Coinbase admits RBI's use of informal pressure prompted halting of trade

The tussle between India’s apex financial institution, the Reserve Bank of India, and the crypto industry is finally out. Brian Armstrong, co-founder and chief executive of Nasdaq-listed Coinbase, said the company disabled UPI payments from its platform due to informal pressure from the RBI.

Armstrong also stated that the RBI and government had been applying soft pressure to disable some of these payments. “India is a unique market in the sense that the Supreme Court has ruled that it can't ban crypto, but there are elements in the government there, including at the Reserve Bank of India, who don't seem to be as positive on it. And so they -- in the press, it's been called a "shadow ban" -- are basically applying soft pressure behind the scenes to try to disable some of these payments which might be going through UPI,” said Armstrong in the analyst call after the company’s results.

Armstrong also said that this stance of the RBI was actually against the ruling of the Supreme Court. “My hope is that we will be live in India again in relatively short order, along with a number of other countries where we're pursuing international expansion similarly. I think our preference is really just to work with them and focus on relaunching,” he said.

Coinbase had started its services in India in April this year. The company had then said that crypto traders in India could sign up on the platform with their Aadhaar cards and use their United Payments Interface (UPI) accounts to buy and sell crypto on the app.

“Coinbase has a long-term plan for investing in India. The country has a lot of engineering and entrepreneurial talent and has shown a lot of willingness to embrace new technologies,” founder and CEO Brian Armstrong said at an event in Bengaluru. But within a few days the company had to stop payments using UPI.

After Coinbase's foray into India, the National Payments Corporation of India (NPCI), which operates UPI, issued a statement saying they are not aware of any crypto exchanges using UPI. Following the clarification, a slew of crypto exchanges who were giving the option of rupee deposits using UPI, disabled it.

Following NPCI’s clarification, a few banks that are shareholders of NPCI, the umbrella entity of digital payments in the country, asked the payments body to come up with a formal directive on the usage of UPI for buying and selling cryptocurrencies, according to a report. However, so far, the payments body, apart from the clarification it issued, has not come out with any formal circular barring the use of UPI for such transactions.

Industry in a tizzy

The crypto industry in India has been facing an uphill task as the regulatory body has time and again stated its distrust in the business.

The RBI has time and again expressed its reservations against cryptocurrencies and called for a complete ban. RBI Governor Shaktikanta Das, after the February monetary policy meet, warned that private cryptocurrencies were posing a big threat to India’s macroeconomic and financial stability, saying they lacked the underlying value of even a tulip. This was a reference to tulipmania, one of the famous market bubbles and crashes of all time, when speculation drove the value of tulip bulbs to extremes in the seventeenth century.

Meanwhile the industry has continued to face challenges on payments and settlement systems, with the recent whammy being taxation and reports that the government is mulling 28 per cent GST on crypto.

Attempts made to get in touch with CoinSwitch and WazirX on Coinbase’s comments or on the shadow ban remained unanswered.

After the crypto exchanges disabling payment through UPI, payment aggregators have also decided not to support crypto exchange transactions. In an earlier interaction with Business Standard, Vishwas Patel, executive director of Infibeam Avenues, said: “Payment gateways are avoiding powering crypto exchanges. The payment gateways have not been working with the crypto exchanges for a long time, except for one or two small payment gateways.”

“Payment aggregators, networks and banks are licensed and regulated by the RBI. And, the RBI is against cryptos. So, we are staying away from crypto exchanges,” Patel added.

Executives representing the industry say that in some cases even the NEFT and IMPS options have been disabled. “The RBI has asked banks informally not to transact with crypto exchanges. And now the transactions are P2P. Even net banking has stopped for many exchanges,” said an industry insider on the condition of anonymity.

If this was not enough, the government also announced taxes. In the Budget for 2022-23, the government announced a 1 per cent tax deduction at source. Any earning from crypto assets now has a tax of at least 30 per cent. And now there are reports that the government is mulling GST, too.

Aritra Sarkhel, director of public policy at WazirX, said on the government mulling a 28 per cent GST on crypto: “If we observe the current trends, it is visible that the movement in crypto markets mirrors the other financial markets globally. For example, the recent Fed announcement of increasing rates was followed by a market dip. Virtual digital assets (VDAs) are an asset class with varied use cases across industries. It’s not akin to gambling or lottery as is being made out.”

Sarkhel further added: “The industry is open to a dialogue with the larger GST council on such matters. It will be great if deliberations are made to keep the taxation on VDAs in line with India’s treatment of other regular financial instruments and/or evaluate the different use cases of the tokens while making decisions on crypto taxation. It will also be essential to look at global jurisdiction arguments on such tax."