INTERNET AND MOBILE ASSOCIATION VS. RESERVE BANK OF INDIA 2020/INSC/264:

DATE: 04.03.2020

COURT: Supreme Court of India

BENCH: Justice Rohinton Fali Nariman, Justice Aniruddha Bose, and Justice V. Ramasubramanian

FACTS:

In April 2018, the Reserve Bank of India (RBI) issued a "Statement on Developmental and Regulatory Policies" on 5 April 2018, followed by a circular dated 6 April 2018. Exercising powers under the Banking Regulation Act, 1949, the RBI Act, 1934, and the Payment and Settlement Systems Act, 2007, the RBI directed all regulated entities (banks, NBFCs, payment system providers, etc.) not to deal in or provide any services for facilitating transactions in virtual currencies (cryptocurrencies). The circular also mandated that entities already providing such services to cryptocurrency businesses must exit those relationships within a stipulated time. This effectively barred banks and financial institutions from offering banking services to individuals or entities engaged in cryptocurrency trading or exchanges.

The Internet and Mobile Association of India (IAMAI), representing the interests of online and digital services industry including cryptocurrency exchanges, along with individual crypto exchanges, their founders/shareholders, and traders, challenged the RBI’s Statement and Circular. They filed writ petitions under Article 32 of the Constitution before the Supreme Court, contending that the RBI’s directive was arbitrary, disproportionate, and violated their fundamental right to carry on trade and business under Article 19(1)(g). The petitioners argued that virtual currencies were not banned by any law, no empirical evidence of harm to the banking sector was provided by the RBI, and the blanket prohibition amounted to an unreasonable restriction on legitimate business activities. This led to the matter being heard by the Supreme Court.

ISSUES:

The primary issues before the Supreme Court were whether the RBI’s circular dated 6 April 2018, which prohibited regulated entities from dealing with or providing banking services to individuals or businesses engaged in virtual currencies (cryptocurrencies), was valid and within the RBI’s statutory powers, and whether the circular constituted a disproportionate and arbitrary restriction on the petitioners’ fundamental right to carry on trade and business under Article 19(1)(g) of the Constitution, especially in the absence of any legislative ban on cryptocurrencies and lack of empirical evidence demonstrating harm to the banking or payment systems.

JUDGEMENT WITH REASONING:

The Supreme Court allowed the writ petitions and set aside the RBI’s circular dated 6 April 2018. The Court held that while the RBI had the power to regulate or issue directions concerning virtual currencies, the impugned circular was disproportionate and violative of Article 19(1)(g). It directed that banks and regulated entities could no longer be barred from providing services to cryptocurrency businesses solely on the basis of the quashed circular.

The Court acknowledged that the RBI possessed sufficient statutory authority under various provisions of the Banking Regulation Act, RBI Act, and Payment and Settlement Systems Act to issue regulatory directions for protecting the banking and payment systems. However, it emphasized that any restriction imposed by the RBI must satisfy the test of proportionality. The Court applied the doctrine of proportionality as evolved in Indian jurisprudence, requiring that the measure be suitable, necessary, and balanced in relation to the objective sought to be achieved. It found that the RBI had not produced any cogent evidence or quantifiable data showing that virtual currency transactions had adversely affected the entities it regulated. The RBI’s consistent stand that it had not banned virtual currencies, coupled with the fact that the Government of India had not enacted any law prohibiting them despite multiple committee reports, rendered the blanket ban on banking services unreasonable. The Court noted that virtual currency trading was a legitimate business activity not declared illegal by Parliament, and access to banking channels was essential for such businesses to function.

In the second key aspect of its reasoning, the Court held that the circular failed the proportionality test because it imposed a complete prohibition rather than a calibrated regulatory framework. It distinguished between the RBI’s power to regulate (which was upheld) and the manner of exercise of that power (which was struck down). The absence of any study or material demonstrating real harm to the regulated entities, the failure to consider less restrictive alternatives, and the severe impact on the petitioners’ fundamental rights under Article 19(1)(g) led the Court to conclude that the circular was manifestly arbitrary and disproportionate. The judgment reinforced those executive actions, even by expert bodies like the RBI, must be backed by adequate material and must not disproportionately infringe upon constitutional rights when less intrusive measures are available.

ANALYSIS:

This landmark Supreme Court judgment is a significant exposition on the limits of regulatory power and the application of the doctrine of proportionality in Indian constitutional law. By striking down the RBI’s 2018 circular, the Court reinforced that even expert bodies like the Reserve Bank cannot impose blanket prohibitions that severely impact fundamental rights under Article 19(1)(g) without adequate empirical justification and consideration of less restrictive alternatives. The decision underscores the principle that virtual currency trading, though unregulated at the time and not declared illegal by Parliament, could not be effectively throttled through banking channels in the absence of concrete evidence of systemic risk. It also highlights the Court’s willingness to subject executive/regulatory actions to strict judicial scrutiny when they affect economic freedoms, marking an important check on regulatory overreach in emerging technological sectors.

The judgment carries far-reaching implications for the fintech and cryptocurrency ecosystem in India. It paved the way for the resumption of banking services to crypto businesses (subject to due diligence), boosted the legitimacy of digital asset trading, and influenced subsequent policy developments, including eventual legislative attempts to regulate cryptocurrencies. Legally, it strengthened the jurisprudence on proportionality as a key test for restrictions on fundamental rights, serving as a precedent in future challenges involving regulatory bans on new-age businesses. The ruling balances the RBI’s legitimate concerns for financial stability with constitutional protections, emphasizing that regulation, not prohibition, is the preferred route in the absence of clear legislative prohibition or proven harm.