The banking obstacles faced by Indians hoping to transact on crypto exchanges has failed to dampen their appetite for cryptocurrencies. Indian investors are now trying to circumvent the restrictions imposed by the big banks on crypto transactions by using alternative methods like peer-to-peer transfers, a report by the Economic Times says.
Indian exchanges have been dealing with banking challenges for the last six months. In May, ICICI Bank reportedly asked payment processing platforms to block all crypto-related transactions. A few days later, State Bank of India’s payment and card services as well as HDFC Bank sent warning emails to customers about dealing with cryptocurrencies and threatened account suspension or closure.
The emails cited a now-defunct 2018 circular by the Reserve Bank of India that asked banks to cut ties with crypto businesses. On May 31, the country’s central bank issued a statement saying its 2018 circular was invalid since it was struck down by the apex court last year. However, the RBI did not direct banks to resume services to crypto businesses. On the contrary, according to a Reuters report, despite the supreme court order, the RBI has been informally urging banks to distance themselves from crypto exchanges.
Earlier this month, as crypto exchange WazirX reintroduced net banking services from select banking partners, it seemed like the banking challenges might be finally going away. However, last week, SBI, the country’s largest public sector bank, blocked payments through its unified payments method to crypto businesses. WazirX has also suspended its UPI payment option for all banks again. The UPI payment method allows users to transfer funds directly using an email-like payment address that is linked to bank accounts.
Amid the ongoing banking issues, Indians are increasingly looking towards alternative methods like P2P trades to invest in cryptocurrencies. Other methods that have gained popularity include spot trading, trading and buying through WhatsApp and Telegram groups, and direct buying through mutual funds, according to the Economic Times report. These modes of transaction now make up almost 80% of all trades on exchanges in India, the report says.
In P2P trades, the exchanges act as an escrow. Buyers can place orders to purchase Tether, the world’s largest stablecoin, through the P2P option using its fiat currency. Once the buy order is matched with a seller, the exchange holds the number of tokens in the buy order for safekeeping while the buyer has to transfer the fiat funds to the seller’s bank account. Once the seller confirms the receipt of payment, the USDT tokens are released to the buyer. The USDT tokens can then be converted into any cryptocurrency by the buyer.
Kaparthi Jonnalagadda, an entrepreneur and crypto investor, prefers P2P trades over buying directly from the exchange because of competitive prices. “Most P2P sellers offer cheaper rates than the market price on exchanges,” he said.
Moreover, the banking issues can easily be overcome through the P2P method, since the transaction directly takes place between the buyer and the seller. “When you buy from the exchange, the name of the exchange shows up in the bank transaction, which is where the payments get blocked,” Jonnalagadda said. However, when conducting P2P trades, it is a direct transaction between the two parties where the exchange is not involved. Therefore, these transactions cannot be blocked by banks.
The increase in alternative trading methods, which were commonly used prior to the rise of crypto exchanges, suggests that India’s hunger for cryptocurrencies is only increasing, despite the regulatory uncertainty. The country ranked second in Chainalysis’ 2021 Crypto Adoption Index, while most exchanges are reporting an astronomical increase in new user signups. 2021 also saw the birth of India’s first crypto unicorn CoinDCX while crypto exchange CoinSwitch Kuber became the largest exchange in terms of number of users with over 10 million customers.
Cryptocurrencies currently fall in a regulatory gray area in the country. The crypto bill, which reportedly seeks to classify cryptocurrencies as commodities in the asset class, is currently awaiting approval from the Union Cabinet before it can be introduced in parliament.