International Tax Panorama

Today the Reserve Bank of India(RBI) clarified that banks and other entities cannot caution customers from dealing in digital currencies by citing its 2018 order on virtual currencies. It is because it has been set aside by the Supreme Court of India in 2020. 

Recently, several large private and public sector lenders have cited the RBI’s 2018 notice to caution customers from dealing in digital currencies and deny certain cryptocurrency exchanges’ services.

WazirX, India’s largest cryptocurrency bourse, has repeatedly faced issues with deposits and withdrawals of customer funds with the exchange’s banking partners throughout this month.

Earlier today, several media houses reported that HDFC Bank, State Bank of India and others have warned their customers that their dealings in cryptocurrencies could result in suspension of their accounts with them.

Due diligence must not be compromised

The RBI, however, asked banks and other regulated entities to continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer, Anti-Money Laundering, Combating of Financing of Terrorism and obligations of regulated entities under Prevention of Money Laundering Act in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act for overseas remittances.

The clarification from the central bank will come as a sign of relief for all investors and crypto exchanges in India who invested in virtual currencies.

Has RBI finally approved Cryptocurrency as a legal medium of exchange in India?

The answer to this is no. The regulator, in fact, has not taken any position on the validity and legality of cryptocurrency transactions in India.  It has, only avoided a potential contempt case/

This is because in March, 2020 when the SC quashed the crypto circular on a petition by the Internet and Mobile Association of India v. Reserve Bank of India, the respondent was the RBI and not banks and, hence, any contempt proceedings will befall on the RBI, not banks if the crypto lobby moves court against banks using the 2018 RBI circular.

The RBI, clearly, doesn’t want to invite the embarrassment of Contempt of Court and invite the wrath of the judiciary in this issue. Hence, the regulator (most probably based on a legal advice), has only safeguarded its position with the clarification.