The last two decades have witnessed technological advancement in India and across the world by leaps and bounds. The unprecedented growth of technology has led to its penetration in several sectors of the economy and one such burgeoning sector is Fintech. With the increasing popularity and understanding of cryptocurrency such as Bitcoin, Ripple, Dogecoin, and others among the Indian public, many have begun to spend substantial amount of their time and money in Virtual Currencies (VCs) with hope of reaping huge profits and returns in view of current global trends.
As a result of growing popularity of the crypto market in the Indian public and the associated risk of potential revenue loss, the Reserve Bank of India (RBI) has time and again issued Circulars cautioning the public against dealing in virtual currencies and also completely prohibited cryptocurrencies in India in the year 2018. However, later, the Supreme Court on March 04, 2020 lifted the ban imposed by RBI on cryptocurrencies in 2018. The Apex Court’s verdict was considered a historic one, especially for India’s virtual currency industry and start-ups.
WHAT ARE VIRTUAL CURRENCIES?
As per the European Banking Authority (EBA), Virtual Currencies (VC) are a digital representation of value that is neither issued by a Central Bank or a public authority, nor necessarily attached to a FC (Conventional Fiat currency), but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically. Virtual Currencies (VC) includes cryptocurrencies like Bitcoin, Ethereum etc. The status quo of Virtual Currencies currently is that the same is not illegal in India pursuant to Supreme Court judgement in 2020.
RBI’s Circular- Clarification on Transactions related to VCs
In a recent development, considering the growing dealings of VCs in India, the RBI has issued a circular for providing clarification on transactions related to Virtual Currencies (VCs).
Clarifications provided in RBI circular:
- Banks and financial institutions to not caution their customers against dealing with transactions related to Virtual Currencies (VC);
- Banks to follow regular compliance of regulations governing standards.
RATIONALE BEHIND THE CIRCULAR
This Circular has been issued in light of various banks and financial institutions warning their customers to not deal with transactions related to cryptocurrencies by citing a RBI circular which had been later invalidated by the Supreme Court. This is in reference to a Circular dated April 06, 2018 which had previously prohibited any transactions or dealings in Virtual Currencies (VC) and imposed a blanket ban on VCs in India and directed that 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.
The Circular dated April 06, 2018 was later set aside by the Supreme Court stating that the restrictions imposed by RBI on banks and financial institutions with respect to dealings of VCs was unfair and that the impugned Circular was no longer enforceable. Hence, the Supreme Court validated dealing in VCs and lifted the ban imposed by RBI on cryptocurrencies in 2018.
However, recently few Banks had sent emails to their customers alerting about the lack of clarity issued by RBI on regulations related to dealing in VCs and a possible suspension of their bank account in case of continued transactions. Reportedly, these Banks cited the struck down RBI circular of 2018 for reference and curtailed transaction services.
COMPLIANCE OF REGULATION GOVERNING STANDARDS
Additionally, the RBI addressed the importance of asking Banks to provide constant due diligence with regard to the government regulations to their customers. These standard regulations include:
- financial institutions (KYC),
- Anti-Money Laundering (AM),
- Combating of Financing of Terrorism (CFT)
- Obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002.
Due diligence of customers dealing in international transactions and remittances also needs to be ensured properly by following compliance of relevant provisions of Foreign Exchange Management Act (FEMA).
In view of the current situation, it is imperative that clarity is rendered with reference to the laws and regulations governing the dealings of Virtual Currencies in India. Hence, RBI’s present Circular is a very positive development for the whole industry as it provides a sense of clarity to the banks as well as customers. However, the lack of guidelines and specific law related to dealings in VCs is creating an impediment in the growth VCs in India. Interestingly, despite the RBI’s circular and clarification, it has been reported that Banks and Financial Institutions in India are still hesitant to facilitate transactions in relation to Cryptocurrency.
 ‘EBA Opinion On ‘Virtual Currencies’’, http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf
 Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018