CRYPTO V/S RBI , Compilation of arguments from Supreme Court of India.

Compilation of all arguments in Supreme Court of India on Crypto V/S RBI shared by Crypto Kanoon

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August 8

• Matter reached for hearing today and is being heard by the Court.
• In the beginning Counsel for RBI requested for adjournment but the Court showed its disagreement and directed the parties to start with their arguments.Hopefully no ‘tareekh pe tareekh’ anymore.
• The court resumed and arguments started on RBI banking ban. Counsel for exchanges is arguing.
• Provisions of Reserve Bank of India Act and Banking Regulation Act are being analysed in order to know whether RBI has power to issue such circular or not.
• RBI circular is being analysed in the Court.counsel for exchanges is arguing that RBI restricting banks from providing services to Crypto is a colorable exercise in the guise of consumer interest.
• It can exercise power in public interest only to the extent as provided under law such as interest of depositors,borrowers etc
• RBI in its cautionaries gave impression as if some authorization was required for exchanges to run, however no such authorization was required under law.
• If Crypto was a commodity then SEBI could have stepped in but RBI has nothing to do with it.
• Cryptos are not the means using which laws are violated in fact there are many ways.
• This way can also be regulated.RBI is only a delegate of power which cannot exercise same powers as parliament which has a direct impact on legitimate businesses.
• Court asked Why cant you work without bank?
  Counsel answered Any settlement taking place will be converted into cash. users are owners of bitcoin kept in my wallet, when they wish to sell, they sell their bitcoin through my bank account.
• Court asked show us from your pleadings that any of the company/ business has got shut down due to banking ban effect since this averment is compulsory for making case under article 19(1)gCounsel showed from page 39 of their writ petition that they have suffered losses also showed page 199 stating that exchange has lost users due to banking ban.
• Manner in which other countries have treated Cryptos has been discussed.
  Justice Nariman Asked for a detailed chart on that.
• Technology underlying the Blockchain and Crypto is being explained to the Hon’ble judges.
• Counsel argues that Cryptos must not be equated to Sovereign Currency i.e., rupee etc.
• One is commodity, other is currency.
• In support, judgement of Brazilian Supreme Court is being read.Court hearing ends here.
• Case will resume on coming Wednesday 14th August 2019.

August 14

Case is listed in Court no 4 as item no. 1.
Court about to be resumed in few minutes.

