Reserve Bank of India
The Reserve Bank of India (RBI) is the central bank of India.
The Reserve Bank of India was founded in 1935 in accordance with the Reserve Bank of India Act of 1934. It was originally established in Calcutta, but moved to Mumbai in 1937. It was privately owned until 1949, when the bank was nationalized.
Cryptocurrency and Blockchain
Among other things, the Reserve Bank of India ("RBI") supervises the business of financial institutions in India, including their use of cryptocurrencies and support for their customers' use of cryptocurrencies. On April 6, 2018 the RBI announced a prohibition on its regulated entities' use of cryptocurrencies. It provided three months' relief for entities already dealing in cryptocurrencies.
Referring to them as Virtual Currencies or VCs, on December 24, 2013 the RBI cautioned users of cryptocurrencies about the risks attendant to the cryptocurrencies' lack of governmental backing, incomplete infrastructure, and unclear legal circumstances around their issuance and transfer as well as their propensity to be used in fraud. On February 1, 2017, noting that it had not provided anyone authorization to trade or transact in cryptocurrencies, the RBI reminded users that they did so at their own risk. In another press release on December 5, 2017 the RBI again reminded users that it had not authorized the use of cryptocurrencies including bitcoin.
On April 6, 2018 the RBI told all banks and payment system providers that they were no longer permitted to engage in cryptocurrency business. Temporary, three-month relief was provided to entities already active. The ban does not apply to non-regulated entities nor to the population at large.
Litigation against the banking ban was entered into before the Supreme Court of India. The Supreme Court declined to overturn the ban on July 3, 2018. The Indian Ministry of Finance may make a final ruling on a broader ban of trading in cryptocurrencies.
In January 2019, users across India began reporting over Twitter that other Indian banks, such as Kotak Mahindra Bank, had begun following suit with the RBI's ban. Users posted screenshots of agreements requiring users to do things like give their banks the right to close their accounts without further notice should they “deal with any transactions related to Crypto-currency including Bitcoins." Similar warnings were reported appearing on ATM screens. Twitter users in Pakistan reported receiving similar warnings from banks, such as Faysal Bank.
In June 2019 Varun Sethi, a lawyer specializing in blockchain laws, filed an inquiry into the RBI's involvement with a bill being drafted by Indian legislators. The bill, “Banning of Cryptocurrencies and Regulation of Official Digital Currencies Bill 2019," which was reported on by the Economic Times, would ban the sale, purchase, and issuance of all cryptocurrencies in India. Officials from the RBI denied any involvement with the bill, saying they had not been in contact with the legislators drafting the bill.
In June 2019, the RBI ordered Koinex, an Indian cryptocurrency exchange, to cease operations and shut down. The ban was challenged in the Indian supreme court. According to CoinDesk, an online cryptocurrency news service, RBI admitted that it "ring fenced" banks and financial institutions in order to keep them from from dealing in cryptocurrencies due to its perception that dealing with cryptocurrencies poses reputational and financial risks. A hearing regarding the ban was scheduled for January 21, 2020.
In February 2020, India's Supreme Court overturned the RBI's ban from April 2018, calling it "unconstitutional." This paved the way for Indian traders to legally directly deposit Indian rupees from their bank accounts to cryptocurrency exchanges. A local Indian news outlet, the Economic Times, reported that the RBI was planning to appeal the decision.
Ironically, RBI made a complete reversal from its earlier positions against cryptocurrency use when it warned banks on May 31 that they could not use RBI’s earlier circulars to deny banking services to persons dealing in cryptocurrencies. RBI's circular said that banks should still conduct due diligence of their customers "in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances."
Blockchain research unit
In August 2018, a rumor began circulating that the RBI had created a unit to "research and possibly draft rules" for engaging in the blockchain space in India, after an article was published in the Economic Times India. The RBI issued a statement in late September denying the "formal creation" of such a unit.
In October, senior government officials contradicted this statement, saying that India's finance ministry was "evaluating the government-backed cryptocurrency and crypto-token...and we are looking to develop and encourage our own research and development of blockchain technology." The official went on to say that possession of non-government-controlled cryptocurrencies may soon be a punishable offense in India.
Central bank digital currency
In its 2020-21 monetary policy review, Report on Currency and Finance, the Reserve Bank said that it was imperative for it to be ready to "operationalize" a central bank digital currency (CBDC). The report indicated that, among other things, the bank did not want India to be left behind when other countries began adopting CBDCs.Recognizing the transformative potential of innovation, the bank also said, FinTechs would reduce transaction costs among counterparties; provide transparency with simpler products; and increase efficiency (Curran, 2016). FinTechs would be the vehicle to reach customers who are outside the pale of the financial system thereby promoting financial inclusion.