Monetary policy review: Banks can't deal with crypto traders, says RBI

(From left) RBI Governor Urjit Patel, Executive Director M D Patra, Deputy Governors N S Vishwanathan, B P Kanungo and Viral Acharya during a press conference in Mumbai on Thursday. Photo: Kamlesh Pednekar
The Reserve Bank of India (RBI) has said it is considering issuing its own bitcoin-like digital currency and has instructed financial institutions to cut off business ties with private entities dealing in such currencies.

Central banks all over the world were debating the introduction of a fiat digital currency as opposed to private digital tokens, which were growing in popularity, said the central bank.

A digital currency, if issued, would be in circulation in addition to the paper currency, and reduce the cost of printing currencies, it said.

“While many central banks are still engaged in the debate, an inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” said the RBI. The report will be submitted by June 2018.

Industry experts said a central bank-issued digital currency was a great idea and would increase the security of transactions in the country. 

“Cryptocurrency has a fixed address and does not hide anything, unlike cash. RBI’s cryptocurrency would cut a lot of the black economy, minimise tax evasion and induce a rise in the country’s overall revenue,” said Rohas Nagpal, chief blockchain architect, Primechain Technologies.  

The RBI, however, has frowned upon private cryptocurrencies and ring-fenced regulated financial entities from those dealing in these currencies.  

“Digital tokens by private currencies have been getting attention worldwide for their speculative value. While regulatory responses to this token currency are not uniform internationally, it is universally felt that they can seriously undermine the AML (Anti-Money Laundering) and FITF (Financial Inclusion Technology Fund) framework, adversely impact market integrity and capital controls. If they grow beyond a certain size, they can endanger financial stability as well,” said B P Kanungo, deputy governor, RBI.

The industry was divided as to whether banning financial institutions from transacting with private entities dealing in digital currencies was the right move. Nagpal said private cryptocurrencies like bitcoin were unidentified and very easy to use for criminal activities and to avoid taxation whereas RBI’s digital currency would have follow proper know-your-customer (KYC) requirements and thus be safer.  

Payment Council of India Chairman Naveen Surya said the ring-fencing was a back handed way of crippling a system. “Regulator should implement KYC requirements, risk mitigation and general security related measures for the sector instead.”

Cryptocurrency exchanges were working on a collective response at the time this story went to print. “RBI’s move to ban regulated entities from dealing in…(digital)…currencies will safeguard the general investor community from potential losses, particularly those who end up investing without understanding the volatility, dynamics and functioning of cryptocurrencies,” said Mukul Shrivastava, Partner, Fraud Investigation & Dispute Services, EY India.

“The RBI has the intent to protect customer interest. However, the ring-fencing move will only adversely impact the organised sector and the government. Cryptocurrency volumes have dropped and are trading at low prices. This would force customers to sell at losses and make them more susceptible to taking illegal routes for trading crypto currency. This move will also harm legitimate businesses. The government has received Rs 500-1000 million in taxes alone from the segment last year," said Surya.  

The RBI has repeatedly cautioned users, holders and traders of digital currencies regarding risks associated with dealing in private digital currencies. The central bank, however, acknowledges the potential benefits of the underlying blockchain technology.

RBI’s Kanungo said that it can be used to drive financial inclusion and for enhancing the efficiency of the financial system.

RBI policy in 2 minutes


Monetary and liquidity measures

  • Key policy rate (repo) kept unchanged at 6%
  • Reverse repo rate remains at 5.75%, and both marginal standing facility (MSF) rate and bank rate at 6.25%
  • Policy stance is neutral

  • Reduces policy rate corridor; reserve repo now at 6%

  • Liquidity is expected to be moderately surplus in the first half

Macroeconomic parameters

  • CPI inflation to be in the range of 4.7-5.1% in the first half

  • Economic growth to strengthen from 6.6% in 2017-18 to 7.4% in 2018-19

  • GDP growth in FY18 was lower; investment demand accelerated in the second half of FY18

  • Recent high-frequency indicators point to further strengthening. Industrial activity has rebounded

  • Financial market volatility and potential trade wars pose a threat to output

  • Near-term outlook on crude price volatility uncertain

Regulatory measures

  • Move to have a central bank digital currency

  • Debars regulated players from dealing in or providing services to virtual currencies

  • Asks payment system operators to ensure data related to payments is stored only inside the country

  • Implementation of Indian Accounting Standards (IndAS) postponed to April 2019

  • Allows non-residents to access rupee interest rate swap (IRS) market

  • Introduces Single Master for reporting of foreign direct investment in India