Analysis | Has RBI really endorsed crypto transactions in India?

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The RBI has only asked banks not to shoot from its shoulder. The language indicates high caution. Banks will not have the backing of the regulator and will have to deal in crypto at their own risk.
 DINESH UNNIKRISHNAN MAY 31, 2021 / 10:06 PM IST
Reserve Bank of India (RBI) Governor Shaktikanta Das
Hours after major Indian banks, including State Bank of India (SBI) and HDFC Bank sent emails to customers warning against using their services to trade in crypto currencies, the Reserve Bank of India (RBI) has clarified that banks cannot cite the 2018 circular for such communications. This is because, the circular was quashed by the Supreme Court of India on a petition filed by Internet and Mobile Association of India in March, 2020.

The RBI said “Such references to the above circular by banks/ regulated entities are not in order” and “in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from."

As expected, shortly after the RBI clarification, there has been a flood of reactions from the pro-crypto lobby welcoming the RBI move and interpreting it as a move from the regulator in support of the growth of crypto business in India.

"We welcome the move from the RBI to clarify the stand around the old circular which was set aside by the honorable Supreme Court. I hope the confusion around the same ends now," said Sumit Gupta, CEO & Co-Founder, CoinDCX. "We also respect the concern the banks may have around AML policies and discussions around the same will make the industry stronger, and investors and investments safer," Gupta said.

"RBI’s statement to banks on cryptocurrency investments clears their position on whether customers are legally allowed to invest in crypto," said Ashish Singhal, CEO, Coinswitch Kuber.

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"Instead of denying service to their customers basis an invalidated circular, it is time banks came onboard the crypto investment bandwagon, allow the crypto exchanges to hold accounts with them and enable customers to make investments via all possible options, including UPI and bank transfers. Cryptocurrencies are the future and we must ensure we stay at the forefront of this technology," Kuber said.

Does this clarification mean that the RBI is endorsing the crypto trading? Clearly, it is not.

The regulator, in fact, has not taken any position on the validity and legality of cryptocurrency transactions in India. It has, only avoided a potential legal hazard—inviting a contempt of the apex court by maintaining silence when a clutch of banks have used its old, invalid circular to keep the crypto lobby away.

This is because in March, 2020 when the SC quashed the crypto circular on a petition by the Internet and Mobile Association of India v. Reserve Bank of India, the respondent was the RBI and not banks and, hence, any contempt proceedings will befall on the RBI, not banks if the crypto lobby moves court against banks using the 2018 RBI circular.

The RBI, clearly, doesn’t want to invite the embarrassment of Contempt of Court and invite the wrath of the judiciary in this issue. Hence, the regulator (most probably based on a legal advice), has only safeguarded its position with the clarification.

While the RBI has not so far formed an opinion on crypto regulations, what we know so far is the regulator has so far expressed its concern against using cryptocurrency as a medium of exchange. The RBI is in favour of a central bank-backed digital currency but clearly not crypto currency as a medium of exchange.

Is the regulator okay with the use of cryptocurrency as an asset? The fact is we don’t yet since the central bank has not made its position clear on this too.

In fact, 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 also 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.

So what will happen now? The RBI clarification has, in fact, created more uncertainty. The topic is now open for interpretations on both sides.

As it is evident already, crypto-lobby will now likely cite the RBI clarification to convince banks to open their channels for crypto trades. Banks have so far stayed away from such requests citing lack of clarity from the regulator on this issue and quoting the 2018 circular. Banks aren’t comfortable in dealing in cryptos as it is a high risk, high-volatile instrument and there is lack of regulation.

Banks can, of course, not cite the 2018 circular anymore without risking the legal repercussions. The RBI clarification doesn’t mean banks have the permission from the regulator to deal in crypto currencies. In fact, the RBI has clearly warned banks to exercise caution citing a raft of pertinent regulations such as 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 and compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.

Reading between the lines, here, the message from the RBI is clear to banks.

Banks will have to, if they wish to, open the doors to crypto business at their own risk. Banks will be forced to take a board approved policy to avoid being dragged to court and even then that risk stands.

Till the government forms a national regulation on this asset class, it will be risky for any bank to do this. They will not have the backing of the regulator in case of any downside.

Essentially, the RBI has told banks not shoot from the its shoulder.

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