(1.)THE STORY LINE:
1.1. Reserve Bank of India (hereinafter, "RBI") issued a "Statement on Developmental and Regulatory Policies" on April 5, 2018, paragraph 13 of which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).
1.2. Following the said Statement, RBI also issued a circular dated April 6, 2018, in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (hereinafter, "RBI Act, 1934") and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.
1.3. Challenging the said Statement and Circular and seeking a direction to the respondents not to restrict or restrain banks and financial institutions regulated by RBI, from providing access to the banking services, to those engaged in transactions in crypto assets, the petitioners have come up with these writ petitions. The petitioner in the first writ petition is a specialized industry body known as 'Internet and Mobile Association of India' which represents the interests of online and digital services industry. The petitioners in the second writ petition comprise of a few companies which run online crypto assets exchange platforms, the shareholders/founders of these companies and a few individual crypto assets traders. It must be stated here that the individuals who are some of the petitioners in the second writ petition are young high-tech entrepreneurs who have graduated from premier educational institutions of technology in the country. Contents of the impugned Statement and Circular of RBI:
1.4. The Statement dated 05-04-2018 issued by RBI, impugned in these writ petitions, sets out various developmental and regulatory policy measures for the purpose of (i) strengthening regulation and supervision (ii) broadening and deepening financial markets (iii) improving currency management (iv) promoting financial inclusion and literacy and (v) facilitating data management. Paragraph 13 of the said statement which falls under the caption "currency management" deals directly with virtual currencies and the same constitutes the offending portion of the impugned Statement. Therefore, paragraph 13 of the impugned Statement alone is extracted as follows:
13. Ring-fencing regulated entities from virtual currencies
Technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others. Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately.
1.5. The Circular dated 06-04-2018 deals entirely with virtual currencies and the prohibition on dealing with the same. This Circular is statutory in character, issued in exercise of the powers conferred by (i) the Reserve Bank of India Act, 1934 (ii) the Banking Regulation Act, 1949 and (iii) the Payment Settlement Systems Act, 2007. This Circular in its entirety is reproduced as follows:
Prohibition on dealing in Virtual Currencies (VCs) Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. 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 VCs.
3. Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.
4. These instructions are issued in exercise of powers conferred by section 35A read with section 36(1)(a) of Banking Regulation Act, 1949, section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949, section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.
2.1. The Statement dated 05-04-2018 and the Circular dated 06-04-2018 of RBI, impugned in these writ petitions, were a culmination of a flurry of activities by different stakeholders, nationally and globally, over a period of about 5 years. Therefore, it is necessary to see the setting in which (or the backdrop against which) the impugned decisions of RBI were posited. While doing so, it will also be necessary to take note of the developments that have taken place during the pendency of these writ petitions, so that we have a close-up as well as aerial view of the setting.
2.2. It was probably for the first time that RBI took note of technology risks in changing business environment, in their Financial Stability Report of June 2013. Paragraph 3.60 of this report noted that globally, the use of online and mobile technologies was driving the proliferation of virtual currencies. Therefore, the report stated that those developments pose challenges in the form of regulatory, legal and operational risks. Box 3.4 of the said report dealt specifically with virtual currency schemes and it started by defining virtual currency as a type of unregulated digital money, issued and controlled by its developers and used and accepted by the members of a specific virtual community. It was declared in Box 3.4 of the said report that "the regulators are studying the impact of online payment options and virtual currencies to determine potential risks associated with them".
2.3. In June 2013, the Financial Action Task Force (hereinafter, "FATF"), also known by its French name, Groupe d'action financière, which is an inter-governmental organization founded in 1989 on the initiative of G-7 to develop policies to combat money laundering, came up with what came to be known as "New Payment Products and Services Guidance" (NPPS Guidance, 2013). It was actually a Guidance for a Risk Based Approach to Pre-paid cards, Mobile Payments and Internet-based Payment Services. But this Guidance did not define the expressions 'digital currency', 'virtual currency', or 'electronic money', nor did it focus on virtual currencies, as distinct from internet based payment systems that facilitate transactions denominated in real money (such as Paypal, Alipay, Google Checkout etc.). Therefore, a short-term typologies project was initiated by FATF for promoting fuller understanding of the parties involved in convertible virtual currency systems and for developing a risk matrix.
2.4. On 24-12-2013, a Press Release was issued by RBI cautioning the users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security related risks that they are exposing themselves to. The Press Release noted that the creation, trading or usage of VCs, as a medium of payment is not authorized by any central bank or monetary authority and hence may pose several risks narrated in the Press Release.
