Reserve Bank of India issued a press release on Thursday that had a directive for withdrawing support to virtual currency businesses. The news sent a frenzy across the Indian cryptocurrency community and everyone could only talk about how India’s central bank has ‘banned’ cryptocurrencies. A massive wave of FUD followed in the market driving down the prices of cryptocurrencies in India significantly. But, did RBI just in fact ban cryptocurrencies?
RBI is a banking regulatory body and controls the monetary policies of India, but it is not a legislative body. It can set directive regulations for the bodies that come under its defined authority, but cannot control or penalize other businesses or individuals.
A law to ban the use or trade of cryptocurrencies in India has to come from either the elected governments (whether central or state) or the judiciary (Supreme Court of India or the State High Courts).
Here’s a verbatim quote of what RBI said in the press release:
..entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time.
The quote specifically mentions that this directive only applies to the bodies that come directly under RBI’s guidelines. This doesn’t mean that this regulation will have no effect.
All banks registered in India come under RBI’s regulation and have to follow its directives. This is bad news for cryptocurrency exchanges in particular who rely on banks for their business. The exchanges and other cryptocurrency businesses now have to find a way around using the services of Indian banks. They will have the option of dealing in cash, for example. Things have been made harder, not outlawed.
Another thing to note here is that RBI has not defined the timeline by which the regulated entities have to stop providing services to virtual currency related businesses. It is still allowed for them to continue providing services until RBI comes up with a further notice. Nothing has changed in that regard for now either. It is the market FUD following the news that is driving the prices down.
With this regulation, it is the banks that will have to discontinue dealing with cryptocurrencies businesses once RBI has given them a formal notice along with a deadline. For the rest, the government of India has still not taken any decision regarding regulating cryptocurrencies in India till now.
The Supreme Court of India had sought a response from the Indian Government for a petition asking for regulation of cryptocurrencies. The government is yet to respond.