• After the Court starts, few minutes will go in dealing with “urgent mentioning” matters.
• Urgent Mentioning matters are being dealt with.
  Crypto case hearing has started.Mr. Ashim Sood, Counsel for IAMAI, started explaining why Banking support is necessary.
• Court asked cant u change your bank such as those which aint governed by RBI?‌Counsel answered only foreign banks are there and exchanges use that there will be problem with Outward remittance which is hit by FEMA regulation.
• Court says take permission from the concerned authority with regard to outward remittance.
• further says you cant come under 19(1) g till the time you have alternate to dodge the banking ban.
• Counsel says he will argue on this during the course.Now the counsel started on the legality of RBI ban as no study done by it.
• Banking regulation Act prescribes the exercise of power by RBI only for the inner working of the Banks and for the interest of the depositors specifically in their capacity as depositors and not otherwise.
• RBI taking actions for general consumer interest is beyond legality. A judgement in support of the above point is being read by Mr. Ashim Sood. Judgement summarises that RBI cant step out of its powers as set out in Banking regulation Act.
• Therefore its action against private businesses in the form of 6th april circular is illegal.
• Another judgement of the Supreme court is being read out which enumerates basic fetters on RBI is the exercise of its powers including that it must act in good faith.
• Counsel says that RBI in its reply itself admits that RBI does not have jurisdiction to speak on the legality of Crypto as it is neither coins nor currency and RBI Act and Payment Settlements Act are not applicable on Cryptos.
• Despite that they use ancillary powers in a diff.
• Act and takes action against exchanges which is clearly a colorable exercise.
• RBI acted under error of law as it says that exchanges have to show that in which provision they have a right to use crypto for exchange of goods and services.
• However, the law says something which is not prohibited is legally permitted.
• Banning or regulating something must be a legislative act, it is a power which cannot be exercised by way of delegation.
• A decision to ban or regulate should have come from the legislature instead of RBI.
• Counsel argues that doing business in Crypto is not “Res extra commercium”.
• Res extra commercium (lat. “a thing outside commerce”) is a doctrine originating in Roman law, holding that certain things may not be the object of private rights, and are therefore insusceptible to being traded.
• Curtailment of an economic activity must come from the legislature as it puts people out of business involved in that economic activity.
• Further says that we are not on the legislative competence of the legislature bit just saying that the Competence has to be exercised by the legislature itself and not delegatee.
• Virtual currencies are of many kinds/ types.
• RBI financial stability report 2013 is being referred to show why a legislative policy is necessary for Cryptos.
• UK’s financial conduct authority’s report on Crypto Assets is being read by the counsel.
• It recognizes 3 kinds of Crypto Assets.
• There is an existing differences between diff kinds of Crypto Assets.
• However RBI says in their reply that there is no need to define virtual currencies.
• Says that the Govt. has to apply its mind in order to deal with a modern technology, it cant just put out the entire thing in one box just because they don’t want to think over it.
• Counsel is referring to securities contract regulation Act.
• By showing various docs, counsel submits that RBI can exercise such power only in the case where there is an extant legislative policy of the Parliament.
• However in the present case there is total absence of relatable legislative policy behind the action taken by RBI under Sec. 35A.
• Judge says that there are wide powers in the existing Acts which govern RBI powers. The important question here is that whether that power is guided by the preamble of the Acts or not.
• Counsel says that preamble of the RBI Act provide general powers only. Whereas no legislative backing for action of RBI.
• The judge asks question “cant RBI ban an activity in order to maintain financial stability or not as provided under the Act?” Counsel answers that any power to be exercised by RBI has to be guided by some legislative Act.
• Otherwise tomorrow RBI can say that we are banning Cheez burgers.
• So there has to be a specific limit of delegation. In absence thereof, it will be absurd. Section 45 J confers power on RBI to formulate the policy, the judge says.
• Counsel answers that 45J is about NBFCs however we are concerned with the Banks.
• Counsel says 45J of RBI Act though provides power of policy formulation but RBI took action under 35A of Banking regulation Act which must be guided by the preamble of that legislation and not RBI.
• Judge says both legislations are cognate. Judge asks what are you concerned with bitcoin or all Crypto?
• Counsel answers crypto in general.
• Judge says we want to understand all, give us in writing about all and how they are different. DLT is being explained.
• How it is immutable! Crypto is an electronic token to incentivise people who serves the DLT system to maintain its integrity.
• Crypto is being explained with very beautiful illustration.
• Judge says there is an essence of speculation when an exchange facilitates two people to buy sell.
• Counsel nods in agreement and says it is similar to commodity trade, share market etc.
• People have consensus on its value. Crypto is not an undesirable outcome but it is a technology in itself.
• No country has found the Crypto as pernicious and no country believe that it should not be regulation.
• No country believes that it should be banned. Chart explaining other countries’ treatment to Crypto, is being read.
• It is the same chart submission of which was directed by the court on the last date.
• Some countries have specific laws to regulate Crypto while some have general set of guidelines.
• Treatment of Crypto by EU, China, France has been discussed.
  Japan specifically regulates exchanges under Payment Services Act.
• Japan implemented KYC and Anti Money laundering laws on exchanges.
• Mexico formulated specific fintech companies in March 2018.
• Laws in all G20 nations are being discussed.Singapore, Saudi Arabia, Australia, Malaysia.
• South Africa, UK.USA,New York law regulating Crypto in being discussed in depth.
• Judge says read the types of Virtual currencies as provided under NY law, as he finds it interesting.
• Counsel submits that he does not deny that Crypto has detrimental effects also as every technology has. but these effects are required to be regulated as other countries are doing.
• Hearing ends here. Arguments to resume on Tuesday 20th August.

