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A sale within the meaning of the U.P. Trade Tax Act, 1948. The argument advanced was that an exchange or barter cannot be said to be a sale. After referring to the phrase “cash, deferred payment or other valuable consideration”, this court pointed out that “money is a legal tender, but cash is narrower than money.” This is for the reason that in contradistinction to cash, deferred payment or other valuable consideration would also come within the meaning of money, for the purpose of the Act. 6.71. Just as the very concept of ‘money’ or ‘currency’ has changed over the years, and different jurisdictions and different statutes have adopted different definitions of ‘money’ and ‘currency’, depending upon the issue sought to be addressed, the concept of VCs have also undergone a sea of change, with different regulators and statutory authorities adopting different definitions, leading to diametrically opposite views emerging from courts across the spectrum. Let us now see how courts in other jurisdictions have grappled with the definition of the word D ‘virtual currency’. 6.72. The Securities and Exchange Commission (SEC) of the United States of America prosecuted a person by name Trendon Shavers, who was the founder and operator of Bitcoin Savings and Trust (BTCST), for soliciting illicit investments in Bitcoin related opportunities from a E number of lenders, defrauding them to the tune of 700,000 BTC in funds. While SEC contended that Bitcoin investments were securities, Shavers contended that Bitcoin is not money and hence, not ‘securities’. But the Sherman Division Eastern District Court of Texas opined in SEC v. Trendon Shavers,44 that: “It is clear that bitcoin can be used as money. It can be used to purchase goods or services and as Shavers F stated, used to pay for individual living expenses. The only limitation of bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies such as the US dollar, euro, yen and Yuan. Therefore, bitcoin is a currency or form of money…” G 6.73. In United States v. Ulbricht,45 the United States District Court, Southern District, New York was concerned with the defendant’s motion to dismiss four counts namely (i) participation in a narcotics trafficking conspiracy (ii) a continuing criminal enterprise (iii) computer 44 Case No. 4: 13-Cv-416 (August 6, 2013) H 45 31F. Supp. 3d 540 (2014)

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hacking conspiracy and (iv) money laundering conspiracy, for which the A Grand jury returned indictment. The allegation against the defendant was that Ulbricht engaged in these offences by designing, launching and administering a website called Silk Road, as an online marketplace for illicit goods and services. According to the prosecution, Bitcoin was used to launder the proceeds. The website was available only to those using B Tor (abbreviation for ‘The Onion Router’), a free and open source software and a network that allows anonymous, untraceable internet browsing. Payments were allowed only through Bitcoin. Opposing the money laundering charge, Ulbricht contended that the use of Bitcoin did not involve a legally cognizable financial transaction. But the court held “Bitcoins carry value-that is their purpose and function-and act as C a medium of exchange. Bitcoins may be exchanged for legal tender, be it US dollars, euros or some other currency”. 6.74. The decision in Ulbricht (supra) was closely followed by another decision of the same court in United States v. Faiella.46 This was also a case where the defendants were charged with the operation of an underground market in the virtual currency bitcoin via the website Silk Road. Faiella moved the District court to dismiss count one of the indictments namely that of operating an unlicensed money transmitting business in violation of a particular statute. The contention of the defendant was (i) that Bitcoin does not qualify as money (ii) that operating a Bitcoin exchange does not constitute “transmitting” of money and (iii) that he is not a money transmitter. While rejecting the motion, the court held “bitcoin clearly qualifies as money or funds under the plain meaning definitions. Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value and is used to conduct financial transactions.” The decision in Trendon Shavers F (supra) was relied upon. 6.75. While the district courts of USA took the view that virtual currency can be used as money, the Commodity Futures Trading Commission (CFTC) took a view in In re Coinflip, Inc,47 that virtual currencies are “commodities”. This was in relation to the initiation of G public administrative proceedings to determine whether the defendant was engaged in violation of the provisions of Commodity Exchange Act and the Commission’s Regulations by operating an online facility named 46 39F. Supp. 3d 544 (2014) 47 CFTC Docket No. 15-29 dated 17-09-2015 H

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A Derivabit offering to connect buyers and sellers of Bitcoin option contracts. Interestingly, the defendant admitted an offer of settlement in anticipation of administrative proceedings. 6.76. Within a week, another entity, by name, TeraExchange LLC also submitted an offer of settlement before CFTC In the matter of B TeraExchange LLC.48 CFTC reiterated even in that case that Bitcoin is a commodity under the relevant statute. Another Bitcoin exchange, by name Bitfinex, also conceded the position, before the CFTC when public administrative proceedings were sought to be initiated against them. In the order accepting the offer of settlement, delivered on 02-06-2016 In the matter of BFXNA Inc, d/b/a BITFINEX,49 CFTC recorded that C Bitcoin and other virtual currencies are commodities under the relevant provisions of the statute. 6.77. In United States v. Murgio,50 which was also before the US District Court, S.D. New York, the defendant was charged with operating Coin.mx, as an unlicensed money transmitting business. The D government alleged that Murgio and his co-conspirators attempted to shield the true nature of his Bitcoin exchange business by operating through several front companies, to convince financial institutions that Coin.mx was just a members-only association of individuals interested in collectable items. Count one of the indictments was the alleged conspiracy in the operation of an unlicensed money transmitting business, punishable under 18 U. S. C. § 1960. Under Section 1960, a business must (i) transfer on behalf of public, (ii) funds and (iii) in violation of licensing and registration requirements, to qualify as an unlicensed money transmitting business. The court concluded that Bitcoins are funds within the plain meaning of the term, as the word “funds” would mean pecuniary resources, generally accepted as a medium of exchange or means of payment. Interestingly, the defendant’s contention that Bitcoin is a commodity as held by CFTC was rejected by the court. 6.78. However, despite the opinion of other District courts in four previous cases, the United States District Court, Eastern district of New G York held in a preliminary hearing for injunctive relief, in Commodity Futures Trading Commission v. Patrick McDonnell 51 (Memorandum 48 CFTC Docket No. 15-33 dated 24-09-2015 49 CFTC Docket No. 16-19 dated 02-06-2016 50 209 F. Supp. 3d 698 (2016) 51 H 18-Cv-361 dated 03-06-2018

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and order), that virtual currencies are commodities within the meaning of the Commodity Exchange Act. But it is seen from the order that there was no ‘currency versus commodity’ debate in the entire order. 6.79. A similar view was taken by United States District Court, District of Massachusetts in Commodity Futures Trading Commission v. My Big Coin Pay, Inc. et al.,52 holding that since there is futures trading in virtual currencies, they constitute ‘commodity’ within the meaning of the Statute. 6.80. State of Florida v. Michell Abner Espinoza, 53 is an interesting case which came up before the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. In that case, a Detective of the C Miami Police department teamed up with a Special Agent of the Miami Electronic Crimes Task Force of the United States Secret Service to initiate an investigation into virtual currencies. After getting in touch with a person who advertised the sale of Bitcoins in an online platform run by a peer-to-peer Bitcoin exchange by name Localbitcoins.com, the team organized an undercover operation in December 2013/January 2014. D The Detective offered to pay for the Bitcoins through stolen credit cards and when the transaction was about to take place, the offeror was arrested. He was charged with one count of unlawfully engaging in money services business and 2 counts of money laundering. The defendant filed motions for dismissal and the State filed motions for E striking out those motions. While allowing the defendant’s motion to dismiss all the 3 counts on the ground that the court will be unwilling to punish a man for selling his property to another, when his action falls under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning, the court ruled as follows: F “Nothing in our frame of references allows us to accurately define or describe Bitcoin……. Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects. While Bitcoins can be exchanged for items of value, they are not a commonly used means of exchange. They are accepted by some but not by all G merchants or service providers. …. With such volatility they have a limited ability to act as a store of value, another important attribute of money. This court is not an expert in 52 18-Cv-10077-RWZ dated 26-09-2018 53 F 14-2923 decided on 22-07-2016 H

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A economics, however it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is equivalent of money. The Florida Legislature may choose to adopt statutes regulating virtual currency in future. At this time, however, attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole” 6.81. But the decision of the Circuit Court was appealed to the Third District Court of Appeal, State of Florida. By an opinion rendered on 30-01-2019, reported as State of Florida v. Michell Abner Espinoza54 the Court of Appeal reversed the decision of the Circuit Court and held, after referring to the June 2014 Report of FATF titled “Virtual currencies: key definitions and potential AML/CFT risks” that given the plain language of the Florida statutes governing money service businesses and the nature of bitcoin and how it functions, Espinoza was acting both as a payment instrument seller and engaging in the business of a money transmitter. The Court of Appeal pointed out that the definition of a “payment instrument” included “a cheque, draft, warrant, money order, travelers’ cheque, electronic instrument or other instrument, payment of money or monetary value, whether or not negotiable”. The phrase “money services business” was defined in the statute to include any person who acts as a payment instrument seller. E Since the expression monetary value means a medium of exchange, whether or not redeemable in currency, the court concluded that VCs are payment instruments and hence a person dealing with the same is in money services business. Though Bitcoin does not expressly fall within the definition of “currency” found in the statute, the court concluded that Bitcoin would certainly fall under the definition of a payment instrument. The Court of Appeal took note of the fact that several restaurants in the Miami area accepted Bitcoins as a form of payment and hence Bitcoin functions as a medium of exchange. (What is important to note about this decision is that it dealt with a penal statute. This is why the Circuit court followed the cautionary approach, not to allow a citizen to be prosecuted on the basis of conjectures about what is a money services business. But the Court of Appeal found on fundamentals that the business concerned a payment instrument and that therefore, there was no ambiguity.) 54 H 264 So. 3d 1055 (2019)

