BANKS IN INDIA CAN’T STOP CUSTOMERS FROM DEALING IN VIRTUAL CURRENCIES: RBI

Days after the State Bank of India and HDFC Bank cautioned their customers against dealing in virtual currencies, citing the April 2018 order by the Reserve Bank of India (RBI), the apex bank has issued circular saying banks and other regulated entities must not cite the order as it was set aside by the Supreme Court in March 2020. Several banks have warned users that their cards may be suspended if they continue to deal in virtual currencies.

RBI said in the circular:

“It has come to our attention through media reports that certain banks and regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular dated April 8, 2018.”

“Such references to the RBI circular by banks and regulated entities are not in order as this circular was set aside by the Supreme Court on March 4, 2020 in the matter of writ petition (Civil) No.528 of 2018 (Internet and Mobile Association of India vs Reserve Bank of India).”

This means banks can no more take action against customers who deal in virtual currencies.

The RBI said, “Banks, as well as other entities addressed above, may continue to carry out customer due to diligence processes 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, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances”.

Fintech companies welcome RBI notification.

“The RBI notification brings some welcome respite for the crypto industry. It clarifies that, as of now, there is no ban from the RBI on cryptocurrencies. Thus individuals holding or trading in cryptocurrencies and crypto businesses enabling this does not violate any RBI policy. Moreover, this also goes for banks – the mention of due diligence procedures clarifies that banks can choose to serve such individuals with suitable risk mitigation measures. While the notification does not specifically discuss servicing crypto businesses, not allowing this would be contradictory. An express clarification from the regulator on this as well will be welcome, which will greatly ease banks and other service providers providing financial services essential to the crypto industry,” says Ashita Regidi, Head of Fintech Policy, Cashfree.

“The RBI notification is very welcome given the general public misconception that holding or dealing with cryptocurrencies in any way is illegal in India when the fact is that these are unregulated. The Supreme Court verdict made this clear in March 2020 when it set aside the April 2018 ring-fencing notification. Despite this, the lack of clarity on how banks and other service providers act in the interim until the regulator takes a final stand led to ambiguity and reluctance in servicing the crypto industry. This is what the notification now clarifies, bringing some welcome interim clarity on how banks and other service providers can act,” Regidi further points out.

“It is well known that with 15 million users and upwards of Rs 10,000 crore held by small investors, India is among the top players in the global crypto market. For the welfare of the users, crypto assets must be regulated. This is a good move by RBI and positive news for the crypto industry. It is a good sign that India is moving towards more acceptance and awareness amongst the mainstream markets and regulators and would help in shaping the crypto-assets market,” IAMAI-BACC said.

“This is a positive development for the cryptocurrency industry. The RBI’s much-needed clarification gives hope for a meaningful industry-government engagement in the coming days. With cryptocurrency companies and banks practicing due diligence as a statutory process, it brings the focus back to financial entities deploying robust KYC, user data privacy, and AML policies to reduce room for cryptocurrency transactions to be exploited for fraudulent activities, such as crimes, money laundering, and tax evasions. Adoption of technology-based solutions becomes crucial to safe and secure transactions; however, with this announcement, we can now expect further innovation and growth in the crypto ecosystem in India,” says Arpit Ratan, co-founder of Signzy, a no-code AI platform for financial institutions.

Why were banks citing the April 2018 RBI circular?

In April 2018, the RBI directed all regulated entities, including banks, not to provide services to businesses dealing in virtual currencies such as Bitcoin to protect consumer interest and halt money laundering. The ban led to plummeting trade volumes and exchanges shutting their businesses. However, in March 2020, the Supreme Court quashed the RBI ban and allowed banks to handle cryptocurrency transactions from exchanges and traders.

The Indian government is already working on the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is expected to impose a ban on all private digital currencies (cryptocurrencies) and promote a regulatory framework to launch the country’s own official Central Bank Digital Currency (CBDC) backed by the RBI. Reports suggest the CBDC will be named Laxmi Coin.

The Bill was to be tabled in Parliament’s Budget Session but was deferred as the government continues to talk to stakeholders in the space.

In March this year, Union Finance Minister Nirmala Sitharaman said the government would not “shut off all windows” for cryptocurrency. “We will allow a certain amount of windows for people to experiment on blockchain and Bitcoin,” she said.

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