IMAI v. RBI: striking the crypto banking circular

The facts in brief

The Reserve Bank of India had been issuing public cautions about virtual currencies (VCs) since 24 December 2013, when it warned users of the financial, operational, legal, customer-protection and security risks associated with VC dealings. Successive press releases in February 2017 and December 2017 repeated the cautions and added that no entity had been authorised by RBI to operate schemes or deal in VCs. On 5 April 2018 the RBI issued a Statement on Developmental and Regulatory Policies announcing that, in view of the risks associated with VCs, all entities regulated by RBI would be prohibited from dealing in VCs or providing services for facilitating any person or entity in dealing with or settling VCs. The operational Circular dated 6 April 2018 — issued in exercise of powers under Sections 35A and 36(1)(a) of the Banking Regulation Act 1949, Sections 45JA and 45L of the Reserve Bank of India Act 1934, and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act 2007 — directed that "entities regulated by the Reserve Bank shall not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling VCs". Existing relationships were required to be unwound within three months.

The operational effect was to cut off the banking-payments interface for cryptocurrency exchanges and individual traders. Exchanges could no longer accept fiat deposits from customers via the formal banking system; they could no longer disburse fiat withdrawals through bank accounts. The architecture was a de facto ban on the operational viability of VC exchanges, achieved through the banking-regulator's authority over the entities through which the exchanges accessed fiat liquidity. The substantive prohibition on VCs themselves was not pronounced by RBI — VCs remained legally undefined in the Indian framework — but the practical effect on the industry was severe.

The Internet and Mobile Association of India (IMAI), a trade association whose members included several major crypto exchanges, filed Writ Petition (Civil) No. 528 of 2018 before the Supreme Court. Rajdeep Singh Cheema and other individual traders filed Writ Petition (Civil) No. 373 of 2018. The petitions were heard together. The petitioners argued that RBI had no jurisdiction over VCs since they are neither currency nor money; that the circular violated Article 19(1)(g) by foreclosing the right to carry on the trade of operating a VC exchange; that the circular was disproportionate in the absence of empirical evidence of harm to RBI-regulated entities; and that the absence of legislative regulation of VCs meant the executive had impermissibly stepped into a regulatory vacuum. The Union of India and RBI defended on the substantive risk-management rationale and on the breadth of RBI's statutory mandate.

The three-judge bench of Rohinton F. Nariman, Aniruddha Bose and V. Ramasubramanian JJ heard the petitions at length across 2019 and 2020 and reserved judgment in January 2020. The judgment, authored by Justice V. Ramasubramanian, was delivered on 4 March 2020 and reported as (2020) 10 SCC 274.

The constitutional and statutory question

The case raised three connected questions. The first was whether RBI's statutory jurisdiction under the RBI Act 1934, the Banking Regulation Act 1949 and the Payment and Settlement Systems Act 2007 extends to virtual currencies and to the banking interface with VC exchanges. RBI had argued that its mandate to safeguard the payment-and-settlement system and the consumer banking interface was broad enough to cover anything that posed a threat — currency or not, money or not. The petitioners had argued that VCs are neither currency nor money and that RBI's mandate accordingly did not extend to them.

The second was whether, assuming jurisdiction, the operational restriction on VC exchanges' banking access satisfied the proportionality test that the Modern Dental College v. State of MP (2016) 7 SCC 353 and the K.S. Puttaswamy v. Union of India (2017) 10 SCC 1 doctrinal line had crystallised as the standard of constitutional review for state action affecting fundamental rights. The four-stage proportionality test required RBI's action to pursue a legitimate aim, by suitable means, no more restrictive than necessary, with a balance struck between the impact on the right and the importance of the objective.

The third was whether the expert-body deference doctrine — the Peerless General Finance and Investment Co. Ltd. v. RBI (1992) 2 SCC 343 line — insulated RBI's economic-policy judgement from judicial review on the empirical foundation of the circular. RBI argued that its supervisory judgement was entitled to deference; the petitioners argued that deference does not extend to insulating empirical assumptions from scrutiny on a writ challenge to a fundamental-rights infringement.