2.5. On 27-12-2013, newspapers reported the first ever raid in India by the Enforcement Directorate, of 2 Bitcoin trading firms in Ahmedabad, by name, rBitco.in and buysellbitco.in. This was stated to be India's first raid on a Bitcoin trading firm and the second globally, after Federal Bureau of Investigation of the United States of America conducted a raid in October of the same year.
2.6. Thereafter, a report titled "Virtual Currencies Key Definitions and Potential AML/CFT Risks" was issued in June 2014 by FATF, highlighting, both legitimate uses and potential risks associated with virtual currencies. What is of great significance about this FATF report is that it defined 2 important words. The FATF report defined 'Virtual currency' as a digital representation of value that can be traded digitally and functioning as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but not having a legal tender status. The FATF report also defined 'Cryptocurrency' to mean a math-based, decentralised convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred.
2.7. Again, in June 2015, FATF came up with a "Guidance for a Risk Based Approach to Virtual Currencies", which suggested certain recommendations, as follows:
A. Countries to identify, assess and understand risks and to take action aimed at mitigating such risks. National authorities to undertake a coordinated risk assessment of VC products and services that:
(1) enables all relevant authorities to understand how specific virtual currency products and services function and impact regulatory jurisdictions for Anti Money Laundering ('AML' for short)/Combating the Financing of Terrorism ('CFT' for short) treatment purposes;
(2) promote similar AML/CFT treatment for similar products and services having same risk profiles.
B. Where countries are prohibiting virtual currency products and services, they should take into account among other things, the impact a prohibition would have on local and global level of money laundering/terrorism financing risks, including whether prohibition would drive such payment activities underground, where they will operate without AML/CFT controls.
2.8. The FATF submitted a report in October 2015 on "Emerging Terrorist Financing Risks". The report was divided into four parts, under the captions (i) introduction (ii) financial management of terrorist organisations (iii) traditional terrorist financing methods and techniques and (iv) emerging terrorist financing threats and vulnerabilities. Even while acknowledging in part 3 of the report that the traditional methods of moving funds through the banking sector happens to be the most efficient way of movement of funds for terrorist organisations, the report acknowledged the emergence of new payment products and services in part 4 of the report. The report took note of different methods of terrorist financing, such as self-funding, crowd funding, social network fund raising with prepaid cards etc. Coming to virtual currencies, the report noted the following:
"Virtual currencies have emerged and attracted investment in payment infrastructure built on their software protocols. These payment mechanisms seek to provide a new method for transmitting value over the internet. At the same time, virtual currency payment products and services (VCPPS) present ML/TF risks. The FATF made a preliminary assessment of these ML/TF risks in the report Virtual Currencies Key Definitions and Potential AML/CFT Risks. As part of a staged approach, the FATF has also developed Guidance focusing on the points of intersection that provide gateways to the regulated financial system, in particular convertible virtual currency exchangers.
Virtual currencies such as bitcoin, while representing a great opportunity for financial innovation, have attracted the attention of various criminal groups, and may pose a risk for TF (terrorist financing). This technology allows for anonymous transfer of funds internationally. While the original purchase of the currency may be visible (e.g., through the banking system), all following transfers of the virtual currency are difficult to detect. The US Secret Service has observed that criminals are looking for and finding virtual currencies that offer: anonymity for both users and transactions; the ability to move illicit proceeds from one country to another quickly; low volatility, which results in lower exchange risk; widespread adoption in the criminal underground; and reliability.
Law enforcement agencies are also concerned about the use of virtual currencies (VC) by terrorist organisations. They have seen the use of websites affiliated with terrorist organisations to promote the collection of bitcoin donations. In addition, law enforcement has identified internet discussions among extremists regarding the use of VC to purchase arms and education of less technical extremists on use of VC. For example, a posting on a blog linked to ISIL proposed using bitcoin to fund global extremist efforts."
In support of the above conclusions, the report also indicated a case study, which concerned the arrest of one Ali Shukri Ameen, who admitted to have had a Twitter account with 4000 followers. He claimed to have used his Twitter handle to provide instructions on how to use a virtual currency to mask the provision of funds to ISIL. In an article, the link to which he tweeted to his followers, it was elaborated how jihadists could utilize the virtual currency to fund their efforts. (It must be noted that the report also took note of how prepaid cards and other internet-based payment services could also be used for terror financing).
