After leading private sector banks began instructing payment gateway firms to block services to many Indian crypto-exchanges over the past month, Paytm Payments Bank had swooped in to rescue the exchanges. But it looks like the fear of regulatory action from the Reserve Bank of India (RBI) has now also pushed Paytm to pull the plug on servicing the exchanges through the payment gateway channels.
Paytm Payments Bank began servicing crypto-exchanges like CoinDCX, WazirX, BuyUCoin, Zebpay and others over the past few weeks. The bank provided the exchanges with virtual nodal accounts, which are used by payments gateway providers to transmit funds from an investor’s account to the exchanges’. Interestingly, while it was largely unreported that Paytm had rescued the crypto-exchanges, in the last few days many investors and stakeholders tweeted that Paytm was the new crypto anchor bank for many exchanges. This may have triggered Paytm to toe the same line that the large private banks are adhering to.
MediaNama reached out to the crypto-exchanges named above for comments. Paytm declined to comment.
Shift to alternative models
In an email to investors late Thursday night, WazirX said that Rupee deposits to their account with Paytm Payments Bank would no longer be available from midnight. The exchange promised that any Rupee transactions to the Paytm account, after midnight May 20, would be reversed in 7 to 10 days. MediaNama has seen a copy of the email.
The exchange has moved back to a Peer-2-Peer (P2P) model, wherein buyers of crypto-currencies transfer Rupees to the seller of a crypto-currency, and vice versa. This means WazirX no longer plays a role of an intermediary that collects funds from investors and settles Rupee transactions between buyers and sellers. Instead, under the P2P model, individual investors have to settle the transactions between themselves while WazirX confirms the payment on both ends and updates their investors’ portfolio on their platform, depending on the type of trade.
Similarly,both BuyUCoin and CoinDCX have enabled deposits into their respective crypto-wallets through MobiKwik and other means. A few days ago one could transfer funds to the wallet through payment gateways sitting on top of a Paytm Payments Bank account used by the two exchanges.
MediaNama spoke to executives from four crypto-exchanges, who said that the fear of regulatory action has triggered Paytm to pull the plug although the company tried their best to help and support them.
The first executive said that the regulators’ action seems to have been triggered by ads by crypto-exchanges during the Indian Premier League and a rise in trading volumes in the last few months. “The regulator would have seen those ads and since then, they have been instructing banks to tell the payment gateway companies to restrict their services. Relying on banks and payment processors is like a cat and mouse game. At any point in time, transactions can fail and if there is downtime at the bank or gateway side, the exchange goes down. If the regulator blocks the top banks and payment companies from servicing crypto-exchanges, it could force some to turn to obscure companies,” this person said on the condition of anonymity.
The second executive said that they have been firefighting for the last few weeks and this development has added to the chaos. “We are trying to speak to our banking and payment gateway partners, and trying to see if we can bring in new payment companies,” this person said on the condition of anonymity. “For now, many exchanges are moving back to the P2P model which is slower than a payment gateway model which allows UPI or IMPS based payments,” they added.
A third executive said that using PPI wallets is expensive and there is an entrance cost for the investor since they need to set up an account and complete the Know-Your-Customer process. “Also wallet players have limits on how much a new user can deposit in a day, so while small investors can use this route the bigger investors will have to go the P2P way,” this person said on the condition of anonymity. “Payment gateway companies are under scrutiny, so they are questioning whether they need to take on this additional risk. Application Programme Interface-based payment services are now a challenge to integrate,” they added.
Most crypto-exchanges are currently supported by Hypto, a payment processor which works with banks and companies to provide API payment services. Responses to queries sent to Hypto are awaited.
A fourth executive told MediaNama that they are hesitant to move to a P2P model since the user experience is poorer compared to a payment gateway model and because P2P is not the best model from an anti-money laundering standpoint. “When Hypto made the change from ICICI Bank to Paytm, we anticipated this issue. It is not that Paytm has blocked our accounts, but that they are no longer supporting Hypto at the back-end for various reasons,” this person said on the condition of anonymity. For now, deposits are working fine through our other channels, they added.
Need regulatory clarity
The RBI’s rationale to stop services to crypto-exchanges is unclear since there is no formal order issued by the central bank to the commercial banks. Instead, the private banks pulled their services after the RBI informally communicated that they were uncomfortable with the level of crypto-activity taking place through the Indian banking system. Banking industry officials told MediaNama earlier that because of a significant amount of transactions taking place between their account holders and crypto-exchanges on a daily basis, their legal and compliance teams are also anxious about regulatory scrutiny.
The fourth executive quoted above said that while some banks are unwilling to work with crypto-exchanges, many of the leading private banks are very supportive of the industry. “But the problem is they are not speaking publically, and they are not communicating the reasons why they have to stop working with us. Since there is no regulatory clarity, they do not know what to do and how to continue supporting the exchanges,” this person said.
Crypto-trading and investments in India have sky-rocketed ever since the Supreme Court verdict in March 2020, which quashed the RBI’s April 2018 circular which barred banks from interacting with crypto-firm. In January this year, the government announced plans to introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will ban “private” crypto-currencies while at the same time providing the RBI with the requisite legal powers to develop a central bank-backed digital currency (CBDC).
It was recently reported that the government would set up a new committee tasked with exploring the use-cases for blockchain and recommend regulations for crypto-currencies, treating them as digital assets instead of as a currency. The committee may also be asked to study ways in which the RBI’s digital rupee can be operationalised. Back in 2019, a Finance Ministry committee headed by the former finance secretary Subash Chandra Garg had recommended a complete ban on crypto-currencies and suggested that the government enact criminal provisions against crypto-firms, investors, miners and other market participants.
“Right now, we as an industry are approaching the RBI to provide some formal guidance. If they provide a notification or clarification on its stance, it will be positive for the industry,” said the second executive quoted above. “Our understanding is that the government’s new panel will look at crypto-currencies as a digital asset, which is a positive step,” they said.
MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.