Anger, shock, confusion as RBI bars banks from cryptocurrencies

Yesterday the Reserve Bank of India barred banks and financial institutions from dealing in cryptocurrencies. In a statement, the regulator said, "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 VCs (virtual currencies)."

“We have decided to ring-fence the RBI regulated entities from the risk of dealing with entities associated with virtual currencies. 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,” BP Kanungo, deputy governor, RBI, said. 

   Banks will not be allowed to facilitate sale or purchase of cryptocurrencies, 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. 

   This will impact nearly 50 lakh Indians who have invested in cryptocurrencies, as well as India's crypto exchanges. Bitcoin investments in India are estimated to be in region of $2billion. 

Speaking in two voices?
A payments expert who spoke to ET Online on the condition of anonymity called the decision "confusing" - while it does not directly ban cryotocurrencies, it makes trading in them impossible.
"On one hand, you put in place a panel to devise a cryptocurrency framework, and on the other hand, RBI comes up with this decision. Even if there is an issue with one or two players, you can’t put the whole industry and consumers in a fix," he said.

"If the regulator behaves this way, then one wonders - what kind of economy are we creating? Why are we talking digital? What kind of message are we sending to digital entrepreneurs? If you want to be like China [which has banned cryoto ..ryotocurrencies], at least make it clear," he added. 

               End of the road for investorsand exchanges?
 Sathvik Vishwanath, co-founder of crypto exchange Unocoin, said the move will create panic among investors. 

   "It is going to be difficult for these people to find an exit route out of these currencies. These are middle-class people who will now be stuck," said VishalNSE 0.00 % Gupta, founder, Binex Trade. 
   Payment Council of India chairman Naveen Surya agreed. "The RBI's intent is to protect customer interest, however this move will only adversely impact the organised sector and the government. Cryptocurrency volumes and prices have dropped. This would force customers to sell at losses and make them more susceptible to taking illegal routes for trading." 

  This is a back-handed way of crippling a system. Instead, the regulator should implement KYC requirements, risk mitigation, and general security-related measures for the sector," Surya added. 
  Initial coin offerings (ICOs), which have started to become popular in India as an alternative way to raise funds, will also be impacted by this move, says Aditya Dev Sood, chief mentor and general partner, Startup Tunnel. Sood fears the move might have deleterious effects on India's larger blockchain plans. "I expect things will change eventually, but this will make us few years late in the game," he said.  

       The RBI's move will push investors to either go to "OTC markets or overseas", believes Pankaj Jain, founder of BlockHack.io, a community promoting blockchain and crypto, and former partner, 500 Startups. "It’s a very poorly thought-out decision. If they think crypto is going to go away, then they really don’t understand this space at all. You are forcing these people to become criminals and go underground, and this is completely opposite of what the Narendra Modi government is trying to achieve .. 

      Some experts feel investors will find a way to keep crypto trading alive. In China, investors took to WeChat and formed groups to exchange cryptocurrencies when the Chinese government took a strict stance against the exchanges. 

 In Venezuela people figured out a way to mine bitcoins and used it to buy Amazon coupons on the Internet. A similar case cannot be ruled out in the Indian market," said a Bitcoin trader who didn't want to be named. "Indians know many means to keep an underground market active. They might actually show the way to the world on how to [circumvent bans]." 

       Will cryptocurrency exchanges shut down? Or will they hang in by only supporting crypto-to-crypto trading? If they shut down, what will .. 

"I think some small exchanges will shut down, but the larger ones will continue if they can move to crypto-to-crypto," said Jain of BlockHack.io. Some new exchanges with innovative models might even crop up, he added.

Killing a potential golden goose?
• According to Surya of the Payments of Council India, the government earned Rs50-Rs100 crore in taxes from the crypto segment last year.

• "The Indian tax department is still sending circulars to a lot of i ..