August 20

• Matter is listed in Court no. 5 as item 1 today. Court has resumed.
  Crypto case hearing has started.
• Mr. Ashim Sood started his arguments.
• Mr. Sood is arguing that the action of RBI is against the doctrine of proportionality beside being based on no study whatsoever.
• Mr. Sood now explaining the law formulated by Wyoming (USA) to regulate Crypto assets and custodial services (Exchanges).
• Discussing the disclosure policy, anti-money laundering policy and KYC policy which is applicable to the industry in Wyoming.
• Licensing requirement in NY statute is being explained.
• SEC guidelines on Howey’s test is being explained now on what is security token and what not.
• Directive of European parliament is being discussed.
• Favourable regulatory guidelines of G20 countries explained and pointed out that most of the countries in g20 nations are inclined to regulate Crypto and are not treating industry players as bunch of criminals.
• That does not mean that Crypto cannot be used for Criminal activities.
• In fact most of the nations have included the preventive provisions to deal with that.
• FAFT guidelines are being discussed and how it guides to suppress the illicit side of Crypto assets.
• Pursuant to FAFT guidelines, Financial conduct authority has issued a regulation for crypto assets.
• UK is one example which had the same risks as recognized by India.
• Regulators there exercised their powers intelligently and they studied the technology.
• UK realized that you cant prevent anybody to manage their affairs dealing with Crypto.
• Whereas RBI has not applied mind.
• Documents of G20 meeting 2019 is being read.
• Argues that My Lord, on one side we have UK USA etc. and on other we have China Saudi and Indonesia.
• It may not matter which side we fall.
• But there is no sense that something should be banned because it involves risks.
  RBI circular does not reveal any purpose.
• Various docs of RBI shows no study is conducted.
• Various reports of RBI being read which discussed Crypto.
• RBI mentions in one of its doc that effect of the Crypto on economy is negligible.
• RBI showed concern about market integrity in April 5 Circular.
• However which failed to explained which market and how its integrity is at risk.
• Argues that since there has been no application of mind by RBI, the decision fails in the test of proportionality.
• RBI purportedly took action in consumer protection, anti money laundering, terrorists financing etc.
• However in one of its doc (post circular), RBI realized that it pushed the transparent exchanges to dark port, people are resorting to peer to peer using cash.
• It later realized that it has not achieved anything by cutting off banking channel.
• Major concerns of are consumer protection, volatility, exposure of traders to financial and legal risks and usage of bitcoin and Crypto in illicit activities.
• Mr. Sood argues that India has Consumer protection laws in existence which can be specifically made applicable to Crypto and special provisions can be formulated to deal with peculiar situations Anti Money laundering law of India is a comprehensive law which provides for disclosures, maintenance of records etc.
• It can be made applicable on Crypto as well.
• RBI circular is void on the ground of vagueness. It gives no definition of Crypto and seeks to crack down on all indiscriminately.
• A judgement is being read which holds that vagueness of rule is detrimental to its validity.1970 1 SCC 248
• Judgement on Article 19 1g is being read.
• If restriction on business is so stringent that it cannot be carried out then it is an unreasonable restriction.
• Another judgment is being read.
• If restricted is such that it though does not prohibit the business but has the effect of doing so, it is an unreasonable restriction. 1969 1 SCC 853 1950 SCR 759
• When a statute under the guise of protecting public interest, put restrictions on individual business, it is arbitrary and unreasonable.
• Parliamentary debate is being referred to where minister has answered the questions on crypto after banking ban.
• points out that only IMC report is there which has not yet reached the parliament. So getting influence by that it not warranted.
• Judgment – 2004 10 SCC 1Conclusively argues that RBI has acted under 35A and 36 in the manner which was not contemplated under law.
• Mr. Ashim Sood completes his arguments.
• Mr. Nakul Dewan, Ld. Senior Advocate has started his arguments now.
• He is representing the Exchanges’ Petition i.e., Rajdeep Singh & Ors. v. RBI
• Mr. Dewan arguing on interaction between Virtual currencies and Fiat currency. what is legal characteristics of Virtual currencies.
• He is briefing the court on how the use of money evolved in the worlds from barter to gold to fiat.
• The period which gave rise to VC’s is 2008 financial crises.
  When US objected India Iran deal of fuel.
• India had the option to take fuel in exchange of fuel. which is purely a peer to peer transaction.

