RBI warns banks about crypto risks, wants higher scrutiny

The Reserve Bank of India (RBI) has warned lenders about cryptocurrencies, telling them to step up scrutiny of financial transactions by companies and exchanges involved in the trade of bitcoins and similar digital tender, said two people aware of the matter. 

While the central bank stopped short of directing banks to desist from dealing with such entities, the formal communication is expected to lead to a near freeze as no lender would want to get on the wrong side of the regulator, they said. Both RBI and the government have issued warnings on bitcoin previously. 

The central bank's note asks banks to understand how such currencies work before dealing with such companies, sources said. 

"RBI has told us to carefully evaluate businesses of these cryptocurrencies, but the wording of the RBI letter does not prohibit us in dealing with bitcoins," said one of the persons. "The regulator's remarks raise questions in our mind and that is enough for us to make us stay away from this business." 

The central bank didn't respond to queries on the matter. Virtual currency businesses such as Zebpay, Unocoin, CoinSecure and BtcxIndia didn't respond to queries. 

RBI has said previously that it hasn't given licences to any company to operate or deal in bitcoin or any other virtual currency. South Korea and China have already clamped down on virtual currencies. 

ET reported January 20 that top lenders including State Bank of India, Axis Bank, HDFC Bank, ICICI Bank and Yes Bank have suspended some accounts of major bitcoin exchanges in India, suspecting dubious transactions. 

"There is a reputation risk for banks if a bitcoin business fails and people lose money and if the framework is not defined how does a bank protect itself?" another banker said. "While RBI's thought process is a work in progress, all banks are taking a wait-and-watch stance."

The top cryptocurrency exchanges are looking to approach the government jointly regarding challenges they face from tax authorities and the banks, a person close to the development said. "The cryptocurrency exchanges are contemplating the next step they could take including getting clarity from the courts," a senior lawyer working with at least two exchanges told ET. 

"For tax-related clarity, some bitcoin exchanges want to approach quasi-judicial bodies. The exchanges want to come together and take the next step." 

A senior executive at one of the top four exchanges said additional scrutiny is taking time. "There is a tremendous pressure from the banks regarding the current accounts," the executive said. "Even in cases where the accounts are not yet suspended, banks are seeking additional information and crosschecking every transaction. This is leading to increase in the time taken by exchanges to service a customer who may have either bought or sold a cryptocurrency." 

Banks have also sought additional collateral from promoters of exchanges on their borrowings and have capped cash withdrawals from the few accounts that are still operational. This follows direct tax and indirect tax departments scrutinising bitcoin exchanges. 

Industry insiders said bitcoin players earn revenue through commissions, transaction fees, or price-arbitrage opportunities. Most of the exchanges allow trading of various cryptocurrencies besides bitcoin. 

Due to the absence of regulations, banks are wary about getting into trouble if they engage with such businesses. 

ET reported on December 16 that the indirect tax department had launched an investigation into bitcoin exchanges operating in India to ascertain the goods and services tax (GST) rate that can be levied on them. The sales tax department and VAT authorities have already launched an investigation on the taxability of bitcoins in the last financial year. #casansaar (Source - Economic Times)