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6.82. In a completely different context, the Singapore International A Commercial Court ruled in B2C2 Ltd. v. Quoine Pte Ltd.,55 that virtual currency can be considered as property which is capable of being held on trust. The case arose out of a dispute between a person who traded in virtual currencies and the VC Exchange platform on which he traded. The dispute revolved more around the breach of contract and breach of trust than around the identity of virtual currencies. It was in that context that the court opined that crypto currencies satisfied the definition of ‘property’ as provided by the House of Lords in National Provincial Bank v. Ainsworth56 to the effect that it must be “definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”. The court further noted that “crypto currencies are not legal tender in the sense of being a regulated currency issued by a government but do have the fundamental characteristic of intangible property as being an identifiable thing of value”. The decision of the Commercial Court was appealed to the Court of Appeal. While dismissing Quoine’s appeal on breach of contract claim, but allowing it on breach of trust claim, the Court of Appeal held in Quoine Pte Ltd v. B2C2 Ltd57 that though crypto currencies are capable of assimilation into the general concepts of property, there are difficult questions as to the type of property that is involved. Therefore, the Court of Appeal did not take a final position on the question, since it felt that the precise nature of the property right involved, was not clear. 6.83. In a very recent decision, in AA v. Persons Unknown & others Re Bitcoin,58 the English High Court ruled that Bitcoin is property. But this decision was on the basis of the definition adopted by UK Jurisdictional Taskforce of the Law Tech Delivery Panel, in its “Legal F Statement on the Status of Cryptoassets and Smart Contracts”, that crypto assets constitute property under English law. The facts out of which this decision arose, were peculiar. The IT system of a Canadian insurance company was hacked through a malware called Bitpaymer, which encrypted all the data of the company. A ransom equivalent of G US $ 950,000 in Bitcoin was demanded by the hackers for decryption.

55 [2019] SGHC (I) 3 56 [1965] 1 AC 1175 at 1248 57 [2020] SGCA (I) 02 58 [2019] EWHC 3556 (Comm) H

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A After negotiations through a specialist intermediary by name Incident Response Company, the insurance company paid the ransom into a wallet and retrieved the data with the decryption tools provided by the hackers. Thereafter the insurance company engaged the services of a blockchain investigation outfit known as Chainalysis Inc., which found that of the total of 109.25 Bitcoins transferred as ransom, 13.25 Bitcoins (worth approximately US $ 120,000 at the time) had been converted into an untraceable fiat currency. The remaining 96 Bitcoins had been transferred to a “wallet” linked to a Virtual Currency exchange known as Bitfinex (registered in the British Virgin Islands). The insurance company then sued the VC Exchange before the High Court and sought ancillary disclosure orders to know the identity of persons who held the Bitcoins in the wallet of the exchange. The company also sought a proprietary injunction. Interestingly, the Court agreed to hear the application in private and protect the identity of the insurer which got hacked, for they feared retaliatory copycat attacks. The core issue before the court was whether crypto currencies constituted a form of property capable of being the subject matter of a proprietary injunction. After referring to Fry L.J’s statement in Colonial Bank v. Whinney,59 that all things personal are either in possession or in action and that the law knows no third category between the two and also after referring to the four classic criteria for property, [namely they are (i) definable; (ii) identifiable by third parties; E (iii) capable in their nature of assumption by third parties; and (iv) capable of some degree of permanence] set out by Lord Wilberforce in National Provincial Bank v. Ainsworth (supra), Bryan, J held in AA v. Persons Unknown that virtual currencies are neither choses in action (not embodying a right capable of being enforced in action) nor choses in possession (being virtual and incapable of being possessed). However, the court ruled that VCs can still be treated as property, by applying the 4 criteria laid down in National Provincial Bank and Law Tech Delivery Panel’s Legal Statement, though it did not constitute a statement of the law. Bryan J. was convinced that the statement’s detailed legal analysis of the proprietary status of cryptocurrencies was “compelling” and should be adopted by the court. Thus, what prevailed with the court was the definition provided by Law Tech Delivery Panel’s UK Jurisdiction Task Force, which, unlike RBI, did not enjoy a statutory status, but was only an industry-led government backed initiative. 59 H [1885] 30 ChD

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6.84. The ruling of the European Court of Justice in Skatteverket A v. David Hedqvist,60 was with particular reference to the identity of virtual currencies. ECJ was in this case asked to decide a reference from Supreme Administrative Court, Sweden on whether transactions to exchange a traditional currency for the ‘Bitcoin’ virtual currency or vice versa, which Mr. Hedqvist wished to perform through a company, B were subject to value added tax. The opinion of the court was to the effect that: (i) Bitcoin with bidirectional flow which will be exchanged for traditional currencies in the context of exchange transactions cannot be categorized as tangible property since virtual currency has no purpose other than to be a means of payment. C

(ii) VC transactions do not fall within the concept of the supply of goods as they consist of exchange of different means of payment and hence, they constitute supply of services. (iii) Bitcoin virtual currency being a contractual means of payment D could not be regarded as a current account or a deposit account, a payment or a transfer, and unlike debt, cheques and other negotiable instruments (referred to in Article 135(1)(d) of the EU VAT Directive), Bitcoin is a direct means of payment between the operators that accept. (iv) Bitcoin virtual currency is neither a security conferring a E property right nor a security of a comparable nature. (v) The transactions in issue were entitled to exemption from payment of VAT as they fell under the category of transactions involving ‘currency [and] bank notes and coins used as legal tender’. (vi) Article 135(1)(e) EU Council VAT Directive 2006/112/ F EC is applicable to non-traditional currencies i.e., to currencies other than those that are legal tender in one or more countries in so far as those currencies have been accepted by the parties to a transaction as an alternative to legal tender and have no purpose other than to be a means of payment. G The court accordingly concluded that virtual currencies would fall under this definition of non-traditional currencies. 6.85. Thus (i) depending upon the text of the statute involved in the case and (ii) depending upon the context, various courts in different 60 Case C-264/14 dated 22-10-2015 H

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A jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds. While each of these descriptions is true, none of these constitute the whole truth. Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism,61 B (theory of non-absolutism that encourages acceptance of relativism and pluralism) who attempt to describe an elephant, but end up describing only one physical feature of the elephant. 6.86. RBI was also caught in this dilemma. Nothing prevented RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in Section 2(h) of FEMA, 1999 which defines ‘currency’ to mean “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.” After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are just goods/commodities and can never be regarded as real money. E 6.87. Once we are clear about the above confusion, and once it is accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, there is no escape from the conclusion that the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the Reserve Bank of India. The statutory obligation that RBI has, as a central bank, (i) to operate the currency and credit system, (ii) to regulate the financial system and (iii) to ensure the payment system of the country to be on track, would compel them naturally to address all issues that are perceived as potential risks to the monetary, currency, payment, credit and financial systems of the country. If an intangible property can act under certain circumstances as money (even without faking a currency) then RBI can definitely take note of it and deal with it. Hence it is not possible to accept the contention of the petitioners that they are carrying on an activity over which RBI has no power statutorily. 61 According to this doctrine, truth and reality are perceived differently from different points of view and no single point is the complete truth.

