The Reserve Bank of India (RBI) has banned banks, NBFCs, eWallets and any other intermediary regulated by it from providing services to cryptocurrency dealers with immediate effect. Regulated entities which already provide such services will be given a time-frame (most likely, three months) to exit.
The announcement will directly affect cryptocurrency exchanges such as Zebpay and Unocoin and could mean the end of their business. This is because their bank accounts are likely to be closed and they will be barred from accepting or making payments to customers.
Have Bitcoin/Other Cryptocurrencies been declared illegal?
Not exactly. The RBI decision prohibits regulated entities from providing accounts and other services to cryptocurrency dealers. It does not affect individuals who already hold cryptocurrencies.
Effects of the announcement
The announcement is likely to end the business of cryptocurrency exchanges. These entities may have no option but to close their bank accounts. They will not be able to accept fund transfers from customers or pay money to them.
It is also likely to drive the cryptocurrency trade in India into cash. It is unclear whether bitcoin transactions settled in cash are prima facie illegal because trading or holding cryptocurrencies itself has not been banned. Provided that these transactions are reported to the relevant authorities and all applicable taxes are paid, it is unclear whether there would be a direct illegality in them.
However, the push to cash is likely to move the trade towards individuals/entities who are associated with the underground or ‘black economy’. Also note that cash transactions above Rs 2 lakh have been banned by the government with effect from April 1, 2017.
If you already hold cryptocurrency
Don’t panic. The mere possession of bitcoin has not been declared illegal. Nor has, for example, the exchange of one type of cryptocurrency into another. This is effectively a ‘barter’ transaction and does not involve an RBI regulated entity such as a bank.
However, you will not be able to easily sell your cryptocurrency/bitcoin units.
The RBI has given banks and other regulated entities three months to unwind their cryptocurrency ties. However, banks could act sooner. Several banks have already moved to close the accounts of cryptocurrency exchanges. If liquidity is valuable to you, it may be best to sell before the exchanges close down.
However, this RBI announcement does not obligate you to sell, as an existing holder of cryptocurrency. You could still hold on to your units in the hope of price appreciation/a more favourable regulatory regime in the future.