Banks' Discretion, Not Law, Blocks Crypto Payments in India

Indian crypto users have long been frustrated by banks blocking payments to cryptocurrency exchanges. However, it's not due to a law or government directive as one might assume.

The RBI's April 2018 circular directing banks to avoid servicing crypto businesses was overturned by the Supreme Court in March 2020, and no equivalent directive has replaced it. Currently, there are 49 registered exchanges, 45 of which are domestic, operating within a legal compliance framework that banks can recognize.

The blocks on payments to crypto exchanges stem from multiple overlapping factors, including internal AML risk models, the RBI's public stance on cryptocurrency, and PMLA obligations. Banks use transaction monitoring software to flag unusual patterns, such as large deposits from or to unfamiliar counterparties, which can trigger automatic holds.

Banks also have discretion under the Banking Regulation Act to manage their own risk and impose additional checks or conditions on customer transactions without needing specific RBI approval. The RBI's risk management guidelines allow banks to categorize transaction types by risk and apply discretionary controls.