A lawyer’s preliminary analysis of Supreme Court Judgment on RBI vs Crypto

Essentially after the Supreme Court Judgment it appears, there is still need to develop more technical literature on the subject matter and therein lies an open opportunity to reBuild, reEducate, reIgnite, reMeet, reLearn from the previous experiences of successes and failures and build a more robust and engaging environment for non traders to enter, student to experience and tech enthusiasts to build in this Industry.

The 2 year long skeptical wait of crypto traders, crypto exchanges and technology enthusiasts culminated into a happy ending on March 04, 2020 with the Indian Honourable Supreme Court deciding in the favour of the petitioners (Internet and Mobile Association of India) {on behalf of the Crypto Community} against the Reserve Bank of India {administrative body of the Government}.

While a deeper analysis of the Judgement and what it means for India and the Crypto Fraternity shall follow. Here is our first reaction to the judgement :

A. What exactly did Supreme Court conclude ? :

Original link of complete Judgement from Supreme Court Website: https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf

B. What it means for the crypto community ?

1. Prima Facie it means, that the position prior to the imposing of ring fencing and banking restriction by the Reserve Bank of India shall be put back.
2. Crypto Exchanges shall re gain access to banking in India.
3. Reserve Bank’s Circular dated 06 04 2018 is set aside on the grounds of “proportionality”.

In the test of Proportionality the “courts will quash exercise of discretionary powers in which there is no reasonable relation between the objective which is sought to be achieved and the means used to that end, {with reference to this case, it means that the actions by RBI of imposing restrictions by not giving banking access to crypto exchanges wasn’t related to its objective of trying to protect innocent crypto traders from risks of crypto trading} or where punishments imposed by administrative bodies or inferior courts are wholly out of proportion to the relevant misconduct”.

So the administrative action which arbitrarily discriminates will be quashed by the court. {which is exactly what the Court did}. The implication of the principle of proportionality is that the court will weigh for itself the advantages and disadvantages of an administrative action and such an action will be upheld as valid if and only if the balance is advantages. If this action is disproportionate to the mischief then it will be quashed

C. What it REALLY means for the crypto community ?

1. While the Crypto exchanges shall now be able to offer services to users to buy and sell cryptos against fiat currency. It is still a largely unregulated sector with no set standard for KYC, data protection, Regulatory body for crypto exchanges or redressal mechanisms in case of crypto frauds.
2. The need for regulation is urgent, comprehensive and necessary. The question is how ? what ? and by whom (if not RBI!) ? Note that the RBI Circular is set aside / quashed on the grounds of proportionality, which simply means that RBI explained that it imposed banking restriction to protect innocent traders from the risks and vagaries of an unregulated crypto market however the means to do it were incorrect, it also means that either similar restrictions can be imposed by some other Government administrative body that has the powers to do so OR RBI can use some other means to achieve it objectives of investor protection.
3. Further, Does it mean that Ministry of Corporate Affairs shall now allow registration of companies with main objects of business as crypto trading? Does it means that the Securities Laws of India shall be updated to accommodate Cryptos as a security instrument ? Or Does it mean that free flow of foreign crypto funds into India and conversion of the same into fiat shall be freely allowed? Does it mean that no limit of Liberalised Remittance Scheme (LRS) which allows upto USD 250,000 per person per year outward remittance under automatic route of Foreign exchange laws shall / shall not apply to cryptos ? Or does it mean that Cryptos can be used as a medium of exchange for trade of goods and services ? Does it mean that Income Tax laws shall apply to cryptos as investment / trade / business in same manner and mode as other capital assets? Does it mean that First Information Report (FIRs) can be filed in case of crypto frauds easily ?

The answers to all these above are currently – No / Can’t say.

However should it stop the crypto traders from availing benefits emanating from this Judgement? Certainly not. Crypto Traders are free to trade using self regulatory or Crypto Exchange based Self Regulations tools or Industry best practices, while the law evolves. The time to regulate is now and how !

D. What it means for RBI ?

It blunt simple terms, it means that it was not empowered to impose the ring fencing restrictions to not allow banking access to crypto exchanges.

However, it doesn’t mean end of the road for RBI, since it has played a vital role in educating masses, through cautionary notices, about the ill effects of an (yet) unregulated industry.

There may be further pivotal role for RBI to play in future regulations for this Industry. Alternatively RBI may also seek other measures to further its objectives of investor protection.

E. What is REALLY means for RBI / Administrative Body of Government?

As stated above, RBI is expected to still pursue its purpose of investor protection and thereby may seek alternative ways to achieve its objectives in an Industry that is fast moving, tech enabled and susceptible to huge risk.

Other alternatives, may be to develop a high powered committee with representatives from RBI SEBI IEPF GSTN IncomeTax and more to regulate the Industry and avail opportunities of taxation revenue collection, create conducive environment for sandboxing high potential crypto projects thereby creating job opportunities and more.

F. What it means if you are a non trader / student / tech enthusiast / interested to enter the fraternity ?

As stated above, there is a urgent, comprehensive and necessary need for implementation of Crypto Regulations. There is still need to develop more technical literature on the subject matter and therein lies an open opportunity to reBuild, reEducate, reIgnite, reMeet, reLearn from the previous experiences of successes and failures and build a more robust and engaging environment for non traders to enter, student to experience and tech enthusiasts to build in this Industry. Its only just started !

G. Does it mean anything else also ?

Well! Yes. It does…. More on that on Part 2 of the post. Stay tuned.

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The post was originally posted on Notion and has been re-posted with permission from the author. Only the headline and summary text are edited.

About the Author:  Varun Sethi is a Technology Lawyer from India and has been in the startup consulting space since past 7 years. Six of this clients have been awarded status of Forbes 30 Under 30 and three have been Y Combinator alumni.   He has also been an active speaker at various forums like Institute of Chartered Accountants of India, Dubai Blockchain Summit, Wire Summit, Blockchained India, Indian Institutes of Technology, Lawyer's Club of India to name a few and has been approached by the National Security Council Secretariat of the Government of India and Andhra Pradesh Chief Ministerial Cabinet, India to lend his technical experience in the field of blockchain and decentralised technologies in addition to his work with Cayman Island government to help Indian blockchains companies to grow to offshore locations. 

Email: [email protected]