What does the ban on servicing cryptocurrencies mean?

Lokeshwarri S K BL Research Bureau | Updated on April 05, 2018

There has been an ongoing debate in recent times about the right label for virtual currencies – such as bitcoins, ethereum and litecoins – as to whether they should be treated as a currency or as an investment asset. The Finance Minister made it clear in the recent Union Budget that virtual currencies cannot be treated as a currency to buy or sell goods or services when he stated that cryptocurrencies are not legal tender.

The RBI has gone one step ahead making it clear that these cryptocurrencies cannot be treated as an asset either.

Impact of the move

The central bank intends to prohibit all entities regulated by it from servicing individuals or businesses that deal or settle crypto currencies. While the circular with the details are awaited, it appears as if no banks, NBFCs or other companies facilitating digital payments, such as mobile wallet operators, can now service transactions involving crypto currencies.

The impact of this move is going to be two-fold. One, investors who have been buying and selling bitcoins and other virtual currencies with the motive of making some quick bucks, will now have to stop. For, most of the larger virtual currency exchanges in India, such as Zebpay and Unocoin, require investors to transact through their bank accounts.

Earlier this year, many leading banks had suspended some accounts of large bitcoin exchanges in India on suspicion of money laundering. With the recent directive, investors will be unable to use their bank accounts to dabble in these virtual currencies. While some exchanges might facilitate transactions in cash, it puts a shadow of illegality on such transactions. It is not clear if the rule applies to cryptocurrency exchanges outside the country as well. If that route is also blocked, Indian investors will have to look at other more conservative avenues to park their money.

The second impact of this ruling could be that the larger exchanges trading virtual currencies could have to now shut shop.

The RBI has forbidden banks and other financial institutions from servicing all entities dealing or settling virtual currencies – this clearly points towards exchanges such as Zebpay and Unocoin. Regulated entities, which are servicing these exchanges, will now have to terminate such relationship within the time, to be specified by the RBI.

Why the ban

Virtual currencies that are mined by solving some complex algorithms became the rage in 2014 when the price of bitcoin (the most popular virtual currency) hit $1,000. While the rally fizzled out soon after, the frenzy resumed when bitcoin prices went past $10,000 in December 2017. Retail investors, unaware of the risks, began converging on VC exchanges in the country, making volumes soar in December 2017 and January 2018.

Bitcoin prices have, meanwhile, been extremely volatile, rallying to $19,511 by December 18, 2017, falling to $5,972 by February 6, 2018, and once again rallying to $11,764 towards late February. It currently trades at $6,797.

Besides price volatility, many unregulated VC exchanges began mushrooming in the country, exposing investors to great risk. As RBI said in its statement, “Virtual Currencies (VCs), also variously referred to as cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others.”

However, the RBI has held out an olive branch to users of cryptocurrencies by saying that it would soon launch a fiat digital currency. That could be good news for those who dreamt about digital currencies unseating traditional ones in the distant future.

Published on April 05, 2018

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