Imagine life without your credit card or with your bank account frozen. Or if you are in the business of selling goods online and are blocked from using payment platforms or banking services. It would be difficult, if not impossible, to function. The situation is not far off from reality for the crypto industry, which has been facing informal and formal bans by banks and payment processors in processing their transactions.
The virtual currency industry is rapidly growing as is clear from data. Investments in cryptocurrency in India jumped from $923 million in April 2020 to $6.6 billion in May 2021, amounting to over 600 per cent growth in just 13 months. However, actions by banks and payment exchanges have become a major barrier to the growth of the blockchain and cryptocurrency industry in India.
RBI’s circular violated fundamental right
In 2018, the Reserve Bank of India (RBI) issued a circular prohibiting banks from facilitating trade in all cryptocurrencies. The crypto exchanges and industry associations challenged it before the Supreme Court. In 2020, the Court quashed the circular, holding that the ban was in violation of the fundamental right to carry on trade and business guaranteed under Article 19(1)(g) of the Constitution.
In May 2021, however, HDFC Bank and State Bank of India, citing the RBI’s 2018 ban, informed their customers that trade in virtual currencies was not permitted.
Thereafter, the RBI released another circular clarifying that “In view of the order of the Hon’ble Supreme Court, the  circular is no longer valid from the date of the Supreme Court judgment, and therefore cannot be cited or quoted from.” It is believed that crypto businesses would have dragged the concerned banks and the RBI to court again, and the latter largely acted to save itself from another embarrassment and to distance itself from the banks’ thoughtless intervention. Notably, though, the RBI circular did not direct the banks to begin servicing the crypto industry. It instead acknowledged that the banks may continue to carry on customer due diligence in line with the (Know Your Customer) KYC and (Anti-Money Laundering) AML standards.
Private banks continue to impose restrictions
No wonder, banks and other payment channels are continuing to exercise restraint in processing cryptocurrency transactions. In September 2021, SBI blocked the receipt of funds by cryptocurrency exchanges on its UPI platform. Similarly, many other banks continue to refuse services to the exchanges. Leading payment gateways RazorPay and CCAvenue prohibit business transactions related to ‘virtual currency and cryptocurrencies.’ These actions have been taken even though there is no regulatory prohibition regarding the operation of cryptocurrencies.
Why are banks banning crypto transactions?
There are several reasons why banks might be concerned about the use of cryptocurrency. Some in the industry believe that the lenders are acting on informal instructions from the RBI. The central bank has regularly expressed its inhibitions around the prevalent use of cryptocurrencies and wishes to rein in the industry before it becomes too large to implement adverse regulations later. However, without any formal instructions, it is not possible to verify this. Another rationale, which is more benevolent to the regulator, could be that in the absence of detailed guidelines on the implementation of effective KYC/AML checks on cryptocurrency users and worried about the recent advertising frenzy, banks find it convenient to not deal with them at all. After all, banks and other regulated financial entities are delegated with the responsibility by the RBI to keep a check on high-risk activities. To be fair, banks globally are extremely conservative in their dealings with cryptocurrency businesses.
The danger is there, but practice unconstitutional
The banks may have no option but to play safe. However, it must be said that the conduct of the banks and other financial institutions is unconstitutional and in violation of the fundamental rights of the crypto traders, investors, and exchanges.
First, access to banking facilities is integral to one’s exercise of the right to practise any trade or business. While deciding on the constitutionality of the 2018 circular, the SC in the Internet and Mobile Association of India (IAMAI) v. RBI noted that “Banking channels provide the lifeline of any business, trade or profession,” and the moment anyone is “deprived of the facility of operating a bank account, the lifeline of his trade or business is severed,” with business getting “automatically shut down.” Thereafter, in the Anuradha Bhasin v. UOI, the SC extended the right under Article 19(1)(g) to digital businesses as well, noting that the freedom of trade and commerce through the medium of the Internet is also constitutionally protected. Hence, the de facto ban being exercised by banks and payment platforms, especially state-owned lenders like SBI, violates the fundamental rights of crypt exchanges, whose businesses are suffering considerably.
Second, the restriction on fundamental rights is taking place without a law in place. It is settled that the restriction of fundamental rights has to be backed by law. However, there is no law that prohibits banks from dealing with cryptocurrencies. In fact, the RBI and the National Payments Corporation of India have expressly decided not to prohibit crypto transactions on their platforms. In the absence of such a law, banks do not have the authority to deny a widely accepted model of trade, and one that is flourishing nationally and globally.
Third, the actions by the banks are clearly disproportionate and fail the ‘necessity’ prong of the proportionality test. After the Puttaswamy case, it was clear that a restriction on fundamental rights is only justified if the impugned action is necessary and there is no other less restrictive alternative. However, in the present case, banks and payment gateways have banned an entire merchant class of virtual currencies and cryptocurrencies, effectively classifying the crypto industry as illegal, rather than banning specific crypto merchants that might pose an unreasonably high risk or engage in fraudulent behaviour.
Banks must intelligently 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/financing terrorism. Otherwise, the action of the banks is contrary to the SC’s judgment in IAMAI, which made it clear that without prohibiting the trading of cryptocurrencies, the RBI (and hence, by extension, banks) cannot prohibit transactions on crypto exchanges. Thus, banks and payment exchanges cannot seek to do indirectly what the RBI was prohibited from doing directly.
In view of all these factors, a writ petition is maintainable against public banks. It may also be possible to implead private banks and payment exchanges on the ground that they are performing a ‘public function’ that is subject to the writ jurisdiction of the high courts. In fact, one such petition has already been filed in the Delhi High Court against SBI in October 2021, asking it to reverse its decision of prohibiting UPI payments in crypto exchanges. The court has issued a notice and listed the matter for December.
Regulate, don’t ban
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-touch regulations. However, in the absence of any such law or decision, banks should not be permitted to continue to violate the fundamental rights of crypto exchanges and retail investors. Most crypto exchanges in the country self-regulate and have established rigorous mechanisms to rein in money-laundering risks. The banks must work with the industry to evolve appropriate KYC/AML mechanisms and other policies.
The author is Founder and Managing Partner at Ikigai Law. Vrinda Bhandari is lawyer at the Supreme Court of India. Views are personal.
(Edited by Humra Laeeq)