Virtual currency banking restrictions failed proportionality review, though the central bank had statutory power to regulate them.

The SC held that the Reserve Bank of India's statutory powers under the Banking Regulation Act, the RBI Act and the Payment and Settlement Systems Act were wide enough to issue directions affecting regulated entities dealing with virtual currencies, because such activity could impact the financial system, banking policy, currency management and payment systems. However, the impugned circular was struck down as a disproportionate restriction under Article 19(1)(g) because it effectively cut off banking access for virtual currency businesses without material showing actual harm to the regulated system. The circular was therefore invalid and consequential relief followed.

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Issues: (i) Whether the Reserve Bank of India had statutory power to direct regulated entities not to deal with or provide services to persons dealing in virtual currencies. (ii) Whether the impugned circular was a proportionate restriction and hence valid under Article 19(1)(g) of the Constitution of India.

Issue (i): Whether the Reserve Bank of India had statutory power to direct regulated entities not to deal with or provide services to persons dealing in virtual currencies.

Analysis: The regulatory powers under the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and the Payment and Settlement Systems Act, 2007 were held to be wide enough to enable the Reserve Bank of India to issue directions to regulated entities in respect of transactions that could affect the financial system, banking policy, currency management and payment systems. Virtual currencies were found to be capable of functioning as a medium of exchange and of impacting the regulated financial ecosystem, even if they did not have legal tender status. The challenge based on lack of power was therefore rejected.

Conclusion: The Reserve Bank of India had the requisite statutory authority to issue directions of the kind in question.

Issue (ii): Whether the impugned circular was a proportionate restriction and hence valid under Article 19(1)(g) of the Constitution of India.

Analysis: Although the Reserve Bank of India had broad preventive powers, the measure had to satisfy proportionality because it effectively severed the banking channel for virtual currency exchanges and crippled their business. The Court found that the Reserve Bank of India had not shown any actual damage suffered by the entities regulated by it from the operations of virtual currency exchanges, and that the measure was not shown to be proportionate to the stated objectives. The impugned circular was therefore struck down on proportionality grounds.

Conclusion: The impugned circular failed the test of proportionality and was invalid as against the petitioners.

Final Conclusion: The petitions succeeded, the circular restricting banking access to virtual currency related entities was set aside, and consequential relief was granted in relation to the frozen account.

Ratio Decidendi: A central bank may regulate or prohibit access to regulated banking channels where virtual currency activity threatens the financial system, but such a measure must still satisfy proportionality and be supported by material showing a real nexus between the restriction and harm to the regulated system.

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