Updated: Dec 16, 2021

After the news broke out that the Government of India is planning to introduce a Bill seeking to prohibit "all private cryptocurrencies in India", market speculation and fear mongering is at an all-time-high. This article aims to reflect on the regulatory history of Cryptoassets / Cryptocurrencies in India post 2018.

India's crypto story has been nothing short of being remarkable. From RBI cracking down on crypto-trading to having more than 20 Million active traders, India has come a long way. It has certainly not been an easy ride for the crypto ecosystem. This article covers the 2018 RBI crackdown and its aftermath. The aim of the author is to give the readers a clear idea as to how India's crypto jurisprudence has evolved over the years. The next article in this series will analytically speculate the future of Virtual Currencies in India. This article will only be briefing the RBI crackdown of the year 2018 and the aftermath (Supreme Court of India's judgement in Internet and Mobile Association of India vs. Reserve Bank of India).


APRIL 5, 2018

The Reserve Bank of India ("RBI") issues a Statement on Development and Regulatory Policies ("Statement"), paragraph 13 of which directed the entities regulated by the RBI:-

(i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies ("VC").

(ii) To exit the relationship, if they already have one with such individuals / business entities, dealing with or settling virtual currencies ("VC").

Paragraph 13 of the Statement is extracted as follows:-


Technological innovations, including those underlying Virtual Currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual Currencies ("VC") also variably referred to as crypto currencies and crypyo assets, raise concern of consumer protection, market integrity and money laundering, among others. Reserve bank has repeatedly cautioned users, holders and traders of virtual currencies. In view of the associated risk, it has been decided that, with immediate effect, entities regulated by the 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.

APRIL 6, 2018

Just a day after issuing the Statement, the RBI issued a circular which dealt entirely with Virtual Currencies and the prohibition on dealing with the same. The circular was issued in the exercise of powers conferred to it by the RBI Act 1934, the Banking Regulation Act, 1949 and the Payment Settlement Systems Act, 2007.

Paragraphs 1 to 3 of the circular are entirely reproduced as follows:-


1. 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.

APRIL, 2018


The Inter-Ministerial Committee submitted its initial report along with a draft Bill known as 'Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018'. The fate of this Bill is not known. A fresh Bill known as 'Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019' was also submitted which was never tabled in the Parliament.


A few companies which run online crypto assets exchange platforms filed 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.



Download RBI • 1.78MB



1. Not a legal Tender: The RBI has no power to prohibit the activity of trading in virtual currencies through VC exchanges since it is not a legal tender, but only a tradable digital commodity. Therefore, it does not fall within the regulatory framework of the Reserve Bank of India Act, 1934 ("RBI Act") or the Banking Regulation Act, 1949 ("BR Act").

2. VCs don't fall within the credit system: VCs do not fall within the credit system of the country so as to enable RBI to fall back upon the Preamble of the RBI Act, which gives RBI mandate to operate the currency & credit system of the country.

3. Beyond RBI's Jurisdiction: RBI has neither got any power to regulate the financial system of the country to its advantage conferred u/S. 45JA of the RBI Act nor to regulate the credit system of the country conferred u/S. 45L of the RBI Act exercisable in Public Interest so as to include goods that doesn’t fall within the purview of the financial or credit system of the country. Likewise, the power to issue directions in Public Interest conferred u/S. 35(1)(a) of the BR Act and to caution / prohibit banking companies against entering into any particular transaction conferred u/S. 36(1)(a) DO NOT extend to the issue of blanket directions that would deny access by virtual currency exchanges, to the banking services of the country, as the expression “public interest” appearing in a particular provision in a statute should take its colour from the context of the statute.

4. Power conferred under the Payment and Settlement Systems Act, 2007 ("P&SS Act) not exercisable on VC Exchanges: Power conferred upon RBI u/S. 10(2) of the P&SS Act to issue guidelines for proper and efficient management of payment systems and u/S. 18 of the said Act to lay down policies relating to payments systems, exercisable in public interest--- not applicable to VC exchanges--- as the service rendered by them don’t fall w/in the definition of the expression payment system u/S. 2(1)(i) of the said Act.

