The RBI clarified on May 31, 2021, stating that banks and regulated entities could no longer cite its April 2018 order on virtual currencies, which had barred banks from facilitating transactions in cryptocurrencies. The Supreme Court Judgement in March 2020 made the RBI 2018 circular invalid, and banks cannot quote from this order.
The RBI made this clarification after HDFC Bank and SBI had warned their customers against dealing in bitcoins and other virtual currencies, citing the RBI 2018 circular. Moreover, these banks sent emails to customers stating that failure to comply with the warning would lead to the suspension of their credit cards and permanent closure of their bank accounts. Will top banks resume cryptocurrency-related services after the RBI clarification?
Will top banks resume cryptocurrency-related services?
Top banks have informed cryptocurrency exchanges in India that cryptocurrency trading services may not resume anytime soon. However, some cryptocurrency exchanges believe that smaller banks may resume business with them.
RBI has asked banks to continue carrying out due diligence processes of customers in line with the government regulatory standards for KYC (Know Your Customer), AML (anti-money laundering) and CFT (Combating of Financing of Terrorism) and the obligation of regulated entities under the PMLA (Prevention of Money Laundering) Act, 2002. Moreover, banks will have to comply with the relevant provisions of FEMA (Foreign Exchange Management Act) for remittances by overseas investors.
The RBI issued a circular in April 2018 instructing banks to ensure their customers dealing in cryptocurrencies such as Bitcoins were not allowed to access banking services. RBI had also warned people of the risks involved while investing in unregulated cryptocurrencies issued by private parties. However, the Supreme Court, in its ruling, overturned the RBI circular in March 2020.
The Supreme Court stated that in the absence of a legislative ban on the trading of cryptocurrencies, the RBI could not impose any restrictions on the trading of these currencies. It would amount to an interference with the fundamental rights of citizens to carry out a trade that is deemed legitimate as per the law.
Banks are reluctant to allow their customers to buy and sell cryptocurrencies as they are not legal tender in India. Moreover, banks and financial institutions have severed ties with cryptocurrency exchanges affecting cryptocurrency investors. You may expect top banks to stay far away from cryptocurrency exchanges until clarity emerges around the regulation and taxation of cryptocurrencies.
Does the RBI circular help cryptocurrency investors in India?
You have 1.5 crore people in India investing more than Rs 15,000 crore in the cryptocurrency market. However, investors in cryptocurrencies continue to face problems due to the lack of support from banks. The source of these problems lies in banks and financial institutions severing ties with cryptocurrency exchanges which affects the transactions of these platforms.
Cryptocurrency sceptics believe the Government will soon ban cryptocurrencies in India. Moreover, a bill was proposed just before the Union Budget 2021 to ban cryptocurrencies. However, the Government had put the bill on hold at the request of the cryptocurrency industry.
You may expect the Government to soften its stance on cryptocurrencies by focusing on regulation and taxation rather than impose a blanket ban on these currencies. The latest RBI circular could be a step in this direction. Moreover, with millions of investors putting money in cryptocurrencies, the Government may opt for regulation to offer security to these investors. It might just revive investor confidence which has taken a hit after the recent cryptocurrency crash and the restrictions imposed on these currencies in different countries.
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