What the Court held

Jurisdiction is established

The bench held that RBI's jurisdiction extends to anything that may pose a threat to the payment-and-settlement system or to the consumer banking interface. The regulator's mandate under Sections 45JA and 45L of the RBI Act 1934, Sections 21, 35A and 36(1)(a) of the Banking Regulation Act 1949, and Sections 10(2) and 18 of the Payment and Settlement Systems Act 2007 is broad and purposive. Whether VCs are technically "currency" or "money" is doctrinally interesting but operationally not the gating question — the gating question is whether VCs engage the payment-and-settlement system, and the Court answered affirmatively.

The petitioners' jurisdictional attack accordingly failed. The first limb of the case was a complete victory for RBI on statutory competence. The Court was careful to distinguish jurisdictional competence from the constitutional validity of any particular exercise of that competence — the regulator's capacity to act and the regulator's justification for a specific action being analytically separate questions.

Proportionality applies

The bench held that when a regulator's action restricts a fundamental right under Article 19(1)(g), the action must satisfy the proportionality test. The four-limb framework — legitimate aim, suitable means, necessity (least-restrictive measure), and balance — applies to economic-policy regulator action no less than to other categories of state action affecting fundamental rights. The constitutional architecture does not admit a category of regulator action that is insulated from proportionality review.

The position as on date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline, namely, the interface with the regular banking sector.

The expert-body deference doctrine survives but does not extend to insulating empirical assumptions from judicial scrutiny. The regulator is entitled to deference on the framing of policy objectives and on the choice among reasonable means — but where the action restricts a fundamental right, the regulator must be able to demonstrate the empirical foundation for the necessity of the restriction.

Necessity limb fails

The substantive holding turned on the necessity limb of the proportionality test. Despite RBI's nearly five-year history of public cautions about VCs from December 2013 onwards, RBI had not produced any empirical material showing that the RBI-regulated entities — banks, NBFCs, payment system operators — had actually suffered any loss or sustained any harm on account of dealings with crypto exchanges. The supervisory hypothesis was articulated; the empirical demonstration was absent.

The architecture of necessity requires more than supervisory apprehension of theoretical harm. It requires the regulator to show that less-restrictive alternatives — graded supervisory measures, KYC and AML mandates, transaction reporting requirements, customer-protection sectoral guardrails — had been considered and demonstrated to be inadequate. RBI had not made out the case that intermediate measures were insufficient before the categorical disconnection was imposed. The proportionality test accordingly failed on the necessity limb.

When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite four years of deliberations, the impugned Circular cannot be sustained on the touchstone of proportionality.

The Circular is struck down

The bench set aside the RBI Circular dated 6 April 2018. The disconnection of the banking interface for VC exchanges accordingly stood vacated; RBI-regulated entities were free to provide banking services to VC exchanges subject to ordinary KYC, AML and customer-due-diligence obligations.

The Court was careful to record what it was not deciding. The judgment expressly does not legalise cryptocurrency. It does not declare VCs to be currency, money or any other regulated financial instrument. It does not rule on the legality of crypto trading itself — that remains a matter for legislative and executive determination. Parliament and the executive remain free to regulate or to prohibit VCs through appropriate legislation. And the door remains open for RBI to re-issue a banking-disconnection circular supported by demonstrated empirical foundation; the judgment forecloses the specific 6 April 2018 circular on the specific evidentiary record, not the general supervisory competence to act.

The doctrinal architecture

IMAI v. RBI accomplishes three structural moves. First, it establishes that Article 19(1)(g) proportionality review applies to banking-regulator action without exception for economic-policy categorisation. The Modern Dental College and Puttaswamy proportionality framework is consolidated as the standard of constitutional review for state action affecting fundamental rights, including action by financial-sector regulators. The judgment is now the principal authority cited where a regulator's action is challenged on Article 19 grounds.

Second, it disciplines the expert-body deference doctrine. Deference is preserved as a substantive constitutional value — the courts are not equipped to second-guess the regulator on macroeconomic-prudential judgement, and the architecture of judicial review accommodates that institutional reality. But deference does not extend to insulating empirical assumptions from scrutiny. The regulator must be able to show that the foundation for restrictive action is grounded in demonstrated rather than hypothetical harm where the action affects a fundamental right.

