Supreme Court Overturns RBI Ban on Banks Providing Services to Crypto Firms

In a landmark ruling, the Supreme Court of India set aside the Reserve Bank of India's (RBI) circular that effectively crippled the cryptocurrency industry by barring banks from serving businesses dealing in virtual currencies. A three-judge bench comprising Justices Rohinton Fali Nariman, Aniruddha Bose, and V. Ramasubramanian held that the circular was disproportionate and violated the fundamental right to trade under Article 19(1)(g) of the Constitution.

The Genesis of the Dispute

The saga began on April 6, 2018, when the RBI issued a circular directing all entities regulated by it—including banks—to refrain from dealing with individuals or businesses involved in virtual currencies (VCs). RBI mandated that regulated entities "exit the relationship" with such customers within three months. The circular was preceded by years of cautionary press releases from RBI warning of risks like money laundering, consumer protection concerns, and potential threats to financial stability.

The circular was challenged by the Internet and Mobile Association of India (IAMAI), which represents online and digital services companies, and by several crypto exchange platforms—including Discidium Internet Labs—along with individual traders. They argued that the RBI lacked the legal authority to regulate virtual currencies, which they claimed were merely commodities, and that even if RBI had such power, the ban was disproportionate.

Arguments from Both Sides

The petitioners, led by counsels Ashim Sood and Nakul Dewan, contended that since virtual currencies are not legal tender but tradable digital goods, they fall outside the regulatory framework of the RBI Act, the Banking Regulation Act, and the Payment and Settlement Systems Act. They argued that the circular created a de facto ban on a legitimate trade, violating their right to carry on business. They further pointed out that other regulators, including SEBI and CBDT, had advocated for a regulatory framework rather than a ban, and that countries like the US and UK had adopted lighter approaches.

The RBI defended its circular as a necessary preventive measure. Senior counsel Shyam Divan argued that VCs pose serious risks to consumer protection, money laundering, terrorist financing, and the stability of the payment and credit system. RBI contended that the power to regulate includes the power to prohibit, and that the circular was a pre-emptive step taken in public interest after five years of study and repeated warnings.

The Court's Analytical Framework

The Supreme Court first examined RBI's powers under the three enactments. It rejected the ultra vires argument, holding that while VCs are not legal tender, they function as a medium of exchange and store of value, and therefore fall within the central bank's regulatory ambit. The Court noted that virtual currencies "have the potential to interfere with the matters that RBI has the power to restrict or regulate."

However, the decisive question was whether the circular satisfied the test of proportionality. The Court applied a four-pronged test: (1) whether the measure is for a proper purpose, (2) rationally connected to that purpose, (3) there are no less intrusive alternatives, and (4) the balance between the aim and the limitation on rights.

A Heavy Burden Unmet

The Court found that while RBI's objective—safeguarding the financial system—was legitimate, the measure failed at the fourth stage. Crucially, RBI had not produced any evidence that its regulated entities had actually suffered harm from providing banking services to crypto exchanges. The judgment observed:

"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."

The Court also noted that the Inter-Ministerial Committee, which initially explored a regulatory approach, later recommended a complete ban, but that legislation never materialized. Meanwhile, the circular had the effect of strangling the crypto industry without formally declaring its activities illegal.

Final Decision and Relief

The Supreme Court allowed the petitions and set aside the circular dated April 6, 2018. The accompanying Statement on Developmental and Regulatory Policies was not a statutory direction and was not invalidated. The Court also directed RBI to instruct the Central Bank of India to defreeze the account of Discidium Internet Labs and release its funds with interest, noting that the RBI had not itself ordered the freeze.

Impact and Legal Recognition

This judgment was a watershed moment for the Indian crypto industry, breathing life back into exchanges that had shut down or moved operations abroad. It affirmed that the government cannot indirectly ban a legal trade through regulatory pressure. In subsequent years, courts have built on this recognition. The Income Tax Act of 2021 now explicitly taxes virtual digital assets, and in the WazirX insolvency case in 2024, the Madras High Court held that crypto assets are " property capable of being held in trust " under Indian law.

However, the underlying legal gap persists. As commentators have noted, in insolvency proceedings, crypto asset holders are still treated as unsecured creditors with limited recovery rights. The Supreme Court’s 2020 ruling did not decide the nature of virtual currencies as property—it only affirmed that the RBI’s circular was disproportionate. That constitutional benchmark remains crucial: any future regulatory or legislative ban must satisfy the strict proportionality test, including demonstrating that less restrictive measures would be ineffective. For now, the judgment stands as a powerful check on executive overreach in India’s evolving digital economy.