6 concerns of RBI:

1. No authoriz
ation to Crypto business (No law prescribes authorization),
2. Hacking (So is with the Digital banking)
3. consumer protection issues (Consumer protection laws can deal with it)
4. No inherent value (Even fiat is not backed by anything as a matter of fact)
5. Volatility (Stocks also have that)
6. use in Illicit activities (Laws like KYC AML etc. can be made applicable)

• Different types of Crypto currencies are being explained.
• Utility token (Unidirectional) has been explained with an example of shopping points and Airlines miles.
• Advantages of blockchain technology is being explained in the banking and financial sectors.
• Inter Ministerial Committee’s report is being read out.
• The judge says that this report seems to guide only on the aspect how the technology can be used by Intra/ inter bank transfers. And not Crypto.
• Counsel says not just that My Lords, it also provides for Official digital currency.
• The court will reassemble post lunch.
• Representation was made to RBI by industry players in pursuance of this Hon’ble Court’s order.
• However RBI did not respond to that except saying that we have forwarded the representation to the IMC.
• Counsel apprises the court that exchanges had even offered to provide dash board to all the relevant authorities citing real time data so that they can understand the technology and business.
• Counsel is citing self regulatory measures already implemented by the crypto business in India.
• investors know about the volatility in Crypto prices and they choose to invest in that.
• They must be allowed to do that in their right.
• Judge replies positively that what you are saying is when you can make a regulatory framework to regulate it then why to ban.
• Similar to regulatory framework for stocks which is not banned.
• Counsel refers to Annexure R2 filed by RBI – 2018 annual report.
  RBI recognized that development in crypto industry need to be monitored as after banking ban there is risk of shift to dark web, tax evasion, aml, cft violations.
• So when the RBI has knowledge about its effect then why not to put it under the framework so as to make it compliant.
• Bank is only a custodian of the deposited money and not the owner.
• A bank acc holder cannot be restricted to have access his own money unless the restriction is sanctioned by a legislation.
• Judgment – Bhavesh Parekh read out. RBI has resorted to unreasonable classification when it considered that only bidirectional Crypto (Convertible to fiat in which people trade) crypto have interaction with banking channel and not unidirectional (Non convertible) like frequent flyers points which in fact can be converted into fiat as people can offer to buy that with fiat and avail that from the airlines.
• So it is violative of Right to equality Article 14.
• Discussion of Singapore Parliament is being referred to in which deputy PM of Singapore had responded certain questions.
• Counsel says Mr. Lords Singapore is a developed economy which has taken into consideration all pros and cons and applying measures to regulate it instead of banning.
• Counsel conclusively says that there is no prohibition on Crypto except RBI banking ban and the same must be struck down.
• Counsel closes his argument by arguing one application for release of money of exchanges lying in bank and banks frozen that even within the 3 months exit period.
• Mr. Shyam Diwan, Ld. Sr. Advocate started his arguments in favour of RBI.
  Crypto is a privately issued digital means of payments.
• It has direct impact on monetary and payment system. And RBI has issued notifications to discourage this but when it did not work, RBI took this action.
• Crypto has some monetary characteristics and its value is driven by people’s consensus.
• If more and more people continue to adopt them as means of payment then it might compromise our monetary system badly. It also has an ability of cross border transactions. That is where the problem lies.
• Counsel is reading out a list of events which transpired over a period of time including actions taken by RBI and policy evolvement by Ministry of Finance.
• The biggest concern for RBI has been using Crypto as means of payment besides its use in illicit activities.
• Counsel says that the first committee appointed by the Govt i.e., Inter disciplinary Committee has studied the subject and applied its mind.
• Budget speech of Mr. Jaitley is being read.
• Yes for Blockchain but Cryptos must not be a part of the payment system. – Mr. Jaitley
• It is evident from the language of the RBI circular 6 April, which seeks to address associated risks of Crypto currencies, so by that time the evaluation and assessment of pros and cons were done by the Govt.
• various incidents of hacking of exchanges worldwide are being cited to the Court including the infamous hack of @Coinsecure exchange.
• Bitcoin and Crypto is a ponzi schemes, price bubble and huge environmental disaster – for example consumption of electricity in mining is even more than the total electricity consumed in Switzerland per year.

