Banks shouldn't cite April 2018 circular for denying crypto services: RBI

Banks, however, must run a checklist of local laws before providing such services, says central bank

The Reserve Bank of India (RBI) on Monday clarified that banks can no longer cite its circular on cryptocurrencies for not offering such products to customers, but said the lenders must adhere to local rules, which are quite exclusionary. 

The central bank, in its circular dated April 6, 2018, had prohibited banks from dealing in cryptocurrencies or offering any service to customers on them.  

The circular was challenged in the Supreme Court, which set aside the rules on 4 March, 2020.  

However, the RBI said, banks continue to cite the 2018 circular by the RBI in order to justify why they are not offering any services on cryptocurrencies.  

“In view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from,” the RBI said in a clarification on its website. 

However, the central bank also cautioned banks that they must still continue to carry out customer due diligence processes “in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.” 

This essentially means that banks can offer services to the customers, but they will have to go through a whole lot of checks and balances before doing so, including ensuring the funds are not used for money laundering or financing terrorism. Since crypto currencies are not backed by central banks and are decentralised by nature, finding the end use would be difficult.  

According to a senior banker, it almost maintains the status quo, unless some cryptocurrency exchange declares that they take the responsibility of checking the background of the end use, which may not be possible.  

Cryptocurrencies have swelled in value in the recent past, and there are a number of currencies that are getting traded in global markets. So-called exchanges in cryptocurrencies are also offering fractions of a currency as an investment option, given their high prices. 

After the Supreme Court verdict, the services part was lifted, but the central bank continues to maintain a hands-off approach when it comes to cryptocurrencies. 

The central bank in the past had clarified that since the currencies are not backed by a central bank, it won’t take responsibility if something goes wrong in the transactions, or a fraud takes place. As an extension to that, it had stopped Indian banks from providing the services.  

RBI governor Shaktikanta Das said in March that the central bank had “major concerns” about crypto currencies that were communicated to the government.  

"Central bank digital currency is one thing. The cryptocurrencies which are traded in the market are something else. Both RBI and government are committed to financial stability. We have flagged certain concerns around these cryptocurrencies which are being traded in the market. We have flagged certain major concerns to the government," Das had said. 

The central bank, on its part, is developing its own digital currency, but it will likely take years.  

"As the underlying technology is still developing, we are exploring ways for a clear, safe and legally certain settlement finality, which is most crucial for a secure and efficient payment system," Das had said.