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6.88. In Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of A India,62 this court pointed out that “Reserve Bank of India is an expert body to which the responsibility of monitoring the economic system of the country is entrusted, under various enactments like the RBI Act, 1934, the Banking Regulation Act, 1949.” Therefore, (i) in the teeth of the statutory scheme of these enactments (ii) from the way different courts and regulators of different jurisdictions have treated VCs and (iii) from the very characteristics of VCs, it is clear that they have the potential to interfere with the matters that RBI has the power to restrict or regulate. Hence, we have no hesitation in rejecting the first contention of the petitioners that the impugned decision is ultra vires. 6.89. It was argued that the Preamble of the RBI Act speaks only about the role of RBI in operating the currency and credit system of the country to its advantage and that since virtual currencies may not form part of the credit system of the country as they are not recognized as currency, the invocation of the provisions of RBI Act was out of context. D 6.90. But as pointed out elsewhere, RBI is the sole repository of power for the management of the currency, under Section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes under Section 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy E of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index. Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. F The expression “management of the currency” appearing in Section 3(1) need not necessarily be confined to the management of what is recognized in law to be currency but would also include what is capable of faking or playing the role of a currency. 6.91. It is ironical that virtual currencies which took avatar G (according to its creator Satoshi) to kill the demon of a central authority (such as RBI), seek from the very same central authority, access to banking services so that the purpose of the avatar is accomplished. As we have pointed out elsewhere, the very creation of digital currency/ 62 (2015) 4 SCC 770 H

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A Bitcoin was to liberate the monetary system from being a slave to the central authority and from being operated in a manner prejudicial to private interests. Therefore, the ultra vires argument cannot be accepted when the provision of access to banking services without any interference from the central authority over a long period of time is perceived as a threat to the very existence of the central authority. Hence, we hold that B RBI has the requisite power to regulate or prohibit an activity of this nature. If at all, the power is only to regulate, not prohibit 6.92. The next contention that if at all, RBI is conferred only with C the power to regulate, but not to prohibit, as seen from the express language of Section 45JA of the RBI Act, does not appeal to us. In Star India Pvt. ltd. v. Dept. of Industrial Policy and Promotion and Ors.,63 this court opined that the word “regulate” has a very broad meaning including the power to prohibit. The following passage from K. Ramanathan v. State of Tamil Nadu64 was quoted in Star India (supra): D

19Copy pinpoint19. It has often been said that the power to regulate does not necessarily include the power to prohibit, and ordinarily the word “regulate” is not synonymous with the word “prohibit”. This is true in a general sense and in the sense that mere regulation is not the same as absolute prohibition. At the same E time, the power to regulate carries with it full power over the thing subject to regulation and in absence of restrictive words, the power must be regarded as plenary over the entire subject. It implies the power to rule, direct and control, and involves the adoption of a rule or guiding principle to be followed, or the making of a rule with respect to the subject to be regulated. F The power to regulate implies the power to check and may imply the power to prohibit under certain circumstances, as where the best or only efficacious regulation consists of suppression. It would therefore appear that the word “regulation” cannot have any inflexible meaning as to exclude G “prohibition”. It has different shades of meaning and must take its colour from the context in which it is used having regard to the purpose and object of the legislation, and the Court must necessarily keep in view the mischief which the legislature seeks to remedy. 63 (2019) 2 SCC 104 H 64 1985 (2) SCC 116

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 397 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

6.93. The contention that the power to prohibit something as res extra commercium is always a legislative policy and that therefore the same cannot be done through an executive fiat, omits to take note of the crucial role assigned to RBI in the economic sphere. It is true that in Godawat Pan Masala Products IP Ltd. & Anr v. Union of India,65 it was held that whether an article is to be prohibited as res extra commercium, is a matter of Legislative policy and must arise out of an Act of legislature and not by a mere executive notification. But we must remember that in Khoday Distilleries Ltd. v. State of Karnataka,66 while dealing with prohibitions on alcohol it was held that what articles and goods should be allowed to be produced, possessed, sold and consumed is to be left to the judgment of legislative and executive wisdom. 6.94. In any case, the projection of the impugned decisions of RBI as a total prohibition of an activity altogether, may not be correct. The impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs. Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly empowers RBI to caution or prohibit banking companies against entering into certain types of transactions or class of transactions. The prohibition is not per se against the trading in VCs. It is against banking companies, with respect to a class of transactions. The fact that the functioning of VCEs automatically gets paralyzed or crippled because of the impugned Circular, is no ground to hold that it tantamount to total prohibition. So long as those trading in VCs do not wish to convert them into fiat currency in India and so long as the VCEs do not seek to collect their service charges or commission in fiat currency through banking channels, they will not be affected by this Circular. Admittedly, peer-to- peer transactions are still taking place, without the involvement of the banking channel. In fact, those actually buying and selling VCs without seeking to convert fiat currency into VCs or vice-versa, are not affected by this Circular. It is only the online platforms which provide a space or medium for the traders to buy and sell VCs, that are seriously affected by the Circular, since the commission that they earn by facilitating the trade is required to be converted into fiat currency. Interestingly, the petitioners argue on the one hand that there is total prohibition and argue 65 (2004) 7 SCC 68 66 (1995) 1 SCC 574 H

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A on the other hand that the Circular does not achieve its original object of curtailing the actual trading, though it cripples the exchanges. If the first part of this submission is right, the latter cannot be and if the latter part is right, the former cannot be. 6.95. The reliance placed in this regard by the petitioners on the decision of this court in State of Rajasthan v. Basant Nahata67 may not be appropriate. The said decision arose out of a challenge to the constitutional validity of Section 22A of the Registration Act, 1908 inserted by way of State Amendment by the State of Rajasthan. By the said amendment, the state government was conferred with unbridled powers to declare by notification in the official gazette, the registration of any document or class of documents as opposed to public policy. In exercise of the power so conferred, the state government issued notifications declaring the registration of an irrevocable power of attorney or a power of attorney to be in force for more than a certain period, authorizing the attorney to transfer any immovable property, as opposed to public policy. D This court found that the delegation made by Section 22A was uncanalised and unguided. In addition, the court found that a transaction between two persons capable of entering into contract, which does not contravene any statute, would be valid in law and that when the State of Rajasthan did not make such transactions illegal, it cannot strike at the documents recording such transactions. The court held that Section 22A cannot control the transactions which fall outside the scope of the Act, through a subordinate legislation. 6.96. But the said decision is of no assistance to the petitioners, since none of the provisions of the RBI Act or the Banking Regulation Act are under challenge before us. The delegation itself is not in question before us. Unlike the Registration Act, Section 36(1)(a) of the Banking Regulation Act, 1949 empowers RBI to specifically target transactions. Moreover, RBI’s role in the economy of the country is not akin to the power of any other delegate. 6.97. While holding that price fixation may normally be a legislative act, this court pointed out in Union of India & Anr v. Cynamide India ltd. & Anr:68

67 (2005) 12 SCC 77 68 H (1987) 2 SCC 720

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“…with the proliferation of delegated legislation, there is a A tendency for the line between legislation and administration to vanish into an illusion. Administrative, quasi-judicial decisions tend to merge in legislative activity and, conversely, legislative activity tends to fade into and present an appearance of an administrative or quasi-judicial activity. B Any attempt to draw a distinct line between legislative and administrative functions, it has been said, is ‘difficult in theory and impossible in practice’. ... The distinction between the two has usually been expressed as ‘one between the general and the particular’. ‘A legislative act is the creation and promulgation of a general rule of conduct without reference to particular cases; an administrative act is the making and issue of a specific direction or the application of a general rule to a particular case in accordance with the requirements of policy’. ‘Legislation is the process of formulating a general rule of conduct without reference to particular cases and usually operating in future; administration is the process of performing particular acts, of issuing particular orders or of making decisions which apply general rules to particular cases’.” (emphasis supplied) 6.98. On the effect and force of delegated legislation, this court held in St. Johns Teachers Training Institute v. Regional Director, E NCTE:69 “The regulations made under power conferred by the statute are supporting legislation and have the force and effect, if validly made, as an Act passed by the competent legislature.”. F Similar views were expressed in Udai Singh Dagar v. Union of India,70 when the court held:”...a legislative Act must be read with the regulations framed. A subordinate legislation, as is well known, when validly framed, becomes a part of the Act.” 6.99. Law is well settled that when RBI exercises the powers conferred upon it, both to frame a policy and to issue directions for its G enforcement, such directions become supplemental to the Act itself. In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank

69 (2003) 3 SCC 321 70 (2007) 10 SCC 306 H

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A of India,71 this court followed the decisions in State of U.P. and Ors v. Babu Ram Upadhya72 and D.K.V. Prasada Rao v. Govt. of A.P.73 to hold that Rules made under a statute must be treated as if they were contained in the Act and that therefore they must be governed by the same principles as the statute itself. Useful reference can also be made in this regard to the following observations in ICICI Bank Ltd v. Official B Liquidator of APS Star Industries Ltd:74 “40. When a delegate is empowered by Parliament to enact a policy and to issue directions which have a statutory force and when the delegatee (RBI) issues such guidelines (policy) having statutory force, such guidelines have got to be read C as supplement to the provisions of the BR Act, 1949. The “banking policy” is enunciated by RBI. Such policy cannot be said to be ultra vires the Act.” (emphasis supplied) 6.100. In his treatise on Administrative Law, Durga Das Basu75 states: D The scope of judicial review is narrowed down when a statute confers discretionary power upon an executive authority to make such rules or regulations or orders ‘as appear to him to be necessary’ or ‘expedient’, for carrying out the purposes of the statute or any other specified purpose. In such a case, the check of ultra vires vanishes for all practical purposes inasmuch as the determination of the necessity or expediency is taken out of the hands of the Courts and the only ground upon which Courts may interfere is that the authority acted mala fide or never applied his mind to the matter, or applied an irrelevant principle in making a statutory order. (emphasis supplied) 6.101. In Jayantilal Amrit Lal Shodhan v. F.N. Rana,76 the majority pointed out that there can be no assumption that the legislative functions are exclusively performed by the legislature, executive functions by the executive and judicial functions by the judiciary alone. The court indicated that the Constitution has not made an absolute or rigid division 71 (1992) 2 SCC 343 72 AIR 1961 SC 751 73 AIR 1984 AP 75 74 (2010) 10 SCC 1 75 Ch. 4, Pg. 121, 6th Edition, 2004 76 H AIR 1964 SC 648

