Stop citing our old anti-crypto order, RBI warns India's banks

India’s central bank has told the country’s lenders to stop citing its own now-obsolete order that banned banks from offering their services to cryptocurrency exchanges and customers.    

The Reserve Bank of India (RBI) issued the instruction on 31 May.

The central bank said that it discovered through media reports that “certain banks and regulated entities” had cautioned their customers against dealing in virtual currencies, referencing a circular published in 2018, which was struck down as unconstitutional last year by India’s supreme court. It said the circular is “no longer valid” sand therefore “cannot be cited or quoted from”.

However, the RBI said banks should continue to carry out customer due diligence checks in line with anti-money laundering (AML), combating financing of terrorism (CFT) and know your customer (KYC) regulations and requirements when providing services to those engaging in cryptocurrency trading.

The 2018 circular banned banks from dealing in virtual currencies or provide services for facilitating any person or entity in dealing with or settling them.  

This included maintaining accounts, trading, settling, clearing, providing loans against virtual tokens, and facilitating the transfer of money in accounts for selling or purchasing virtual assets.

It justified the ban at the time, saying it was intended to “ring-fence banks and investors” from cryptocurrencies. However, the supreme court struck down the ban as unconstitutional in March 2020, after petitions from several crypto exchanges and fintechs.

The RBI did not publish revised guidelines on cryptocurrency after the court lifted the ban.

The circular comes after a recent report in India’s Economic Times that cryptocurrency exchanges are planning to approach the supreme court over an “informal notice” from the RBI last month that caused banks to withdraw their services.

It also says the country’s largest lenders – State Bank of India, HDFC Bank, Axis Bank and ICICI Bank – have communicated to several exchanges that services are “unlikely to be resumed immediately” and that a lack of follow-up regulation for the RBI has created a grey area for banks.

Sumit Gupta, CEO of Indian cryptocurrency exchange CoinDCX, said the announcement was “great news”.

“Simply put, this is a testament that banks cannot stop people from investing in crypto,” he said.

India’s government deferred a cryptocurrency bill it had planned to introduce into the Lok Sabha, the lower house of the national legislature, in its March budget session. The details of the proposed legislation – Cryptocurrency and Regulation of Official Digital Currency Bill 2021 – are not currently  in the public domain.

The Indian Parliament’s lower house, the Lok Sabha, has stated in its bulletin the goal of the bill is to facilitate creation of an official, RBI-issued, digital rupee and to “prohibit all private cryptocurrencies in India”.

It replaces a previous draft – the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill – which India’s government proposed in 2019.

Ritu Sajnani, a senior associate at ‎Cyril Amarchand Mangaldas, says that while there is limited information about the 2021 bill, the fact it “conspicuously omitted” the word ‘ban’ “clearly indicates a change”.

“There are reports the government is now convening a group of experts to discuss crypto regulation in India. It will be interesting to witness the approach finally adopted, whether there will be a soft-touch approach of regulating the entities,” she tells GBRR. 

Bharath Sridhar, another senior associate at the firm, played down the RBI’s lack of revised regulatory framework as likely down to the existence of the bill. “Now the central government is deliberating over cryptocurrency legislation, it is highly unlikely we see the banking regulator release any guidelines on the subject,” he says.

Sridhar also says that India’s ability to roll out a central bank digital currency to “augment the sector” will be a vital part of the bill’s development.

RBI governor Shaktikanta Das recently said the central bank was “very much in the game” regarding its own digital currency, which he called a “work in progress”.

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