"RBI cannot step out of its powers as set out in Banking regulation Act. Therefore, its action against private businesses in the form of a circular is illegal," IAMAI counsel Ashim Sood said.
The counsel also emphasized that the central bank did not undertake research before issuing the ban.
Advocate Sood also informed the court about definitions of 'virtual currency' and cited various sources to show that there are many meanings of virtual currency and various types of it. He said that the circular is vague because it does not define virtual currencies.
The counsel cited various judgements in support of his petition and cited the acts of regulations taken up by the G20 nations like US.
Cryptocurrencies are digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds.
According to the April 6 circular of last year, the entities regulated by the RBI are prohibited from "providing any service in relation to virtual currencies, including those of transfer or receipt of money in accounts relating to the purchase or sale of virtual currencies".
The Internet and Mobile Association of India said that the RBI had banned cryptocurrencies on "moral grounds" as no prior studies were conducted to analyse the effect of these virtual currencies on the economy.
The association contended that the RBI circular has barred all the entities regulated by the apex bank from providing services to any individual or business dealing in virtual currencies like cryptocurrencies.
IAMAI said that the blockchain technology adopted in these virtual currencies was not disputed and, therefore, a blanket ban was "arbitrary, unfair and unconstitutional".
As the argument remained inconclusive, the court has listed the matter for next Tuesday for further hearing.
The Internet and Mobile Association of India is a not-for-profit industry body whose mandate is to expand and enhance the online and mobile value added services sectors.
( With inputs from IANS )