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Exclusive: Private Banks are shutting services to crypto-exchanges

Several leading private sector banks have begun shutting off banking services to crypto-currency exchanges in India, over a year after the Supreme Court quashed the Reserve Bank of India’s April 2018 circular which barred banks from working with crypto-firms. These banks include HDFC Bank, Axis Bank, Kotak Mahindra Bank, IndusInd Bank and ICICI Bank, industry insiders told MediaNama.

In the wake of the SC verdict in March 2020, many banks opened up their services to crypto-currency exchanges and other entities. The RBI did not issue a fresh circular or a new policy for payment companies and banks to follow when dealing with crypto-currencies, which is why most banks did not hold back. However, due to the regulatory uncertainty surrounding crypto-investing and trading in the country, several banks are now pulling away from offering services to crypto-firms. They have told payment gateways to ‘deactivate’ any merchants on their network that is dealing with crypto-currencies.

MediaNama has sought responses from HDFC Bank, Axis Bank, Kotak Mahindra Bank, IndusInd Bank and ICICI Bank. Queries were also sent to the RBI. Their responses are awaited.

According to a report in the Economic Times, the RBI has been communicating its reservations on crypto-currencies in meetings with senior bankers. In February, some of the top banks wrote to customers seeking clarity on their crypto trades and investments. This writer also received an email communication from a bank seeking details on crypto-investments made last week.

Most of the top crypto-exchanges have switched their payment gateway provider and are using other bank accounts, so trading and investments can continue.  Users looking to buy or trade crypto-currencies today, can continue to do so. However, they may face issues when it comes to withdrawing their funds from their crypto-wallets since the crypto-exchanges have only a limited number of banking and payment partners. If more banks and payment gateways block services to domestic crypto-exchanges, it would effectively turn the taps off on any movement of funds to and from investors.

Banks acting on RBI directions, say crypto founders

In January this year, the government announced that it will introduce new legislation which will ban crypto trading, mining and investments in the country. But since then, it seems that the government has softened its stance on some aspects. However, there is no draft bill and very little information trickling down from the government.

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MediaNama spoke to four crypto founders who confirmed the development and said that there is a lack of regulatory clarity from the RBI, which is why banks are pulling back. They said banks are essentially shutting the exchanges’ current or business account and are returning the funds, because the regulator is apprehensive about allowing banks and payment companies to continue servicing crypto-exchanges when the government plans to introduce a bill banning crypto-currency investments.

The last time the RBI intervened in the crypto-currency space, it formally instructed banks to stop working with crypto-firms. This time, however, the RBI has passed on instructions directly to individual banks rather than issuing a new policy that applies to all banks at one, two of the founders explained. The said that the biggest issue is that the banks have not communicated the reason why they cut off services because if they sent a letter explaining the reasons, the crypto-firms could challenge such decisions legally.

“We approached our bank manager and found that this is not a specific bank policy. The bank did not stop account services because we are non-compliant with Know-Your-Customer or Anti-Money Laundering rules, but because they have received instructions from the RBI to stop such services,” said one founder on the condition of anonymity.

Recently, the government introduced new disclosures in the company filings rules allowing companies and promoters to declare their crypto holdings and the quantum of investor money they had received towards crypto-currency investing. It also clarified that that investors and crypto-firms would be liable to pay Income-Tax and Goods and Services Tax. “The banks are earning a lot of fees from crypto-currency companies so it is not a business issue they face, but regulatory issues despite the fact that we have been paying GST and other taxes,” the founder quoted above added.

A second crypto founder told MediaNama that many of the top private banks had instructed payment gateway providers to stop providing crypto-exchanges with payment pages and links. “We are currently working with a small gateway provider and some lesser known private banks. If this continues like this, without any clarity from the RBI, all other banks will stop services and in a few weeks the entire industry will be affected,” this person said on the condition of anonymity.

Two senior bankers told MediaNama that the RBI has been informally communicating to banks to stop supporting crypto-currency companies. “This is a huge industry and we can make a lot of money through fees. But if the regulator says that there are risks and that we should stop services, we have to listen to them. Our understanding is that the government will introduce a bill that will ban crypto-currencies in the next session of Parliament, which is why the RBI has been sending instructions to banks in the last few weeks, ” said one of the bankers on the condition of anonymity.

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Restricting payment channels

Crypto-exchanges rely on payment gateway providers to provide them with a pipeline to accept and make payments. Since crypto-currency exchanges are unregulated, they rely on payment gateways and banks to allow them to accept deposits from customers. So if a customer wants to buy Rs 5,000 worth of cryptos, the payment gateway will allow the crypto-exchange to accept the money through debit or credit cards, net-banking, mobile banking and even through the Unified Payments Interface (UPI). But since payment gateways are inherently tied to banks, if banks instruct them to stop services to specific merchants they have no choice but to comply.

“An exchange should have multiple current accounts so that it can process hundreds of payments to investors in a single day. I can only work with one payment gateway and just through a few bank accounts, with one or two banks, which restricts the amount of transactions we can do everyday,” the second founder quoted above said. “We can still accept Rupee deposits from investors now, but withdrawals (or returning investor money) are going to become challenging if banks are going to restrict us,” they added.

A third founder explained that crypto-exchanges have not been able to work with leading payment gateway companies like CC Avenue, PayU or Razorpay, because their banking partners placed restrictions long ago. “So we had to turn to smaller payment gateway players. Right now our gateways are working fine, but we are working to create backups,” this person said on the condition of anonymity.

MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India

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Written By

Reports on banking, payments, fintech and crypto-curencies. Additional reporting on media regulations, data protection and other areas.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.



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