India Bans Financial Institutions From Cryptocurrency Trading

Regulated financial institutions in India can no longer legally deal with cryptocurrencies, the Reserve Bank of India announced Thursday.

“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 virtual currencies,” the bank said in a statement, CNBC reported.

Those that already provide cryptocurrency services will need to end the relationships within a specified time, which the bank said will be announced separately.

Cryptocurrencies caught the attention of regulators after bitcoin’s price rose more than 1,300% last year, near $20,000 in December. The cryptocurrency was trading near $6,887 on Thursday.

Most digital currencies, such as bitcoin, are not backed by any central government, meaning each country has different standards and regulations.

Bitcoin and other cryptocurrencies are not legal tender in India. Before Thursday’s statement, the Indian government had issued warnings about the risk associated with trading. The digital assets also raised flags over consumer protection, market integrity and money laundering, the bank said.

The government had planned to “take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system,” India’s finance minister told lawmakers in New Delhi in February, according to a transcript by The Hindu newspaper.

The country’s tax department sent notices about cryptocurrency investing to tens of thousands of citizens after a national survey showed more than $3.5 billion worth of transactions have been conducted over a 17-month period.

Thursday’s statement was part of an announcement about broader regulatory policy measures for strengthening financial market regulation.

The Reserve Bank of India was more open to blockchain, the technology that underpins virtual currencies, which it said has the potential to improve the efficiency and inclusiveness of the financial system.

This will impact nearly five million Indians who have invested in cryptocurrencies, as well as India’s crypto exchanges.

A payments expert who spoke to Economic Times Online on condition of anonymity called the decision “confusing”—while it does not directly ban cryotocurrencies, it makes trading in them impossible.

Sathvik Vishwanath, cofounder of crypto exchange Unocoin, said the move will create panic among investors.

“It is going to be difficult for these people to find an exit route out of these currencies. These are middle-class people who will now be stuck,” said Vishal Gupta, founder, Binex Trade.