Internet & Mobile Association of India v. Reserve Bank of India

Case Details

Introduction

Imagine waking up one day to find that your bank account has been frozen, not because you did anything illegal, but because the Reserve Bank of India (RBI) simply does not trust the industry you work in. That is exactly what happened to thousands of cryptocurrency traders and exchanges in India after the RBI’s 2018 circular cut them off from the banking system. The case of Internet and Mobile Association of India v. Reserve Bank of India, decided by the Supreme Court on March 4, 2020, became the turning point in this story. It is remembered today not just as India’s “crypto case,” but as one of the clearest examples of the Court applying the doctrine of proportionality to test whether a regulator’s actions were truly justified, or simply an overreaction dressed up as caution.

Facts of the Case

The story begins in the aftermath of demonetisation and the global rise of Bitcoin, when virtual currencies started gaining serious traction among Indian investors. Alarmed by the risks of money laundering, terror financing, and consumer harm associated with unregulated digital assets, the RBI issued repeated cautionary press releases between 2013 and 2017, warning the public against dealing in virtual currencies (VCs).

Matters escalated on April 6, 2018, when the RBI issued a formal circular under Section 35A read with Section 36(1)(a) of the Banking Regulation Act, 1949. This circular directed all entities regulated by the RBI, including banks, to stop providing any banking services, such as maintaining accounts, granting loans, or facilitating payments, to any individual or business dealing in virtual currencies. Entities that already had such relationships were told to exit them within three months. In effect, this did not ban cryptocurrency itself, since no law in India prohibited owning or trading it, but it achieved almost the same result by choking off the banking lifeline that every exchange and trader needed to function.

The consequences were immediate and severe. Cryptocurrency exchanges saw their trading volumes collapse, some shut down entirely, and others were forced to experiment with risky peer-to-peer or barter-style arrangements just to stay afloat. The Internet and Mobile Association of India (IAMAI), a not-for-profit body representing internet and technology companies including several crypto exchanges such as WazirX and CoinDCX, along with individual traders, approached the Supreme Court under Article 32 of the Constitution, challenging the circular as unconstitutional, arbitrary, and beyond the RBI’s regulatory powers.

Issues Before the Court

The Supreme Court had to answer a handful of tightly connected questions. First, did the RBI have the statutory authority to restrict banking services to entities dealing in virtual currencies, even though it had not been shown to directly regulate or control such currencies itself?

Second, did the circular violate the petitioners’ fundamental right to carry on trade or business under Article 19(1)(g) of the Constitution?

Third, was the circular disproportionate and arbitrary, thereby falling foul of Article 14’s guarantee of equality and reasonableness, especially since the RBI could not point to any concrete, empirical harm suffered by its regulated entities because of virtual currency trading?

Arguments of the Parties

The petitioners, appearing through senior counsel, argued that trading in virtual currencies was a legitimate business activity protected under Article 19(1)(g), and that the RBI circular amounted to a blanket, disproportionate restriction that killed an entire industry without any law actually prohibiting the activity. They pointed out that the RBI had never conducted any empirical study showing that cryptocurrency exchanges had caused measurable harm to banks or to the financial system. They also argued that safer, less drastic alternatives, such as regulating exchanges through Know-Your-Customer and anti-money-laundering norms, were available but were never seriously considered before this blunt, all-or-nothing ban was imposed.

The RBI, represented by senior counsel, defended the circular as a legitimate exercise of its statutory mandate to protect the integrity of the banking and financial system. It argued that virtual currencies posed genuine risks, including extreme price volatility, the absence of any underlying issuer or asset, vulnerability to hacking, and their potential misuse for money laundering and terror financing. The RBI maintained that as the country’s monetary authority, it was entitled to take a precautionary, even preventive, approach and that courts should be slow to second-guess the expert judgment of a specialised regulator on matters of financial stability.

Judgment

By a unanimous verdict, the three-judge bench struck down the RBI circular of April 6, 2018, declaring it unconstitutional and unenforceable. The Court accepted that the RBI, as India’s central bank, undoubtedly possessed wide powers to regulate the banking sector and to act in the interest of monetary stability, and it did not dispute the RBI’s good faith or its general concern about the risks of virtual currencies. However, it held that possessing regulatory power is not the same as being free to exercise that power without restraint or justification.

The decisive finding was that the RBI had failed to demonstrate, through any tangible or empirical material, that the entities it regulated, meaning the banks, had actually suffered any adverse effect on account of the crypto exchanges’ dealings with virtual currencies, despite virtual currencies having been in existence and traded in India for years before the circular was issued. In the absence of such demonstrable harm, the circular’s blanket restriction was found to be disproportionate to the objective it sought to achieve, and it was accordingly set aside on the ground that it violated the petitioners’ right to carry on a lawful trade under Article 19(1)(g) of the Constitution.

