India's Central Bank Explains in Court Filing Why It Blocked Banks From Using Cryptos

The Reserve Bank of India has said in a court filing that it had "ringfenced" financial institutions from dealing with digital assets over perceived risks, but hadn't banned cryptos.

AccessTimeIconJan 21, 2020 at 10:35 a.m. UTC
Updated Sep 13, 2021 at 12:10 p.m. UTC
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The Reserve Bank of India (RBI), the nation's central bank, said it "ringfenced" financial institutions from dealing with cryptocurrencies over a range of perceived risks.

In a response to a petition from the Internet and Mobile Association of India (IAMAI) – which is currently fighting the central bank in the nation's Supreme Court on behalf of companies affected by the RBI's April 2018 order – the RBI said that in restricting bank involvement it had not banned cryptocurrency use generally in India.

The Economic Times said in a report Tuesday it had seen a copy of the 30-page affidavit filed with the court in September and quoted the RBI as stating:

“Firstly, the RBI has not prohibited VCs (virtual currencies) in the country. The RBI has directed the entities regulated by it to not provide services to those persons or entities dealing in or settling VCs. ... The RBI has been able to ringfence the entities regulated by it from being involved in activities that pose reputational and financial risks along with other legal and operational risks.”

The use of cryptos in illicit finance was specifically listed as a concern, with the RBI saying that means of anonymous cross-border transactions "have to be acted upon swiftly and stringently dealt with."

The RBI bank ban has greatly affected the local crypto industry, with several popular exchanges – including Koinex and Zebpay – having shut down with no way for users to fund their accounts with fiat currency. Others have attempted to cling on by offering just crypto-to-crypto trading.

More recently, the world's largest exchange by trading volume, Binance, acquired the India-based WazirX exchange. Previously a fiat-free exchange, Binance will enable users to fund their accounts with rupees on its fiat gateway and charge their WazirX accounts using the tether (USDT) stablecoin.

The case against the RBI restrictions is continues before the Supreme Court after months of delays, with the latest hearing to commence Tuesday, according to the Economic Times.

The Economic Times added that the RBI, in its affidavit, said it had had discussions with the government in 2018 over whether cryptos should be regulated or banned. It had proposed that initial coin offerings should be barred, it said, while crypto funds should not be permitted.

It had also suggested payments for crypto purchases should be barred and monitored under amended foreign exchange laws.

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