The State Bank of India, the country’s largest public sector bank, has blocked payments to cryptocurrency exchanges on its Unified Payments Interface (UPI), according to a report by the Economic Times. The UPI payment method allows users to directly transfer funds to other accounts using UPI addresses that are similar to email addresses and are linked to bank accounts. 

SBI has reportedly asked payment processors to block all payments to crypto exchanges. This means that crypto investors in India cannot use SBI’s UPI payment method to process transactions on exchanges. 

Over the last six months, crypto exchanges in India have been increasingly dealing with banking challenges. In May, SBI Cards and Payments services had sent emails to its customers demanding clarifications for crypto-related transactions. The email cited a defunct 2018 central bank circular banning banks from dealing with crypto businesses, which was struck down by the country’s apex court early last year. 

The email advised customers against dealing with cryptocurrencies and threatened account suspensions or closures in case of failure to comply with its demands. HDFC Bank had sent similar emails to its customers at the same time. Earlier in the month, ICICI bank, the country’s largest private lender, had blocked payments to crypto businesses. 

On May 31, the Reserve Bank of India, the country’s central bank, issued a statement to clarify that its 2018 circular cannot be cited since it was struck down by the Supreme Court. However, RBI’s statement did not direct banks to restart services to crypto businesses, despite having the authority to do so. Following RBI’s statement, HDFC and SBI retracted their emails. 

Over the next few months, crypto exchanges continued to negotiate with banks to restart services, while the only mode of payment available was through mobile wallets. For instance, crypto exchange WazirX, which is owned by Binance, only allowed payments through the MobiKwik wallet. However, transaction limits and wallet charges had made customers wary of conducting crypto transactions. 

In early September, however, most exchanges including WazirX and CoinDCX, which turned unicorn — a startup worth over $1 billion — last month, reintroduced payments through net banking supported by select banks. The list of supporting banks included major names like Deutsche Bank, Federal Bank, IDBI Bank, Indian Overseas Bank and Punjab National Bank. 

Moreover, WazirX had also reintroduced the payment through UPI option, which has again been suspended. CoinDCX, however, still allows payments through the UPI method. 

WazirX CEO Nischal Shetty told the Economic Times: “We’re trying to discuss and put forward our points to SBI. WazirX follows know your customer [KYC] norms and anti-money laundering [AML] policies. Being the largest crypto exchange in India, millions of Indians are currently affected due to this move by SBI.”

The latest banking challenge arises despite the fact that cryptocurrencies currently fall in a regulatory gray area. The RBI has reiterated its stance against cryptocurrencies and has proposed a blanket ban. According to a Reuters report in May 2021, the RBI has been urging banks to cut ties with crypto businesses behind the scenes. 

The country’s crypto bill is currently awaiting approval from the Union Cabinet. The bill will be introduced in the next session of parliament if the cabinet nod comes by November. 

Despite the regulatory uncertainty, India’s crypto sector has been thriving. Earlier this month, U.S.-based crypto exchange CrossTower entered India, while the country’s crypto businesses have been attracting capital from the Silicon Valley and other international venture capital funds. 

Moreover, Indian teens are earning small fortunes from the sector while crypto penetration among adults is increasing at an unprecedented rate, especially in the smaller towns and cities. Last week, CoinSwitch Kuber became the largest exchange in the country in terms of number of users with over 10 million customers. 

However, given India’s 1.3 billion population, the crypto sector is still at a nascent stage with a major lack of knowledge about the sector among the majority of the population.