Why are crypto exchanges prevented from using UPI even as transactions cross 6-billion mark?
India loves UPI. The payment solution clocked an all-time high of 6.28 billion transactions in July 2022; is the highest number of transactions since its launch in 2016. The QR code, which resembles a Rorschach inkblot, is ubiquitous from a florist or a kirana to big businesses, allowing scores of Indians to pay with their phones.
The courtesy, however, is not extended to Indian crypto exchanges. The service is conspicuously absent on these platforms.
What is the Unified Payments Interface: The National Payments Corporation of India (NPCI) defines UPI as a system that powers multiple bank accounts into a single mobile application, merging several banking features, fund routing, and merchant payments under one umbrella.
- It allows users to use their mobile phones to transfer money instantly into bank accounts of friends, acquaintances, and merchants.
Understanding the issue: It all started when Coinbase, one of the biggest crypto exchanges in the world, announced its India entry and rolled out its services in April 2022, with a grand proclamation that its users would be able to fund their accounts through UPI.
- The exchange was forced to disable the feature after three days following a curious statement from the NPCI claiming that it was not aware of any crypto exchange using UPI payments. The buck did not stop at Coinbase as the option of UPI payment disappeared on every major exchange like WazirX or Coinswitch Kuber in the coming days.
- Coinbase CEO & Co-founder Brian Armstrong cited “informal pressure” from the RBI as the reason behind its decision during an earnings call for the first quarter of 2022. It must be noted that there is no official word from the NPCI or the Reserve Bank of India (RBI) restricting banks from enabling UPI for crypto exchanges.
- Medianama had reached out to Coinbase for a comment but it received no response. We will update this story if and when they respond to our request.
“It’s been called a shadow ban in the press. They’re applying soft pressure behind the scenes to try to disable some of these payments which might be going through UPI,” Armstrong had said in the call.
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Why it matters: The absence of UPI on crypto platforms suggests that the industry is a victim of discrimination as it is a facility that is available to most financial businesses. The lack of UPI limits the ability of crypto exchanges to offer users a choice to transfer their money seamlessly putting off prospective investors.
- Moreover, the act of making UPI unavailable to exchanges violates their fundamental rights as it impinges on their freedom of trade and commerce.
- It also sheds light on how uncertainty is crippling the growth of a burgeoning crypto industry in India, higlighting an urgent need for a law.
Is a de facto ban legal?
The clamour around the suspension of UPI services has subsided in the last few months as crypto exchanges fend off an investigation by the Enforcement Directorate. But it is important to understand whether this so-called ban on crypto exchanges is legal or not. Medianama spoke to several lawyers in order to get to the bottom of this issue and understand how such a ban has been in place without any scrutiny.
Siddharth Acharya, a lawyer who is arguing for a petition seeking to remove barriers to UPI payments on cryptocurrency exchange WazirX in the Delhi High Court, told Medianama that the NPCI or the RBI cannot prevent crypto exchanges from offering UPI on their platforms.
Acharya believes that such a ban can only be enforced by the Parliament with legislation to that effect.
On the other hand, Kritika Seth, Founding Partner, Victoriam Legalis, stated that there is no ban imposed on making payments to crypto exchanges via UPI but suggested that exchanges have halted using UPI due to a lack of clarity following NPCI’s “confusing statement”.
Sameer Jain, Managing Partner, PSL Advocates & Solicitors, explained that the “RBI has the requisite legislative authority to formulate and issue policies in order to regulate payment systems affecting domestic transactions in the financial and general public interest”.
Jain buttressed his opinion with an analysis of the Supreme Court’s judgement in the IAMAI v/s RBI case and provisions of Payments and Settlement Systems Act, 2007, which, according to him, goes to show that the definition of ‘payment system’ includes payment concluded between a payer and a beneficiary and it extends to transactions processed via Unified Payments Interface (‘UPI’) service providers.
“Notably, RBI’s power to regulate also includes the power to prohibit or ban certain third parties, which, in its opinion, are detrimental to financial pillars of the country,” he said.
Jain, however, added that “such (a) decision issued informally without any underlying legislative reading may be devoid of the ‘satisfaction’ and perhaps lack ‘application of mind’ as required by law and ultimately may be struck down by the courts”. He believed that a ban only on UPI as a channel for payments to crypto exchanges may be “far-fetched”.
