In a 2018 circular, the Reserve Bank of India (RBI) had stated it does not consider VCs such as Bitcoin as 'legal tender'
The Supreme Court on March 4 allowed banks and financial institutions from providing services related to cryptocurrencies by setting aside the Reserve Bank of India's 2018 circular which had prohibited them.
The order is likely to come as a big relief to virtual currency (VC) proponents in the country. Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds, operating independently of a central bank.
A three-judge bench, headed by Justice RF Nariman, said the RBI circular is liable to be set aside on the ground of "proportionality".
"Accordingly, the writ petitions are allowed and the circular dated April 6, 2018, is set aside," said the bench, also comprising justices Aniruddha Bose and V Ramasubramanian.
"When the consistent stand of RBI is that they have not banned VCs (virtual currencies) 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 for us to hold that the impugned measure is proportionate," the bench said in its 180-page verdict.
The apex court delivered the verdict on pleas challenging the RBI circular.
According to the circular, the entities regulated by the RBI were prohibited from "providing any service in relation to virtual currencies including those of transfer or receipt of money in accounts relating to the purchase or sale of virtual currencies".
The petitioner, Internet and Mobile Association of India (IMAI) had argued in the top court that the RBI had banned cryptocurrencies on "moral grounds" as no prior studies were conducted to analyse their effect on the economy.
It had contended that the RBI barred all the entities regulated by it from providing services to any individual or business dealing in virtual currencies.
In 2013, the RBI in an advisory cautioned users, holders, and traders of virtual currencies, including Bitcoins, about the potential financial, operational, legal, customer protection, and security-related risks that they were exposing themselves to.
On July 3, 2018, while hearing IMAI's plea, the top court had refused to stay the RBI circular prohibiting banks and financial institutions from dealing with the cryptocurrencies like bitcoin. It had sought response from the RBI, Finance Ministry and Union ministry of Information and Technology on the plea.
The RBI had in an affidavit in January told the SC it "had not banned cryptocurrencies, but only ring-fenced regulated entities from associated risks."
Meanwhile, Bitcoin, the world's largest cryptocurrency, on February 12 surged past $10,000 mark once again to touch a fresh high for CY20. It was trading at $8,821.07 at 11.05 am.
The government had constituted an inter-ministerial committee in 2017 under the chairmanship of secretary, economic affairs, with Secy (MeiTY), Chairman (SEBI) and deputy governor, RBI as members, to study the issues related to virtual currencies and propose specific action to be taken in this matter.
The draft of Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 proposes 10-year jail for those who “mine, generate, hold, sell, transfer, dispose of, issue or deal in cryptocurrencies directly or indirectly.”
In April 2018, the RBI gave a three-month notice to the banking sector to stop their involvement in any sort of cryptocurrency transactions and thousands of crypto-traders India faced a setback.
In September 2018, India’s largest cryptocurrency exchange Zebpay shut down after the Reserve Bank of India (RBI) had imposed an apparent ban on virtual currencies. Zebpay, founded in 2014, was primarily responsible for introducing cryptocurrency trading to thousands of people in India.
Unocoin, another leading cryptocurrency trading platform in India, was laying off the majority of its staff amid regulatory uncertainty. The Bengaluru-based startup reportedly scaled down its team to merely 14 employees in April from over 100 people in February 2018.
While the world has found renewed interest in cryptocurrencies after Facebook announced its cryptocurrency project Libra, the company ruled out an entry in India, with sources saying it would not be available in countries where cryptocurrencies are banned.(With inputs from PTI)