of this singular fact, the Court stated that the RBI’s circular failed the test of proportionality. In this post, the author seeks to discuss this landmark judgment and its (dis)advantages to the Indian economy.

Before delving into the legalities of trading in cryptocurrency, it would be useful to briefly understand its meaning, and what made India’s central bank so wary of this technological innovation, despite its simultaneous attempts at digitalizing the Indian monetary system.

Bitcoin: The Face of Cryptocurrency

While there are several examples of cryptocurrency like Etherum, Ripple and Litecoins, it is “Bitcoins” that undoubtedly gained the maximum attention. In fact, it is to such an extent that the markets now identify the concept of cryptocurrency with “Bitcoins”. Hence, we may, too, perhaps understand cryptocurrency with the help of Bitcoins.

Bitcoin, or cryptocurrency, is not a regular fiat money. It is digital currency that operates on block-chain technology, independent of any government or bank. Created digitally using algorithms, cryptocurrencies have no underlying asset, and they exist only virtually. Further, unlike the present monetary system, it does not rely on a central body for its issuance and operation. The Bitcoin software is designed in a manner such that every Bitcoin transaction and the holdings of every user would be tracked and recorded by the computers of all those using the digital money (‘nodes’) on a communally maintained database that would come to be known as the blockchain. The synchronised function of a private and public key associated to each node further makes this system transparent in the sense that all participants on the network can access the information, yet private enough to not let out substantive information about a particular transaction to anyone other than the parties. Hence, cryptocurrencies made possible a financial network that would create and move money without a central authority.

Hence, the following can be enlisted as the defining elements of cryptocurrency:

  • Absence of any centralized control;
  • No underlying asset, with the value solely dependent on market sentiments;
  • An unalterable record of all transactions ever carried out on the network; with 24*7 accessibility to all participants in the network;
  • Anonymity of transactions, which take between public keys (uniquely assigned to every participant) and, hence, identities of the parties to the transaction remains cryptic.
RBI’s Apprehension and Warning Bells

Of the elements discussed above, it was the anonymity of transactions that perturbed the RBI the most. Ever since cryptocurrency set its first steps in the Indian economy, the RBI raised concerns of consumer protection, market integrity, money laundering and terror financing, among others. However, one must note that its circular dated 6 April 2018 was not the first time that such concerns were raised by the RBI. Apprehensions that cryptocurrencies pose challenges in form of regulatory, legal as well as operational risks was observed in its Financial Stability Report dating back to 2013. Moreover, owing to its massively growing popularity and reach, regulatory bodies across the globe took note of virtual currency and hence made available a rich literature on what virtual currency is all about.

The Courtroom Battle

What followed the RBI Circular was a flood of writ petitions filed before the Supreme Court and various High Courts, praying for annulment of the Circular. The first of such petitions was filed by the Internet & Mobile Association of India in January 2018 and, two years hence, the Supreme Court has pronounced its landmark judgement, based on two main questions: (i) whether cryptocurrency is money or a commodity; and (ii) whether the Circular was an appropriate exercise of its power.

Cryptocurrency- Money or Commodity?

The first question for adjudication related to the classification of cryptocurrency as money or commodity. This distinction is important as it forms the basis of determining the validity of the Circular.

In order to be classified as money, it was important to determine whether cryptocurrencies satisfied the four functions of money, that is:

  • A unit of account;
  • A medium of exchange;
  • A store of value; and
  • A standard of deferred payment.
Hence, the Supreme Court sought to superimpose the definition of virtual currencies, as accorded by various international bodies, statutory enactments and non-statutory directives of governmental bodies across the globe, to the four functions of money to determine if at all virtual currency could be called money. A study of various legal frameworks makes it clear that several economies have accepted cryptocurrencies as an accepted mode of payment and identified it as another form of currency while, on the contrary, economies like China have imposed a complete ban on the same.

Based on an exhaustive analysis of the legal framework and judicial precedents in this regard, the Court arrived at a simple conclusion that “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”.

However, the author respectfully submits that the aforesaid conclusion of the Supreme Court does not clarify the true nature of cryptocurrencies, and again leaves room for interpretation. Having said so, the author has attempts to analyse the nature of cryptocurrencies, as follows:

As a unit of account

A unit of account is something than can be used to value goods and services, record debts, and make calculations. In other words, it is a measurement for value. However, considering that the value of cryptocurrencies is based solely on demand-supply factors, and not an actual underlying asset, it may be difficult to definitively say that cryptocurrencies are a standard unit of account. Further, their high volatility and wide-ranging prices also make it difficult to identify cryptocurrencies as a standard unit.

Medium of exchange

For a mode of payment to be identified as a medium of exchange, the same has to be widely accepted by the population for making payment. A macro level approach offers an idea that cryptocurrencies like Bitcoin have been increasingly used to enter into transactions. However, are not prevalent enough to buy goods or services. Similarly, in India too, while the presence of cryptocurrencies has in fact been acknowledged, the same cannot be said to a “medium of exchange”, at least at this point of time.

Store of value

Another feature of money is that it acts as “store of value”. In essence, maintains its value without depreciating over time. Considering that the fiat currency derives its value from an underlying asset (gold), it fulfils the criteria of being a “store of value”. The question here is whether cryptocurrencies, having no underlying asset, be treated as having a store of value. While a literal interpretation would suggest otherwise, the value that cryptocurrencies, especially Bitcoins, have obtained in the current market makes it prudential to consider the same as having a store of value.