2.9. The Bank of International Settlements (hereinafter, "BIS") which is a body corporate established under the laws of Switzerland, way back in the year 1930 pursuant to an agreement signed at Hague on 22-01-1930 and owned by 60 Central Banks of different countries including RBI, has several committees, one of which is "Committee on Payments and Market Infrastructure" (CPMI). This committee started taking note of digital currencies, while dealing with innovations in retail payments. This committee formed a sub-group within the CPMI Working Group on Retail Payments, to undertake an analysis of digital currencies. On the basis of the findings of the sub- group, CPMI of BIS submitted a report in November 2015 on Digital currencies. The sub-group identified three key aspects relating to the development of digital currencies one of which was that the assets featured in digital currency schemes, typically have some monetary characteristics such as being used as a means of payment, but are not backed by any authority. In Note 1 under the Executive Summary of the said report, it was stated as follows: "although digital currencies typically do have some, but not all the characteristics of a currency, they may also have characteristics of a commodity or other asset. Their legal treatment can vary from jurisdiction to jurisdiction." (emphasis supplied) Paragraph 4 of the said report dealt with the "implications for central banks, of digital currencies and their underlying decentralized payment mechanisms". In the said paragraph, the report indicated that "digital currencies represent a technology for settling peer to peer payments without trusted third parties and may involve a non-sovereign currency". Though the report stated that the impact of digital currencies on the mainstream financial system is negligible as at that time, some of the implications indicated in the report may actually materialize if there was widespread adoption of digital currencies. Two risks were noted in the report and they were consumer protection and operational risks. But in so far as distributed ledger technology is concerned, the report was positive. However, the report cautioned that a widespread substitution of bank notes with digital currencies could lead to a decline in central banks' non-interest paying liabilities and that if the adoption and use of digital currencies were to increase significantly, the demand for existing monetary aggregates and the conduct of monetary policy could be affected. Nevertheless, the report stated that at present, the use of private digital currencies is too low for these risks to materialize.
2.10. In December 2015, the Financial Stability Report of RBI was issued, and it included a chapter on "Financial Sector Regulation". The same dealt with the challenges posed by technology- based innovations such as virtual currency schemes. In Box 3.1 of the said report, it was indicated that though the initial concerns over the emergence of virtual currency schemes were about the underlying design, episodes of excessive volatility in their value and their anonymous nature which goes against global money laundering rules rendered their very existence questionable. However, the report noted that the regulators and authorities need to keep pace with developments, as many of the world's largest banks started supporting a joint effort for setting up of private blockchain and building an industry-wide platform for standardizing the use of technology.
2.11. In December 2016, the Financial Stability Report of RBI came. It took note of the rapid developments taking place in Fin Tech (financial technology) globally and exhorted the regulators to gear up to adopt technology (christened as RegTech). Paragraph 3.22 of the said report identified the establishment of regulatory sandboxes [Regulatory sandbox refers to live testing of new products/services in a controlled/test regulatory environment.] and innovation hubs for testing new products and services and providing support/guidance to regulated as well as unregulated entities. The report also noted that fast paced innovations such as virtual currencies have brought risks and concerns about data security and consumer protection on one hand and far reaching potential impact on the effectiveness of monetary policy itself on the other hand. The report took note of the fact that many central banks around the world, had already started examining the feasibility of creating their own digital currencies, after fretting over them initially.
2.12. In January 2017, the Institute for Development and Research in Banking Technology (IDRBT) established by RBI in 1996 as an institution to work at the intersection of banking and technology submitted a Whitepaper on "Applications of blockchain technology to banking and financial sector in India". While dealing with the applications of blockchain technology in chapter 3, the whitepaper also enlisted the advantages and disadvantages of digital currency. While the advantages indicated were (i) control and security, (ii) transparency and (iii) very low transaction cost, the disadvantages indicated were risk and volatility.
2.13. On 01-02-2017, RBI again issued a Press Release cautioning users, holders and traders of virtual currencies. Closely on the heels of this Press Release, the Government of India, Ministry of Finance, constituted, in April 2017, an Inter-Disciplinary Committee comprising of the Special Secretary (Economic Affairs) and representatives of the Departments of Economic Affairs, Financial Services, Revenue, Home Affairs, Electronics and Information Technology, RBI, NITI Aayog, and State Bank of India. The task of the Committee was to (i) take stock of the status of VCs in India and globally, (ii) examine the existing global regulatory and legal structures and (iii) suggest measures for dealing with VCs. The Committee was mandated to submit a report within 3 months.
