This year has seen a worldwide wave of regulatory responses in the digital currency realm as governments begin to tackle the legal and practical issues surrounding digital currencies, digital currency exchanges and exchange operators.

India has recently joined the list of countries responding to these developments by clamping down on digital currency.

On 6 April 2018, the Reserve Bank of India (RBI) published a circular barring banks and financial institutions regulated by it from dealing in virtual currencies or providing services “for facilitating any person or entity dealing with or settling” virtual currency.

The proscribed services include:

  • maintaining accounts
  • registering, trading, settling, clearing, or giving loans against virtual tokens
  • accepting them as collateral
  • opening accounts of exchanges dealing with them
  • transferring or receiving money in accounts relating to the purchase or sale of virtual currencies.

Although not a ‘ban’ on digital currencies as such, practically speaking these restrictions are likely to put a severe brake on the digital currency ecosystem in India.

The RBI has said in previous public notices that cryptocurrencies raise concerns around consumer protection, market integrity and money laundering. The RBI has now given regulated entities who are already providing the services referred to in the circular three months from the date of the RBI circular to wind down their business relationships with digital exchange operators. This means that come 6 July 2018, India’s RBI regulated banks and lenders will no longer be able to transact or facilitate transactions with companies or individuals that trade in cryptocurrencies.

The exponential growth of cryptocurrency in a largely unregulated market, has seen an escalation in concern from governments that digital currencies could be associated with undesirable conduct, such as money laundering, tax evasion and financial terrorism.

Regulatory responses seem to consist either of the introduction of new regulations (as in Australia for example) or banning (or severely restricting) the trade in digital currencies, which currently is the Indian response.

Signalling a glimmer of hope for the sector in India however, the RBI Deputy Governor B.P Kanungo acknowledged that “the blockchain technology or the distributed ledger technology that lies beneath the virtual currencies has potential benefits for financial inclusion and enhancing the efficiency of the financial system.”

Mr Kanungo announced the introduction of an inter-departmental group that will study and provide guidance on the desirability and feasibility of introducing a central bank digital currency. The report is due to be submitted by the end of June 2018, in advance of the July deadline referred to above.

Despite the extension of an olive branch by the RBI, several virtual currency exchanges are taking action to challenge the RBI order in the Delhi High Court. Kali Digital Eco-Systems has commenced action in the Delhi High Court alleging the RBI’s ‘ban’ on cryptocurrency is unconstitutional and, specifically, that the RBI order violates Articles 14 and 19(1)(g) of the Constitution of India that grant every person the right to equality and the right to practise any profession, or to carry on any occupation, trade or business.

Kali Digital is currently building a platform for buying, selling and storing digital assets with the trade name CoinRecoil. The official launch of CoinRecoil in India is scheduled for August 2018, but this may be problematic given the RBI’s current stance. Kali Digital is reportedly planning to expand its operations to more crypto-friendly countries such as Australia, Canada, Singapore and The United Arab Emirates.

The Delhi High Court has issued a notice to the RBI and the Ministry of Finance seeking a response to the claims by Kali Digital. The response is expected at a hearing on May 24, 2018.

It remains to be seen whether the RBI will introduce a permanent ban on cryptocurrency, or whether it is simply seeking a temporary solution to buy the RBI and relevant Indian governmental bodies time to establish a long-term strategy for cryptocurrency regulation.

The full text of the notice is available here.