The Supreme Court of India vs. The Reserve Bank of India

IRAC Summary:

Issue: Whether the Reserve Bank of India’s (RBI) action of prohibiting banks and financial institutions from providing services in relation to virtual currencies is legal and constitutionally valid.

Rule: The relevant legal provisions include:
1. The Constitution of India, particularly Article 19(1)(g) that guarantees the freedom to practice any profession, or to carry on any occupation, trade, or business.
2. The Banking Regulation Act, 1949, and the powers of RBI to issue directions to banks under Section 35A.
3. The RBI Act, 1934, which outlines the functions and powers of the Reserve Bank as the central banking authority.

Application: The RBI’s directive was challenged on the grounds that it was arbitrary, disproportionate, and violative of the right to practice any profession or to carry on any occupation, trade, or business guaranteed under the Constitution. The RBI’s action was evaluated in light of its statutory authority to ensure the stability of the banking system and the economy as a whole. The Court examined the availability of less restrictive measures and the balance between any potential harm caused by virtual currencies and the rights of those involved in the virtual currency market.

Conclusion: The Supreme Court of India struck down the RBI’s circular on the grounds that it was unreasonable and disproportionate, thereby allowing banks and financial institutions to provide services to the virtual currency market within the regulatory framework.

Detailed IRAC Outline:


  • Overview of the rise of virtual currencies.
  • The RBI’s concerns regarding the potential risks associated with virtual currencies.
  • The issuance of a circular by RBI prohibiting banks and financial institutions from dealing in virtual currencies or providing services for facilitating any person or entity in dealing with or settling virtual currencies.


  • The central legal question is whether the prohibition imposed by the RBI on banks and financial institutions is a valid exercise of its statutory and regulatory powers.


  • The Constitution of India provides the backdrop for assessing the validity of the restrictions imposed by the RBI.
  • Statutory provisions empowering RBI to regulate the financial system, including the Banking Regulation Act and the RBI Act, provide the legal framework for the central bank’s actions.

Application (Detailed Discussion):

  1. Authority of RBI: Examination of the statutory provisions that lay down the powers and functions of the RBI to determine if the impugned circular falls within the scope of its regulatory authority.

  2. Freedom to Conduct Business: Analysis of how the prohibition affects the constitutional right to conduct business under Article 19(1)(g) and whether the restrictions are justified under Article 19(6), which allows the state to impose reasonable restrictions in the interest of the general public.

  3. Proportionality Test: Application of the proportionality test to assess whether the blanket ban on providing services in relation to virtual currencies is a necessary and least restrictive means to achieve the intended objectives.

  4. Evidence and Risks: Evaluation of the evidence provided by the RBI regarding the risks associated with virtual currencies and whether these risks could be mitigated by measures less drastic than an outright ban.

  5. Impact on Stakeholders: Consideration of the impact of the RBI’s circular on the businesses and individuals engaged in the virtual currency market, and whether the RBI considered the interests of these stakeholders while issuing the directive.

  6. Alternative Measures: Discussion on the alternative regulatory measures that could have been adopted by the RBI to address its concerns without imposing a blanket ban, including robust Know Your Customer (KYC) norms, anti-money laundering (AML) provisions, and other regulatory safeguards.


  • The final determination of the Supreme Court that the RBI’s prohibition on banks and financial institutions from providing services related to virtual currencies was not proportionate to the risks posed, and therefore, the circular was set aside as being violative of the Constitution and the principles of proportionality.

Recommendations (If part of the study outline):

  • Suggestions for the RBI on how to create a balanced regulatory framework for virtual currencies that addresses its concerns while not infringing on the constitutional rights of businesses and individuals.
  • The need for a legislative framework specifically tailored to address the complexities of virtual currencies and their impact on the financial system and economy.

Further Research:

  • A comparative study of international regulatory approaches to virtual currencies to draw lessons for the Indian context.
  • Analysis of the potential economic impact of virtual currencies in India and their implications for the traditional banking system.

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