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 401 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

of functions between the three agencies of the state and that at times the exercise of legislative or judicial functions are entrusted to the executive. A very important observation made by the Constitution Bench in Jayantilal (supra) was as follows: “…..in addition to these quasi-judicial and quasi-legislative functions, the executive has also been empowered by statute to exercise functions which are legislative and judicial in character and in certain instances, powers are exercised which appear to partake at the same moment of legislative, executive and judicial characteristics.” 6.102. In Shri Sitaram Sugar Co. Ltd. & Anr v. Union of India C & Ors,77 the Constitution bench of this court held that whether an order is characterized as legislative or administrative or quasi-judicial or whether it is a determination of law or fact, the judgment of the expert body entrusted with power is generally treated as final and the judicial function is exhausted when it is found to have “warrant in the record” and a rational basis in law. D

6.103. It must be pointed out that the power of RBI is not merely curative but also preventive. This is acknowledged by this court in Ganesh Bank of Kurunwad Ltd. & Ors v. Union of India & Ors.,78 where it was held that RBI has a right to take pre-emptive action taking into account the totality of the circumstances. E

“It is not that when there is a run on the bank then only RBI must intervene or that it must intervene only when there are a good number of court proceedings against the bank concerned. RBI has to take into account the totality of the circumstances and has to form its opinion accordingly.” F 6.104. The impugned Circular is intended to prohibit banking companies from entering into certain territories. The Circular is actually addressed to entities regulated by RBI and not to those who do not come within the purview of RBI’s net. But the exercise of such a power by RBI, over the entities regulated by it, has caused a collateral damage G to some establishments like the petitioners’, who do not come within the reach of RBI’s net.

77 (1990) 3 SCC 223 78 (2006) 10 SCC 645 H

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A 6.105. The power of a statutory authority to do something has to be tested normally with reference to the persons/entities qua whom the power is exercised. The question to be addressed in such cases is whether the authority had the power to do that act or issue such a directive, qua the person to whom it is addressed. While persons who suffer a collateral damage can certainly challenge the action, such challenge will be a very weak challenge qua the availability of power. 6.106. Apart from the provisions of the RBI Act, 1934 and the Banking Regulation Act, 1949, the impugned Circular also refers to the power under Section 18 of the Payment and Settlement Systems Act,

2007. In order to buttress their contention regarding the availability of power to regulate, the petitioners refer to the definition of the expression “payment system” under Section 2(1)(i) of the said Act and contend that VCEs do not operate any payment system and that since the power to issue directions under Section 18 is only to regulate the payment systems, the invocation of the said power to something that does not fall within the purview of payment system, is arbitrary. 6.107. But Section 18 of the Payment and Settlement Systems Act indicates (i) what RBI can do (ii) the persons qua whom it can be done and (iii) the object for which it can be done. In other words, Section 18 empowers RBI (i) to lay down policies relating to the regulation of payment systems including electronic, non-electronic, domestic and international payment systems affecting domestic transactions and (ii) to give such directions as it may consider necessary. These are what RBI can do under Section 18. Coming to the second aspect, the persons qua whom the powers under Section 18 can be exercised are (i) system providers (ii) system participants and (iii) any other person generally or any such agency. The expression “system provider” is defined under Section 2(1)(q) to mean a person who operates an authorized payment system. The expression “system participant” is defined in Section 2(1)(p) to mean a bank or any other person participating in a payment system, including the system provider. Other than the expressions ‘system provider’ and ‘system participant’, Section 18 also uses the expressions ‘any other person’ and ‘any such agency’. 6.108. It is true that the purposes for which the power under Section 18 can be exercised, are also indicated in Section 18. They are (i) regulation of the payment systems (ii) the interest of the management and operation of any payment system and (iii) public interest.

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 403 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

6.109. As we have pointed out elsewhere, the impugned Circular A is primarily addressed to banks who are “system participants” within the meaning of Section 2(1)(p). The banks certainly have a system of payment to be effected between a payer and a beneficiary, falling thereby within the meaning of the expression payment system. 6.110. It may also be relevant to take note of the definition of the B expressions “payment instruction” and “payment obligation” appearing in clauses (g) and (h) of subsection (1) of Section 2 which read as follows: 2(1)(g) “payment instruction” means any instrument, authorisation or order in any form, including electronic means, to effect a payment,— C (i) by a person to a system participant; or (ii) by a system participant to another system participant; 2(1)(h) “payment obligation” means an indebtedness that is owned by one system participant to another system participant as a result of clearing or settlement of one or more payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions; 6.111. Therefore, in the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 should fail. II. Mode of exercise of power: F Satisfaction/Application of mind/relevant and irrelevant considerations 6.112. That takes us to the next question whether the power was exercised properly in a manner prescribed by law. The argument of Shri Ashim Sood, learned Counsel for the petitioner is that assuming that G RBI has the requisite power under Section 35A(1) of Banking Regulation Act, 1949 to do what it has done, the necessary sine qua non is the “satisfaction”. Section 35A(1) of the Banking Regulation Act, 1949 as well as Section 45JA and 45L of the RBI Act, 1934 empower RBI to issue directions “if it is satisfied” about the existence of certain H

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A parameters. Satisfaction can be arrived at only by (i) gathering facts (ii) sifting relevant material from those which are irrelevant and (iii) forming an opinion about the cause and connection between relevant material and the decision proposed to be taken. In respect of each of these requirements, the learned Counsel relied upon certain judicial precedents. B 6.113. But we do not think that in the facts of the present case, we could hold RBI guilty of non-application of mind. As a matter of fact, the issue as to how to deal with virtual currencies has been lingering with RBI from June 2013 onwards, when the Financial Stability Report took note of the challenges posed by virtual currencies in the form of regulatory, legal and operational risks. The Financial Stability Report of C June 2013 led to a press release dated 24-12-2013 cautioning the users, holders and traders of virtual currencies about the potential financial, operational, legal and consumer protection and security related risks associated with virtual currencies. Then came the Financial Stability Report of December 2015 which raised concerns about excessive D volatility in the value of VCs and their anonymous nature which went against global money laundering rules rendering their very existence questionable. The Financial Stability Report of December 2016 also took note of the risks associated with virtual currencies qua data security and consumer protection. The report also recorded concerns about far reaching potential impact of the effectiveness of monetary policy itself. E Therefore, the report suggested RegTech to deal with FinTech. 6.114. IDRBT, established by RBI to work at the intersection of banking and technology submitted a white paper in January 2017, which enlisted the advantages as well as disadvantages of digital currencies. This white paper was taken note of by RBI in the Financial Stability F Report of June 2017. In the meantime, RBI issued a press release on 01-02-2017 once again cautioning the users, holders and traders of virtual currencies. 6.115. The sub-committee of the Financial Stability and Development Council took a decision in April 2016, pursuant to which G RBI set up an Inter-Regulatory Working Group on FinTech and Digital Banking. This Working Group submitted a report in November 2017, after which RBI issued a third press release on 05-12-2017. Thereafter RBI also sent a mail on 02-04-2018 to the central government, enclosing a note on regulating crypto assets. To be fair to RBI, even this note H examined the pros and cons of banning and regulating crypto currencies.

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 405 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

6.116. All the above sequence of events from June 2013 up to 02- A 04-2018 would show that RBI had been brooding over the issue for almost five years, without taking the extreme step. Therefore, RBI can hardly be held guilty of non-application of mind. If an issue had come up again and again before a statutory authority and such an authority had also issued warnings to those who are likely to be impacted, it can hardly B be said that there was no application of mind. For arriving at a “satisfaction” as required by Section 35A(1) of Banking Regulation Act, 1949 and Section 45JA and 45L of RBI Act, 1934, it was not required of RBI either to write a thesis or to write a judgement. 6.117. In fact, RBI cannot even be accused of not taking note of relevant considerations or taking into account irrelevant considerations. C RBI has taken into account only those considerations which multinational bodies and regulators of various countries such as FATF, BIS, etc., have taken into account. This can be seen even from the earliest press release dated 24-12-2013, which is more elaborate than the impugned Circular dated 06-04-2018. The press release dated 24-12-2013 reads as follows: D RBI cautions users of Virtual Currencies against Risks The Reserve Bank of India has today cautioned the users, holders and traders of Virtual currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are E exposing themselves to. The Reserve Bank has mentioned that it has been looking at the developments relating to certain electronic records claimed to be “Decentralised Digital Currency” or “Virtual Currency” (VCs), such as, Bitcoins, litecoins, bbqcoins, dogecoins etc., F their usage or trading in the country and the various media reports in this regard. The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration G or authorisation is stated to have been obtained by the entities concerned for carrying on such activities. As such, they may pose several risks to their users, including the following: • VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are H

