Why do banks want you to stop using cryptocurrencies ? Recently many account holders of several banks were receiving a warning from their bank, which said that trading or investing in virtual (crypto) currency is prohibited and cited a 2018 circular of RBI.
What is the circular of RBI which banks keep quoting?
In April of 2018, RBI issued a circular prohibiting the use of Virtual Currencies. In clause 2 of the circular, RBI mentioned:
“In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs”RBI circular of 2018
It also gave a deadline of 3 months to exit all the relationships the banks had entered.
Why is this circular not valid anymore?
On March 04 2020, in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India) the honourable Supreme Court set aside this circular.
Why did Supreme Court set aside this circular?
The honourable Supreme Court set aside this circular in the view that it was a disproportionate restriction of fundamental rights defined by the constitution. Article 19 ( 1) (g) of the Constitution of India provides the right to practice any profession or to carry on any occupation, trade or business to all citizens.
The court also said that among other reasons :
- RBI has not been able to prove how currency trading was harming its regulated entities
- There is no law made by legislation that explicitly bans the trading of virtual currencies
- The court did not find anything wrong with the way these crypto exchanges used to work
So, the court set aside the circular, keeping in mind that the banks were the lifeline of crypto exchanges and prohibiting them from conducting business would violate Article 19 of the Indian constitution, which provides the right to practice any profession or carry on any business.
Why do banks want to ban Crypto?
Although this has not been spoken explicitly by banks, RBI has cleared its stand by issuing the circular in 2018. RBI is clearly not comfortable with crypto as a medium of exchange. RBI governor has said that the central bank has flagged its concerns regarding cryptocurrencies to the central government.
To understand why banks feel threatened with the introduction of cryptocurrency, we need to understand what is cryptocurrency :
Why was Crypto Currency created?
The cryptocurrency was created in the wake of the 2008 financial crisis as a way for people to control their money themselves and not depend on the government. It was made as an alternative to the currency issued by the governments.
The first-ever cryptocurrency created was Bitcoin. It was created by a man who goes by the pseudo name Satoshi Nakamoto. It is a totally decentralized (no one controls it) currency system that works on blockchain technology.
As it is a totally decentralized currency, it cannot be manipulated. Although no one knows who Satoshi Nakamoto is, it is said that he created it so that it could be used as a medium of exchange.
Why do banks feel threatened by this?
If you have not guessed already, the banks really do feel threatened by virtual currencies as they can easily reduce their business and influence over financials.
For example Banks on average charge 1 to 3 per cent of the total amount to transfer money internationally. It is a major chunk of revenue for every bank. But cryptocurrencies do it for a minimal fee. If you want to send money from Afganistan to the United States, you can just transfer them Bitcoin. They will just have to cash out Bitcoin at their end. And this can be done in a very safe, encrypted way and that too at a very small cost.
If people start using Crypto as a form of exchange, nobody would need to go to the bank to make the transactions. To simplify it, let us compare Bitcoin with Gold.
Bitcoin Vs Gold
Gold is a similar asset to Bitcoin. Like gold, Bitcoin also has a limited supply and can only be obtained through digital mining.
So, in ancient times, when there was no uniformity in the global economy, people used gold as a form of change worldwide. Gold was always considered a precious metal and was scarce. But as the world progressed, we started treating gold as an asset rather than a currency. Today we use it to store our money rather than using it in a day-to-day transaction.
So, Gold was replaced by currency issued by the government of each state. We currently use the US dollar as a global reserve currency.
Like ancient times, if everyone starts using Bitcoin like we used gold in day to day transactions, we would not need banks. This is what banks in India fear.
Banks fear that crypto can replace the government-issued currency as a medium of exchange, which will affect the bank’s business. But history has shown that whoever does not adapt to changing technology has ceased to exist. (Like Nokia)
After reading and researching a lot about crypto, I conclude that it is a revolutionary technology that can change the world. We are already lagging in many other sectors, let us not miss the crypto bus as well. Instead of banning crypto, I suggest regulating it and utilising it to its maximum potential.