2.14. The report of the Inter-Disciplinary Committee was submitted on 25-07-2017 and it contained certain recommendations which are as follows:
(i) A very visible and clear warning should be issued through public media informing the general public that the Government does not consider crypto-currencies such as bitcoins as either coins or currencies. These are neither a legally valid medium of exchange nor a desirable way to store value. The Government also does not consider it desirable for people to use or invest in something which has no real underlying asset value.
(ii) A very visible and clear warning should be issued, through public media, advising all those who have been offering to buy or sell these currencies, or offering a platform to exchange these currencies, to stop this forthwith.
(iii) Those who have bought these currencies in good faith and are holding these should be advised to offload these in any jurisdiction where it is not illegal to do so.
(iv) All consumer protection and enforcement agencies should be advised to take action against all those who, despite these warnings, indulge in buying/selling or offering platform for trading of these currencies, since the presumption would be that it is being done with illegal, fraudulent or tax evading intent.
(v) If the Government agrees with the above recommendations, a committee should be constituted with members from DEA, RBI, SEBI, DoR, DoLA, Consumer Affairs, and MeitY, to suggest whether any further actions, including legislative changes, are required to make possession, trade and use of crypto-currencies expressly illegal and punishable.
(vi) Finally, it is clarified that none of the above recommendations are meant to restrict the use of blockchain technology for purposes other than that of creating or trading in crypto-currencies.
2.15. In August 2017, Securities and Exchange Board of India (SEBI) established a 10-member advisory panel to examine global fintech developments and report on opportunities for the Indian securities market. The goal of the new Committee on Financial and Regulatory Technologies was to help prepare India to adopt fintech solutions and foster innovations within the country.
2.16. On 02-11-2017, the Government of India constituted a committee chaired by the Secretary (Department of Economic Affairs) and comprising of Secretary, Ministry of Electronic and Information Technology, Chairman, SEBI and Deputy Governor, RBI (Inter- Ministerial Committee) to propose specific actions to be taken in relation to VCs.
2.17. At that stage, two persons, by name, Siddharth Dalmia and Vijay Pal Dalmia came up with a writ petition in WP (C) No.1071 of 2017 under Article 32 of the Constitution of India seeking the issue of a writ of mandamus directing the respondents to declare as illegal and ban all virtual currencies as well as ban all websites and mobile applications which facilitate the dealing in virtual currencies. Similarly, another person, by name, Dwaipayan Bhowmick came up with a writ petition in WP (C) No.1076 of 2017, seeking the issue of a writ of mandamus directing the respondents to regulate the flow of Bitcoin (crypto money) and to constitute a committee of experts to consider the prohibition/regulation of Bitcoin and other crypto currencies. On 13.11.2017, this Court ordered notice in both the writ petitions.
2.18. Around the same time, namely, November 2017, the Inter- Regulatory Working Group on Fintech and Digital Banking, set up by RBI, pursuant to a decision taken by the Financial Stability and Development Council Sub-Committee way back in April 2016, submitted a report. This report, in paragraph 22.214.171.124, dealt with Digital Currencies. It defined 'digital currencies' to mean digital representations of value, issued by private developers and denominated in their own unit of account. The Report also stated that "digital currencies are not necessarily attached to a fiat currency, but are accepted by natural or legal persons as a means of exchange."
2.19. Thereafter, RBI issued another Press Release dated 05- 12-2017 reiterating the concerns expressed in earlier press releases. The Government of India, Ministry of Finance also issued a statement on 29-12-2017 cautioning the users, holders and traders of VCs that they are not recognized as legal tender and that the investors should avoid participating in them.
2.20. On 01-02-2018, the Minister of Finance, in his budget speech said that the Government did not consider crypto currencies as legal tender or coin and that all measures to eliminate the use of these currencies in financing illegitimate activities or as part of the payment system, will be taken by the Government. However, he also said that the Government will explore the use of blockchain technology proactively for ushering in digital economy.
2.21. The Central Board of Direct Taxes (CBDT), by an Office Memorandum dated 05-03-2018, submitted to the Department of Economic Affairs, a draft scheme proposing a ban on cryptocurrencies. But the draft scheme advocated a step-by-step approach, as many persons had already invested in cryptocurrencies. The scheme also contained an advice to carry out legislative amendments before banning them.
