The Reserve Bank of India (RBI) on May 31 clarified that banks and other regulated entities cannot cite its 2018 circular on cryptocurrencies as it has been set aside by the Supreme Court (SC) in March, 2020. The circular is not valid from the date of the SC order and cannot be cited or quoted from, the RBI said.
However, the central bank asked banks to carry out the necessary customer due diligence process in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002.
Also, banks need to ensure compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances, the RBI said. The RBI circular, called Customer Due Diligence for transactions in Virtual Currencies (VC), came shortly after major Indian banks have started warning customers against using their services to trade in cryptocurrencies.
"This notification clearly brings in clarity that RBI hasn’t asked any bank to stop services. And doing due diligence on a business is what banks do for all the businesses," said Nischal Shetty, founder and CEO, WazirX.
The RBI said it has observed that certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to its 2018 circular.
"Such references to the above circular by banks/ regulated entities are not in order as this circular was set aside by the Hon’ble Supreme Court on March 04, 2020 in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India)," the RBI said. "As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from," the RBI said.
Commenting on the circular, Sandeep Naliwal, Polygon, said, "This is very positive for the ecosystem and it feels like overall consensus within the government and regulatory bodies is against stifling innovation and growth in the crypto ecosystem in India."
Banks send emails to customers
Earlier, in an email to customers, banks, including HDFC Bank and State Bank of India, have said that users who deal in virtual currencies may face account suspension citing a 2018 circular from the Reserve Bank of India. Notably, the circular was struck down by the Supreme Court in March 2020.
Cryptocurrency is decentralised digital money, which works based on blockchain technology. Bitcoin and Ethereum are the popular crypto currencies but there are thousands of cryptocurrencies in circulation.
Even as the RBI and the Government have not formed an opinion on the cryptocurrencies, there are many Indians who have taken exposure in crypto market. According to data from crypto exchanges, there are approximately 1.5 crore Indians who have invested in cryptocurrencies holding Rs 15,000 crore.
There are 350 startups who operate in blockchain and crypto. Crypto exchanges, WazirX, CoinSwitch Kuber and other exchanges, have seen a big rush in demand from users and crypto exchanges are advertising heavily on investments.
On March 25, speaking at the 7th edition of India Economic Conclave, the RBI Governor, Shaktikanta Das had said the central bank has flagged some major concerns to the Government about crypto currencies. "Both RBI and the government are committed to financial stability. We have flagged some major concerns to the government on crypto currencies. The government will come out with a decision sooner than later," Das had said.
While the RBI is clearly not comfortable with the idea of cryptocurrency as a medium of exchange, the government’s stance on this issue is not clear. The government has proposed to present a Bill to regulate cryptocurrencies called The Cryptocurrency and Regulation of Official digital currency Bill, 2021. The Bill has provisions to make any dealings in cryptocurrency illegal. But there is no clarity yet on when this Bill will be introduced in Parliament.
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