The Supreme Court has struck down a ban on the trading of virtual currencies (VC) in India, which was in place after the Reserve Bank of India’s order from April 2018. The court in its 180-page judgment said that the ban was not proportionate. The top court allowed a batch of plea challenging the 2018 circular of the Reserve Bank of India, which had prohibited banks and financial institutions from providing trading services with relation to virtual currencies, which includes cryptocurrencies.  Popular forms of cryptocurrencies such as Bitcoin, Ethereum use blockchain technology and operate independent of a central bank. The Internet and Mobile Association of India (IAMAI) was the petitioner in this case on behalf of all the virtual currency trading companies. 
 
What does Supreme Court judgment on virtual currencies say
  1. We have allowed the writ petitions, a bench headed by Justice R F Nariman said while pronouncing the verdict.
  2. In the judgment, the bench noted, “While we have recognised 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 a measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities.
  3. According to the judgment, RBI’s circular was not proportionate. It also pointed out the contradiction in the RBI stand where it insisted that virtual currencies are not banned in India, but the circular had then gone on to ban all trading around them.
  4. The judgment also refers to the differing position from the government of India, and notes how the same inter-ministerial committee has come to two completely different conclusions in 2018 and 2019.
  5. In the 2018 version of the Crypto-token Regulation Bill, the Inter-Ministerial Committee approved the sale and purchase of digital crypto asset at recognised exchanges.
  6. But this position completely changed in 2019. The same committee called for a complete ban on “private cryptocurrencies,” while also calling for the creation of a digital rupee as a legal tender. This inherent confusion in the stance of the government is noted in the judgment.
  7. The bench said that by banning trading and the VC exchanges, the virtual currencies have been disconnected from their lifeline.
What the did RBI order of April 2018 say
  1. In its 2018 order, the RBI said, “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. 
  2. 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. All regulated entities involved in trading of virtual currencies had to exit the relationship within three months from the date of the circular.
What are virtual currencies and blockchain?
  1. A virtual currency in simple terms is a digital currency, which is not a legal tender, meaning it does not have the backing of a central bank like say the Reserve Bank of India. 
  2. A virtual currency is used by the community of developers who create it. Cryptocurrency is a form of virtual currency is one which is protected by cryptography.
  3. Bitcoin, Ethereum, etc rely on the blockchain ledger technology to protect the currency
  4. A Blockchain is best defined as an open ledger, updated in real-time and the records are permanent, meaning they cannot be changed. 
  5. Every time a transaction is done, a new block is added and each node or computer part of the network helps to maintain this blockchain. 
  6. There is no central network or computer, which is keeping the records in one place.
  7. For example, all Bitcoin transactions which have taken place since 2009 are part of the blockchain. 
  8. One cannot go and change them or modify these records, because they are protected by complex cryptography. 
  9. One would technically have to control a majority of the blockchain or 51 per cent in order to tweak these records.