Has RBI legitimised cryptocurrencies? Traders, banks think it has

Central bank goes beyond saying that its April circular banning virtual currencies is no longer valid.

The Reserve Bank of India issued a notification on April 6, 2018 asking banks not to deal or to provide services facilitating any person or entity in dealing with or settling with cryptocurrencies (VC), including Bitcoin.

Two years later in March 2020, the court quashed the RBI’s notification following a plea by the Internet and Mobile Association of India (IMAI).

The RBI on Monday--15 months after the Supreme Court order--issued a circular saying its April 2018 order is no longer valid from the date of the court judgement and cannot be cited or quoted by banks to deny service to the customers.

One reason for the central bank’s new circular is that banks by citing the April order refused customers who wanted to deal with cryptocurrencies. This could have landed the central bank in trouble, as such a stance would have been seen as violation of the Supreme Court order. The IMAI was contemplating to move the court seeking clarification on banks citing RBI circular for not offering services despite the March 2020 judgment.

RBI has not just clarified that its April circular is no longer valid. It went on to say banks can continue to carry out customer due diligence processes for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and Prevention of Money Laundering Act, (PMLA), 2002, “in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.” The last provision opens up the possibility of remittances being sent via virtual currencies under the liberalized remittance scheme (LRS) of RBI.

Sources in the RBI said allowing banks to carry out due diligence for crypto users amounts to legitimising trading in the country. “They could have stopped after the first paragraph which said the April circular is no longer valid. But RBI went on to permit banks to carry out due diligence for crypto customers like any other legitimate activities that are allowed for the banks,” said a source.

Crypto players have not missed the messaging.

“RBI was not having this clear stance. They have not issued any circular after the April 2018 circular even after the Supreme Court’s March 2020 judgement,” said Sumit Gupta, chief executive officer (CEO) and co-founder of CoinDCX, a crypto exchange.

“This is a positive move, shows RBI may not have a problem with cryptocurrency. They have made it clear from their side. This will trigger a positive dialogue with the banks and will get the industry more mature and stronger,” said Gupta.

"This notice by RBI is a ray of hope for the Indian crypto ecosystem. We really appreciate the Reserve Bank of India’s clarification on this. We hope that this circular encourages banks to update their compliance teams and provide banking access to Indian crypto exchanges. Now there’s clarity that will help banks provide services to the crypto industry,” said Nischal Shetty, said founder and CEO of WazirX, a cryptocurrency exchange.

The crypto industry had always cited vacuum for the sector from a regulation point of view. They always wanted to come under some regulation in order to gain acceptance. After the Supreme Court order last year, crypto exchanges saw volume surging but lack of regulation has always made them worried. Now that gap has been filled.

Gupta said now the banks need to offer clarity on how they are going to take it forward.

“One question is, what are things that the banks want from us. We will have dialogue with the banks. We will ask them what are the things that you want us to provide.

Also, there are issues relating to taxation. For example if an individual is buying crypto, how will you tax it? There is no regulatory framework in India on this. All this will take time. Monday’s development is one such baby step in that direction,” Gupta said.

Banks have heaved a sigh of relief as well after the clarification, which they were asking the regulator since the Supreme Court order in March 2020.

"RBI is very progressive. They have clarified now that both the government and the RBI are committed to financial stability. The world has changed in the last three years, and I think the regulator has taken the right decision to promote digital currency,” said Shekhar Bhandari, president, Global Transaction Banking, Kotak Mahindra Bank, said.

In March this year, RBI governor Shaktikanta Das, while speaking at a seminar, said the central bank has major concerns over cryptocurrencies traded and this was conveyed to the government.

Das said he has "reasons to believe" that the government is in agreement with the "major concerns" flagged by the RBI about the cryptocurrencies.

The central bank will need to explain what changed between March and May. From having concerns over cryptocurrencies, the central bank has now asked banks to treat it at par with any other business that banks are allowed to carry out.

The monetary policy review announcement on Friday will give an opportunity to the RBI to explain its change in stance on cryptocurrencies.