When it comes to illustrating the uncertain status of cryptocurrencies in India, it would be difficult to beat the three-way regulatory wrangle that has taken place in recent months between the country’s central bank, its top court and some of its largest lenders.
In the absence of regulation and rumors of an impending ban on cryptocurrencies, the country’s biggest banks have been trying to distance themselves from the crypto community, apparently egged on by the Reserve Bank of India.
In May, HDFC Bank sent a number of its customers an email warning them against virtual currency transactions. The email cited an RBI circular published on April 6, 2018, instructing all of the businesses it regulates to cease any involvement with cryptocurrencies.
State Bank of India Cards & Payment Services sent similar emails to its customers, not only requesting clarification about cryptocurrency transactions but also advising against engaging in them. The emails warned customers that failures to comply with its de facto ban on crypto-linked activities could result in account suspensions or closures.
The banks’ emails predictably prompted an uproar among customers, with many taking to social media to express their discontent.
Also last month, several large banks — including ICICI Bank, the country’s largest private lender — stopped providing services to crypto exchanges. Banks reportedly asked payment gateways to block internet banking and other services to merchants dealing with cryptocurrencies.
Since then, several cryptocurrency exchanges have reported difficulties with bank deposits and transfers. Following the closure of crypto exchanges’ bank accounts, several exchanges have struggled to provide their users with payment alternatives.
WazirX, for instance, one of India’s largest crypto exchanges, currently offers deposits and withdrawals only through payment wallet MobiKwik, as it is no longer able to offer the internet banking and Unified Payments Interface options it had previously made available.
All of this has taken place despite the fact that the RBI’s circular was struck down by the Supreme Court early last year. The court contended in its March 2020 ruling that the RBI had failed to provide sufficient proof, and to detail instances of losses arising from crypto transactions, that might merit such a drastic measure as its de facto ban on banks’ involvement with cryptos.
On May 31, fully 14 months after the court’s decision, the RBI issued a circular to clarify that its 2018 circular, cited by the banks in their emails, was legally invalid since it had been struck down by the court. The circular could not be “cited or quoted from,” it said.
Crypto exchanges regard the RBI’s latest circular as a step in the right direction. Nischal Shetty, the CEO of Binance-backed exchange WazirX, told Forkast.News: “It’s an excellent move by the RBI. It brings in a lot of clarity for the banks. They’ve been on the fence [about] whether they should service the crypto industry or not. Now there’s clarity that will help banks provide services to [the] crypto industry.”
Vikram Subburaj, CEO of crypto exchange Giottus Technologies, said: “This is a huge victory for the thriving crypto ecosystem in India. Many investors and startups like ours were inconvenienced by banks citing the defunct RBI circular.
“This update from the RBI could have come immediately post the Supreme Court’s verdict in 2020, but we are nonetheless thankful for this clarification now. However, we feel the RBI could have definitely done more now to encourage relationships between banks and the crypto ecosystem instead of just the clarification.”
Anirudh Rastogi, a founder of Ikigai Law who represented cryptocurrency exchanges before the Supreme Court last year, however, said the RBI’s clarification was too little, too late, telling Forkast.News: “This circular stops short of denying the banks the power to decline services to cryptocurrency businesses and users.”
Rhetoric and reality
Although the country’s central bank has made it clear — albeit with palpable reluctance — that it does not regard cryptocurrencies as illegal, it has taken no action against the banks that sent out warning emails. Nor has it tried to stop them from refusing crypto-related services to users in the future. This, despite the fact that it has the authority to prevent banks and other regulated businesses from declining services to crypto users.
“The RBI has the power and, I would argue, a moral obligation, to intervene,” Rastogi said.
However, Shetty is hopeful that the RBI’s statement of its position will encourage more banks to consider providing banking services to crypto businesses.
“We’re optimistic that RBI’s latest circular will help the crypto industry,” he said. “We hope that this circular encourages banks to update their compliance teams and provide banking access to Indian crypto exchanges.”
Yet it may take time before crypto businesses see much change.
Subburaj said: “From a business point of view, supporting crypto entities will only turn out to be a win-win situation for banks and crypto entities. But with [the] history of RBI not having shown support to this industry, it might take some time for the relationship to smoothen out between banks and crypto entities.”