2.22. In the wake of a meeting of G-20 Finance Ministers and Central Bank Governors that was scheduled to be held in mid-March 2018, the Financial Stability Board [Forum founded in 1999 by G-7 Finance Ministers and Central Bank Governors.] (FSB) sent out a communication dated 13-03-2018. It was indicated in the said communication that as per the initial assessment of FSB, crypto assets did not pose risks to global financial stability, as their combined global market value even at their peak, was less than 1% of global GDP. But the report also noted that the initial assessment was likely to change and that FSB was established by G-20 in April 2009, as a successor to the Financial Stability crypto assets raised a host of issues around consumer and investor protection as well as their use to shield illicit activity and for money laundering and terrorist financing.
2.23. The communique issued by G-20, after the meeting of its Finance Ministers and Central Bank Governors on March 19-20, 2018 also acknowledged that technological innovation including that underlying crypto assets, has the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly. But it also noted that crypto assets do raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. Though crypto assets lacked the key attributes of sovereign currencies, they could, at some point, have financial stability implications. Therefore, the communique resolved to implement FATF standards and to call on international standard- setting bodies to continue their monitoring of crypto assets and their risks.
2.24. On 02-04-2018, RBI sent an e-mail to the Government, enclosing a note on regulating crypto assets. It was with reference to the record of discussions of the last meeting of the Inter-Ministerial Committee on virtual currency. This note examined the pros and cons of banning and regulating cryptocurrencies and suggested that it had to be done, backed by suitable legal provisions.
2.25. Immediately thereafter, the Statement dated 05-04-2018 and the Circular dated 06-04-2018, impugned in these writ petitions came to be issued by RBI. It appears that at around the same time (April 2018), the Inter-Ministerial Committee submitted its initial report, (or a precursor to the report) along with a draft bill known as Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018. [ The fate of the 2018 Bill is not known but a fresh bill called 'Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019' has been submitted.]
2.26. But in the meantime, a few companies which run online crypto assets exchange platforms together with the shareholders/ founders of those companies and a few individual crypto assets traders came up with the first of the writ petitions on hand, namely WP (C) No. 373 of 2018, challenging the aforesaid Statement dated 05-04-2018 and Circular dated 06-04-2018. On 01-05-2018 this writ petition was directed to be tagged along with the writ petitions WP (C) Nos. 1071 and 1076 of 2017 which sought a ban on or regulation of cryptocurrencies.
2.27. On 11-05-2018, all the three writ petitions, namely WP (C) Nos. 1071 and 1076 of 2017 and 373 of 2018, came up for hearing. At that time, it was pointed out that a few High Courts were also seized of writ petitions concerning cryptocurrencies. Therefore, this Court gave liberty to RBI to move appropriate applications for transfer of all those cases to this Court.
2.28. Accordingly, RBI came up with transfer petitions and the transfer petitions were taken on Board on 17-05-2018 and a direction was issued that no High Court shall entertain any writ petition relating to the impugned Circular dated 06-04-2018. This Court also passed an interim order on 17-05-2018 permitting the petitioners in WP (C) No. 1071 of 2017 to submit a representation to RBI with a further direction to RBI to deal with the same in accordance with law.
2.29. In the meantime, the Internet and Mobile Association of India came up with the second of the writ petitions on hand, namely WP (C) No. 528 of 2018 and notice was ordered in the said writ petition on 03-07-2018. While doing so, this Court issued a direction to RBI to dispose of the representation, if any, already submitted by the Association. Accordingly, RBI considered the representation and issued two communications dated 06-07-2018 and 09-07-2018.
2.30. On 23-07-2018, SEBI sent its comments on the 2018 Bill, to the Department of Economic Affairs. Their primary objection to the Bill was that they are not best suited to be the regulators of crypto assets and tokens.
2.31. Next came the Annual Report of RBI for the year 2017- 2018. It contained a separate Box II.3.2 on "Cryptocurrency: Evolving challenges". The relevant portion of the same reads as follows:
"Though cryptocurrency may not currently pose systemic risks, its increasing popularity leading to price bubbles raises serious concerns for consumer and investor protection, and market integrity. Notably, Bitcoins lost nearly US$200 billion in market capitalisation in about two months from the peak value in December 2017. As per the CoinMarketCap, the overall cryptocurrency market had nearly touched US$800 billion in January 2018.
The cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy. Furthermore, being stored in digital/electronic media electronic wallets it is prone to hacking and operational risks, a few instances of which have already been observed globally. There is no established framework for recourse to customer problems/disputes resolution as payments by cryptocurrencies take place on a peer-to-peer basis without an authorised central agency which regulates such payments. There exists a high possibility of its usage for illicit activities, including tax avoidance. The absence of information on counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject users to unintentional breaches of anti-money laundering laws (AML) as well as laws for combating the financing of terrorism (CFT) (Committee on Payments and Market Infrastructures CPMI, 2015). The Bank for International Settlements (BIS) has recently warned that the emergence of cryptocurrencies has become a combination of a bubble, a Ponzi scheme and an environmental disaster, and calls for policy responses (BIS, 2018). The Financial Action Task Force (FATF) has also observed that cryptoassets are being used for money laundering and terrorist financing. A globally coordinated approach is necessary to prevent abuses and to strictly limit interconnections with regulated financial institutions.
On a global level, regulatory responses to cryptocurrency have ranged from a complete clamp down in some jurisdictions to a comparatively 'light touch regulatory approach'. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have emerged as the primary regulators of cryptocurrencies in the United States, where these assets like most other jurisdictions, do not enjoy the legal tender status. Asian countries have experienced oversized concentration of crypto players Japan and South Korea account for the biggest shares of crypto asset markets in the world. In the case of Bitcoins, half of transactions worldwide are carried out in Japan. In September 2017, Japan approved transactions by its exchanges in cryptocurrencies. China's exchanges hosted a disproportionately large volumes of global Bitcoin trading until their ban recently. [...]
Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash. Possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations, thus raising concerns on AML/CFT and taxation issues, require close watch."
2.32. In this background, all the four writ petitions namely WP (C) Nos. 1071 and 1076 of 2017 (seeking a ban) and WP (C) Nos. 373 and 528 of 2018 (challenging the indirect ban) came up for hearing, along with the transfer petitions, on 25-10-2018, when this Court was informed that the Union of India had already constituted a committee and that this Inter-Ministerial Committee was deliberating on the issue. Therefore, the writ petitions were adjourned to enable the Committee to come up with their recommendations.
2.33. It appears that the Committee so constituted, submitted a report on 28-02-2019 indicating the action to be taken in relation to virtual currencies. A bill known as "Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019" had also been prepared by then to be introduced in the Lok Sabha. To this report of the Committee, is appended, the minutes of the discussions of the Committee in the meetings held on 27-11-2017, 22-02-2018, and 09- 01-2019. The contents of the report of the Inter-Ministerial Committee dated 28-02-2019, can be well understood only if we look at the Record of Discussions of the meetings of the Committee. The Record of Discussions held on 27-11-2017 shows that the Inter- Ministerial Committee was of the initial view that the banning option was difficult to implement and that it can also drive some operators underground, encouraging the use of such currencies for illegitimate purposes. But it was generally agreed in the said meeting that VCs cannot be treated as currency. However, in the meeting held on 22-02-2018, the Deputy Governor, RBI made an initial intervention and argued in favour of using the banning option. Eventually, the other members of the Committee agreed, and it was resolved in the said meeting that a detailed paper on the option of banning VCs, including a draft law could be prepared and submitted by RBI and CBDT. It was also resolved to prepare a detailed paper within Department of Economic Affairs on options of regulating crypto assets. Following the same, it was resolved in the next meeting held on 09-01-2019 that a Standing Committee should be constituted to revisit certain issues. Eventually, the Inter-Ministerial Committee submitted the aforesaid report dated 28-02-2019. The key aspects of this report are:
i. Virtual currency is a digital representation of value that can be digitally traded and it can function as a medium of exchange and/or a unit of account and/or a store of value, though it does not have the status of a legal tender.
ii. Initial Coin Offerings (hereinafter, "ICO") are a way for companies to raise money by issuing digital tokens in exchange for fiat currency or cryptocurrency, but there is a clear risk with the issuance of ICOs as many of the companies are looking to raise money without having any tangible products. In the year 2018, as many as 983 ICOs were issued, through which funds to the tune of USD 20 billion were raised.
iii. Virtual currencies are accorded different legal treatment by different countries, which range from barter transactions to mode of payment to legal tender. Countries like China have imposed a complete ban.
iv. The mining of non-official virtual currencies is very resource- intensive requiring enormous amounts of electricity which may prove to be an environmental disaster.
v. They may also affect the ability of the Central Banks to carry out their mandates.
vi. China has not only banned trading in cryptocurrencies but also used its firewall to ban crypto currency exchanges. China even blocked crypto currency focused accounts from WeChat and crypto- currency related content from Baidu. However, Chinese traders use VPNs to circumvent these bans.