5. Failed to consider the precautionary measures taken up by exchanges: RBI did not consider that the Members of Petitioner Association took necessary precautions (such as avoiding cash transactions, ensuring compliance with KYC norms, etc.) on their own accord and allowed peer-to-peer transactions only within the country.

6. Failed to exercise application of mind: RBI did not apply its mind in the fact that not every VC is anonymous. The report of the EU Parliament classified VCs into anonymous and pseudo-anonymous. Hence, if the problem is anonymity, the same could have been achieved by resorting to the least invasive option of prohibiting only anonymous VCs. It also failed to take note of the difference between various VC schemes, such as closed VC schemes, undirected VC schemes and bidirectional flow VC schemes and unreasonably differentiates between unidirectional flow schemes and bidirectional flow schemes by targeting only bidirectional flow schemes.

7. Paradox: It's a paradox that the Blockchain Technology is acceptable to the RBI, but Virtual Currencies are not (which are generally built on the Blockchain technology itself).

8. Benefit of Rule of Judicial Deference to Economic Policies not available to the RBI: the impugned circular is an exercise of power by a statutory body and is neither a legislation nor an exercise of executive power. There is no deference in law to process but only to opinion emanating from the process. No study was taken by the RBI before the impugned measure was taken. Hence, the impugned decisions are not even based upon knowledge or expertise. The prohibition must come from an Act of the legislature and not by a notification issued by an executive authority owing to res extra commercium.

9. Not a reasonable restriction u/A. 19(6) of the Constitution: A total prohibition, especially through a subordinate legislation-- not declared by law to be unlawful is violative of Article 19(1)(g). Whether a directive would tantamount to regulation or prohibition depends upon the impact of the directive.



1. Do not satisfy a single criteria for being recognized as a currency: VCs do not satisfy the criteria such as store of value, medium of payment and unit of account, required for being acknowledged as currency. The impugned decisions were necessitated because in the opinion of RBI, VC transactions cannot be termed as a payment system, but only peer-to-peer transactions which do not involve a system provider under the Payments and Settlement Systems Act. Despite this, VC transactions have the potential to develop as a parallel system of payment.

2. No structured disputes redressal mechanism: Virtual currency exchanges do not have any formal or structured mechanism for handling consumer disputes/grievances.

3. High Risk of being used for Illegal Activities: Virtual currencies are capable of being used for illegal activities due to their anonymity/pseudo-anonymity.

4. Dangerous for the Indian Economy: Increased use of virtual currencies would eventually erode the monetary stability of the Indian currency and the credit system. Cross-border nature of the trade in VCs, coupled with the lack of accountability, has the potential to impact the regulated payments system managed by RBI. A large constituent of the VC universe does not hold membership of the Petitioner association or is not even accountable for their acts but is material and instrumental in driving the VC trade

5. Circular Legislative in Character: The impugned decision of RBI is legislative in character and is in the realm of an economic policy decision taken by an expert body warranting a hands-off approach from the Court.

6. Within Jurisdiction: The impugned decision is within the range of wide powers conferred upon RBI under the BR Act, the RBI Act and the P&SS Act.

7. No violation of Fundamental Rights: No one has an unfettered fundamental right to do business on the network of the entities regulated by RBI. The impugned decisions do not violate any of the rights guaranteed by Articles 14, 19 and 21 of the Constitution of India.

8. Not unreasonable; Enough time afforded and application of mind exercised: The impugned decisions are not excessive, confiscatory or disproportionate in as much as RBI has given three months’ time to the affected parties to sever their relationships with the banks. The host of material taken note of by RBI in their reports, the reports of the committees to which RBI was a party and the cautions repeatedly issued by RBI over a period of 5 years, would demonstrate the application of mind on the part of RBI. They also demonstrate that the RBI did not proceed in haste, but proceeded with great care and caution.

