The Reserve Bank of India asked banks to continue due diligence with respect to transactions done by its customers with entities dealing in cryptocurrencies, according to a circular issued by it on Monday.
However, banks could not do this due diligence citing a circular issued by the central bank in 2018, which had been scrapped by the Supreme Court in March 2020. Banks, however, could carry on this due diligence under the applicable provisions of know-your-customer norms (KYC), the Foreign Exchange Management Act (FEMA) for overseas remittances, anti-money laundering and preventing terror financing.
This latest directive from the RBI followed after several banks referenced its 2018 circular to caution customers against transactions with entities dealing in cryptocurrencies and warned them of curbs.
BloombergQuint reported that HDFC Bank and SBI Cards are among the organisations resorting to referencing the scrapped circular to warn their customers against these transactions.
"We have observed that your account reflects probable virtual currency transactions which aren't permitted as per RBI guidelines", said HDFC Bank in an e-mail to one of its customers. E-mails of a similar nature have also been sent by SBI Cards to its customers warning them against these transactions; or their card could be terminated.
The 2018 circular in question, dated April 6, banned banks, non-banking financial companies and any other body regulated by it from extending financial or miscellaneous services of any kind to cryptocurrency exchange or entity.
The Supreme Court struck down this circular on March 4, 2020.
Cryptocurrencies remain a gray area in Indian regulation. While the government was formulating an outright ban just before the Budget Session of Parliament this year, that would have been among the most stringent globally; such a law is yet to materialise, keeping the trading community on its toes.
Though popular cryptocurrencies like bitcoin, dogecoin, and ethereum are not illegal to possess and trade in, the regulatory gap leaves questions on how the gains acquired by trading in them would be taxed. Cryptocurrency exchanges serve as a medium for users to buy and sell cryptocurrencies across the board.
Tax jurisdictions around the world tax gains on cryptocurrencies differently according to research with the library of US Congress - such as a financial asset in Bulgaria, a foreign currency in Switzerland, and subject to income tax in Argentina and Spain.
Read the RBI's latest circular here.