The report dated 28-02-2019 of the Inter-Ministerial Committee finally made certain recommendations which included a complete ban on private cryptocurrencies.
2.34. It is important to note here that the report of the Inter- Ministerial Committee dated 28-02-2019 not only recommended a ban, but also specifically endorsed the stand taken by RBI to eliminate the interface of institutions regulated by RBI from crypto currencies.
2.35. As a matter of fact, the issue of the impugned Circular by RBI was even taken note of by the Financial Stability Board (of G-20), in a document titled 'Crypto Assets Regulators Directory', submitted to G-20 Finance Ministers and Central Bank Governors in April 2019. While acknowledging the fact that RBI does not have a legal mandate to directly regulate crypto assets, this Directory indicated that with a view to ring fence its regulated entities from the risks associated with VCs, RBI has issued the impugned Circular.
2.36. In a report released in June 2019 under the caption 'Guidance for a risk-based approach to Virtual Assets and Virtual Asset Service Providers', FATF reiterated a risk-based approach advocated in FATF 2012 and 2015 recommendations. At the same time, this Guidance recognized that a jurisdiction has the discretion to prohibit VA activities and VASPs in order to support other policy goals not addressed in the Guidance such as consumer protection, safety and soundness or monetary policy. But the Guidance also suggested that countries which prohibit VA activities or VASPs should also assess the effect that such prohibition may have on their money laundering and terrorist financing risks.
2.37. It is also relevant to note here that the Government was conscious of the impugned Circular issued by RBI. This can be seen from the answer provided by the Minister of State in the Ministry of Finance, on 16-07-2019 in response to a question raised in the Rajya Sabha (Unstarred question no. 2591). While answering in the negative, the question whether the Government had banned cryptocurrencies in the country, the Minister of State added that RBI has been issuing advisories, press releases and circulars.
2.38. On 22-07-2019, the Report of the Inter-Ministerial Committee, recommending a ban, along with the draft of the Bill "Banning of Crypto currency and Regulation of Official Digital Currency Bill 2019", was hosted in the website of the Department of Economic Affairs. Therefore, on 08-08-2019, the first two writ petitions namely WP (C) Nos. 1071 and 1076 of 2017 were delinked and adjourned to January 2020, since, the prayers made in these two writ petitions (seeking a ban) appeared substantially answered.
2.39. Thereafter, the present writ petitions were taken up for hearing and this Court passed an interim direction on 21-08-2019, directing the Reserve Bank of India to give a detailed point-wise reply to the representations dated 29-05-2018 and 30-05-2018. The reply already given by RBI to the representations dated 29-05-2018 and 30-05-2018 was found by this Court to be inadequate and hence this direction. Accordingly, RBI gave a detailed point-wise reply on 04-09- 2019 and 18-09-2019. Thereafter, the present writ petitions were taken up for hearing.
3.1. The archeological excavations carried out at the (world wide web) sites, reveal that this digital currency civilization is just 12 years old (at the most, 37 years). But these excavations became necessary since virtual currencies, known by different names such as crypto assets, crypto currencies, digital assets, electronic currency, digital currency etc., elude an exact and precise definition, making it impossible to identify them as belonging either to the category of legal tender solely or to the category of commodity/good or stock solely.
3.2. Any attempt to define what a virtual currency is, it appears, should follow the Vedic analysis of negation namely "neti, neti". Avadhuta Gita of Dattatreya says, "by such sentences as 'that thou are', our own self or that which is untrue and composed of the 5 elements, is affirmed, but the sruti says 'not this not that'." The concept of Neti Neti is an expression of something inexpressible, but which seeks to capture the essence of that to which no other definition applies. This conundrum will squarely apply to crypto currencies and hence this flashback, into its genesis, so that its DNA is sequenced.
3.3. Though the idea of digital cash appears to have been first introduced by David Lee Chaum, an American Computer Scientist and Cryptographer way back in 1983 in a research paper and was actually launched by him in 1990 through a company by name Digicash, the company filed for bankruptcy in 1998, with Digicash becoming Digi-crash. But the actual story of creation of cryptocurrencies began, in a more scientific way, according to Nathaniel Popper, the New York Times journalist, [From his book "Digital Gold: Bitcoin and the inside story of the Misfits and Millionaires Trying to Reinvent Money".] in 1997, when a British Cypherpunk [Cypherpunk is an activist advocating widespread use of strong cryptography and privacy enhancing technologies, as a route to social and political change. This word was added to the Oxford English Dictionary in November 2006.] by name Adam Back released a plan called hashcash, which claimed to have solved some of the problems that stalled the digital cash project. But this program had its shortcomings. Another Cypherpunk by name Nick Szabo, came up with a concept called bitgold, which attempted to solve hashcash's shortcomings. Soon, an American by name Wei Dai came up with something called b-money. Hal Finney, another American created his own option. But all of them had a common goal, which, as revealed by Adam Back was as follows:
"What we want is fully anonymous, ultra low transaction cost, transferable units of exchange. If we get that going... the banks will become the obsolete dinosaurs they deserve to become."