‘Violation of fundamental rights’
Anirudh Rastogi, Managing Partner and Co-founder, Ikigai Law, told Medianama that a de facto ban violates the fundamental rights of crypto exchanges. He added that there is no law that prohibits banks from dealing with cryptocurrencies and any restriction of fundamental rights has to be backed by law.
“Generally speaking, the RBI, NPCI and RBI regulated entities can deny payment services to anyone for policy reasons. However, when such denial extends to an entire, otherwise legitimate industry, there are grounds for challenge,” Rastogi said in his statement.
Jain said that the reasonableness of any such decision also has to meet the constitutional parameters and legal rights available with every citizen. He remarked that Article 19(1)(g) of the Indian Constitution allows all the citizens to practise any profession, occupation, trade or business of their choice without any hindrance.
The decision to cut-off crypto exchanges from UPI services has to be evaluated on the four-pronged test of proportionality, according to Jain.
It must require a—
- Proper purpose;
- Rational connection to the measure undertaken;
- No better alternative;
- Nexus between the importance of achieving the aim and the importance of limiting the right.
Rastogi said: “Access to payment facilities is a prerequisite for business. In Anuradha Bhasin v. Union of India, the SC extended the right under Article 19(1)(g) (and) observed that the freedom of trade and commerce through the medium of the Internet is constitutionally protected.”
He was of the opinion that a denial of service is disproportionate and fails the ‘necessity’ prong of the proportionality test, reasoning that “an entire merchant class of virtual currency businesses have been banned, rather than banning specific crypto merchants that might pose an unreasonably high risk or engage in fraudulent behaviour”.
Impact on crypto exchanges
Crypto exchanges have been forced to bear the brunt of regulatory uncertainty prevailing in the country. The euphoria of 2021 has been replaced with fear and scepticism as trading volumes have dropped steeply since April 2022 owing to a variety of factors.
One of the executives at a major crypto exchange spoke to Medianama on condition of anonymity to reveal that the government wants to make the industry uncomfortable without doing anything “dramatic” that will affect India in the long run.
They added that the hurdles being put in place by authorities are forcing investors to move to foreign exchanges. He claimed that this was one of the reasons why volumes have dropped by nearly 90 per cent across the industry.
“RBI sends out unofficial circulars or they have closed-door meetings where they tell banks not to support crypto exchanges. It’s very difficult for a crypto exchange to have a banking connection,” they told Medianama.
The executive revealed that the “fiasco” started with Coinbase’s India entry, and labelled NPCI’s curious statement a “thinly-veiled threat”. They said that UPI services were “yanked” from all exchanges overnight following the statement. They said that the reason there is no official circular is because it will constitute “contempt of court”.
The crypto executive believes that the government is trying to foster an environment of fear in the industry in two ways— unfair taxation and banking disruptions.
The executive said that RBI and NPCI have been “extremely unkind” towards crypto exchanges. They added that it was okay for authorities to not like crypto but they should not forget that the industry provides employment to hundreds of thousands of people in India.
Medianama has reached out to NPCI for a comment but the email did not elicit a reaction. The post will be updated if there is a response.
Grounds for implementing a ban
Seth said that a user can only be prevented from sending money to a crypto exchange only in the event that a user has not complied with its KYC and/or other legal requirements with respect to the UPI and crypto platform.
She added that authorities can implement such bans in public interest or if UPI platforms are not in compliance with existing guidelines. On the other hand, the executive averred that exchanges follow the best practices, adding that the industry must be given credit for taking a lot of burden on itself to ensure compliance especially when there are no rules.
Jain said that a ban is ideal when the functioning of UPI is in contrast to other payment systems wherein it is being operated without requisite safeguards in place.
“…it has been observed that virtual digital assets do attract considerable attention from certain anti-social elements, such as those engaged in money laundering and terrorist financing activities. In such situations, a temporary ban can be opted for,” said Jain.
However, the executive countered that money laundering and terrorism financing were very “convenient sticks” with which one likes to beat this industry, adding that the number was “negligible”. They maintained that hawala remains the most preferred method of laundering money.
Knocking on judiciary’s doors
The fact that crypto exchanges have not been able to offer UPI on their platforms beggars the question— what has stopped them from approaching the courts?
The executive explained that exchanges want to work with the government because they do not want to aggravate the situation.