9. Exercised for greater public benefit: The impugned decisions were necessitated in public interest to protect the interest of consumers, the interest of the payment and settlement systems of the country and for protection of regulated entities against exposure to high volatility of the virtual currencies. RBI is empowered and duty bound to take such pre-emptive measures in public interest and the power to regulate includes the power to prohibit. Hence, the RBI or any other Government authority would not be able to curtail, limit, regulate or control the generation of VCs and their transactions, resulting in ever-present and inevitable financial risks.



The Hon'ble Court rejecting the Petitioner's contention that RBI had no statutory power to restrain the petitioners stated that "...once it is accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, (it can safely be concluded that) the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the Reserve Bank of India. The statutory obligation that RBI has, as a central bank:-

(i) to operate the currency and credit system

(ii) to regulate the financial system and

(iii) to ensure the payment system of the country to be on track;

would compel them naturally to address all issues that are perceived as potential risks to the monetary, currency, payment, credit and financial systems of the country. 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. "

The Hon'ble Apex Court also rejected the petitioner's argument that the Preamble of the RBI only speaks about the role of RBI in operating the currency and credit system of the country to its advantage and since Virtual Currencies may not form part of the credit system of the country as they are not recognized as a currency, the invocation process of the provisions of the RBI Act was out of context. The court stated that:

"... RBI is the sole repository of power for the management of the currency, under Section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes under Section 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index. Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. The expression “management of the currency” appearing in Section 3(1) need not necessarily be confined to the management of what is recognized in law to be currency but would also include what is capable of faking or playing the role of a currency...."
"...Hence, we hold that RBI has the requisite power to regulate or prohibit an activity of this nature."


The Hon'ble Court referred to its judgement in Star India Pvt. Ltd. v. Department of Industrial Policy and Promotion and Ors. in which it opined that the word regulate has a very broad meaning including the power to prohibit.

The court further clarified that

The impugned circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs. Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly empowers RBI to caution or prohibit banking companies against entering into certain types of transactions or class of transactions. The prohibition is not per se against the trading in VCs. It is against banking companies, with respect to a class of transactions. The fact that the functioning of VCEs automatically gets paralyzed or crippled because of the impugned Circular, is no ground to hold that it tantamount to total prohibition. So long as those trading in VCs do not wish to convert them into fiat currency in India and so long as the VCEs do not seek to collect their service charges or commission in fiat currency through banking channels, they will not be affected by this Circular. Admittedly, peer-to-peer transactions are still taking place, without the involvement of the banking channel. In fact, those actually buying and selling VCs without seeking to convert fiat currency into VCs or vice-versa, are not affected by this Circular. It is only the online platforms which provide a space or medium for the traders to buy and sell VCs, that are seriously affected by the Circular, since the commission that they earn by facilitating the trade is required to be converted into fiat currency.

The Court pointed out the fallacy in the Petitioner's argument and stated that on the one hand the Petitioners allege that there is total prohibition and argue on the other hand that the Circular does not achieve its original object of curtailing the actual trading, though it cripples the exchanges. The contradicting contentions can not both hold true, the Court opined.

Rejecting the Petitioner's argument that the RBI exercised in excess of the powers provided to it under the provisions of Section 18 of the Payment and Settlement Systems Act 2007, the Court held that 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. Hence the argument revolving around Section 18 would fail.


On the Petitioners' contention that RBI did not exercise its application of mind, the Court answered in negative. The Hon'ble Court cited the Financial Stability Report of the year 2013 and 2015 which highlighted the potential risks involved with the operation of VCs, such as its volatility and being a safe gateway to financial crimes. The Court's reasoning is reproduced as follows:-

"... But we do not think that in the facts of the present case, we could hold RBI guilty of non-application of mind. As a matter of fact, the issue as to how to deal with virtual currencies has been lingering with RBI from June 2013 onwards, when the Financial Stability Report took note of the challenges posed by virtual currencies in the form of regulatory, legal and operational risks. The Financial Stability Report of June 2013 led to a press release dated 24-12-2013 cautioning the users, holders and traders of virtual currencies about the potential financial, operational, legal and consumer protection and security related risks associated with virtual currencies. Then came the Financial Stability Report of December 2015 which raised concerns about excessive volatility in the value of VCs and their anonymous nature which went against global money laundering rules rendering their very existence questionable. The Financial Stability Report of December 2016 also took note of the risks associated with virtual currencies qua data security and consumer protection. The report also recorded concerns about far reaching potential impact of the effectiveness of monetary policy itself. Therefore, the report suggested RegTech to deal with FinTech.."