He added: “In fact, by passing the responsibility to the bank to do due diligence on [know-your-customer] and [anti-money-laundering measures], the RBI has sort of added a disclaimer in its clarification.”
In other words, the RBI is signaling that banks’ involvement with cryptocurrency users and businesses comes at their own risk.
Subburaj said some banks remained leery of the crypto industry despite the RBI’s clarification, but that others were in discussions with their compliance teams on whether or not to extend their support to the trade.
HDFC Bank, citing the RBI circular, retracted its previous advisory on May 31. Although its retraction indicates that customers need not worry about cryptocurrency transactions, it remains unclear whether the bank will restart the provision of services to cryptocurrency users. SBI has yet to retract its advisory.
Forkast.News contacted the RBI and HDFC Bank to request comment, but neither had responded by the time this article went to press.
Alongside the RBI’s urging, the timing of the banks’ crypto clampdown may have been influenced by a cryptocurrency bill that has yet to be introduced in parliament. The bill proposes a sweeping ban on all cryptocurrencies and related transactions and businesses, including traders, miners and exchanges.
“Banks globally tread cautiously in servicing cryptocurrency users, because crypto transactions introduce a heightened money laundering [and] terrorism-financing risk,” Rastogi said. “However, it does seem more than a mere coincidence that multiple banks have begun to clamp down on the crypto industry at once.”
Yet the likelihood of a complete ban on cryptocurrencies has diminished since the bill was announced.
Rastogi said: “A complete ban is looking less likely now. There have been positive murmurs from the government on this issue.”
Last month, the Economic Times reported that the government was looking to set up a panel of experts to study the possibility of regulating cryptocurrencies, a development that Shetty welcomes.
“The government of India might be on the path to positive crypto regulations,” he said. “Around the world, crypto adoption is picking up. Governments and tech giants around the globe are embracing crypto, and I’m confident that India will not stay behind.”
Indian crypto investors are also optimistic.
Entrepreneur and investor Kaparthi Jonnalagadda, who has been investing in Bitcoin since 2014, said: “I do not believe that there will be a crypto ban in India, because it is easier to regulate cryptocurrency than to ban it completely. It takes numerous efforts and time to block all the crypto trade channels accessible to an investor or a trader. Moreover, regulating crypto can be beneficial to the Indian economy in general as it brings in more investments to crypto startups.”
Shetty told Forkast.News in an interview that contrary to popular perception, the government had displayed its “openness” to regulating crypto.
“When you talk to some of the key leaders, you realize that they do want to understand,” he said. “They do want to participate. They probably feel nothing bad should happen, especially because we are dealing with finance and that’s people’s money.”
Earlier this month, a number of cryptocurrency exchanges teamed up with the Internet and Mobile Association of India’s Blockchain and Crypto Asset Council to form a self-regulatory body and a code of conduct for crypto exchanges. Subburaj, who, like Shetty, is a member of the council, said that could help crypto exchanges to demonstrate the steps they are taking to protect their customers.
“Since the onus is now on the banks to decide if they are willing to support the crypto industry, it becomes all the more important to educate the bankers about the processes crypto exchanges already follow to ensure a safe and secure trading platform,” Subburaj said.
However, gaining the trust of the broader finance community may prove challenging, as suggested by the fact that WazirX and its directors, Shetty and Sameer Mhatre, were last Friday handed a show cause notice by India’s foreign exchange and money laundering enforcement agency for alleged forex violations involving 27.9 billion rupees (US$382 million) related to cryptocurrency transactions.
And then there remains the larger question of what shape crypto legislation might take, which was further complicated last week, when reports emerged that India is considering regulating crypto as an asset class rather than as currency. If New Delhi takes that approach, a number of issues will arise, not least taxation. Yet also, it may offer crypto businesses a respite from the hostility they have experienced at the hands of the RBI, which would likely lose its regulatory mandate over the sector to the country’s securities watchdog.
Despite the pervasive and persistent uncertainty surrounding the status of cryptocurrencies in the world’s second-most-populous nation, it’s a safe bet that the battle of wills we have witnessed in recent months will continue for some time yet.