When Surojit Chatterjee walked on stage at a Coinbase Global conference in Bengaluru, India, on April 7, he had little reason to anticipate the fallout that would shortly ensue.
Mr Chatterjee, the company’s chief product officer, told the audience that cryptocurrency investors would now be able to use the country’s online retail payments system to transfer funds to its local exchange.
Hours after Mr Chatterjee’s announcement, the central bank-backed entity that runs the system – called United Payments Interface – said it was “not aware” of any cryptocurrency exchange using the network. Within three days of the event, Coinbase had halted rupee transfers to its trading app via UPI.
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The abrupt reversal left Coinbase customers without any way of funding their accounts with rupees, dealing a blow to its expansion plans in India.
“We are committed to working with NPCI and other relevant authorities to ensure we are aligned with local expectations and industry norms,” a spokesperson for Coinbase said in a statement to Bloomberg on April 11, referring to the National Payments Corporation of India, which operates UPI.
Coinbase wasn’t the only one affected. Since its announcement, at least four other companies that provide cryptocurrency-related trading services have either suspended rupee deposits or seen banks and payment gateways pull support for money transfers onto their platforms, according to executives at the firms and local media reports.
Two other exchanges had lost support for rupee deposits from a payment service provider before the incident.
Those actions put additional pressure on already falling trading volumes, exchange executives said. The industry is also bracing for a new tax on all cryptocurrency transactions above a certain size that will take effect on July 1. The government this month introduced a 30 per cent levy on income from digital asset investments.
Daily trading volumes on Indian cryptocurrency exchanges, which collectively cater to about 15 million people, has tumbled by between 88 per cent and 96 per cent since peaking last year, data from CoinGecko show.
WazirX, India’s biggest cryptocurrency bourse, saw volumes drop 93 per cent from an October high, according to the data.
Investors who cash in cryptocurrency positions on an exchange can still withdraw their fiat currency. Coinbase already offered trading in cryptocurrency pairs in India, which doesn’t require customers to deposit rupees into their accounts.
“After the Coinbase announcement, whoever was providing support to the industry has withdrawn support,” said Vikram Subburaj, chief executive of cryptocurrency exchange Giottus.
Giottus’s payment gateway stopped working with it, he said, declining to name the company. Trading volume on the platform plunged about 70 per cent as a result, Mr Subburaj said.
Local rival BuyUcoin also halted payments via UPI after the notice from NPCI, said co-founder Atulya Bhatt.
NPCI, an initiative by the central bank and the Indian Banks’ Association, is an umbrella organisation for retail payments and settlements in the country of 1.4 billion people.
CoinSwitch Kuber, a Bengaluru-based cryptocurrency exchange, temporarily halted accepting rupee deposits via UPI and other banking channels, the Economic Times reported on April 12.
Cryptocurrency trading companies in India have had an uneasy relationship with banks and payment services providers since 2018, when the central bank issued a directive to lenders to stop working with digital asset companies.
While the Supreme Court in 2020 reversed that directive, some banks remained hesitant to work with the sector – in part because top officials at the Reserve Bank of India have kept calling publicly for cryptocurrencies to be banned.
As a result of the wariness from the traditional banking sector, payment gateways such as Juspay and MobiKwik have become a crucial link between cryptocurrency exchanges and clients seeking to deposit fiat currency.
Without their co-operation, investors are limited to using methods like transferring money to the exchanges’ current accounts, a time-consuming manual process prone to errors. Coinbase doesn’t offer that option in India.
Investors can also engage in peer-to-peer trading, where transfers of fiat is handled directly between the counterparties, although that represents a small share of the market in India.
One payment service provider stopped working with cryptocurrency exchanges last year after being told by banks to do so, its chief executive said, asking that he and his company not be named due to the sensitivity of the issue.
MobiKwik, a local payment service provider, stopped working with Indian cryptocurrency exchanges on April 1, according to a report by news outlet Moneycontrol.
WazirX and CoinDCX, another Indian cryptocurrency exchange, have both announced that rupee deposits via MobiKwik have been temporarily suspended.
Restricting payment access without legal grounds for doing so adds up to unfairly singling out the digital asset industry, said Jaideep Reddy, a lawyer at Nishith Desai Associates, which specialises in technology.
“If a bank denies service to a crypto business, there has to be a valid reason other than the mere fact that it’s a crypto business,” Mr Reddy said. “Banks have to be transparent, as account holders also have a charter of rights, which includes transparency from the service provider.”
Edul Patel, co-founder and chief executive of algorithmic cryptocurrency trading company Mudrex, said payment gateways in India started withdrawing support after the Coinbase episode. That happened to Mudrex as well, Mr Patel said.
“While exchanges around the world are innovating on Web 3.0, Indian exchanges are busy finding the next payment provider,” Mr Subburaj of Giottus said.
