India’s Supreme Court has effectively banned banks from dealing with cryptocurrencies

The Reserve Bank of India’s proposed ban on cryptocurrency transactions among regulated entities like banks is all set to come into effect. Yesterday, India’s Supreme Court refused to lift the ban, which will be effective from July 6th.

The order prohibits all financial institutions from facilitating cryptocurrency transactions between individuals and businesses. This includes settling trades, allowing the transfer and receipt of earnings between accounts and recognising cryptocurrencies as collateral when extending loans.

In anticipation of the ruling, Zebpay, a prominent Indian virtual currency trading platform, issued a warning last month to all its customers that it might not be able to honour withdrawal requests from traders. It explained that the “outcome was beyond its control”. After the court’s ruling, it was forced to disable withdrawal and deposit options for Indian rupees on its mobile app.

A risk control measure

When the RBI order was issued in April, banks were only given three months to end relationships with trading outfits. The central bank’s purpose was to prevent banks from the risks associated with virtual currencies. The move followed a statement from Finance Minister Arun Jaitley that virtual currencies would not be accepted as legal tender in the country.

The main problems linked to cryptocurrency trading include capital flight, money laundering and an inherent lack of price stability. Rather than drafting regulations aimed at tackling these problems, the RBI and Supreme Court are choosing to block banks from facilitating trades altogether.

No respite for traders

As a result, India’s cryptocurrency traders, of which they’re many - including people as removed from the mainstream as housewives in rural Punjab - will have no choice but to settle their transactions in cash. Additionally, cryptocurrency trading platforms will not be allowed to clear trades through banks, and can only facilitate crypto-to-crypto trades.

This will definitely dent the popularity of cryptocurrencies in India. Almost all banks and deposit-taking institutions are regulated by the RBI. Without banking support, people will be hesitant to invest in these currencies and trade them on platforms. In order to circumvent this hurdle, cryptocurrency exchanges will have to develop a system for transferring and withdrawing deposits made in Indian rupees.

All is not lost, however. The Supreme Court will hear a petition from the Internet and Mobile Association of India against the ruling later this month. It will also deliberate on other appeals.