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A prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them. B • Payments by VCs, such as Bitcoins, take place on a peer- to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc. C • There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value. D • It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks. • There have been several media reports of the usage of VCs, E including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti- money laundering and combating the financing of terrorism (AML/CFT) laws. F The Reserve Bank has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations. G 6.118. When a series of steps taken by a statutory authority over a period of about five years disclose in detail what triggered their action, it is not possible to see the last of the orders in the series in isolation and conclude that the satisfaction arrived at by the authority is not reflected appropriately. In any case, pursuant to an order passed by this court on H 21-08-2019, RBI has given a detailed point-wise reply to the

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 407 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

representations of the petitioners. In these representations, the petitioners A have highlighted all considerations that they thought as relevant. RBI has given its detailed responses on 04-09-2019 and 18-09-2019. Therefore, the contention that there was no application of mind and that relevant considerations were omitted to be taken note of, loses its vigour in view of the subsequent developments. B Malice in law/colorable exercise 6.119. Drawing our attention to a reply given by RBI dated 26- 04-2017 to a query under the Right to Information Act, and the reply given by Minister of State for Finance in response to a question raised in the Lok Sabha (Unstarred Question No. 2113) on 28-07-2017, wherein C RBI took a position that they had no power to freeze the accounts either of defaulting companies or of shell companies, it was contended by Shri Ashim Sood, that the impugned Circular goes contrary to the position so taken officially, as the Circular has the effect of closing the accounts of VCEs and that therefore it was hit by arbitrariness and caprice. D 6.120. But the above argument arises out of a misconception about the purport of the impugned Circular. The impugned Circular does not order either the freezing or the closing of any particular account of a particular customer. All that the impugned Circular says is that RBI regulated entities shall exit the relationship that they have with any person or entity dealing with or settling VCs, within three months of the date of the Circular. The regulated entities are directed not to provide services for facilitating any person or entity in dealing with or settling VCs. Some of the petitioners herein are individuals and companies who run virtual currency exchanges. In case they have other businesses, the impugned Circular does not order the closure of their bank accounts relating to other businesses. The prohibition under paragraph 2 of the impugned Circular is with respect to the provision of services for facilitating any person or entity in dealing with or settling VCs. This prohibition does not extend either to the closing or the freezing of the accounts of the petitioners in relation to their other ventures. G 6.121. Taking clue from the averment contained in the counter- affidavit of RBI to the effect that “VCs are outside the ambit of the central authority’s effective sphere of control and management” and also referring to the stand taken by RBI in their letter dated 04-09-2019 to the effect that “neither VCs nor the businesses involved in providing VC based services come under the regulatory purview of RBI”, it was H

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A contended by Shri Ashim Sood that the impugned Circular is a colourable exercise of power and tainted by malice in law, in as much as it seeks to achieve an object completely different from the one for which the power is entrusted. State of Punjab & Anr v. Gurdial Singh & Ors,79 Collector (District Magistrate) Allahabad & Anr v. Raja Ram Jaiswal,80 and Kalabharati Advertising v. Hemant Vimalnath Narichania & Ors81 B are relied upon in this regard. 6.122. But the above contention is completely misconceived. There can be no quarrel with the proposition that RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company C or in public interest. If the exercise of power by RBI with a view to achieve one of these objectives incidentally causes a collateral damage to one of the several activities of an entity which does not come within the purview of the statutory authority, the same cannot be assailed as a colourable exercise of power or being vitiated by malice in law. To D constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and willfully without reasonable or probable cause. The impugned Circular does not fall under the category of either of them. 6.123. The argument that the invocation by RBI, of ‘public interest’ as a weapon, purportedly for the benefit of users, consumers or traders of virtual currencies is a colourable exercise of power also does not hold water. Once it is conceded that RBI has powers to issue directions in public interest, it is impossible to exclude users, consumers or traders of virtual currencies from the coverage. In fact, the repeated press releases issued by RBI from 2013 onwards indicate that RBI did not want the members of the public, which include users, consumers and traders of VCs, even to remotely think that virtual currencies have a legal tender status or are backed by a central authority. Irrespective of what VCs actually do or do not do, it is an accepted fact that they are capable of performing some of the functions of real currencies. Therefore, if RBI 79 (1980) 2 SCC 471 80 (1985) 3 SCC 1 81 H (2010) 9 SCC 437

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 409 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

takes steps to prevent the gullible public from having an illusion as though A VCs may constitute a valid legal tender, the steps so taken, are actually taken in good faith. The repeated warnings through press releases from December 2013 onwards indicate a genuine attempt on the part of RBI to safeguard the interests of the public. Therefore, the contention that the impugned Circular is vitiated by malice in law and that it is a colorable B exercise of power, cannot be sustained. 6.124. Relying upon (i) the decision in Meerut Development Authority v. Assn. Management Studies & Anr,82 wherein it was held that the term “public interest” must be understood and interpreted in the light of the entire scheme, purpose and object of the enactment (ii) the decision in Bihar Public Service Commission v. Saiyed Hussain Abbas C Rizwi & Anr,83 wherein it was held that the term “public interest” does not have a rigid meaning and takes its colour from the statute in which it occurs (iii) the decision in Utkal Contractors & Joinery (P) Ltd. & Ors v. State of Orissa & Ors,84 wherein it was held that the words of a statute take their colour from the reason for it and (iv) the decision in D Empress Mills v. Municipal Committee, Wardha,85 wherein it was held that general words and phrases must usually be construed as being limited to the actual object of the Act, it was contended that the expression ‘public interest’ appearing in Section 35A(1)(a) of the Banking Regulation Act, 1949, cannot be given an expansive meaning. E 6.125. But the said argument does not take the petitioners anywhere. As we have indicated elsewhere, the power under Section 35A to issue directions is to be exercised under four contingencies namely (i) public interest (ii) interest of banking policy (iii) interest of the depositors and (iv) interest of the banking company. The expression “banking policy” is defined in Section 5(ca) to mean any policy specified by F RBI (i) in the interest of the banking system (ii) in the interest of monetary stability and (iii) sound economic growth. Public interest permeates all these three areas. This is why Section 35A(1)(a) is invoked in the impugned Circular. Therefore, we reject the argument that the impugned decision is a colorable exercise of power and it is G vitiated by malice in law.

82 (2009) 6 SCC 171 83 (2012) 13 SCC 61 84 (1987) 3 SCC 279 85 (1958) SCR 1102 H

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A M. S. Gill Reasoning 6.126. The impugned Circular cannot be assailed on the basis of M. S. Gill86 test, for two reasons. First is that in Chairman, All India Railway Recruitment Board v. K. Shyam Kumar & Ors,87 this court held that MS Gill test may not always be applicable where larger public interest is involved and that in such situations, additional grounds can be looked into for examining the validity of an order. This was followed in PRP Exports & Ors v. Chief Secretary, Government of Tamil Nadu & Ors.88 In 63 Moons Technologies ltd. & Ors v. Union of India & Ors,89 this court clarified that though there is no broad proposition that MS Gill test will not apply where larger public interest is involved, subsequent materials in the form of facts that have taken place after the order in question is passed, can always be looked at in the larger public interest, in order to support an administrative order. The second reason why the weapon of MS Gill will get blunted in this case, is that during the pendency of this case, this court passed an interim order on 21-08-2019 D directing RBI to give a point-wise reply to the detailed representation made by the writ petitioners. Pursuant to the said order, RBI gave detailed responses on 04-09-2019 and 18-09-2019. Therefore, the argument based on MS Gill test has lost its potency. Calibration/Proportionality E 6.127. The next argument is that the impugned measure is extreme and that it will not pass the test of proportionality. For the purpose of convenience, we shall take up this argument together with the argument revolving around Article 19(1)(g) while dealing with the reasonableness of the restriction. F III. Wait and watch approach of the other stakeholders 6.128. The argument that other stakeholders such as the Enforcement Directorate which is concerned with money laundering, the Department of Economic Affairs which is concerned with the economic policies of the State, SEBI which is concerned with security G contracts and CBDT which is concerned with the tax regime relating to goods and services, did not see any grave threat and that therefore RBI’s reaction is knee-jerk, is not acceptable. Enforcement Directorate can 86 M S Gill v. The Chief Election Commissioner, (1978) 1 SCC 405 87 (2010) 6 SCC 614 88 (2014) 13 SCC 692 H 89 (2019) SCC Online SC 624

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 411 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

step in only when actual money laundering takes place, since the statutory A scheme of Prevention of Money Laundering Act deals with a procedure which is quasi-criminal. SEBI can step in only when the transactions involve securities within the meaning of Section 2(h) of the Securities Contracts (Regulation) Act, 1956. CBDT will come into the picture only when the transaction related to the sale and purchase of taxable goods/ B commodities. Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others. IV. Light-touch approach of the other countries C

