A Body Blow
Suspension of UPI services has left several crypto exchanges in the lurch
X WHEN THE WORLD’S second-largest crypto exchange, USbased Coinbase, announced its entry into India at a big bang event in Bengaluru on April 7, it was definitely not prepared for what lay ahead. Soon after the company declared that it would allow users to purchase cryptocurrencies using Unified Payments Interface (UPI)—an instant real-time payment system that facilitates inter-bank transactions using a mobile phone—it came under regulatory scrutiny.
The National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India, which oversees UPI, released an official statement clarifying that “we are not aware of any crypto exchange using UPI”. This was a strange statement, because many exchanges such as WazirX and CoinSwitch Kuber were already offering UPI services through mobile wallets such as MobiKwik. After the scrutiny, Coinbase had to disable the option of buying cryptocurrencies using UPI.
The chaos, however, did not stop there. In the following days, UPI services for other exchanges also got disabled, following which trading volumes dipped between 60 per cent and 90 per cent on many leading exchanges. According to the website CoinGecko, trading volume on WazirX dipped to $46,801,290 on April 8, 2022, against the comparative volume of $157,468,430 on March 31, 2022. WazirX, CoinDCX and Giottus did not reply to queries.
Incidentally, two people familiar with the matter told Business Today that, recently, MobiKwik’s application for payment aggregator Zaakpay, which is used to power the wallet, has also been rejected by the RBI. MobiKwik is one of the popular e-wallet services on cryptocurrency exchanges. MobiKwik declined to comment on the development. The sudden suspension of UPI services has left the exchanges in a lurch. Exchanges are now resorting to peer-to-peer transfer of cryptos in the absence of banking services.
The experience, however, has not been uniform across the board. There are some exchanges such as Unocoin where UPI disruption has not created much of an impact. “We have not seen any decline in turnover due to UPI disruption as there are other modes of payment such as IMPS, NEFT and RTGS through which users can continue to deposit and withdraw without any disruption in services,” says Sathvik Vishwanath, Founder and CEO of Unocoin Cryptocurrency Exchange.
Another reason for the decline in turnover has been the imposition of a 30 per cent tax on crypto gains from April
1, 2022. The Finance Bill 2022, as passed by the Lok Sabha, has inserted a new section 115BBH to provide the method of computation and the tax rate for the income arising from the transfer of Virtual Digital Assets (VDA). According to the new rules, gains from cryptos are taxable at 30 per cent, and there is no provision for setting off and carrying forward unclaimed losses.
CRYPTO CONUNDRUM
The government and the RBI have time and again made their stand clear on cryptocurrencies. While the government has supported blockchain technology, and not crypto per se, the RBI has shared a cautionary note about cryptocurrency trading in India—considering it a threat to financial stability.
In tune with its philosophy, on April 6, 2018, RBI had directed all entities regulated by it to not deal in virtual currencies. Following the directive, all banks disabled their services to crypto trading platforms within three months. But things changed on March 4, 2020, when the Supreme Court of India set aside the RBI circular, spurring crypto trading in India. Within months, millions of people, especially youngsters, started flocking to this new alternative investment avenue attracted by extraordinary returns. Then came a jolt when leading banks such as ICICI Bank, HDFC Bank and Axis Bank suddenly stopped their API services to crypto exchanges. Though there was no notification from the RBI after the Supreme Court ruling in 2020, banks were informally told to stop their services to exchanges. However, a few banks and mobile wallets such as MobiKwik continued offering services to exchanges through IMPS, NEFT and UPI. Now the UPI service has come under regulatory scrutiny.
Given the intent of the regulator and the government, many digital payment solution providers have clearly stayed away from crypto exchanges. “You have the Prime Minister of our country saying that crypto poses an imminent threat and the world should come together to solve it. RBI is also very clear in its stance against crypto exchanges. Everybody agrees that crypto coins, which are being floated from abroad, have no underlying assets. Second, the Indian laws are not clear—is it a currency or an asset, and whether you’re buying these international coins under the Liberalised Remittance Scheme or are you breaking any other Indian law,” says Vishwas Patel, Executive Director, Infibeam Avenues.
Patel adds, “All banks are governed by RBI. We, as an intermediary and a soon-to-be licensed payment aggregator, are very clear that we are not processing any payments of any crypto exchange, as the RBI is against it.”
Recently, Finance Minister Nirmala Sitharaman also made a strong case for regulating cryptocurrencies at a global level to mitigate the risk of money laundering and terror funding. Participating in a panel discussion organised by the IMF, the Finance Minister, on April 19, 2022, said that as long as the non-governmental activity of the crypto assets was through unhosted wallets, regulation was going to be very difficult. “The risk which worries me more in the nongovernmental domain is that essentially you’re looking at unhosted wallets across the borders, across the globe. So, regulation cannot be done by a single country within its terrain through some effective method, and for doing it across the borders, technology doesn’t have a solution that will be acceptable to various sovereigns, at the same time applicable within each of the territories,” she had said.