FM on cryptos: RBI concerned; need international collaboration

Underscoring that the Reserve Bank of India (RBI) has expressed concerns over cryptocurrencies and sought a ban on them from the government, Finance Minister Nirmala Sitharaman on Monday said that “international collaboration” would be needed for any effective regulation or ban on cryptocurrency as the digital currency is borderless in nature.

“Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards,” she said, while responding to questions raised in Lok Sabha by member of Parliament Tholkappiyan Thirumavalavan.

The Finance Minister said the RBI has mentioned that “cryptocurrencies are not a currency” and could have a “destabilising effect” on the monetary and fiscal stability of a country. “… the value of fiat currencies is anchored by monetary policy and their status as legal tender, however the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored,” the RBI has told the government, Sitharaman said.

“In view of the concerns expressed by RBI on the destabilising effect of cryptocurrencies on the monetary and fiscal stability of a country, RBI has recommended for framing of legislation on this sector. RBI is of the view that cryptocurrencies should be prohibited.”

Incidentally, the Financial Stability Board — an international body that monitors and makes recommendations about the global financial system and includes officials from the Group 20 countries including India — had earlier this month said that it would propose “robust” global rules for cryptocurrencies in October.

Sitharaman’s remarks come after India introduced a 30 per cent income tax on gains made from cryptocurrencies from this April, in a move that was widely seen as the country embracing the virtual currency. In July, rules regarding 1 per cent tax deducted at source on cryptocurrency came into effect.

The RBI, however, has been consistent in its stance on cryptocurrencies. “The RBI has been cautioning users, holders and traders of virtual currencies (VCs) since 2013 at regular intervals that dealing in VCs is associated with potential economic, financial, operational, legal, customer protection and security-related risks.”

In April 2018, it issued a direction to its regulated entities prohibiting them to deal in VCs or provide services for facilitating any person or entity in dealing with or settling. The circular was set aside by the Supreme Court in 2020.

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Crypto payments are frozen across India, hitting trading

BENGALURU: When Surojit Chatterjee walked on stage at a Coinbase Global Inc conference in Bengaluru, India, on April 7, he had little reason to anticipate the fallout that would shortly ensue. Chatterjee, the company’s chief product officer, told the assembled audience that crypto investors would now be able to use the country’s online retail payments system to transfer funds to its local exchange.
Hours after Chatterjee’s announcement, the central bank-backed entity that runs the system — called United Payments Interface — said it was “not aware” of any crypto exchange using the network. Within three days of the event, Coinbase had halted rupee transfers to its trading app via UPI.
The abrupt reversal left Coinbase customers without any way of funding their accounts with rupees, dealing a blow to its expansion plans in India. “We are committed to working with NPCI and other relevant authorities to ensure we are aligned with local expectations and industry norms,” a spokesperson for Coinbase said in a statement to Bloomberg on April 11, referring to the National Payments Corporation of India, which operates UPI.
Coinbase wasn’t the only one affected. Since its announcement, at least four other companies that provide crypto-related trading services have either suspended rupee deposits or seen banks and payment gateways pull support for money transfers onto their platforms, according to executives at the firms and local media reports. Two other exchanges had lost support for rupee deposits from a payment service provider before the incident.
Industry slump
Those actions put additional pressure on already falling trading volumes, exchange executives said. The industry is also bracing for a new tax on all crypto transactions above a certain size that will take effect on July 1. The government this month introduced a 30% levy on income from digital asset investments.
Daily trading volumes on Indian crypto exchanges, which collectively cater to about 15 million people, has tumbled by between 88% and 96% since peaking last year, data from CoinGecko show. WazirX, India’s biggest crypto bourse, saw volumes drop 93% from an October high, according to the data.
Investors who cash in crypto positions on an exchange can still withdraw their fiat currency. Coinbase already offered trading in crypto pairs in India, which doesn’t require customers to deposit rupees into their accounts.
“After the Coinbase announcement, whoever was providing support to the industry has withdrawn support,” said Vikram Subburaj, chief executive officer of crypto exchange Giottus, in an April 12 interview. Giottus’s payment gateway stopped working with it, he said, declining to name the company. Trading volume on the platform plunged about 70% as a result, Subburaj said.
Local rival BuyUcoin has also halted payments via UPI after the notice from NPCI, said co-founder Atulya Bhatt.
Uneasy relationship
NPCI, an initiative by the central bank and the Indian Banks’ Association, is an umbrella organization for retail payments and settlements in the country of 1.4 billion people. It didn’t respond to requests for comment.
CoinSwitch Kuber, a Bengaluru-based cryptocurrency exchange, temporarily halted accepting rupee deposits via UPI and other banking channels, the Economic Times reported April 12. CoinSwitch didn’t respond to an emailed request for comment.
Crypto-trading firms in India have had an uneasy relationship with banks and payment services providers since 2018, when the central bank issued a directive to lenders to stop working with digital asset companies. While the Supreme Court in 2020 reversed that directive, some banks remained hesitant to work with the crypto sector — in part because top officials at the Reserve Bank of India have kept calling publicly for cryptocurrencies to be banned.
As a result of the wariness from the traditional banking sector, payment gateways like Juspay and MobiKwik have become a crucial link between crypto exchanges and clients seeking to deposit fiat currency. Without their cooperation, investors are limited to using methods like transferring money to the exchanges’ current accounts, a time-consuming manual process prone to errors. Coinbase doesn’t offer that option in India.
Investors can also engage in peer-to-peer trading, where transfers of fiat is handled directly between the counterparties, although that represents a small share of the market in India.
One payment service provider stopped working with crypto exchanges last year after being told by banks to do so, its CEO said, asking that he and his company not be named due to the sensitivity of the issue.
MobiKwik, a local payment service provider, stopped working with Indian crypto exchanges on April 1, according to a report by news outlet Moneycontrol. MobiKwik declined to comment. WazirX and CoinDCX, another Indian crypto exchange, have both announced that rupee deposits via MobiKwik have been temporarily suspended.
Singled Out
Restricting payment access without legal grounds for doing so adds up to unfairly singling out the digital asset industry, said Jaideep Reddy, a lawyer at Nishith Desai Associates for specializes in technology.
“If a bank denies service to a crypto business, there has to be a valid reason other than the mere fact that it’s a crypto business,” Reddy said. “Banks have to be transparent, as account holders also have a charter of rights which includes transparency from the service provider.”
Edul Patel, co-founder and CEO of algorithmic crypto trading firm Mudrex, said payment gateways in India started withdrawing support after the Coinbase episode. That happened to Mudrex as well, Patel said in an April 12 interview, declining to name its partner.
The moves didn’t just impact trading, he said: Inflows into Coin Sets, a mutual fund-like crypto product the Y Combinator-backed startup offers, fell by roughly half in the previous two to three days.
“While exchanges around the world are innovating on Web 3.0, Indian exchanges are busy finding the next payment provider,” Subburaj of Giottus said.

