A few days after some banks issued warnings to people regarding cryptocurrency, the RBI on Monday stated that banks should not cite a Reserve Bank rule to curb crypto trading as the rule has already been overruled by the Supreme Court.
What did the RBI’s circular say? What made RBI issue such circular?
The RBI in its new circular issued to the banks said-
“In view of the order of the Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from.”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’s circular also stated-
“It has come to our attention through media reports that certain banks and regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular dated April 8, 2018. Such references to the RBI circular by banks and regulated entities are not in order as this circular was set aside by the Supreme Court on March 4, 2020 in the matter of writ petition (Civil) No.528 of 2018 (Internet and Mobile Association of India vs Reserve Bank of India).”
RBI’s notice came after of SBI and HDFC Banks started cautioning customers against dealing in cryptocurrency and cited an old RBI notice that was issued in April 2018. In its caution, banks told their customers that if they fail to adhere to the caution, it may lead to their cards being cancelled or suspended temporarily or permanently.
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Does this clarify Indian government’s position on cryptocurrency?
Not really. The government has been giving ambiguous insights into the development. In March, Nirmala Sitharaman, the Indian Finance Minister claimed in the Rajya Sabha proceedings that cryptocurrencies won’t be completely banned in India. However, reports around the same time emerged which confirmed that the government is indeed planning to introduce a Cryptocurrency & Regulation of Official Digital Currency Bill which is reported to have provisions that impose a blanket ban on trading or other uses of cryptocurrencies like Bitcoin, Ethereum.
However, the new clarification from the RBI is indeed going to pose some relief to cryptocurrencies traders and investors. The current investment into cryptocurrency is estimated to be over Rs. 10,000 crores and the new RBI circular does provide a signal that the government is not going to block the usage any time soon. It should be noted that the RBI is working towards issuing its own digital currency.
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What will the banks like SBI and HDFC that issued warnings do now?
The banks that RBI addressed in its new circular are now expected to continue with its verification and diligence procedures. This will not only make the cryptocurrency environment safer, but will also inculcate faith in crypto traders that the banks are fully vested in their best interest. These verifications include – KYC (know your customer), AML (Anti-Money Laundering), CFT (Combating of Financial Terrorism) and meeting provisions mentioned in the PMLA, 2001 (Prevention of Money Laundering Act). The entities will have to also ensure that the customers are complying with the FEMA (Foreign Exchange Management Act) provisions.
What was RBI’s earlier position?
The Reserve Bank’s earlier position was critical of cryptocurrency. The RBI issued an order in 2018 which said-
“In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.”
RBI further said-
“Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase or sale of VC.”
In a nutshell, RBI directed all financially regulated entities that provide the services mentioned above to exit the trade with crypto entities within 3 months from the date of the issue of the notice.
What was Supreme Court’s decision regarding RBI’s earlier position?
In a significant Supreme Court ruling on the IAMAI (Internet and Mobile Association of India) VS RBI case, the top court overruled the RBI’s 2018 order. According to the Supreme Court, the RBI cannot impose unnecessary and disproportionate restrictions on cryptocurrency trading in the absence of a government passed legislative ban. The apex court observed that such a ban would interfere with the basic fundamental right all Indians having the right to trade.