Hence, according to the author at the present juncture, cryptocurrencies may not fit into the conventional definition of money. Hence, there remains doubt on whether the categorisation of cryptocurrencies as goods is tenable.

Understanding cryptocurrencies as goods

Under section 2(7) of the Sale of Goods Act, 1939, “goods means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”. Hence, to answer whether cryptocurrencies can be categorised as goods or not, we must note the following:

  • According to the General Clauses Act, 1897, a movable property shall mean property of every description, except immovable property[1] i.e. which can be moved freely without damage. As such, cryptocurrencies are movable.
  • Considering that cryptocurrency does not impose a claim on anybody, it does not tantamount to an “actionable claim”.[2]
While there may be sufficient reason to classify cryptocurrencies as goods, in light of the fact that the cryptocurrencies do not have an “intrinsic value” or “speculative value” of its own, it does not completely fit into the definition of goods either. In the said context, however, the author is of the opinion that nature of cryptocurrencies is more inclined towards goods rather than money.

Issuance of ‘Circular’: An Appropriate Exercise of Power?

The second question for adjudication related to the tenability of RBI’s Circular. It must be noted that the Circular did not impose an explicit ban on virtual currencies as a whole. Rather, it imposed a restriction on all entities regulated by the RBI, thereby implying that cryptocurrency could not be converted into fiat currency. However, the pertinent question is whether RBI at all had the power to issue the Circular.

Power of the RBI to regulate virtual currency

Attention may be drawn to section 18 of the Payment and Settlement Act, which indicates that the RBI has the power to lay down policies relating to the regulation of payment systems, including electronic, non-electronic, domestic and international payment systems affecting domestic transactions; and to give such directions as it may consider necessary. Having said so, even if it does not completely classify as “money”, the fact that it is indeed being used as a payment system cannot be ruled out. Hence, as the Supreme Court observed: “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.”

Tenability of the Circular

As discussed above, the Circular was not the first time when RBI expressed its concerns about the risks that cryptocurrency brings along with it. As such, the central bank stood its ground that the Circular was issued after a long drawn research and analysis; and hence, in no way was the Circular arbitrary. Further, given the fact that other regulatory authorities, viz.,Enforcement Directorate, the Securities and Exchange Board of India, and the Central Board of Direct Taxes did not consider the Circular as a knee-jerk reaction, and that their roles come into picture during the actual commission of offence, the RBI cannot be faulted on the grounds on issuing a preventive circular.

Hence, despite the Circular being tenable in all other aspects, the Supreme Court annulled the same on the grounds on principle of proportionality, which is discussed hereunder.

The Circular vis-à-vis Doctrine of Proportionality

The final checkbox for the Circular to be held valid was its adherence to article 19(1)(g) of the Constitution of India on the basis of test of proportionality. Before delving into the same, it would be useful to set out what the principle of proportionality means.

The doctrine of proportionality

It is a principle that is used as a ground for reviewing administrative actions. The doctrine essentially signifies that any measure taken by a constituted body should not be disproportionate to its purpose. As was held in Coimbatore District Central Coop. Bank v Employees Assn.: “Proportionality is a principle where the Court is concerned with the process, method or manner in which the decision-maker has ordered his priorities, reached a conclusion or arrived at a decision.”  It is dependent on four main factors:

  • that the measure is designated for a proper purpose;
  • that the measures are rationally connected to the fulfilment of the purpose;
  • that there are no alternative less invasive measures; and
  • that there is a proper relation between the importance of achieving the aim and the importance of limiting the right.
Article 19(1)(g): Freedom of occupation

It was contended that the ‘Circular’ was in breach of the right of freedom of carrying out an occupation not prohibited by law. Further, it was argued that the restriction was not ‘reasonable’ according to article 19(6) of the Constitution and that, irrespective of its object, the impact of the Circular was a direct restriction on virtual currency exchanges (VCEs) and not the actual trading. Hence, it is a restriction from carrying an otherwise legal activity. As such, by the very reason that the Circular effectively wipes off all VCEs, it must pass the test of proportionality.

The Supreme Court observed that, while the RBI indeed has powers to issue the Circular, its validity shall be subject to the test of proportionality by which, though the measures taken by the RBI were for a designated purpose, it cannot be accepted that there were no other alternatives which were less invasive. Reference was drawn to the recommendations made by the European Parliament, and in the Crypto-Regulation Bill, 2018, by which a generalised or total ban of virtual currencies is not a favourable or advisable approach. Rather, the functioning and operation of virtual currencies should be brought within the scope of regulation, viz., RegTech for FinTech. Hence, the Circular was adjudged to have failed the test of proportionality.

Concluding Remarks

While the Order of the Supreme Court has set the stage free for cryptocurrencies and VCEs to flourish, we cannot turn a blind eye towards the lingering risk of consumer or investor protection, anonymity and money laundering, as identified by RBI. One must bear in mind that the Supreme Court rejected the RBI circular on the singular ground of proportionality and, as such, does not rule out the presence of the risk that comes as collateral to this Order.

The author is of the view that with cryptocurrencies having been held valid, it is now time to introduce a sound regulatory framework for dealing with the same. Reviving from the quasi-ban that led to the shutting down of many companies acting as VCEs, establishing a distinct legal set up for regulating cryptocurrencies shall be a pre-requisite for instilling confidence amongst investors as well as service providers.

Megha Mittal



[1] Section 3(26) of General Clauses Act, 1897 provides that “Immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”

[2] See General Clauses Act, 1897



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