Context: The Supreme Court has set aside a ban by the Reserve Bank of India (RBI) on banks and financial institutions from dealing with virtual currency holders and exchanges.

• The court held that the ban did not pass the “proportionality” test. The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1)(g), which states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.
• In a circular in 2018, the RBI had banned banks from dealing with virtual currency exchanges and individual holders on the grounds that these currencies had no underlying fiat and that it was necessary in the larger public interest to stop banks from providing any services related to these.

About Virtual Currency 

There is no globally accepted definition of what exactly is virtual currency. Basically, virtual currency is the larger umbrella term for all forms of non-fiat currency being traded online.

• Fiat Money is a kind of currency, issued by the government and regulated by a central authority such as a central bank. Such currencies act like legal tender and are not necessarily backed by a physical commodity.
• Virtual currencies are mostly created, distributed and accepted in local virtual networks. Virtual Currencies also includes cryptocurrencies.
• Cryptocurrencies have an extra layer of security, in the form of encryption algorithms.
• Most cryptocurrencies now operate on the blockchain or distributed ledger technology, which allows everyone on the network to keep track of the transactions occurring globally.
• Popular forms of cryptocurrencies include Bitcoin, Ethereum, etc.
• Satoshi Nakamoto, widely regarded as the founder of the modern virtual currency bitcoin and the underlying technology called blockchain, defines bitcoins as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party (central regulator)”.

Why did the RBI ban virtual currencies?

• In its arguments in the Supreme Court, the RBI said it did not want these virtual currencies spreading like contagion, and had therefore, in the larger public interest, asked banks not to deal with people or exchanges dealing in these non-fiat currencies. 
• Lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules.
• Risks and concerns about data security and consumer protection.
• Potential impact on the effectiveness of monetary policy.

Arguments in Support of Use of Virtual Currencies in India

• RBI should have adopted a wait-and-watch approach, as taken by other regulators such as the Directorate of Enforcement or the Securities and Exchange Board of India.
• Digital/virtual currencies (both private or government backed) are integral part of digital economy and digital countries.