Hearing ends here.

Arguments will resume tomorrow by RBI and the same will be followed by Rejoinder by the Petitioners.

AUGUST 21

Hearing of Crypto case has resumed.  Mr. Shyam Divan, Ld. Sr. Advocate started his arguments for RBI.  Most likely the arguments will conclude today.  This coverage is #powered by @coindcx

• European Union directive of May 2018 is being referred to which also discussed the concerns involved with Crypto and biggest being the problem of  anonymity.
• Counsel now requests that court to come to RBI counter affidavit filed in reply to IAMAI petition.
• At page 59 and 60 of the counter affidavit the counsel starts reading the incidents of hacking happened with various exchanges worldwide and publications regarding these incidents.
• Also reads page 108 for various comments by world famous personalities against bitcoin and Crypto.
• Now moves to Ministry of Finance reply to the Petition.
• Now the Counsel moves to the Petition of IAMAI.
• Counsel says that the figures (number of users, revenue etc.) mentioned on page 7 of IAMAI petition is sizable enough to alarm the regulator to take action although its overall size is negligible.
• After referring to certain paragraphs in Rajdeep singh’s petition, now the counsel moves to relevant statues/ legislations.
• A document containing discussion before the enactment of Payment and Settlement Systems Act, is being read.
• This document mentions the necessity and concerns of enacting payment and settlement systems Act 2007.
• Unauthorized alternate of payments were one of the concerns.
• Now reading statement of objects and reasons of Payment and settlement Systems Act
• Courts attention is drawn to various definitions in PSS Act, 2007 including payment system.  Justice Nariman points out that payment means that it has to be through legal tender always.  Counsel nods and says and Crypto is an alternative to that.
• Justice Nariman interrupts and says that it is not RBIs case that exchanges are covered by PSS Act so this is immaterial.  Counsel answers that prima facie they are not, but there is potential threat to undermine monetary policy.
• Counsel refers to Section 10 (2) of PSS Act which provides power to RBI to issue guidelines in reference of any payment system.

• Also refers to Section 18 of the PSS Act emphasizing that RBI has power to issue policy in order to manage or operate its payment system and in public interest etc. Points out that RBI has wide powers to regulate its entities is there is a threat to the payment system.  

• Counsel now refers to RBI Act provisions in Section 45J and 45L and points out that RBI has wide powers with regard to the action its has taken in the form of banking ban.
• Now the counsel moves to Banking regulation Act and reads out Section 36 1 a to points out that it covers the scope of banking ban circular and RBI is well empowered to do it.
• Now the Counsel turns to Foreign Exchange Management Act and reading out various provisions of the same including Section 4 and Section 3b. Definition of currency, foreign currency etc.

Court rose up for the lunch. Matter will continue post lunch  Thank you.  This coverage is powered by @coindcx

Stay Tuned.

