THE CRYPTO - CONUNDRUM - RBI's LATEST CIRCULAR

The RBI in its latest circular dated 31.05.2021 has stated that the reference to an earlier circular whereby it had intimated banks/financial institutions to caution their respective customers from dealing in virtual currencies is not valid in the light of the Order of the Supreme Court in Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India dated 04.03.2020. 

I. The earlier Circular of RBI - 6th April 2018

II. Supreme Court's Order - 4th March 2020

III. Latest circular of RBI - 31st May 2021

So what did the earlier circular of RBI state :-

I. Earlier Circular - 6th April 2018

RBI/2017-18/154
DBR.No.BP.BC.104 /08.13.102/2017-18

April 6, 2018

All Commercial and Co-operative Banks /Payments Banks/Small Finance Banks /
NBFCs / Payment System Providers

Madam / Dear Sir,

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.

Yours faithfully,

(Saurav Sinha)
Chief General Manager-In-Charge

Link: https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11243&fn=2&Mode=0

 II. Supreme Court Order - dated 04.03.2020 

The Supreme Court in the matter of Writ Petition (Civil) No.528 of 2018 Internet and Mobile Association of India v. Reserve Bank of India held as follows:

 At para 6.173 - 

 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.

 At para 7.1- 

Therefore, in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality. Accordingly, the writ petitions are allowed and the Circular dated 06-04-2018 is set aside. The Statement dated 05-04-2018, though challenged in one writ petition, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise.

Full text:  https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf

III. Latest circular of RBI - 31st May 2021

RBI/2021-22/45
DOR. AML.REC 18 /14.01.001/2021-22

May 31, 2021

All Commercial and Co-operative Banks / Payments Banks/ Small Finance Banks /
NBFCs / Payment System Providers

Madam / Dear Sir,

Customer Due Diligence for transactions in Virtual Currencies (VC)

It has come to our attention through media reports that certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular DBR.No.BP.BC.104/08.13.102/2017-18 dated April 06, 2018. Such references to the above circular by banks/ regulated entities are not in order as this  circular was set aside by the Hon’ble Supreme Court on March 04, 2020 in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India). As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgment, and therefore cannot be cited or quoted from.

2. Banks, as well as other entities addressed above, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.

Yours faithfully,

(Shrimohan Yadav)
Chief General Manager

 Link: https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12103&Mode=0

The RBI has thus without in specific terms have so far refrained from passing any judgment regarding the validity of crypto-currencies and at the same time has not provided in clear specific terms its approval and blessings. Only asked to tread with caution. Till the time there is an express bar under the law and/or from RBI, trading, and investment in virtual currencies and similar instruments are valid under Indian laws as on date hereof.

 

 


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