Empire Strikes Back: Banks Snap Ties With Crypto Exchange Platforms
The Reserve Bank of India in May last year, while responding to an RTI, said there is no prohibition on banks in providing accounts to traders dealing with cryptocurrencies
On the night of May 12, Twitter exploded with news of possibly the highest donation by an individual for India's COVID-19 relief. Ethereum co-founder Vitalik Buterin donated $1 billion worth of SHIB, a crypto coin, for India's fight against the second wave of the pandemic. As soon as the news went viral, Indian entrepreneurs and the country's crypto community lauded him and expressed concern over the government's possible move in banning cryptocurrencies, when it is helping the country.
Last week has been nothing less than a nightmare for Indian crypto exchange platforms. As the crypto transactions in India boomed, leading banks in the country started distancing themselves including ICICI Bank from crypto exchange platforms, leaving exchange platforms in a lurch for payment options. At a time when around 10.5 million Indians own cryptocurrencies worth INR 15,000 crore, and around 2 million new users are being added every month, almost all the banks have snapped ties with exchange platforms.
"Confusion and fear are the biggest reason behind the current situation. Banks are not sure whether they will be able to provide their services to crypto or not," said Nischal Shetty, co-founder, and chief executive officer of WazirX, one of the country's leading crypto exchange platforms.
"However, there shouldn't be any confusion as the Supreme Court has set aside RBI's 2018 circular, and RBI itself has admitted that the top court has ruled out its circular in its annual report," he added.
Shetty was referring to the apex court's March 2020 judgment where it struck down RBI's curbs on cryptocurrency trade in India. The order in effect lifted the ban on trading in virtual currency and cryptocurrency.
RBI, through its circular in 2018, restricted banks and financial institutions not to provide banking services to any individual or business entities dealing with virtual currencies, including bitcoin. RBI feared that cryptocurrency can lead to money laundering and threaten consumer protection.
Shetty said that lack of information flow in the various departments of the bank, especially the compliance department has caused the issue.
He said some banks continue to cite RBI's older order. As per Shetty, the surge in crypto transactions can be one of the reasons behind banks' skepticism, as the industry is now hogging the limelight.
One of the top executives of a leading crypto platform in India, requesting anonymity, said RBI is "not happy" with cryptocurrencies. The executive said initially, banks were willing to work with cryptocurrency exchange platforms, but later they pulled out citing an older RBI circular.
The central bank in May last year while responding to an RTI said there is no prohibition on banks in providing accounts to traders dealing with cryptocurrencies.
"When we state all these facts to banks, they don't respond and when we ask them for a written response, they stop communicating as a written response will act as proof for defiance of the verdict given by the top court," the executive added.
"We face two challenges right now: One is the record volumes of crypto transactions, which are putting a strain on banks, payment gateways, and crypto exchanges. The other is regulatory uncertainty. We don't see this as a banks-versus-crypto story. We have common goals," said Vikram Rangala, chief operating officer of ZebPay.
He said that banks have to do their risk assessments and without regulatory clarity, it's difficult for them.
Interestingly, the executive quoted above stated even top payment gateways such as Razorpay, Cashpay, CC Avenue, among others, are not willing to work with cryptocurrency platforms. "Few payment gateway companies when they start working with us, they open a bank account, and after a week they say they can't deal with crypto anymore," the executive added. He said on paper they state risk factors, but unofficially the directions come from the "top".
At present, cryptocurrency platforms are using third-party payment processors such as Paytm Payments Bank to facilitate payments, but how long can Paytm continue as it continues to receive cold stare from bank lobbies?
"Paytm has also said they won't be able to work with crypto exchange platforms and already have closed down accounts of some exchange platforms. It is just a matter of time that Paytm pulls the plug," added the executive, whose crypto currency platform in the past one month has switched 4-5 banks.
Need For Regulation?
Shetty added he has been demanding regulation on crypto transactions from RBI for some time now. He said the regulation will take some time, but in the meanwhile, the government can chalk out guidelines for crypto exchange platforms.
However, he stressed that lack of crypto regulation/guidelines should not prohibit crypto transactions as there is no anti-crypto regulation in the country and there already exists a self-regulatory code of conduct that is being followed by crypto exchange platforms in India. He argued that there has been no regulation in most of the Internet startups that have become billion-dollar companies now.
"Reluctance of banks is actually damaging a very fast growing sunrise sector in India and is affecting lots of common people of India," he added.
The executive said regulating something in a big country like India will take a lot of time. "By the speed, things are coming down, we can't just simply close down our businesses and then hold a discussion about regulation."
He feared that by the time India regulates crypto exchanges, India would have lost a major opportunity.
The executive argued that crypto was one area where development started almost at the same pace both in the US and India. "Coinbase did a $100 billion in IPO and it started in 2012. The first crypto exchange in India came in 2013. Look where they are and where we are struggling with banks," he exclaimed.
As per Rangala, the long-term solution is a clear message from the RBI and government that while they develop a full set of legislation and regulations, businesses can carry on without fear of repercussions as long as crypto exchange platforms continue to practice the highest standards of ethics, protection against fraud and money laundering, and transparency.
Banks Being Cautious?
When asked whether banks are taking these steps to protect customer money or prevent money laundering, Shetty demanded for any data to back any claims of money laundering via exchange platforms.
"There is no anonymous transaction or cash transactions happening on WazirX or exchanges that are part of IMAI," he added.
The executive added that if banks are worried about certain crypto tokens such as Dogecoin because of the volatile nature then restrict those or even impose a limitation on the amount of money a person can invest in cryptocurrencies. "There are multiple ways to protect customers' money and exchanges are willing to do it".
On money laundering, the executive said, "Crypto exchange platforms are the clean players. Nobody does money laundering after doing KYC on a crypto exchange platform," he said.
With all that said, one silver lining is that Shetty said that a few banks have started reaching out to understand cryptocurrency and how they can support the industry as a whole. He further added that once one-two banks partner with cryptocurrency platforms, then other banks will be left out, as most of the crypto platform will go ahead with those particular banks.
Entrepreneur India has emailed Paytm, Razorpay and ICICI Bank, and the story will be updated once they send responses.