“The government frames the rules of the game at the end of the day so we don’t want to take panga with the government. It benefits nobody because the government comes after you. It’s evident right now,” they said.
The executive went on to add that exchanges speak to the RBI regularly, and provide them with data but the central bank hasn’t discussed the ban of UPI services with exchanges.
Acharya echoed their comments revealing that exchanges are fearful because a case can cause damage to their bargaining power with the government in future discussions. He believes that exchanges have a “very good case” because they have a Supreme Court judgement in their favour.
Seth said that exchanges can bring a case only in the event that “such ban has been imposed arbitrarily, without reason and is not in the public interest and is causing a hindrance with the crypto exchanges carrying out their lawful business and other activities”.
Jain concurred that crypto exchanges can argue that the imposition of such a ban without justification eliminates what is likely to be the most convenient form of monetary transactions in the future.
“Now whether a legal recourse exists or not, depends, since neither RBI nor NPCI has officially announced any such ban,” Jain added.
He said that a challenge can ensue under Article 14 requiring the basis for separately classifying UPI given that only UPI payment systems have been banned. “Thus, it shall be upon RBI to explain a rational nexus to the object being sought by such (a) ban,” he concluded.
Plea in the Delhi High Court
A case has been filed by Arnav Gulati in the Delhi High Court asking it to issue an order directing the State Bank of India (SBI) to take back the decision of prohibiting UPI payments to crypto exchanges.
It also urges the HC to issue orders compelling the RBI to make provisions for payment interfaces and decisions. A copy of the petition has been reviewed by Medianama. (You can read it here)
The petition argues that the decision taken by the SBI is “arbitrary and wrong” in prohibiting UPI transactions for its customers who have an account with the WazirX cryptocurrency exchange. The prohibition makes “an anti-competitive and discriminatory environment for the cryptocurrency exchange”.
Acharya explained that the grounds of the petition cover only WazirX because the petitioner was a WazirX user. It was later that he found out that other exchanges were also targeted because the petition was filed at a time when other exchanges had not come up on RBI’s radar. He added that the ban was a setback for the sector which triggered the crypto “brain drain”.
“There’s a lack of communication between policymakers and the industry which is causing a lot of damage to crypto investment in the country at the moment,” Acharya told Medianama.
The Delhi HC is yet to give out a verdict but it has issued notices to the RBI, the SBI, NPCI, and the Department of Financial Services.
Overview of the Supreme Court of India’s verdict
A case was brought by crypto exchanges such as CoinDCX, Koinex, Throughbit and CoinDelta against the RBI’s 2018 circular which restricted banks from providing services to businesses dealing with cryptocurrencies.
The SC struck down the banking ban against cryptocurrencies in March 2020, stating that the directive was disproportionate. A three-judge bench consisting of Justice Rohinton Fali Nariman, Justice S. Ravindra Bhat, and Justice V. Subramaniam, quashed the circular on the following grounds:
- There was no empirical evidence of any harm caused to the RBI regulated entities, including banks, from the directive;
- Cryptocurrencies were not banned by the Indian government despite several committees coming up with proposals and two draft bills;
- The ban was not proportionate to the risk sought to be addressed by such a ban.
The RBI issued a circular in 2021 subsequently to clear up confusion among banks to no avail. The central bank, in its circular, said that banks cautioning their customers against dealing in virtual currencies by making a reference to its 2018 circular were “not in order” as it was set aside by the apex court.
Medianama has filed a Right to Information (RTI) request with the RBI to find out if there is any paper trail dealing with the suspension of UPI services to crypto exchanges. This post will be updated once we obtain a response.
Is India any closer to a crypto law?
Several countries across the world have introduced draft bills to regulate digital assets within their jurisdictions. Even conversations with experts resulted in a consensus that a law was the need of the hour as it is the most comprehensive way to clear up major issues including suspension of UPI services.
Crypto exchanges, too, are eagerly waiting for legislation as they believe that things will get better in the aftermath.
“We are very clear that we have to survive one year because we believe that the market sentiment is negative. It will be positive in a year’s time. 2023 is likely to be better in terms of visibility, regulation, and uncertainties,” the executive told Medianama.
The Indian government is working on a draft consultation which will cover a whole gamut of issues thrown up by digital assets. It was supposed to be out in August but it is yet to be released to the public. The government has revealed that it is working on a new bill but there are no details on when the government plans to introduce it in the Parliament.
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