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Banking Central | Is there a shadow ban on crypto payments in India?

The allegations by the Coinbase CEO and reports contradicting his claim made news last week. What really happened?

May 16, 2022 / 10:11 AM IST

Is there a shadow ban in India on crypto payments using the UPI method in India?

Recently, the US-based crypto exchange Coinbase's chief executive officer Brian Armstrong raised a eyebrows when he said there was an informal pressure from the Reserve Bank of India (RBI) forcing the firm to discontinue the UPI-payment method shortly after the launch.

Armstrong’s comments suggested that the central bank’s alleged action is against a Supreme Court order. However, reports soon emerged citing informed sources that this claim was incorrect. The reports said the Indian central bank hasn’t acted to impose an undeclared shadow ban on crypto companies in violation of the apex court order.

For the uninitiated, the context here is this: The RBI, in its circular dated May 31, 2021, stated that in view of the order of the Supreme Court, the circular of April 6, 2018 which had imposed certain restrictions on regulated entities in dealing with virtual currencies, is no longer valid from the date of the Supreme Court judgment. Logically, the RBI didn’t want to find itself as a party violating the apex court’s order.

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It is no secret that despite this clarification, the central bank has been quite vocal against the risks associated with cryptocurrencies. Governor Shaktikanta Das has warned investors about the high risks of putting their money on crypto. Besides, Das has repeatedly said that the RBI has conveyed the central bank’s concerns to the government saying private cryptocurrencies pose far deeper macroeconomic concerns to the Indian economy.

One of the deputy governors of the Reserve Bank of India (RBI), T Rabi Sankar, on February 14 said banning cryptocurrency is "perhaps the most advisable choice open to India". Indian banks and payment system operators closely pay attention to the central banks thinking on regulated affairs, including those where there is no written order.

The regulated entities would not want to be seen doing activities that the regulator has a problem with. Time and again, this approach is clear in the sector on subjects including lending to certain sensitive sectors, disclosures and customer fairness practices. The truth is no bank or financial services company want to get into the bad book of the central bank.

As far as Crytocurrencies are concerned, what we know for sure are two things.

One, there is absolutely no clarity till the moment on the legality of these instruments in India. Second, the banking regulator has major concerns on private virtual currencies in India.

In the last union budget, the Union government announced 30% tax on private digital assets from the next fiscal year, but has so far refused to make cryptocurrencies legal or illegal. The crypto lobby has been interpreting the lack of clarity as some of silent approval. Even the 30% taxation is a sign of recognition, they have said.

But, at least with the RBI, that’s the not the case (recognition on Cryptocurrencies). The regulator has fiercely countered any such arguments.

Private cryptocurrencies carry many fundamental risks for those investing in such instruments.  These are some of the concerns highlighted by the regulator in the past. There is no underlying asset, there is no regulatory recourse in the event of a major irregularity or loss of money for investors. And above all, crypto market is highly volatile for average investors.

So, till the regulatory structure becomes clear for Crypto instruments in India, banks and payment service providers are likely to keep an arm’s length from any transactions involving Crypto. A written order from the regulator isn’t always necessary.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)

Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: May 16, 2022 10:11 am
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