RBI Bars Financial Institutions From Dealing With Cryptocurrency

Financial institutions in India will no longer legally be able to deal  with cryptocurrencies, the bank is also looking into releasing its own  fiat cryptocurrency in the future the  (RBI) Reserve Bank of India announced. 

 “In view of the associated risks, it has been decided that, with  immediate effect, entities regulated by RBI shall not deal with or  provide services to any individual or business entities dealing with or  settling virtual currencies,” the bank said in a statement. 

Which means crypto investors will not be able to transfer money from  their bank accounts to crypto-trading wallets like Zebpay, Koinex,  Unocoin, Coinsecure, and others. 

Those that already provide cryptocurrency services will need to end the  relationships within a specified time, which the bank said will be  announced separately. 

The government had planned to “take all measures to eliminate the use of  these crypto-assets in financing illegitimate activities or as part of  the payment system,” India’s finance minister told lawmakers in New Delhi in February, according to a transcript by The Hindu newspaper. 

In a media conference, RBI Deputy Governor BP Kanungo stated the central  bank has given regulated entities three months to unwind their business  relationships with crypto-related companies, according to local news  outlet Quartz India. 

 “We have decided to ring-fence the RBI-regulated entities from the risk  of dealing with entities associated with virtual currencies,” Kanungo  said. “They are required to stop having a business relationship with the  entities dealing with virtual currencies forthwith and unwind the  existing relationship within a period of three months.” 

Kanungo stated that while the regulatory reaction to cryptocurrencies is  not uniform internationally, it is universally felt that they can  seriously undermine the anti-money laundering (AML) and Financial Action  Task Force (FATF) framework. He added that any investment in  cryptocurrency for speculative purposes can adversely impact the market  integrity and capital controls, and if they grow beyond a critical size,  they can endanger financial stability of a fiat currency. 

The central bank has repeatedly cautioned users, holders, and traders of  cryptocurrencies regarding various risks. It has also clarified that it  has not given any license to any company to operate or deal with  Bitcoin or any other cryptocurrency. 

The RBI, however, recognizes the importance of blockchain and will  encourage the technology for the growth of financial inclusion. 

 “We also recognize that the blockchain technology, or the distributed  ledger technology that lies beneath the virtual currencies, has  potential benefits for financial inclusion and enhancing the efficiency  of the financial system and we also believe that they should be  encouraged to exploit beneficially for the economy,” Kanungo said. 

Kanungo further stated that the central bank has constituted an inter-departmental group to study the feasibility of a fiat cryptocurrency backed by the RBI. 

 “We have constituted an inter-departmental committee, Reserve Bank of  India will produce a report and they will explore the feasibility and  desirability of issuing a digital currency by the central bank,” Kanungo  said. “These are issued by central banks, they constitute the liability  of the central bank and they will be in circulation in addition to the  paper currency. It also holds the promise of reducing the cost of  printing of the notes.” 

India’s finance minister had criticized cryptocurrencies back in June  for their “lack of intrinsic value”, with the Indian government imposing  regulations back then to control the market and taxes for traders. 

It is important to note this order does not directly ban  cryptocurrencies, but what it does do is it makes trading in them  impossible. 

Although, India may take the route of China and citizens might start to trade over the counter  (OTC) if this happens the Indian government is opening up its citizens  to riskier black market trading where investors could have their funds  stolen. 

Last year, investigators from the income tax department of India raided nine offices of the country’s top Bitcoin exchanges on suspicion of alleged tax evasion. 

The RBI has previously expressed its view on cryptocurrencies stating  that India was not comfortable with cryptocurrencies that were  decentralized like Bitcoin and explained the difference between fiat  cryptocurrencies and cryptocurrencies. 

“As regards non-fiat cryptocurrencies, I think we are not comfortable,”  Sen said, adding “Bitcoins for example. That’s a private  cryptocurrency.” 

Ripple, the central banker cryptocurrency that saw gains from potential for widespread adoption in India, is currently trading at [FIAT: $0.475238] according to Coin Market Cap at the time of this report. 

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