Iimagine life without your credit card or with your bank account frozen. Or if you sell goods online and cannot use payment platforms or banking services. It would be difficult, if not impossible, to operate. The situation is not far from reality for the crypto industry, which has faced informal and formal bans from banks and payment processors in processing their transactions.
The virtual currency industry is growing rapidly, as the data shows. Investments in cryptocurrency in India jumped up from $923 million in April 2020 to $6.6 billion in May 2021, a growth of more than 600% in just 13 months. However, the shares of banks and payment exchanges have become a major impediment to the growth of the blockchain and cryptocurrency industry in India.
The RBI circular violated a fundamental right
In 2018, the Reserve Bank of India (RBI) issued a circular prohibiting banks from facilitating trade in all cryptocurrencies. Crypto exchanges and industry associations challenged it in the Supreme Court. In 2020, the Court canceled the circular, considering that the ban violated the fundamental right to engage in commercial and commercial activity guaranteed by Article 19(1)(g) of the Constitution.
In May 2021, however, HDFC Bank and State Bank of India, citing the 2018 RBI ban, informed their clients who trade in virtual currencies were not allowed.
Subsequently, the RBI released another one circular specifying that “Having regard to the order of the Honorable Supreme Court, the  Circular is no longer valid from the date of the Supreme Court’s judgment and therefore cannot be quoted or quoted. The crypto firms are believed to have once again taken the affected banks and the RBI to court, and the latter largely acted to save itself from another embarrassment and distance itself from the banks’ rash intervention. Notably, however, the RBI circular did not direct banks to start servicing the crypto industry. Rather, he acknowledged that banks can continue to perform customer due diligence in accordance with (Know Your Customer) KYC and (Anti-Money Laundering) AML standards.
Private banks continue to impose restrictions
No wonder banks and other payment channels continue to exercise restraint in handling cryptocurrency transactions. In September 2021, SBI blocked the receipt of funds by cryptocurrency exchanges on its UPI platform. Likewise, many other banks continue to deny services to exchanges. Main payment gateways Razor Pay and CCAvenue prohibit commercial transactions related to “virtual currency and cryptocurrencies”. These measures were taken even though there is no regulatory ban on the operation of cryptocurrencies.
Why do banks prohibit crypto transactions?
There are several reasons why banks might be concerned about the use of cryptocurrency. Some in industry to believe that lenders act on informal instructions from the RBI. The central bank has regularly expressed inhibitions about the widespread use of cryptocurrencies and wants to rein in the industry before it becomes too big to implement unfavorable regulations later. However, without formal instructions it is not possible to verify this. Another logic, more benevolent for the regulator, could However, in the absence of detailed guidelines on implementing effective KYC/AML checks on cryptocurrency users and worried about the recent advertising frenzy, banks find it convenient not to deal with it at all. After all, banks and other regulated financial entities are delegated responsibility by the RBI to control high-risk activities. To be fair, banks around the world are extremely conservative in their dealings with cryptocurrency companies.
The danger is there, but unconstitutional practice
Banks may have no choice but to play it safe. However, it must be said that the conduct of banks and other financial institutions is unconstitutional and in violation of the fundamental rights of crypto traders, investors and exchanges.
First, access to banking services is an integral part of exercising the right to engage in any trade or business. While deciding on the constitutionality of the 2018 circular, the SC of the Internet and Mobile Association of India (IAMAI) vs. RBI noted that “banking channels are the lifeline of any business, trade or profession”, and the moment someone is “deprived of the ability to operate a bank account, the lifeline of their trade or his business is cut offâ, with business getting âclosed automaticallyâ. Subsequently, in the Anuradha Bhasin c. UOI, the SC also extended the Article 19(1)(g) right to digital businesses, noting that freedom of trade and commerce through the Internet is also constitutionally protected. Therefore, the de facto ban exercised by banks and payment platforms, especially public lenders like SBI, violates fundamental rights of crypto exchanges, whose business suffers significantly.
Second, the restriction of fundamental rights takes place without a law being in place. He is installed that the restriction of fundamental rights must be backed by law. However, there is no law prohibiting banks from dealing with cryptocurrencies. In fact, the RBI and the national Payments Corporation of India has expressly decided not to ban crypto transactions on their platforms. In the absence of such a law, the banks do not have the power to negate a widely accepted model of commerce, which is thriving nationally and globally.
Third, the banks’ actions are manifestly disproportionate and fail the ânecessityâ part of the proportionality test. After Puttaswamy Case, it was clear that a restriction of fundamental rights is only justified if the action complained of is necessary and there is no other less restrictive alternative. However, in this case, banks and payment gateways have banned an entire class of virtual currency and cryptocurrency merchants, effectively classifying the crypto industry as illegal, rather than banning crypto merchants. that may pose an unreasonably high risk or engage in fraudulent behavior.
Banks should smartly implement the necessary KYC and AML checks and blacklist only those merchants who pose a credible risk to consumers and the financial system in general, or who are suspected of engaging in money laundering/dealing. financing of terrorism. Otherwise, the action of the banks is contrary to the judgment of the CS in IAMAI, which made it clear that without prohibiting the trading of cryptocurrencies, the RBI (and therefore, by extension, the banks) cannot prohibit transactions on cryptocurrencies. crypto exchanges. Thus, banks and payment exchanges cannot seek to do indirectly what the RBI was prohibited from doing directly.
Considering all these factors, a petition in writ is admissible against the public banks. It may also be possible to challenge private banks and payment exchanges on the grounds that they exercise a âpublic functionâ subject to the jurisdiction of the high courts. In fact, such a petition has already been filed in the Delhi High Court against SBI in October 2021, asking it to reverse its decision to ban UPI payments in crypto exchanges. The court issued a note and listed the topic for December.
Regulate, do not prohibit
Cryptocurrencies are the reality of today. We need effective regulation to protect investors, and it is important that the government comes forward and governs the sector through light regulations. However, in the absence of such a law or ruling, banks should not be allowed to continue violating the fundamental rights of crypto exchanges and retail investors. Most of the country’s crypto exchanges are self-regulating and have rigorous mechanisms in place to limit money laundering risks. Banks should work with the industry to develop appropriate KYC/AML mechanisms and other policies.
The author is founder and managing partner at Ikigai Law. Vrinda Bhandari is an Advocate at the Supreme Court of India. Views are personal.
(Edited by Humra Laeeq)