6.129. The argument that most of the countries except very few like China, Vietnam, Pakistan, Nepal, Bangladesh, UAE, have not imposed a ban (total or partial) may not take the petitioners anywhere. The list of countries where a ban similar to the one on hand and much more has been imposed discloses a commonality. Almost all countries in the neighborhood of India have adopted the same or similar approach (in essence India is ring fenced). In any case, our judicial decision cannot be colored by what other countries have done or not done. Comparative perspective helps only in relation to principles of judicial decision making and not for testing the validity of an action taken based on the existing statutory scheme. 6.130. There can also be no comparison with the approach adopted by countries such as UK, US, Japan, Singapore, Australia, New Zealand, Canada etc., as they have developed economies capable of absorbing greater shocks. Indian economic conditions cannot be placed on par. F Therefore, we will not test the correctness of the measure taken by RBI on the basis of the approach adopted by other countries, though we have, for better understanding of the complexities of the issues involved, undertaken a survey of how the regulators and courts of other countries have treated VCs. G V. Precautionary steps taken by petitioners 6.131. The next contention of the petitioners is that the VC exchanges run by them have already put in place certain best practices such as (i) avoidance of cash transactions (ii) enhanced KYC norms and (iii) confining their services only to persons within India. Therefore, H

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A it is contended that all the issues flagged by RBI have already been addressed and that therefore, there was no necessity to disconnect the trade from the regular banking channels. But the fact of the matter is that enhanced KYC norms may remove anonymity of the customer, but not that of the VC. Even the European Parliament, in the portion of its report relied upon by Shri Ashim Sood accepts that the adequacy of mandatory registration of users (as a less invasive measure), whether or not of fully anonymous or pseudo anonymous crypto currencies depends on the users’ compliance with the registration requirement. After pointing out that compliance will partly depend on an adequate sanctioning toolbox in the event of breach, the report wonders whether it is at all possible outside of the context of randomly bumping into it, at least when fully anonymous VCs are concerned. In any case, we are not experts to say whether the safety valves put in place could have addressed all issues raised by RBI. VI. Different types of VCs require different treatments D 6.132. Drawing our attention to a Report by the European Parliament under the caption ‘Cryptocurrencies and Blockchain’, released in July 2018, it is contended by Shri Ashim Sood, learned Counsel for the petitioners that all virtual currencies are not fully anonymous. While some, such as Dash and Monero are fully anonymous, others such as Bitcoin E are pseudo-anonymous. Therefore, it is contended that banning transactions only in fully anonymous VCs could have been a better and less intrusive measure. An identical argument is advanced by Shri Nakul Dewan learned Senior Counsel for the petitioners, with reference to a report of October 2012 of the European Central Bank on “Virtual Currency Schemes”. According to the said Report, Virtual Currency F schemes can be classified into three types, depending upon their interaction with traditional real money and real economy. They are (i) closed virtual currency schemes basically used in an online game (ii) virtual currency schemes having a unidirectional flow (usually an inflow), with a conversion rate for purchasing the virtual currency which can G subsequently be used to buy virtual goods and services, but exceptionally also to buy real goods and services and (iii) virtual currency schemes having a bidirectional flow, where they act like any other convertible currency with two exchange rates (buy and sell) which can subsequently be used to buy virtual goods and services as well as real goods and services. H

INTERNET AND MOBILE ASSOCIATION OF INDIA v. 413 RESERVE BANK OF INDIA [V. RAMASUBRAMANIAN, J.]

6.133. Let us first deal with Shri Nakul Dewan’s submission. In A the very same October 2012 Report of the European Central Bank, it is accepted that virtual currencies (i) resemble money and (ii) necessarily come with their own dedicated retail payment systems. These two aspects are indicated in the Report to be covered by the term “Virtual Currency Scheme”. B 6.134. But the entire premise on which the petitioners have developed their case is that they are neither money nor constitute a payment system. Therefore, if the Report of the European Central Bank is to be accepted, it should be accepted in total and cannot be selectively taken. C 6.135. The examples provided in the October 2012 Report of the European Central Bank show that there are VC Schemes set up by entities such as Nintendo, in which consumers can purchase points online by using a credit card or in retail stores by purchasing a Nintendo points card which cannot be converted back to real money. The Report also shows that one VC by name Linden Dollars is issued in a virtual world called “Second life”, where users create avatars (digital characters), which can be customized. Second life has its own economy where users can buy and sell goods and services from and to each other. But they first need to purchase Linden dollars using fiat currency. Later they can also sell Linden dollars in return for fiat currency. Therefore, it is clear that the very same virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the entities come up. Moreover, the question whether anonymous VCs alone could have been banned leaving the pseudo-anonymous, is for experts and not for this Court to decide. In any case, the stand taken by RBI is that they have not banned VCs. Hence, the question whether RBI should have adopted different approaches towards different VCs does not arise. VII. Acceptance of DLT and rejection of VCs is a paradox 6.136. It was argued that the acceptance of the Distributed Ledger Technology and the rejection of VCs is actually a contradiction in terms. G This argument is based upon the various reports, both of RBI and of the Inter-Ministerial Group, to the effect that DLT is part of FinTech. 6.137. The above contention, in legal terms, is about the irrationality of the impugned decision. But there is nothing irrational about the acceptance of a technological advancement/innovation, but the rejection H

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A of a by-product of such innovation. There is nothing like a “take it or leave it” option. VIII. RBI’s decisions do not qualify for Judicial deference 6.138. It is contended by Shri Ashim Sood, learned Counsel for the petitioners that the impugned Circular does not have either the status B of a legislation or the status of an executive action, but is only the exercise of a power conferred by statute upon a statutory body corporate. Therefore, it is his contention that the judicial rule of deference as articulated in R.K. Garg v. Union of India,90 BALCO Employees’ Union (Regd.) v. Union of India & Ors,91 and Swiss Ribbons Pvt. C Ltd. & Anr v. Union of India & Ors,92 will not apply to the decision taken by a statutory body like RBI. If, a legislation relating to economic matters is placed at the highest pedestal, an executive decision with regard to similar matters will be placed only at a lower pedestal and the decision taken by a statutory body may not even be entitled to any such deference or reverence. D 6.139. But given the scheme of the RBI Act, 1934 and the Banking Regulation Act, 1949, the above argument appears only to belittle the role of RBI. RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get liberated even from its creator. This is why it is given a mandate – (i) under the E Preamble of the RBI Act 1934, to operate the currency and credit system of the country to its advantage and to operate the monetary policy framework in the country (ii) under Section 3(1), to take over the management of the currency from the central government (iii) under Section 20, to undertake to accept monies for account of the central government, to make payments up to the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union (iv) under Section 21(1), to have all the money, remittance, exchange and banking transactions in India of the central government entrusted with it (v) under Section 22(1), to have the sole right to issue bank notes in India and (vi) under Section 38, to get rupees into circulation only through it, to the exclusion of the central government. Therefore, RBI cannot be equated to any other statutory body that merely serves its 90 (1981) 4 SCC 675 91 (2002) 2 SCC 333 92 H (2019) 4 SCC 17

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master. It is specifically empowered to do certain things to the exclusion of even the central government. Therefore, to place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the Act. 6.140. On the primary question of switching over to judicial “silent mode” or “hands off mode”, qua economic legislation, it is not necessary to catalogue all the decisions of this court such as State of Gujarat & Anr v. Shri Ambica Mills Ltd. & Anr,93 G.K.Krishnan v. Tamil Nadu,94 R. K. Garg v. Union of India (supra), State of M.P. v. Nandlal Jaiswal,95 P.M. Ashwathanarayana Setty v. State of Karnataka, 96 Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India (supra), T. Velayudhan v. Union of India,97 Delhi Science Forum v. C Union of India,98 Bhavesh D. Parish v. Union of India,99 Ugar Sugar Works ltd. v. Delhi Administration & Ors,100 BALCO Employees’ Union (Regd.) v. Union of India (supra), Govt. of Andhra Pradesh & Ors v. P. Laxmi Devi,101 Villianur Iyarkkai Padukappu Maiyam v. Union of India,102 D.G. of Foreign Trade v. Kanak Exports,103 State D of J & K v. Trikuta Roller Flour Mills Pvt. Ltd.,104 and Pioneer Urban Land and Infrastructure Ltd. v. Union of India,105 as the entire history of the doctrine of deference from Lochner Era has been summarized by this court in Swiss Ribbons Pvt. Ltd. v. Union of India (supra). In fact, even the learned Counsel for the petitioners is ad idem with the learned Senior Counsel for RBI that economic regulations require due E judicial deference. The actual argument of the learned Counsel for the petitioners is that such deference may differ in degree from being very weak in respect of the decision of a statutory authority, to being very strong in respect of a legislative enactment. F 93 (1974) 4 SCC 656 94 (1975) 1 SCC 375 95 (1986) 4 SCC 566 96 (1989) Supp (1) SCC 696 97 (1993) 2 SCC 582 98 (1996) 2 SCC 405 G 99 (2000) 5 SCC 471 100 (2001) 3 SCC 635 101 (2008) 4 SCC 720 102 (2009) 7 SCC 561 103 (2016) 2 SCC 226 104 (2018) 11 SCC 260 105 (2019) 8 SCC 416 H

