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Supreme Court Strikes Down RBI Ban on Crypto, Citing and No Damage to Banks
The delivered a landmark ruling on , setting aside the 's circular that effectively severed the banking lifeline of cryptocurrency exchanges. A three-judge bench comprising Justice Rohinton Fali Nariman, Justice Aniruddha Bose, and Justice V. Ramasubramanian held the RBI's directive disproportionate, as the central bank failed to demonstrate any actual harm to regulated entities from their association with virtual currency traders.
The Genesis of the Dispute
The controversy began on , when the RBI issued a circular under the , and the Act, 1934, directing all banks and financial institutions it regulates to stop providing services to any individual or business dealing in virtual currencies (VCs), including Bitcoin. The RBI had, since 2013, repeatedly cautioned the public about the risks of VCs—volatility, anonymity, and potential for money laundering—but the April 2018 circular took the drastic step of cutting off banking access to crypto exchanges and traders.
Petitioners, including the (IAMAI) and several crypto exchanges like Discidium Internet Labs, challenged the circular as and violative of , which guarantees the freedom to practice any profession, occupation, trade, or business.
The Challenge: Power and
The petitioners argued that the RBI lacked the statutory authority to regulate virtual currencies, which they contended were mere commodities or digital goods, not money or legal tender. They further contended that even if the RBI had power, the circular was a disproportionate measure—a complete prohibition in effect, without considering less intrusive alternatives like KYC norms or regulating only anonymous cryptocurrencies.
The RBI defended its action as a legitimate to protect the financial system, relying on its wide powers as the central bank to regulate currency, credit, and payment systems. It pointed to global concerns over VCs being used for illicit activities and cited its own repeated warnings over five years as evidence of due deliberation.
The Test Applied
The Supreme Court first rejected the challenge, holding that the RBI indeed possesses the power to regulate—and even prohibit—transactions that could threaten the monetary and credit system. The court observed that virtual currencies, by their very design, function as a medium of exchange and store of value, bringing them within the RBI's regulatory ambit.
However, on the question of , the court drew a sharp distinction between the availability of power and its exercise. Applying the from —, , , and —the court found the RBI's measure wanting.
Critically, the court noted that the RBI had not presented any empirical evidence that its regulated entities had suffered any loss or adverse effect from providing banking services to crypto exchanges. As the court observed:
“When the consistent stand of RBI is that they have not banned VCs and when the 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 further highlighted that the RBI itself, in its subsequent replies, suggested alternative regulatory approaches like banning initial coin offerings or enhancing provisions—undermining its claim that the banking ban was the only viable option.
The Verdict and Its Implications
The Supreme Court allowed both , setting aside the circular. The court also directed the RBI to instruct the to defreeze the account of , which had been frozen following the circular, and release the funds with interest.
The judgment is a significant reaffirmation that even expert regulatory bodies must calibrate their actions proportionately. As the court noted, while the RBI has wide powers, the exercise of those powers must be supported by —not mere . The ruling opens the door for crypto exchanges to resume banking operations, pending any specific legislation from Parliament. It also aligns with the principle later articulated in the Demat 2.0 framework—that regulatory measures addressing digital asset interfaces must be “proportionate and calibrated,” as the same Supreme Court emphasized in this very case.
The decision does not legalize cryptocurrencies nor prevent future regulation, but it ensures that any ban must come through a proper legislative process, not through an executive circular that indirectly chokes an otherwise lawful activity.
