“There has been no fresh Reserve Bank of India directive asking banks to stay away from cryptos. But senior supervisory managers (of RBI) are telling some banks to exercise caution on cryptos till there is regulatory and legal clarity,” said a senior official of another bank.
Kotak’s stand could deal a blow to the unregulated industry. It follows digital wallet MobiKwik reportedly snapping its links with crypto-related payments since the beginning of April.
MobiKwik had emerged as the sole payment option for the bulk of crypto traders and multiple crypto exchanges, with almost all banks shutting their doors to the industry.
Indeed, some of the crypto exchanges were planning to approach Kotak for processing payments, as it had been doing business with CoinSwitch Kuber for the past few months.
“They will now have to look for an alternative,” said a senior official with one of the bourses. “And clearly, they are running out of choices. Even Kotak was selective. While it was processing payments for CoinSwitch trades, the bank’s talks with a large exchange fell through… This is the toughest phase for the crypto industry in India.”
Kotak officials did not comment on the bank’s decision while a spokesperson for CoinSwitch Kuber did not respond to a query from ET.
Payment avenues for crypto transactions are being choked at a point when the industry is faced with an oppressive tax regime that makes crypto dealings worse than gambling. A crypto trader, unlike a gambler, cannot set off losses against profits to lower the tax outgo. Besides the 30% tax the trader pays on gains from crypto trades, there is a 1% tax deducted at source on sale proceeds (irrespective of whether money is made on the trade).
“Crypto exchanges are being pushed to a corner. Some of them are even thinking whether they should move court, even though that would be the last option. They may soon write to the RBI, ministry and Indian Banks’ Association. But they doubt they would respond,” said an industry person.
Treading with Care
With senior RBI officials publicly and repeatedly voicing strong reservations about cryptocurrencies, banks have distanced themselves from cryptos – despite the government’s decision to tax the industry.
Many banks fear they could be unwittingly caught in the middle of some money laundering transactions in which cryptos are used to send (or receive) funds to (or from) overseas parties by sidestepping the banking system and exchange control regulations.
“It’s impossible for a regulator to track if someone transfers cryptos from an overseas wallet to the private wallet of another crypto trader in India… But these issues on exchange control will not be sorted out till we have regulations on cryptos,” said a banker. “Given the nature of cryptos, it’s very difficult to address all the issues. We believe neither Sebi (Securities and Exchange Board of India) nor RBI has, so far, agreed to be the regulator for the cryptocurrency industry.”
RBI cannot formally direct banks following the March 2020 Supreme Court ruling that had set aside the central bank’s directive to banks to stop letting customers use bank accounts to buy or sell cryptos. But most banks, having read RBI’s mind, have been blocking crypto-related payments since early-2021.
It started with ICICI, India’s second largest bank, telling payment gateway operators in April 2021 to deactivate ICICI netbanking for merchants who were involved in buying or selling cryptos directly or indirectly.
A few months later, the largest local lender, State Bank of India, blocked receipt of funds by crypto bourses on its UPI platform. UPI, or Unified Payment Interface, allows all bank account holders to send and receive money from their smartphones without entering bank account information or netbanking user ID and password.
About the same time, some of the large private banks started asking customers remitting money for overseas investments under RBI’s liberalised remittance scheme to give a declaration that the funds would not be used to trade on cryptocurrencies.