Reasoning of the Court

At the heart of the judgment lies the Court’s application of the doctrine of proportionality, a principle that tests whether a restriction on a fundamental right is genuinely necessary and appropriately calibrated to the harm it seeks to prevent. Drawing on precedents such as Modern Dental College and Research Centre v. State of Madhya Pradesh, which laid down the four-fold proportionality test, and the United Kingdom’s Bank Mellat v. Her Majesty’s Treasury, the Court examined whether the RBI’s circular pursued a legitimate aim, whether it was rationally connected to that aim, whether a less intrusive measure could have achieved the same objective, and whether the restriction struck a fair balance between the rights of the individual and the interests of the community.

The Court accepted that protecting the financial system from money laundering and instability was a legitimate regulatory aim. It also agreed that the RBI, as an expert body entrusted with overseeing the economy, was entitled to a degree of deference in matters of financial policy, relying on earlier rulings such as State of Rajasthan v. Basant Nahata that recognised the RBI’s specialised institutional competence. However, deference to expertise is not a blank cheque. The Court repeatedly returned to one central gap in the RBI’s case: despite years of monitoring virtual currencies, the RBI could not produce a single instance where a regulated bank had suffered actual loss or harm because of its dealings, direct or indirect, with a virtual currency exchange.

Because that crucial evidentiary link was missing, the circular failed the necessity and balancing limbs of the proportionality test. The Court noted that the RBI had considered, and in earlier internal discussions had even leaned towards, a regulatory rather than prohibitory approach, yet it ultimately chose the most extreme option available: a complete severance of banking access. Since less drastic alternatives, such as enhanced due diligence, reporting obligations, or graded regulation, existed and had not been shown to be inadequate, the outright banking ban went further than what was reasonably necessary.

The Court also invoked its earlier reasoning in State of Maharashtra v. Indian Hotel and Restaurant Association to hold that at least some measure of demonstrable damage or risk must be shown before an entire trade can be curtailed, and that the petitioners had suffered real, quantifiable losses sufficient to grant them standing and relief. Importantly, the Court was careful not to declare virtual currencies to be legal tender, currency, or a recognised commodity, leaving that classification question to Parliament and the executive, and confining itself strictly to testing the proportionality of the RBI’s regulatory action.

Significance of the Judgment

This judgment is widely regarded as one of the most significant applications of the proportionality doctrine in Indian constitutional law, standing alongside cases like Puttaswamy in shaping how courts scrutinise restrictions on fundamental rights. It sent a clear message that even an expert, well-intentioned regulator like the RBI cannot restrict a lawful trade merely on the basis of apprehended risk; it must back its action with concrete evidence and choose the least restrictive means reasonably available.

Practically, the ruling breathed new life into India’s cryptocurrency industry, allowing exchanges to reconnect with the banking system and paving the way for renewed investment and innovation in the fintech space. It also triggered a broader policy conversation, prompting the government to work towards dedicated legislation on virtual digital assets, eventually resulting in a specific tax and reporting framework for cryptocurrency transactions being introduced through the Finance Act, 2022. Beyond crypto, the case has become a go-to precedent whenever regulators impose sweeping restrictions without adequate empirical backing, reinforcing that economic freedom under Article 19(1)(g) cannot be curtailed by regulatory anxiety alone.

Conclusion

The IAMAI judgment is a reminder that regulatory power, however well-meaning, must always operate within constitutional limits. The RBI was not wrong to be cautious about a volatile and largely unregulated asset class, but caution alone cannot justify shutting an entire industry out of the banking system without proof of real harm. By insisting on evidence and proportionality rather than accepting fear as a substitute for reasoning, the Supreme Court struck a careful balance between protecting financial stability and safeguarding the constitutional right to trade. Five years on, as India continues to grapple with how best to regulate digital assets, this case remains the foundational precedent insisting that even the country’s most powerful financial regulator must show its work.

References

1.Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No. 528 of 2018, Supreme Court of India, decided March 4, 2020.

2.Indian Kanoon, full text of the judgment, available at indiankanoon.org.

3.Modern Dental College and Research Centre v. State of Madhya Pradesh, (2016) 7 SCC 353.

4.State of Maharashtra v. Indian Hotel and Restaurant Association, (2013) 8 SCC 519.

5.Bank Mellat v. Her Majesty’s Treasury (No. 2), [2013] UKSC 39.