Third, it supplies the doctrinal architecture for the regulatory treatment of novel financial instruments and novel technology-mediated trade. The judgment is the principal Indian authority on regulator response to cryptocurrency and is increasingly cited in adjacent contexts — fintech innovation, embedded finance, virtual-asset service providers, and the proposed central bank digital currency (CBDC) architecture. The proportionality framework supplied by the judgment carries through to those contexts as a structural disciplining input on regulator action.

What the judgment did not decide

The judgment does not decide the legal status of cryptocurrency itself. VCs remain undefined in the Indian framework as of the judgment date; the legislative architecture for VC regulation — the proposed Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019 and its successor Cryptocurrency and Regulation of Official Digital Currency Bill 2021 — was never enacted. The legality of crypto trading is left for legislative determination.

It does not address the taxation of crypto gains. The Finance Act 2022 subsequently brought virtual digital assets (VDAs) within the income-tax architecture under Section 115BBH (30 per cent flat tax) and Section 194S (1 per cent TDS) — an implicit recognition of legal trading activity that operates within the architecture left open by IMAI v. RBI. It does not address the application of the Prevention of Money Laundering Act 2002 to VDA service providers — subsequently brought within the PMLA reporting-entity architecture by the Ministry of Finance notification dated 7 March 2023 under Section 2(1)(sa) PMLA.

It does not address the constitutional status of any future ban legislation. Parliament's competence to regulate or prohibit VCs through legislation is preserved; the proportionality framework would apply to any such legislation on its own terms. It does not address whether a future, evidence-backed RBI circular with the same operational effect would survive — leaving open a re-issued, better-justified version. And it does not address the central bank digital currency (CBDC) architecture — the Reserve Bank's Digital Rupee pilot, launched 1 November 2022 (wholesale) and 1 December 2022 (retail), operates on a separate statutory architecture and was not within the contemplation of the judgment.

After the judgment

The judgment is the foundational Indian crypto-regulation authority and has been widely cited in subsequent regulatory and litigation activity. RBI did not immediately re-issue a banking circular but on 31 May 2021 informally clarified — through a letter to banks — that banks may continue to carry out customer due diligence on VC-related transactions based on KYC, AML and PMLA standards, and could not deny services to customers on the ground of the 6 April 2018 circular alone (the circular having been set aside). The architecture of normal banking access to VC exchanges was thereby restored.

The taxation architecture moved through the Finance Act 2022. Section 115BBH of the Income Tax Act 1961 taxes VDA gains at 30 per cent with no deductions other than cost of acquisition; Section 194S requires 1 per cent TDS on VDA transactions above a threshold. The Ministry of Finance notification dated 7 March 2023 brought VDA service providers within the Prevention of Money Laundering Act 2002 architecture as reporting entities. The Financial Intelligence Unit – India maintains a registration regime for VDA service providers; enforcement action against non-compliant offshore exchanges accelerated through 2023 and 2024.

The proportionality framework from IMAI v. RBI has been applied in subsequent banking-regulator challenges including Yes Bank Ltd v. RBI (2020–21 reconstruction-scheme challenges), the Whatsapp Inc. v. RBI line on intermediary-payment-data challenges, and several smaller-bank licensing matters. The case is the principal proportionality-test precedent for any regulator action affecting Article 19(1)(g) and is regularly cited in writ petitions challenging RBI, SEBI and IRDAI action.

The judgment's standing as a constitutional landmark has, however, been complicated by the persistent public misreading that it legalised cryptocurrency. The Court did not legalise crypto; it set aside one specific banking-disconnection circular. The architectural distinction between regulator-action-proportionality and crypto-legality is foundational, and the judgment is properly understood as belonging to the first category. The legislative question on cryptocurrency remains open as of June 2026.

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Sources

1. SCC OnLine — Internet & Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274.
2. sci.gov.in — judgment text for Writ Petition (Civil) No. 528 of 2018 and connected matters.
3. BarandBench — coverage of the 4 March 2020 judgment and the RBI 31 May 2021 letter.
4. LiveLaw — IMAI v. RBI coverage and post-judgment regulatory analysis.
5. SCC OnLine Blog — proportionality framework analysis post-IMAI v. RBI.
6. Reserve Bank of India press releases archive — Circular dated 6 April 2018 and subsequent clarifications.