​Is the freeze on crypto payments in India a shadow ban?

Synopsis

As far as the question of legal and regulatory clarity is concerned, dealing in cryptocurrencies is not illegal under any provision of law in India.

The Indian crypto industry is facing yet another challenge as many Indian banks and payment service providers have halted their services to crypto exchanges. As a result, users have been unable to make fiat deposits to their crypto exchange wallets. Many exchanges, including WazirX and CoinSwitch Kuber, have removed the option to deposit money through UPI. As reported by Outlook earlier, CoinSwitch Kuber also halted all options — including internet banking, NEFT, RTGS or IMPS — to deposit INR.

The present predicament was triggered after a statement by the National Payments Corporation of India (NPCI) that it was “not aware” of any crypto exchanges using the UPI system. It issued this statement following a Coinbase India launch event where the latter advertised that its users would be able to make deposits using UPI. Following the NPCI statement, Mobikwik, Kotak Mahindra and others stopped providing services to crypto exchanges in India.

There is no official order, circular or statement by the Reserve Bank of India (RBI) or NPCI prohibiting banks or other payment systems from providing services to crypto exchanges. Nevertheless, as reported by The Economic Times, a senior bank official confirmed to them that RBI supervisors have been asking banks to “exercise caution” on crypto until there was greater regulatory clarity.
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It is surely more than a coincidence that so many banks and service providers have been led to take similar actions in quick succession. The only plausible reading of the situation is that they have done so out of abundant caution after NPCI’s statement and RBI’s unofficial nudges. The public statement released by the NPCI is itself cryptic (pun intended) and evasive. It says that the NPCI is “not aware of any crypto exchanges using UPI”. Why would a regulatory body issue a public statement declaring its own lack of awareness unless, of course, it aims to send a subtle message to those associated with the industry concerned?

As far as the question of legal and regulatory clarity is concerned, dealing in cryptocurrencies is not illegal under any provision of law in India. In this light, it becomes important to examine whether, as a statutory body, the RBI is permitted to act, or allow other bodies under its supervision to act, in ways which are prejudicial to a specific industry. After the Supreme Court judgment of 2020 on cryptocurrencies, the legal position on this has been straightforward. The apex court has been unequivocal in its observation that banking channels are the lifeline of any trade or business and the same can not be denied to crypto exchanges, as it has not been shown that they have been involved in unlawful activities or are causing harm to the RBI. In fact, when the court made a specific inquiry on this point, the RBI failed to show “any semblance of damage suffered by its regulated entities”. The court accordingly held that the RBI’s 2018 circular, which sought to insulate crypto exchanges from banking services, was an administrative overreach. If material circumstances have altered and the RBI has credible evidence to suggest that crypto services are causing harm to the economy, or are involved in unlawful activities, then the onus is on the regulator to bring such evidence back to the courtroom. Even so, the legal threshold for justifying a complete ban on the industry would remain fairly high.

What is curious about the recent move is also its unofficial nature. It is important to remember that the central bank is the leading authority on the matter, and the NPCI, having no statutory standing, cannot unilaterally decide whether the UPI infrastructure is to be extended to crypto exchanges or not. But the RBI has been strangely silent on this whole matter thus far.

In administrative and constitutional law, the doctrine of “colourable exercise of power” dictates that a public body cannot do indirectly that which it is not permitted to do directly. The NPCI or RBI cannot specifically target a sector or industry which is not illegal or unlawful under any law and isolate it from banking channels without any official order, circular or communication. Further, the present shadow ban should not merely be looked at as an industry-specific problem. This payment disruption highlights a much broader possibility of arbitrary exercise of power by the RBI/NPCI and associated entities. Nascent sectors, which show great promise of innovation and entrepreneurship, should not be suffocated without reasonable grounds. Even more so when such grounds have already been examined and rejected by the apex court of the country, and there are no material changes in circumstances.

As the RBI has not issued an “official” statement or circular, it should not be assumed that its actions are within the purview of law. It is clear that it is de facto trying to do that which it de jure failed to do in 2018. It is, therefore, time that the courts take notice.

This payment service crisis, coupled with the 30% tax on crypto related gains introduced by the Finance Bill earlier this year, makes it seem that the regulatory chokehold on the industry is steadily growing. In order to productively break this impasse, the RBI must, at the very least, issue an official circular or order clarifying that no banks or payment systems are prohibited from providing services to crypto exchanges. If its official position has changed, then there is an even greater urgency for an explicit statement, clarifying the specific grounds for its action.

(Purushottam Anand is an advocate and Founder of Crypto Legal. Anshuman Singh is the Head of Policy & Research at Crypto Legal. Views expressed are personal.)

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Updated: 04/21/2022 — 09:00