Circular on cryptocurrency
02/06/2021

Tags:

Context:

  • Recently, some leading banks cautioned people against dealing in cryptocurrencies. The Reserve Bank of India (RBI) recently said banks and other regulated entities cannot cite its April 2018 order on virtual currencies (VCs) as it has been set aside by the Supreme Court of India in 2020.

What did the RBI say and what was the trigger?

  • In view of the order of the Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from.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 clarification came after State Bank of India and HDFC Bank cautioned their customers against dealing in virtual currencies such as Bitcoin citing the April 2018 order of the RBI.
  • Banks also warned customers that failure to adhere to the advisory may lead to cancellation or suspension of their cards.
  • The RBI has no option but to allow it after the Supreme Court lifted the banking ban last year. So, the RBI intervened and asked banks to stop being notorious.

Does it clarify the policy position for cryptocurrency holders?

  • The clarification from the RBI, which is developing its own virtual currency, is expected to give some relief to customers who have invested in cryptocurrencies.
  • Many Indians have invested in cryptocurrencies like Bitcoin and Ethereum, the RBI move will be a big respite for them and their money.

What are banks expected to do now?

  • Banks, as well as other entities, may 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.
  • In other words, banks can’t take action against investors in virtual currencies following the court and RBI directives.

What’s the RBI’s position?

  • The RBI’s 2018 position was more restrictive. 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.
  • 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 VCs.
  • Regulated entities which already provide such services should exit the relationship within three months from the date of the circular.

Conclusion:

  • However, the RBI which is against other virtual cryptocurrencies has warned people against such currencies several times in the past.
  • RBI has indicated it’s “very much in the game” and getting ready to launch its own digital currency. “Central bank digital currency is a work in progress.
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