• The court has resumed.  RBI counsel is referring to a judgment. Citation of the judgment is:  1992 2 SCC 3434
• 2010 (10) SCC 1 – ICICI Bank v. Official Liquidator  The above judgment is being read by the counsel now in RBIs favour.
• The above judgment explains the provisions of Banking Regulation Act.
• Reads that action under 35A of Banking regulation Act has ‘Statutory Force of Law’.
• Keshav Lal Khemchand v. Union of India i.e., 2015 (4) SCC 770  Another judgment is being read by the counsel.
• Argues that RBI circular is in supplement to the statutory provisions enunciated by Banking Regulation Act which has to be considered to be having statutory force.
• Argues that RBI was fully aware about the risks etc. with Crypto, the it was incumbent on it to take action under the delegated legislative power it has been conferred with.  Star India Judgment is being referred to i.e., 20__ 2 SCC 104
• Justice Nariman asks which provision says that you have to be ‘satisfied’?  Counsel answers Section 35 A of Banking regulation Act and Section 18 of PSS Act, 2007.
• Judge asks so this satisfaction is not in connection of you being an administrative authority but in the shoes of a legislature’s delegatee?  Counsel says yes since RBI has to deal with the challenges posing threat to the established system.
• More judgements are being read by RBI Counsel in their favor.
• RBI counsel answers the following arguments:  Vagueness of Circular – RBI has sufficiently described crypto in various docs.
• Cheeze Burger Argument: RBI powers is well defined and can be exercised when there threat to monetary, fiscal and financial policy.
• Regulation by other countries: India will make laws as per its needs.  Mr. Divan concludes his arguments.
• judge has asked the Petitioners that RBI is an expert body which has taken decision on the basis of a study, who are we to interfere in their policy? The question is not whether it is arbitrary or not, bit whether they can legislate or not when they are ‘satisfied’ under 35A!
• Counsel of Petitioner Rajdeep singh & Ors. started arguing.  arguing how RBI changed its stance from caution to prohibition.
• What happened is when the Crypto was discussed for the first time in budget speech by Mr. Jaitley, it is when they changed their stance.
• RBI is bereft of any empirical data which supports their stance that they are ‘Satisfied’. There is no data at all which they rely upon to say that it is threat to our monetary stability. The argument of satisfaction is baseless.
• Mr. Ashim Sood has started now. Hit likes and retweets for him guys!!!
• Mr. Sood started with that RBI circular is irrational and a result of no application of mind. there is manifest arbitrariness.
• Justice Nariman questions they are the expert body, they monitored the position, in the realm of economic policy and financial policy they have taken action, so what do you have say on the point of satisfaction?  Mr. Sood answers My Lord yes it is a question but
• the point of satisfaction can be considered when there is a data to substantiate that.  Secondly, satisfaction of one authority cannot be allowed to be taken effect from the satisfaction of other authority.  Meaning thereby, RBI cannot take action based on the study held by others.
• Argument of Ponzi scheme and consumer are in trouble, are merely statements which cannot be substantiated with data.
• Reading out Ministry of Finances advisory. Which says that two things raise concern.  1. its use as payment system  2. its use in illicit activities.  So the Govt. has also not advocated about complete ban. it only said that vices should be eradicated/ regulated.
• Justice Nariman directs the counsel to turn to the representation filed by the exchanges with RBI.  Where they have said that there is no need to ban.  And also read the reply given by RBI to it.
• Mr. Sood reads out the suggestions given to RBI by exchanges. That Money laundering Act can be made applicable to exchanges as intermediaries making them responsible for reporting directly. or enjoining on banks to make additional requirements for exchanges.
• Mr. Sood refers to table which enumerated rbi concerns about crypto. In this table exchanges had addressed each of the concern and suggested ways for that.
• Judges are discussing among themselves and court room silent.
• Now justice Nariman questions RBI why you have not properly responded to the representation. You just said that we are forwarding to Govt. Angrily says this is not an answer.121592
• Justice Nariman reiterates further that this is not an answer Mr. Counsel. Do you still want to give an answer?
• Exchanges are not asking to uplift the ban but they are only asking you to reconsider. If you dont give answer to it, I will pass the judgment.
• Case takes the most unlredictable turn. Justice Nariman directs that RBI must respond to the representation in the manner appropriate.  Offers to defer the case for 2 weeks as part heard, let the answer come on reconsideration of banking ban by RBI.  RBI has agreed.
• Court orders:  After hearing arguments we are of the view that detailed representations by exchanges purusant to this court’s order 17.05.2018, have not been answered point by point, therefore RBI to reply them with in 2 weeks. SG to furnish various docs within 1 week.
• Hearing ends here. Court to rehear the arguments on 25th September, on the reply/ reconsideration to be given by RBI to the exchanges’ representations.

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