The Supreme Court on Wednesday allowed banks to provide services for virtual currencies (VC), better known as ‘Cryptocurrency’ or popularly referred as ‘Bitcoins.’ This order is expected to enable trading of such currencies.
Finance Minister Nirmala Sitharaman said that she is yet to read the order and that the government will decide on further course of action after studying the order.
Virtual Currencies are like codes, numbers or tokens. They are not a legal tender like the rupee, which is ‘fiat currency’ (issued under a government order by the monetary system, enjoying full sovereign support though not backed by any precious metal such as gold or silver).
According to the apex court, there is unanimity of opinion among all regulators and governments of various countries that though Virtual Currencies have not acquired the status of a legal tender, they nevertheless constitute digital representation of value and are capable of functioning as (i) a medium of exchange, (ii) a unit of account, and/or (iii) a store of value.
The petitioner had challenged an RBI circular of April 6, 2018. Considering various risks associated in dealing with Virtual Currencies, the circular asked all commercial and co-operative banks, payments banks, small finance banks, NBFCs and payment system providers, which are regulated by the RBI, not to deal in such currencies or provide services for facilitating any person or entity in dealing with or settling them.
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 Virtual Currencies. This circular was made applicable with immediate effect while gave time to three months to end existing relationship within three months.
A three-judge Bench of the court said that it recognised the power of RBI to take a pre-emptive action, it also tested 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 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,” it said while setting aside the circular.
According to the Bench, till date, the RBI has not come out with a stand that any of the entities regulated by it namely, the nationalised banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.
Boost to blockchain sector
L Viswanathan, Partner, Cyril Amarchand Mangaldas, said that in the light of this order, it is expected that the RBI will reconsider its approach to cryptocurrency and come up with a new, calibrated framework or regulation that deals with the reality of these technological advancements (given that even central banks across the world are issuing their own cryptocurrencies) and simultaneously balancing considerations of regulatory, consumer protection, security and monetary control that the RBI is expected to have over currency and financial products. “This might also catalyse the potential for the use of blockchain in diverse areas,” he said.