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RBI DG Rabi Sankar asks for complete ban on cryptocurrencies in India

Days after the Union Budget proposed taxing cryptocurrencies, which gave rise to apprehensions of legitimising them, an (RBI) official has asked for a complete ban on such virtual currencies citing threat to macroeconomic stability.

In a speech to bankers on Monday, deputy governor T Rabi Sankar demolished all the arguments for allowing in India as none of them pass basic scrutiny.

On the argument that advanced economies (AE) have not resorted to banning such currencies, the deputy governor said it is in the interest of those economies not to ban cryptos because they are not a threat to convertible currencies (most cryptos are priced in dollar) as they are to rupee.

“Significantly, it might be of advantage to the AEs if replace emerging market (EM) currencies as that would give AEs a better strategic control on the EMEs,” Rabi Sankar said at the Indian Banks Association 17th Annual Banking Technology Conference and Awards.

On the issue that banning cryptos would lead to erosion of wealth of investors, the deputy governor said banning in India does not mean investors would lose money, because they can be provided with a reasonable exit. In addition, the investors of cryptos were fully aware of the risks involved, he said.

The deputy governor said data informally gathered in November seems to indicate that crypto investments by Indians is nowhere near to being significant as four out of five investor accounts held investments of less than Rs.10,000, with an average holding size of Rs.1,566. “Wealth loss, if at all it is a possibility, is likely to affect only a small fraction of these investors,” he said.

The deputy governor also refuted the argument that banning would affect the absorption of DLT technology in India.

“…creating native cryptocurrencies is just one way of implementing a blockchain; it can be viewed as just one use case of the blockchain technology. To argue that banning cryptocurrencies would stunt the absorption of blockchain technology is therefore akin to saying that banning human cloning would kill innovations in biotechnology or banning nuclear weapons would hurt nuclear physics as a discipline,” he said.

The deputy governor said that crypto-technology is underpinned by a philosophy to evade government controls as they have specifically been developed to bypass the regulated financial system.

“All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India. the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny,” he said.


Talking on the macro stability risks posed by such currencies, he said increased acceptance of cryptocurrencies would result in effective ‘Dollarization’ of the Indian economy, which could undermine the ability of authorities to control money supply or interest rates, as monetary policy would not have any impact on the non-Rupee currencies or payment instruments.

“When that happens, India loses not just its currency, a defining feature of its sovereignty, but its policy control of the economy. With loss of traction for monetary policy, the ability to control inflation would be materially weakened,” he said.

Rabi Sankar went on to add that credit creation in convertible currencies would be impervious to monetary policy, and in the extreme case where a major part of deposits and credit shift to cryptocurrencies, the result would be a weakened, even crumbling, banking system, impairing financial stability.

He also said that there are already indications that private cross-border flows are taking place in cryptocurrencies and if such a trend is legitimised, a part of the flows related to trade payments, personal remittances or cross border investments would be made in these cryptocurrencies.

“As they are non-reserve currencies, this could have adverse implications for India’s foreign exchange reserves, which lend stability to the external sector. Besides, such cryptocurrency payments can take place outside the ambit of capital account regulations.

“This would adversely affect the integrity of the capital account regime, as policy control on capital flows would be eroded. The consequence of this on foreign exchange reserve accretion and exchange rate management raises serious macroeconomic stability issues,” he added.

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