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A 6.141. But as we have pointed out above, RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But the power conferred upon RBI under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the central government, cannot be taken away. The sole right to issue bank notes in India, conferred by Section 22(1) cannot also be taken away and conferred upon any other bank or authority. RBI by virtue of its authority, is a member of the Bank of International Settlements, which position cannot be taken over by the central government and conferred upon any other authority. Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act. In fact, all countries have central banks/authorities, which, technically have independence from the government of the country. To ensure such independence, a fixed tenure is granted to the Board of Governors, so that they are not bogged down by political expediencies. In the United States of America, the Chairman of the Federal Reserve is the second most powerful person next only to the President. Though the President appoints the seven-member Board of Governors of the Federal Reserve, in consultation with the Senate, each of them is appointed for a fixed tenure of fourteen years. Only one among those seven is appointed as Chairman for a period of four years. As a result of the fixed tenure of 14 years, all the members of Board of F Governors survive in office more than three governments. Even the European Central Bank headquartered in Frankfurt has a President, Vice- President and four members, appointed for a period of eight years in consultation with the European Parliament. World-wide, central authorities/banks are ensured an independence, but unfortunately Section 8(4) of the RBI Act, 1934 gives a tenure not exceeding five years, as the central government may fix at the time of appointment. Though the shorter tenure and the choice given to the central government to fix the tenure, to some extent, undermines the ability of the incumbents of office to be absolutely independent, the statutory scheme nevertheless provides for independence to the institution as such. Therefore, we do not accept the argument that a policy decision taken by RBI does not warrant any deference.

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IX. Article 19(1)(g) challenge & Proportionality A 6.142. The next ground of attack is on the basis of Article 19(1)(g). Any restriction to the freedom guaranteed under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6). It is contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate. It is further contended that the right to access the banking system is actually integral to the right to carry on any trade or profession and that therefore a legislation, subordinate or otherwise whose effect or impact severely impairs the right to carry on a trade or business, not prohibited by law, would be violative of Article 19(1)(g). Reliance is placed in this regard on the decisions of this court in (i) Md. Yasin v. Town Area Committee,1 where it was held that the right under Article 19(1)(g) is affected when “in effect and in substance”, the impugned measures brought about a total stoppage of business, both, in a commercial sense and from a D practical point of view, even though there was no prohibition in form and (ii) Bennett Coleman & Co. v. Union of India,2 where this court held that the impact and not the object of the measure will determine whether or not, a fundamental right is violated. It is further contended, on the strength of the decision in Md. Faruk v. State of Madhya Pradesh & Ors,3 that the imposition of restriction on the exercise of a fundamental right may be in the form of control or prohibition and that when the exercise of a fundamental right is prohibited, the burden of proving that a total ban on the exercise of the right alone may ensure the maintenance of the general public interest, lies heavily upon the state. It was held in the said decision that a law which directly infringes the right guaranteed under Article 19(1)(g) may be upheld only if it is established that it seeks to impose reasonable restrictions in the interest of the general public and a less drastic restriction will not ensure the interest of the general public. 6.143. The parameters laid down in Md. Faruk are unimpeachable. While testing the validity of a law imposing a restriction on the carrying on of a business or a profession, the court must, as

106 (1952) SCR 572 107 (1972) 2 SCC 788 108 (1969) 1 SCC 853 H

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A formulated in Md. Faruk, attempt an evaluation of (i) its direct and immediate impact upon of the fundamental rights of the citizens affected thereby (ii) the larger public interest sought to be ensured in the light of the object sought to be achieved (iii) the necessity to restrict the citizens’ freedom (iv) the inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public and (v) the B possibility of achieving the same object by imposing a less drastic restraint. 6.144. There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession. This is especially so in the light of the restrictions on cash transactions contained in Sections 269SS and 269T of the Income Tax Act, 1961. C When currency itself has undergone a metamorphosis over the centuries, from stone to metal to paper to paperless and we have ushered into the digital age, cashless transactions (not penniless transactions) require banking channels. Therefore, the moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, resulting in the trade or business getting automatically shut down. Hence, the burden of showing that larger public interest warranted such a serious restriction bordering on prohibition, is heavily on RBI. 6.145. In the counter-affidavit filed in WP (C) No. 528 of 2018, RBI has raised 2 fundamental objections in this regard. The first is that corporate bodies/entities who have come up with the challenge are not ‘citizens’ and hence, not entitled to maintain a challenge under Article 19(1)(g). This objection may hold good in respect of the writ petition filed by Internet and Mobile Association of India, which is described by them as a not-for-profit association of corporate entities who are in the trade. But this objection may not hold good in respect of the other writ petition, as the companies running VC exchanges have not come up alone. The shareholders and promoters have come up with the second writ petition along with those entities and hence the challenge under Article 19(1)(g) cannot be said to be not maintainable. 6.146. The second objection of RBI is that there is no fundamental right to purchase, sell, transact and/or invest in VCs and that therefore, the petitioners cannot invoke Article 19(1)(g). But this contention is liable to be rejected outright for two reasons namely, (i) that at least some of the petitioners are not claiming any right to purchase, sell or transact in VCs, but claiming a right to provide a platform for facilitating an activity H (of trading in VCs between individuals/entities who want to buy and sell

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VCs) which is not yet prohibited by law and (ii) that in any case the impugned Circular does not per se prohibit the purchase or sale of VCs. This is why it is contended by the learned Counsel for the petitioners, that what is hit by the impugned Circular is not the actual target. The actual target of the impugned Circular, as seen from various communications and committee reports that preceded the same, is the trade in VCs. The object of hitting at trading in VCs, is to ensure (i) consumer protection (ii) prevention of violation of money laundering laws (iii) curbing the menace of financing of terrorism and (iv) safeguarding of the existing monetary/payment/credit system from being polluted. But hitting the target directly, is not within the domain of RBI and hence the impugned Circular purportedly seeks to protect only the regulated entities, by ring-fencing them. In the process, it has hit VC Exchanges and not the actual trading of VCs, though as a consequence, the volume of transactions in VCs (perhaps through VCEs alone) is stated to have come down. People who wish to buy and sell VCs can still do so merrily, without using the medium of a VC Exchange and without seeking to convert the virtual currencies into fiat currency. It is in this context that the contention revolving around Article 19(1)(g) has to be examined. 6.147. In order to test the validity of the impugned action on the touchstone of Article 19(1)(g), we may have to understand the fundamental distinction between (i) the purchase and sale of virtual currencies by and between two individuals or entities and (ii) the business of online exchanges that provide certain services such as the facility of buying and selling of virtual currencies, the storing or securing of the virtual currencies in what are known as wallets and the conversion of virtual currencies into fiat currency and vice versa. The buying and selling of crypto currencies through VC Exchanges can be by way of hobby or as a trade/business. The distinction between the two is that there may or may not exist a profit motive in the former, while it would, in the latter. 6.148. Persons who engage in buying and selling virtual currencies, just as a matter of hobby cannot pitch their claim on Article 19(1)(g), for what is covered therein are only profession, occupation, trade or business. G Therefore hobbyists, who are one among the three categories of citizens (hobbyists, traders in VCs and VC Exchanges), straightaway go out of the challenge under Article 19(1)(g). 6.149. The second and third categories of citizens namely, those who have made the purchase and sale of VCs as their occupation or H

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A trade, and those who are running online platforms and VC exchanges can certainly pitch their claim on the basis of Article 19(1)(g). Technically speaking, the second category of citizens cannot claim that the impugned decision of RBI has the effect of completely shutting down their trade or occupation. Citizens who have taken up the trade of buying and selling virtual currencies are not prohibited by the impugned Circular (i) either B from trading in crypto-to-crypto pairs (ii) or in using the currencies stored in their wallets, to make payments for purchase of goods and services to those who are prepared to accept them, within India or abroad. As a matter of fact, reports/articles in online journals suggest (i) that a few eateries such as Kolonial, a vintage themed pizzeria in Mumbai’s Worli C area, Suryawanshi restaurant in Indiranagar, Bengaluru and Suri Andhra Mess in Taramani, Chennai were accepting payments in virtual currencies (Mumbai and Chennai eateries are now closed and the one in Bangalore has stopped accepting) and (ii) that there are few intermediaries which accept payments in Bitcoins for gift cards which in turn facilitate online shopping from popular sites. D 6.150. An important aspect to be taken note of is that virtual currencies cannot be stored anywhere, in the real sense of the term, as they do not exist in any physical shape or form. What is actually stored is the private keys, which can be used to access the public address and transaction signatures. E 6.151. The software program in which the private and public keys of those who own virtual currencies is stored, is called a digital wallet. There are different types of wallets namely (i) paper wallet which is essentially a document that contains a public address for receiving the currency and a private key which allows the owner to spend or transfer the virtual currencies stored in the address (ii) mobile wallet, which is a tool which runs as an app on the smartphone, where the private keys are stored, enabling the owner to make payments in crypto currencies directly from the phone (iii) web wallet, in which the private keys are stored on a server which is constantly online (iv) desktop wallet, in which private keys are stored in the hard drive and (v) hardware wallet, where the private keys are stored in a hardware device such as pen drive. 6.152. All the above types of wallets except the desktop wallet allow a great degree of flexibility, in that they can be accessed from anywhere in the world. For instance, paper wallets are printed in the