3.4. But all these experiments continued to hit roadblocks, until the emergence of Satoshi Nakamoto (who still remains anonymous) in the world of netizens. It appears that Satoshi sent an e-mail in August 2008 to Adam Back attaching a white paper prepared by him on what was called 'Bitcoin'. The gist of what Satoshi stated in his paper is indicated in simple terms, for the understanding of the common man, by Nathaniel Popper, in his book as follows:
"Rather than relying on a central bank or company to issue and keep track of the money as the existing financial system and Chaum's DigiCash did this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain.
The process by which this all happened had many layers, and it would take even experts, months to understand how they all worked together. But the basic elements of the system can be sketched out in rough terms, and were in Satoshi's paper, which would become known as the Bitcoin white paper.
According to the paper, each user of the system could have one or more public Bitcoin addresses sort of like bank account numbers and a private key for each address. The coins attached to a given address could be spent only by a person with the private key corresponding to the address. The private key was slightly different from a traditional password, which has to be kept by some central authority to check that the user is entering the correct password. In Bitcoin, Satoshi harnessed the wonders of public-key cryptography to make it possible for a user let's call her Alice again to sign off on a transaction, and prove she has the private key, without anyone else ever needing to see or know her private key.
Once Alice signed off on a transaction with her private key she would broadcast it out to all the other computers on the Bitcoin network. Those computers would check that Alice had the coins she was trying to spend. They could do this by consulting the public record of all Bitcoin transactions, which computers on the network kept a copy of. Once the computers confirmed that Alice's address did indeed have the money she was trying to spend, the information about Alice's transaction was recorded in a list of all recent transactions, referred to as a block, on the blockchain. [...]
The result of this complicated process was something that was deceptively simple but never previously possible: a financial network that could create and move money without a central authority. No bank, no credit card company, no regulators. The system was designed so that no one other than the holder of a private key could spend or take the money associated with a particular Bitcoin address. What's more, each user of the system could be confident that, at every moment in time, there would be only one public, unalterable record of what everyone in the system owned. To believe in this, the users didn't have to trust Satoshi, as the users of DigiCash had to trust David Chaum, or users of the dollar had to trust the Federal Reserve. They just had to trust their own computers running the Bitcoin software, and the code Satoshi wrote, which was open source, and therefore available for everyone to review. If the users didn't like something about the rules set down by Satoshi's software, they could change the rules. People who joined the Bitcoin network were, quite literally, both customers and owners of both the bank and the mint."
3.5. That Satoshi and the Cypherpunks who participated in the initial experiments developed Bitcoin as an alternative to conventional currency, to counter the problems of debasement of currency by central agencies, was made clear by Satoshi himself when he said: "The root problem with conventional currency is all the trust that's required to make it work. The Central Bank must be trusted not to debase the currency but the history of fiat currencies is full of breaches of that trust."
3.6. What attracted people to Satoshi's proposal, was the fact that while Central Banks had no restraints in unlimited printing of money, thereby devaluing all savings and holdings, the Bitcoin software had rules to ensure that the process of creating new coins would stop after 21 million were out in the world. When Martti Malmi, a student at the Helsinki University of Technology, joined hands with Satoshi to improvise the project and to market it, he formulated the philosophy in the following words:
"Be safe from the unfair monetary policies of the monopolistic Central Banks and the other risks of centralized power over a money supply. The limited inflation of Bitcoin system's money supply is distributed evenly (by CPU power) throughout the network, not monopolized to a banking elite."
3.7. Therefore, it is beyond any pale of doubt that irrespective of the metamorphosis (or gene mutation) it has undergone over the years, bitcoin, the Adam or Manu of the race of cryptocurrencies, was developed as an alternative to fiat currency. Keeping this birth chart of virtual currencies in mind, let us now see how the petitioners are aggrieved by the impugned decisions of RBI, the grounds on which they challenge the same and the justification sought to be provided by RBI.