The United Multi State Credit Cooperative Society has partnered with London-based Cashaa Technologies to offer cryptocurrency deposits and loans to customers from January 2021 onward. The two entities have set up a joint-venture called UNICAS to enable customers to buy and invest in cryptocurrencies through physical branches, as well as take out loans against cryptocurrencies, according to a press release.

Ever since the Reserve Bank of India’s April 2018 circular — which prohibited banks from providing services to businesses dealing with virtual currencies — was over-turned by the Supreme Court in March this year, the domestic cryptocurrency industry has been functioning without any regulatory oversight. Unlike commercial banks and cooperative banks that are regulated by the RBI or by the National Bank for Agriculture and Rural Development (NABARD), multi-state credit cooperative societies are regulated by the Central Registrar of Cooperative Societies under the Multi-State Cooperative Societies Act, 2002. These credit societies can either be formal business organisations or a registered collective of individuals who come together to pool their savings and provide loans to their members.

Dinesh Kukreja, managing director, United Multi State Credit Cooperative Society and CEO, UNICAS, says that this partnership will create the first crypto neo-bank in the country. “Many customers in Tier-2 and beyond cities and towns who are interested in cryptocurrency investing are being duped by fraudsters. This partnership will provide our customers and also existing cryptocurrency investors in the country with a proper investment platform and lending service. We are also looking at creating a Systematic Investment Plan through which customers can invest a fixed amount every month into cryptocurrencies.”

While the term neo-bank refers to digital-only banks or virtual banks that have no physical branch presence, it also is used to refer to innovative technology-driven banking services. While there are as many as 10 Indian neo-banks like Razorpay X, Instant Pay, Open and Niyo , to name a few, the partnership between Cashaa and the United Multi State Credit Cooperative Society will offer the first cryptocurrency-based banking services in the country.

Offering deposits and loans based on cryptocurrencies

Kumar Gaurav, founder and chief executive officer, Cashaa told MediaNama that UNICAS will be responsible for digitising branches of the credit society and providing the back-end technology infrastructure to enable the crypto-banking services. “Customers can deposit Bitcoins to earn interest and they can also take a loan against this holding as collateral. These branches will be converted into a crypto-lounge with trained staff to explain how crypto-currencies work and the investing benefits,” he said.

During the first phase of this partnership, the credit society alongside UNICAS will launch a campaign to educate potential customers about the benefits of investing in and trading in cryptocurrencies. In the second phase they will begin opening accounts for crypto investing and thereafter, in the third phase the society will offer loans against cryptocurrencies through smart contracts, Kapur explained. “We are targeting customers between the ages of 40 to 60 years in the Tier-2 and beyond locations, since they have a lot of wealth compared to the younger crypto-currency audience in the country,” he said.

On the deposits side, a customer can either buy Bitcoins, Binance, Bitcoin Cash, Ethereum, Ripple or other cryptocurrencies in cash or use their existing deposits held by the credit society to buy the cryptocurrencies. These depositors can earn interest rates of around 6% since their cryptocurrencies will be used for on-lending to others, Kumar said.

Whereas on the lending side, a customer can receive a loan up to 70%, for instance, against their cryptocurrency holdings. For example, if a customer has ₹10 lakh worth Bitcoins they can get a ₹7 lakh loan against the cryptocurrencies which will be pledged as collateral with the credit society. In turn, Cashaa will use these pledged cryptocurrencies as additional liquidity for the decentralised finance universe which globally has crossed $11 billion globally, Kumar said. “The interest on deposits will be paid by the credit society from the interest it earns from the loans it provides to customers,” he said.

In 2019, a Finance Ministry committee appointed to examine the efficacy of virtual currencies had drafted a bill advocating the banning of trading, issuance and dealings in cryptocurrencies with a strict sentence of imprisonment of up to 10 years and not less than a year for such activities. While the government has not introduced this draft bill into Parliament, a fresh law banning cryptocurrencies was proposed by the Finance Ministry in June, the Economic Times reported.

Vikram Rangala, chief marketing officer, ZebPay says that experiments like this are a natural part of the process. “For entities in India the focus should be on understanding what the law could and should be for Know-Your-Customer, Anti-Money Laundering, and other protections. That way, our self-regulation thinks ahead to what regulators would want and the people deserve. Hopefully, such experiments can inform regulators and help us design policies to protect people and create prosperity,” he said.

According Rashmi Deshpande, partner, Khaitan & Co, it is always best to wait for a regulators’ approval or a government direction before experimenting and launching these novel innovations. “Prior to the RBI’s April 2018 circular many cryptocurrency firms in the country operated with the belief that since there was no explicit ban on trading cryptocurrencies they could could set up shop. But once the circular came in many of them had to shift abroad or they went bankrupt. Though there are no regulations on cryptocurrencies today, in my mind it would be a risky business to launch these services because if the government or regulators comes out with a new policy on cryptocurrencies it may place the entire business in trouble,” she said.

How UNICAS will safeguard against cryptocurrency value fluctuations

Cryptocurrency prices, particularly, Bitcoin are volatile and can swing violently within one day. If the credit society holds onto the cryptocurrencies as collateral, a shift in the price of the Bitcoin will change the value of the collateral.

Kumar said that the technology at the back-end will enable an automated liquidation of the Bitcoins held by the credit society in case there is a fall in its value. “If the Bitcoins falls by 10%, and the loan-to-value (LTV) ratio is at 70%, either customers pledge more Bitcoins with us to maintain the LTV ratio, or we will reduce the loan amount,” he explained.

In banking parlance, the LTV ratio denotes the amount of funds that can be borrowed against the value of collateral that is pledged to a lender. It ensures that in case there is a deterioration in the value of the asset, the lender can always recover the full loan amount.

“In case these two actions are not followed, the system will liquidate the Bitcoins to ensure that the LTV remains the same and the credit society does not suffer a loss.In case of a major price fluctuation, the entire cryptocurrency holdings of the credit society will be liquidated so that they receive the full loan amount and the interest they charge the borrower,” ” Kumar said. On the other hand, if the price of Bitcoins rises during the term of the loan, the credit society will earn a profit over and above the pledged amount, he added.

“Due to the Covid-19 pandemic our lending book has deteriorated. In micro-finance loans defaults have risen to 90% and in our loans against property segment we are not able to recover our dues. Even with gold loans we are finding cases where the valuation of the gold that was pledged was not genuine. With these crypto-assets, even if there is a loan default we can easily recover our dues by selling these assets in the market. So there is less chance of defaults causing a significant loss to our business,” Kukreja said.