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Crypto exchanges vs banks: Customers get caught in crossfire

Crypto exchanges are seeing record demand from customers, but the same customers are unable to transact because banks are not supporting crypto platforms, fearing backlash from the RBI. Moneycontrol explains what is at stake.

Mumbai / May 12, 2021 / 07:25 AM IST
What worries governments and central banks about cryptocurrency is that if it becomes mainstream, they’ll lose control over monetary tools such as interest rates and the supply of money.

What worries governments and central banks about cryptocurrency is that if it becomes mainstream, they’ll lose control over monetary tools such as interest rates and the supply of money.

Cryptocurrency exchanges have been clamouring for more users to join them for years now, wanting to be as mainstream as stocks and mutual funds. Now as millions of new users queue up to invest in bitcoin and the meme-turned currency dogecoin, these exchanges are in a standoff with banks, which have been declining crypto transactions saying that crypto is under a regulatory cloud as per the banking regulator.

Crypto investors who hold bank accounts with private and public sector banks, including ICICI, HDFC and Union Bank of India among others have not been able to deposit or withdraw money from their crypto accounts at various times in the last few weeks, disrupting business in an industry seeing otherwise unprecedented growth, according to people familiar with the matter and tested by Moneycontrol.

HDFC, ICICI, State Bank of India and the regulator Reserve Bank of India did not respond to detailed queries from Moneycontrol seeking comment.

Popular currencies such as bitcoin, ethereum and cosmos often see their prices fluctuate wildly in the course of a day, and investing when the price is low is seen as key to success in a volatile market. Often users identify and track the currency for weeks or even months, planning to invest when the price falls, but they are not able to, because exchanges such as WazirX, CoinDCX or CoinSwitch Kuber do not have support from their banking partners. 

Sudipto Deb, 24, a Mumbai-based engineer, has been investing in cryptocurrencies for the past year, but is now unable to invest properly for the first time. “There is always a problem with the partner bank with all of them (apps). If I know the price is going to rise and I am not able to invest, it is just a waste,” he says.


Bitcoin, the most popular cryptocurrency currently has a market cap of over a trillion dollars, and a single bitcoin trades at $56,000, more than doubling this year alone.

In 2018, the RBI banned cryptocurrencies, although the Supreme Court said last month that such a ban is unconstitutional. While crypto has been under a regulatory cloud for years and the industry has been pushing for legitimacy and self governance, crypto apps have also seen unprecedented growth and adoption in the last few months, adding millions of users and increasing the stakes involved.

India’s leading exchanges have all seen their Twitter accounts fraught with complaints and irate customers demanding refunds, calling the apps fraudulent and yet wanting to invest more at the same time.

Ashish Singhal, co-founder and CEO of CoinSwitch Kuber says that not even at Amazon, in his previous stint, did he have to build tech to support a million users at the same time.

“Even at Amazon we had to handle 100,000 transactions a second. Here we are seeing 500,000 to a million concurrent users. We have grown so fast, all our projections have been proven wrong,” Singhal said. Six months back, he expected to have 2.5 million users by today. He has 5 million registered users currently.

Crypto exchanges have engaged with banks and the RBI in a dialogue, individually and collectively- via the Internet and Mobile Association, hoping for a resolution, sources said.

“Banks are still not fully convinced. There is a lot of confusion. We have been telling them about the Supreme Court’s order that set aside the RBI ban circular, but there is still uncertainty within their departments,” said Nischal Shetty, founder and CEO of WazirX, owned by Binance, one of the world’s largest crypto exchanges. 

Banks say that the RBI hasn’t clarified its stance and that banks are governed by their own regulator ahead of the Supreme Court, leading to a stalemate.

"For banks, the RBI's stance is everything. They are not going to risk offending the regulator. Unless the exchanges can give banks materially new information about the legality or get a positive word from the RBI, the situation will remain tricky till then," a banker said, requesting anonymity

Some banks are selectively providing support, while exchanges are trying their own nifty manoeuvres to keep customers happy. Exchanges are trying to provide banking support to new customers, who expect a top-notch experience and are excited by bitcoin, while letting the stalemate affect older users, who are less likely to leave the platform because of what executives insist is a temporary issue.

“This industry has grown really big really fast. The banks will have an edge if they support it. I am seeing some positive replies but it will take some conversations and some time,” Shetty said.

Some customers, however, have been put off by the constant regulatory flux and despite investing large amounts in crypto and disclosing it, and doing so via foreign exchanges.

“I don’t use Indian exchanges because of the risk of regulators clamping down at any point and this constant back and forth,” says Dhawal Chopda, a 25-year-old chartered accountant and lawyer who has been investing in crypto since 2017. “We need regulatory support because Indian investors should not miss out on potentially huge gains,” he added.

Industry executives expect banking support to resume in the coming weeks, although that may be an optimistic view. To be sure, investors may still be able to invest, but not when they want and not in the mode that they want. And even once they invest, selling their currency may turn out to be the real challenge with banking support unclear.
M. Sriram
first published: May 12, 2021 07:25 am
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