Context: SC lifts Ban on virtual currencies that was imposed by RBI

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.
• Virtual Currencies are mostly created, distributed and accepted in local virtual networks.
• Virtual currency also includes Cryptocurrencies that have an extra layer of security, in the form of encryption algorithms

CryptoCurrency

• It is a digital asset designed to work as a medium of exchange that uses strong cryptography to control the creation of additional units, to secure financial transactions and verify the transfer of assets
• These transactions are verified by network nodes and recorded in public distributed ledger called blockchain 
• They are being transferred, stored or traded electronically.
• Thus, Crypto Currencies are type of unregulated digital money. 
• They are neither issued by central bank/public authority, nor is necessarily attached to fiat currency, but is used and accepted among the members of a specific virtual community 

Blockchain Technology:

• Block chain is a decentralised digital ledger 
• It was invented by Satoshi Nakamoto in 2008 for use in the cryptocurrency bitcoin 
• Blockchains achieve consensus among distributed nodes, allowing the transfer of digital goods without the need for centralized authorisation of transactions.
• Its working can be represented through the below diagram. 

• The Internet allows computers to exchange information; Blockchain allows computers to record information. Both use a lot of computers (nodes).
• The technology thus allows transactions to be simultaneously anonymous and secure, peer-to-peer, instant and frictionless. 

Dinesh Sharma Committee

• It was an inter-disciplinary committee set up in April 2017 by Finance Ministry to look into cryptocurrency legitimacy.
• The committee recommended a total ban on cryptocurrency in India 

Subhash Chandra Garg committee

• It was formed in Nov 2017 to draft regulations for cryptocurrencies.
• It also recommended banning cryptocurrencies in India, citing risks and volatility in prices
• It recommended heavy penalties of up to Rs 25 crore and a jail term up to 10 years for anyone who mines, generates, holds, sells, transfers or issues cryptocurrency.

Criticism of Crypto Currencies:

• Highly speculative nature of assessing their value. For ex: the cryptocurrency traded at a peak of $20,000 in mid-2018 before crashing to $3,000 by the end of the year.
• It is not backed by any central institution but derives trust from its intricate blockchain ledger system. 
• Bitcoins, with their assured anonymity is used in illicit transactions over the “dark web”.

Merits of cryptocurrencies 

• Cryptocurrencies have now been adopted by international trading firms for use in lending, raising funds for other cryptoprojects 
• It facilitates easier cross-border payments
• European Union has not out rightly banned the instrument but have sought to regulate its functioning. 
• The 2019 Bill on Cryptocurrency even proposed the creation of a “digital rupee” as official currency. 

Arguments made by Petitioners in SC against RBI ban

• The ban choked the agencies that sought to provide a platform to facilitate trading in cryptocurrencies by cutting them off from banks. 
• This had a chilling effect on the fledgling cryptocurrency exchanges industry in India and went against their entrepreneurial right to operate a business enshrined in Article 19(1)(g).
• Article 19(1)(g) states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.

Key Highlights of the Supreme Court Judgement

• The court found the ban did not pass the “proportionality” test as mentioned in Article 19(2) 
• Besides, RBI had not considered the availability of alternatives before issuing the order i.e. achieving the same objective by imposing a less drastic restraint.
• Till date, the RBI has not come out with a stand that any of the entities regulated by it have suffered any loss or adverse effect directly or indirectly, on account of VC exchanges.

Conclusion

It is now imperative on authorities to find the right “regulatory balance” on cryptocurrencies, task that is easier thought than done, considering their ever-evolving nature due to technological innovation.