On May 31, India's central bank RBI has clarified that the bank cannot cite its 2018 circular to ban cryptocurrency trading, considering the Supreme court of India had already squashed the 2018 circular on digital currencies. This comes after SBI and HDFC bank has issued warnings to their customers on trading cryptocurrencies.  

According to the 2018 circular, the Reserve Bank of India has cautioned users on holding or trading virtual currencies, and financial entities regulated by RBI were asked to stop providing services to businesses or individuals trading cryptocurrencies. RBI cited the reason for this ban as the highly volatile nature of cryptocurrencies and the risk associated with it. 

Why Indian banks were not allowing cryptocurrency transactions? 

Top Indian banks are sending cautionary emails to their customers regarding the use of cryptocurrencies or bitcoin--warning them against cryptocurrency transactions. 

The banks have been continued blocking transactions of cryptocurrencies of individuals and cryptocurrency exchanges even though the Apex court of India has set aside the RBI’s 2018 circular on virtual currencies. 

Nischal Shetty, CEO of WazirX told The Quint “There seems to be confusion among the banking industry because they are not giving banking access to the crypto industry in India despite the court verdict. We request banks to update their compliance teams about the Supreme Court ruling that set aside the RBI circular against crypto,”  

Over the past week, many cryptocurrency exchanges like WazirX, CoinSwitch Kuber app, and others have been experiencing setbacks—issues with INR deposits via banks and payment gateways. Due to a lack of regulations in the crypto space, most banks have stopped giving services to entities dealing with cryptocurrencies. 

In the absence of any proper regulations and clarifications from RBI after the supreme court quashed the 2018 circulation, the banks have distanced themselves from any cryptocurrency transactions.  

After SC’s ruling in 2020, UPI transaction provider National Payment Corporation of India (NPCI) had continued providing services for crypto trading, but banks stopped providing UPI services to crypto exchanges which lead to the removal of UPI as a payment option. 

HDFC Bank Limited and State Bank of India (SBI) has earlier started sending emails to their customers who were using cryptocurrencies to caution them about its use and warning them of restricting transactions in their account. 

Screenshot of a mail sent by HDFC Bank to a private lender, Sanat Mehrotra said, “We have observed that your account reflects probable virtual currency transactions which aren’t permitted as per RBI guidelines.” It added, “To comply with the regulatory guidelines (RBI vide guidelines DBR.No.BP.BC.104 /08.13.102/2017-18 dated April 06, 2018), the Banks are advised to exercise due diligence by closely examining the transactions carried out in the account on an ongoing basis,” 

As per the tweet by crypto investor Sanat Mehrotra, the bank threatened of withdrawing banking services for purchasing some cryptocurrencies, who argued that “Given crypto being deliberated by lawmakers, is this not harassment?” 

Sathvik Vishwanath, co-founder and CEO of Unocoin, and DigitX cofounder Ashish Mehta got a similar response from ICICI Bank that they are going to stop providing services to crypto entities and the company’s account associated with the bank will be suspended. ICICI Bank has not clarified why it has decided to shut off services to exchanges.  

“Many banks still quote the 2018 RBI circular, which was quashed by the Supreme Court, and pointed out that they have not yet received any official clarification from RBI post the court verdict,” said Subbraj. co-founder and CEO of Giottus Cryptocurrency Exchange. 

The reason behind RBI’s decision 

RBI has taken this decision to avoid any legal trouble by going against the Supreme court of India and to safeguard its position. It still expresses its concerns over the use of virtual currencies, without forming an opinion on regulating digital assets, while the banks still cite RBI’s 2018 circular to ban crypto transactions. 

If the crypto lobby moves court against banks, the Reserve Bank of India will face the wrath of the judiciary and not banks. Hence, RBI told banks to carry out the necessary routine due diligence measures on the deals in line with regulations governing standards and not cite its 2018 circular as it is not valid and hinders digital currency trades.  

Future of digital currency in India 

After the Reserve Bank of India made its stance clear on Monday, the cryptocurrency exchanges and investors breathed a huge sigh of relief. Central bank by maintaining a neutral position has not validated the cryptocurrency after all it’s not conformable with virtual currency as an alternative to traditional currency and the risks involved in making it completely legal. 

Crypto exchanges and investors have welcomed the decision by the RBI, which is seen as support of the growth of the digital currency business in India. But, the most awaited bill called “The Cryptocurrency and Regulation of Official digital currency Bill, 2021,” which is yet to be introduced in Parliament will decide the future of virtual currency in India.