To support this, the Hon'ble Supreme Court further stated that the RBI had been repeatedly cautioning the users, holders and traders of VCs since the year 2013 and that it had not taken any extreme step for five years since 2013 before issuing the impugned Circular in Arpil of 2018. Further, the RBI also took note of the whitepaper of IDRBT, which was established by RBI to work at the intersection of banking and technology, which enlisted the advantages and disadvantages of digital currencies. Likewise, RBI took into account only those considerations which multinational bodies and regulators of various countries such as FATF, BIS, etc., have taken into account. Hence, it was held that the RBI applied its application of mind.


Rejecting the arguments of one of the Petitioners that the impugned circular was hit by arbitrariness as it went against the official position (Reply by RBI on an RTI dated April 26, 2017 and the reply given by the Minister of State for Finance in response to a question in the Lok Sabha dated July 28, 2017, wherein the RBI took a position that they had no power to freeze the accounts either of defaulting companies or of shell companies) because the Circular had the effect of closing the accounts of VCEs, the Hon'ble Apex Court pointed out that the impugned circular does not order either the freezing or closing of any particular account of a particular customer. All that the impugned Circular said was that RBI regulated entities shall exit the relationship that they have with any person or entity dealing with or settling VCs, within three months of the date of the Circular. The regulated entities were directed not to provide services for facilitating any person or entity in dealing with or settling VCs. Hence, it was held that this prohibition did not extend either to the closing or the freezing of the accounts of the petitioners in relation to their other ventures.

On the petitioner's argument that the impugned circular was colourable in nature the court stated that the RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company or in public interest. If the exercise of power by RBI with a view to achieve one of these objectives incidentally causes a collateral damage to one of the several activities of an entity which does not come within the purview of the statutory authority, the same cannot be assailed as a colourable exercise of power or being vitiated by malice in law. To constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target.


It was contended that the impugned circular does not have the effect of a legislation or an executive action. Rejecting this contention in totality, the Apex Court held that the aforementioned argument only belittles the role of the RBI as it is a creature, created with mandate to get liberated even from its creator. The court further held that:-

It is given a mandate–
(i) under the Preamble of the RBI Act 1934, to operate the currency and credit system of the country to its advantage and to operate the monetary policy framework in the country
(ii) under Section 3(1), to take over the management of the currency from the central government
(iii) under Section 20, to undertake to accept monies for account of the central government, to make payments up to the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union
(iv) under Section 21(1), to have all the money, remittance, exchange and banking transactions in India of the central government entrusted with it
(v) under Section 22(1), to have the sole right to issue bank notes in India and
(vi) under Section 38, to get rupees into circulation only through it, to the exclusion of the central government. Therefore, RBI cannot be equated to any other statutory body that merely serves its master.
The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But the power conferred upon RBI under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the central government, cannot be taken away.


It was contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate. It was further contended that the right to access the banking system is actually integral to the right to carry on any trade or profession and that therefore a legislation, subordinate or otherwise whose effect or impact severely impairs the right to carry on a trade or business, not prohibited by law, would be violative of Article 19(1)(g).

Deciding on this issue, the court stated that there can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession. Therefore, the moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, resulting in the trade or business getting automatically shut down. Hence, the court held, the burden of showing that larger public interest warranted such a serious restriction bordering on prohibition, was heavily on RBI.