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form of QR codes that can be scanned, and a transaction completed by using the private keys. Similarly, mobile wallets run as an app on the smartphone and hence they allow a person to use the crypto currency stored in the wallet for buying anything, even while travelling abroad, provided the vendor accepts payments in crypto currencies. Paper wallets and mobile wallets can also be used to draw fiat currency from virtual currency ATMs available in countries like USA, Canada, Switzerland, etc. 6.153. In other words, most of the wallets except perhaps desktop wallet, have great mobility and have transcended borders. Therefore, despite the fact that the users and traders of virtual currencies are also prevented by the impugned Circular from accessing the banking services, the impugned Circular has not paralyzed many of the other ways in which crypto currencies can still find their way to or through the market. 6.154. Persons who have suffered a deadly blow from the impugned Circular are only those running VC exchanges and not even those who are trading in VCs. Persons trading in VCs, even now have different options, some of which we have discussed above (wizards may have many more options). But the VC exchanges do not appear to have found out any other means of survival (at least as of now) if they are disconnected from the banking channels. 6.155. In all cases where legislative/executive action infringing the right guaranteed under Article 19(1)(g) were set at naught by this court, this court was concerned with a ban/prohibition of an activity. The question of the prohibited/banned activities having the potential to destabilize an existing system, did not arise in those cases. The pleadings contained in the first writ petition filed by the Association, would show that three companies who are members of the Internet and Mobile Association of India, had a combined total of approximately 17 lakhs verified users throughout India. These companies held a combined total of approximately Rs. 1365 crores of user funds in trust. The approximate monthly transaction volume of just these three companies was around Rs. 5000 crores. Even according to the petitioner, the crypto asset industry is estimated to have a market capitalization of approximately 430 billion US dollars globally. India is estimated to contribute between 2 and 10% based on varied estimates. It is admitted in WP (C) No. 373 of 2018 that the total number of investors in Indian crypto market was approximately 20 lakhs and the average daily trade volume was at least Rs. 150 crores, H

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A at the time when the writ petition was filed. Therefore, if a central authority like RBI, on a conspectus of various factors perceive the trend as the growth of a parallel economy and severs the umbilical cord that virtual currency has with fiat currency, the same cannot be very lightly nullified as offending Article 19(1)(g). B 6.156. But nevertheless, the measure taken by RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g). On the question of proportionality, the learned Counsel for the petitioners relies upon the four-pronged test summed up in the opinion of the majority in Modern Dental College and Research C Centre v. State of Madhya Pradesh.109 These four tests are (i) that the measure is designated for a proper purpose (ii) that the measures are rationally connected to the fulfillment of the purpose (iii) that there are no alternative less invasive measures and (iv) that there is a proper relation between the importance of achieving the aim and the importance D of limiting the right. The court in the said case held that a mere ritualistic incantation of “money laundering” or “black money” does not satisfy the first test and that alternative methods should have been explored. 6.157. Let us now see whether the impugned Circular would fail the four-pronged test. In fact, the Privy Council originally set forth in E Elloy de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing,110 only a three-fold test namely (i) whether the legislative policy is sufficiently important to justify limiting a fundamental right (ii) whether the measures designed to meet the legislative objective are rationally connected to it and (iii) whether the means used to impair the right or freedom are no more than is necessary F to accomplish the objective. These three tests came to be known as De Freitas test. But a fourth test namely “the need to balance the interests of society with those of individuals and groups” was added by the House of Lords in Huang v. Secretary of State for the Home Department.111 These four tests were more elaborately articulated by the Supreme Court G of United Kingdom in Bank Mellat v. HM Treasury (No. 2).112

109 (2016) 7 SCC 353 110 [1999] 1 AC 69 111 [2007] UKHL 11 112 H [2013] UKSC 39

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6.158. Bank Mellat (supra) is an important decision to be taken note of, as it concerned almost an identical measure by which Her Majesty’s Treasury restricted access to the UK’s financial markets by a major Iranian commercial bank on account of its alleged connection with Iran’s nuclear program. This was done by the Treasury by way of a direction under Schedule 7 of the Counter Terrorism Act, 2008, requiring all persons operating in the financial sector not to have any commercial dealings with Bank Mellat. Schedule 7 of the Act dealt with “terrorist financing and money laundering”. This Schedule 7 has several parts, Part 1 providing “conditions for giving a direction”, Part 2 indicating the “persons to whom a direction may be given”, Part 3 laying down the requirements that may be imposed by a direction, Part 4 containing C “procedural provisions and licensing”, Part 5 dealing with enforcement and information powers, Part 6 dealing with civil penalties, Part 7 listing out the offences and Part 8 containing supplemental provisions. Paragraph 14 of Schedule 7 of the said Act enables the Treasury to issue general directions, to all persons or a description of persons operating in the financial sector. But certain procedural safeguards are provided in paragraph 14(2) as well as paragraph 9(6). Under paragraph 14(2), a general direction issued to persons operating in the financial sector, must be laid before the Parliament and will cease to have effect if not approved by a resolution of each House of Parliament before the end of 28 days. Under paragraph 9(6), the requirements imposed by a direction, either in the form of customer due diligence or in the form of ongoing monitoring or in the form of systematic reporting or in the form of limiting or ceasing business, should be proportionate, having regard to the advice given by the Financial Action Task Force or having regard to the reasonable belief that the Treasury has about the risks of terrorist financing or money laundering activities or the development of radiological, biological, nuclear or chemical weapons. In addition to these procedural safeguards, Section 63 of the aforesaid Act provided for a remedy to a person affected by any such decision of the Treasury, to apply to the High Court or in Scotland, to the Court of Session. Section 63(3) specifically recognized the application of the principles of judicial review, to the applications filed against such measures. 6.159. It is in the context of those specific statutory prescriptions for judicial review available in UK (unlike in India) that Bank Mellat challenged the Treasury’s decision. The challenge was both on procedural and substantive grounds. By a majority of 6 to 3, the Supreme Court of H

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A the United Kingdom allowed the appeal of the Bank on procedural grounds. On the substantive grounds, the appeal of the Bank was allowed by a majority of 5 to 4.

6.160. Lord Reed who wrote a dissent both on the procedural grounds and the substantive grounds, traced the history of the doctrine B of proportionality as follows:

68. The idea that proportionality is an aspect of justice can be traced back via Aquinas to the Nicomachean Ethics and beyond. The development of the concept in modern times as a C standard in public law derives from the Enlightenment, when the relationship between citizens and their rulers came to be considered in a new way, reflected in the concepts of the social contract and of natural rights. As Blackstone wrote in his Commentaries on the Laws of England, 9 th (1783), Vol 1, p 125, the concept of civil liberty comprises “natural liberty so far restrained by human laws (and not farther) as is necessary and expedient for the general advantage of the public”. The idea that the state should limit natural rights only to the minimum extent necessary developed in Germany into a public law standard known as Verhältnismäßigkeit, or proportionality. From its origins in German administrative law, where it forms the basis of a rigorously structured analysis of the validity of legislative and administrative acts, the concept of proportionality came to be adopted in the case law of the European Court of Justice and the European Court of Human F Rights. From the latter, it migrated to Canada, where it has received a particularly careful and influential analysis, and from Canada it spread to a number of other common law jurisdictions.

69. Proportionality has become one of the general principles G of EU law, and appears in article 5(4) of the Treaty on European Union (“TEU”). The test is expressed in more compressed and general terms than in German or Canadian law, and the relevant jurisprudence is not always clear, at least to a reader from a common law tradition. In R v Ministry

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of Agriculture, Fisheries and Food, ex p Fedesa and others A (Case C-331/88) [1990] ECR I-4023, the European Court of Justice stated (para 13): “The Court has consistently held that the principle of proportionality is one of the general principles of Community law. By virtue of that principle, the lawfulness of the prohibition of an economic activity is subject to the condition that the prohibitory measures are appropriate and necessary in order to achieve the objectives legitimately pursued by the legislation in question; when there is a choice between several appropriate measures recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued.” The intensity with which the test is applied – that is to say, the degree of weight or respect given to the assessment of the primary decision-maker - depends upon the context. D

71. An assessment of proportionality inevitably involves a value judgment at the stage at which a balance has to be H