The Reserve Bank of India (RBI), the country’s central bank, has barred banks and financial institutions from providing services to any individual or business dealing in cryptocurrencies.
“In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs (virtual currencies),” the RBI said in a statement. “Regulated entities which already provide such services shall exit the relationship within a specified time.”
In a media conference, RBI Deputy Governor BP Kanungo said the central bank has given regulated entities three months to unwind their business relationships with crypto-related companies.
“We have decided to ring-fence the RBI regulated entities from the risk of dealing with entities associated with virtual currencies,” said Kanungo. “They are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind the existing relationship within a period of three months.”
Kanungo said that while the regulatory response to cryptocurrencies are not uniform internationally, it is universally felt that they can seriously undermine the anti-money laundering (AML) and Financial Action Task Force (FATF) framework. He added that investment in cryptocurrency for speculative purposes can adversely impact market integrity and capital controls, and if they grow beyond a critical size, they can endanger financial stability as well.
The central bank has repeatedly cautioned users, holders and traders of cryptocurrencies regarding various risks. It has also clarified that it has not given any license to any company to operate or deal with bitcoin or any other cryptocurrency.
The RBI isn’t too keen on cryptocurrencies, but it recognizes the importance of blockchain and will encourage the technology for the growth of financial inclusion.
“We also recognize that the blockchain technology or the distributed ledger technology that lies beneath the virtual currencies has potential benefits for financial inclusion and enhancing the efficiency of the financial system and we also believe that they should be encouraged to exploit beneficially for the economy,” Kanungo said.
He also said that the central bank has constituted an inter-departmental group to study the feasibility of a cryptocurrency backed by the RBI.
“We have constituted an inter-departmental committee, Reserve Bank of India will produce a report and they will explore the feasibility and desirability of issuing a digital currency by the central bank,” Kanungo said. “These are issued by central banks, they constitute the liability of the central bank and they will be in circulation in addition to the paper currency. It also holds the promise of reducing the cost of printing of the notes.”