RBI, in its counter-affidavit contended that there is no fundamental right to purchase, sell, transact and/or invest in VCs. and therefore, the petitioners cannot invoke Article 19(1)(g). This contention was rejected on 2 grounds:

(i) some of the petitioners are claiming a right to provide a platform for facilitating an activity (of trading in VCs between individuals/entities who want to buy and sell VCs) which is not yet prohibited by law and

(ii) that in any case the impugned Circular does not per se prohibit the purchase or sale of VCs.

It was also contended by petitioners that what is hit by the impugned Circular is not the actual target. The actual target of the impugned Circular, as seen from various communications and committee reports that preceded the same, is the trade in VCs., but hitting the target directly, is not within the domain of RBI and hence the impugned Circular sought to protect only the regulated entities, by ring-fencing them. In the process, it hit VC Exchanges and not the actual trading of VCs. People who wished to buy and sell VCs could still do it without using the medium of a VC Exchange and without seeking to convert the virtual currencies into fiat currency. It is in this context that the petitioners contended that the the impugned circular violated the provisions of Article 19(1)(g) has to be examined.

The court excluded the hobbyists (who trades in crypto just as a matter of hobby) to challenge the violation of Article 19(1)(g) in the present context as it only covers profession, occupation, trade or business.

The court further clarified that the citizens who have taken up the trade of buying and selling virtual currencies are not prohibited by the impugned Circular (i) either from trading in crypto-to-crypto pairs (ii) or in using the currencies stored in their wallets, to make payments for purchase of goods and services to those who are prepared to accept them, within India or abroad. It further held that despite the fact that the users and traders of virtual currencies were prevented by the impugned circular, it did not paralyze the crypto currencies or its circulation in the market as the different kind of crypto wallets (except the desktop wallet) are highly mobile and transcends borders, and holders can easily transfer it anywhere in the world as they like.

Questioning the measure taken by RBI, the court observed that the RBI did not consider the availability of alternatives before issuing the impugned circular and that it had not found, in the past 5 years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function. Further, it was observed that RBI had not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/co-operative banks/NBFCs has had suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them The court also pointed out the fact that the Inter-Ministerial Committee constituted on 02-11-2017, which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures.

Finally, the Court observed as follows:-

It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of the 3 enactments indicated earlier, but also in view of the special place and role that it has in the economy of the country. These powers can be exercised both in the form of preventive as well as curative measures. But the availability of power is different from the manner and extent to which it can be exercised. While we have recognized elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order 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 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 court concluded it by stating that the petitioners were entitled to succeed and thereby set aside the impugned Circular dated April 6, 2018 on the ground of proportionality. However the statement dated April 5, 2018 was not set aside as it was not in the nature of a statutory direction.

In this judgement, the Hon'ble Supreme Court set aside the impugned circular and cleared the air about the perceived 'blanket ban' on Virtual Currencies. Even after this, there is still an air of ambiguity surrounding the status of Cryptoassets in the country. Moreover, the RBI had not been able to demonstrate that there was any adverse impact on the financial ecosystem of this country in the last five years, despite the fact that the peer-to-peer trading in crypto pairs remained unabated. The Government of India through the Ministry of Electronics and Information Technology, tried to indicate its stance through the "National Strategy on Blockchain" which was issued in December 2021.

Our next article in this series will aim to propose and analytically speculate the ways in which the cryptoasset market in India can be regulated without negatively impacting more than 20 million crypto traders/investors.



Aabhas Pareek is a practicing Advocate at the Supreme Court of India. He has been serving as the Managing Partner of GL Pareek Chambers of Law since January 2021. An Alumnus of National Law University Odisha, he has been appointed as a Sole Arbitrator in more than 12 disputes. He is the Associate Member of Chartered Institute of Arbitrators (CIArb, London), APD-grade Member of Prime Dispute and the member associate of various international organisations. His areas of interest includes International Commercial Arbitration, Blockchain and Cyber Security.

He serves as the Chief Consultant at Blockchain in-focus.

DISCLAIMER: All opinions expressed in this article are of the author only and do not reflect the opinions of Blockchain in-focus in any way.

96 views0 comments

Recent Posts

See All