This news report was authored by Apoorva Mittal & Ashwin Manikandan. It was published in The Economic Times on 11 May 2021. This report features opinion from AnantLaw.
Indian banks enforced “informal restrictions” on cryptocurrency trading after concerns surfaced around money laundering at Indian crypto exchanges, the Dogecoin frenzy among investors and following an aggressive marketing push through repeated TV ads during the Indian Premier League (IPL), multiple industry sources said.
Since early this month, leading banks – notably private sector lenders ICICI Bank and IndusInd Bank – have asked payment gateway partners to stop processing such transactions.
Others such as HDFC Bank, Yes Bank, State Bank of India and Kotak Mahindra Bank had been declining these transactions even earlier.
Over the last few weeks, crypto platforms in India have been blocked by all major payment gateway services providers from processing payments, on the instructions of lenders such as ICICI Bank, ET reported on May 1.
On Saturday, several crypto platforms lost the ability to accept rupee deposits through banking channels NEFT, IMPS, and RTGS, as well as the Unified Payments Interface.
Banks, the industry sources said, have stopped issuing merchant IDs to payment gateways, and have asked these intermediaries to tighten scrutiny while dealing with cryptocurrency exchanges in India.
Insiders from the banking industry pointed out that these restrictions could be due to informal instructions by the Reserve Bank of India (RBI) to banks urging tighter compliance with existing money laundering laws.
None of the banks or gateways have, however, issued any written instructions stating the rationale behind these curbs, triggering confusion in the country’s nascent cryptocurrency industry.
“Since there have been no formal instructions or circular issued by the RBI, you can't even protest,” said an industry source. “It's like a sort of stealth way of creating issues for crypto exchanges, which is very unfortunate.”
Reminder of court order
Crypto platforms, for their part, are in the process of sending a communication to all major banks about the Supreme Court ruling of February 2020 that revoked the banking ban and declared that the central bank cannot issue any formal guidelines or directly regulate these exchanges.
RBI did not respond to an email seeking comment till the time of going to press.
“We’re planning to first send letters to banks informing them about the Supreme Court order so that they’re formally made aware of the court’s ruling,” said a crypto industry official.
Most major lenders, such as HDFC Bank and Kotak Mahindra Bank, had stopped working with crypto platforms despite the apex court’s order, said founders of several crypto exchanges.
Banks of all sizes too have found themselves under renewed pressure to not engage with crypto platforms in recent months. In the current scenario, cryptocurrency exchanges are availing the services of private wallets and smaller banks to maintain business continuity.
Multiple sources in the know told ET that RBI has issued informal instructions to banks as the crypto ecosystem is growing without any regulatory oversight.
According to the sources, the aggressive marketing push by crypto exchanges on TV during the IPL - one of the most watched programs on television - OTT channels and through social media influencers has caused the regulator to clamp down as the industry is not licensed in India.
“We reached out to all our cryptocurrency clients on the instruction of our partner bank to enquire about their arbitrage settlement process,” said an executive at a payment gateway. “We want to ensure that due compliance is followed with anti-money laundering rules. This is a lucrative business for us, but chargeback fees in the event of frauds fall on banks and PGs (payment gateways), which are rather high.”
Citing examples of crypto exchange frauds in Turkey and Estonia in recent years, the executive added that cryptocurrency will remain a supervision risk unless the government drafts a formal law.
Transparent disclosure
Meanwhile, crypto exchanges aware of tightening scrutiny by banking partners say they have been transparent in their disclosures and customer onboardings.
Some of the steps to self-regulate include staying away from terms like “trade” and “astronomical returns” in their marketing initiatives. In addition, several crypto platforms say they issue a disclaimer in every advertisement at the end to educate customers about the unregulated nature of the industry.
“As self-regulation, we put out a message that it is a volatile market and one should enter it with caution,” said Ramalingam Subramanian, chief marketing officer at CoinDCX.
Sharan Nair, the chief business officer of Coinswitch Kuber, which advertised aggressively during the IPL, said that on top of strict internal checks, external parties responsible for broadcasting the advertisement took legal permissions before airing the ads during the cricket series.
Legal experts said advertising and marketing cryptocurrency is not illegal in India.
Under the Cable Television Network Rules, any advertisement on cable services cannot be in breach of law. Since the top court’s decision on crypto-currency, trading of crypto-currency is not illegal or in breach of law till parliament legislates on it. So, “it seems there is no bar on advertisement of crypto-currency or its trading…,” said Akshay Nagpal, Partner, L&L Partners.
According to Rahul Goel, Partner at AnantLaw, the government has not yet declared cryptocurrency as an illegal instrument of payment. “In fact, the change in Company Law requires disclosure. So, anything which is illegal or prohibited under the law can’t be advertised,” he said.
“As a matter of fact, Air India’s official in-flight magazine used to have advertisements on cryptocurrency,” he added.
Doge-day aftermath
Sources also pointed out that the growing popularity of Dogecoin in India has also been A major concern for the banking regulators.
Dogecoin – a meme token in unlimited supply endorsed by electric vehicle maker Tesla’s founder Elon Musk – is known for its volatility and is being viewed by several Indian traders as a way of gaining quick returns through intraday trading through these exchanges.
Dogecoin trading volumes from India have more than trebled since April and platforms have witnessed record-breaking transaction volumes, according to a payment industry source monitoring these transactions.
On May 8, ahead of Musk’s appearance on an American TV show, which was said to be driving up its price token, major crypto exchanges like CoinDCX, WazirX, and Tiger Global-backed Coinswitch Kuber lost access to direct bank deposits and instant bank transfer.
“Due to congestion issues on our Banking Partner’s network, Instant IMPS, NEFT, RTGS options are currently not available,” CoinDCX wrote in an advisory to customers on its app CoinDCX GO.
Coinswitch Kuber issued the announcement on Twitter, “We have disabled INR deposits temporarily as there is an issue from our banking partner’s side.”
Despite losing critical banking access, exchanges witnessed high volumes of Doge-INR trading. For instance, users on WazirX, which is surviving on peer-to-peer transfers, traded Dogecoin worth Rs 820 crore on May 9 (Saturday Night Live aired in India on May 9). Coinswitch Kuber's Doge trading volumes crossed Rs 600 crore on the same day.
According to WazirX, as of Monday, the banking partner issue was resolved and the partner was rolling out access in batches. Most crypto exchanges have partners or self-driven education programs to educate retail investors about crypto.
CoinDCX said it has strict internal compliances in place and only lists tokens that meet certain standards and are compliant with local laws to protect retail investors. According to a CoinDCX spokesperson, Doge met the threshold.