When Surojit Chatterjee took the stage at a Coinbase Global Inc. in Bengaluru, India, on April 7, he had little reason to anticipate the consequences that would soon follow. Chatterjee, the company’s chief product officer, told the gathered audience that cryptocurrency investors will now be able to use the country’s online retail payments system to transfer funds to their local exchange.

Hours after Chatterjee’s announcement, the central bank-backed entity that runs the system — called the United Payments Interface — said it was “not aware” of any cryptocurrency exchanges using the network. Three days after the event, Coinbase stopped rupee transfers to its trading app via UPI.

The abrupt reversal left Coinbase customers with no way to fund their accounts with rupees, hurting their plans to expand in India. “We are committed to working with the NPCI and other relevant authorities to ensure that we are in line with local expectations and industry norms,” a Coinbase spokesperson said in a statement to Bloomberg on April 11, referring to National Payments. Corporation of India, which operates UPI.

Coinbase was not the only one affected. Since the announcement, at least four other companies providing cryptocurrency-related trading services have suspended rupee deposits or seen banks and payment gateways pull support for money transfers on their platforms, according to company executives and local media reports. Two other exchanges lost support for rupee deposits from a payment service provider prior to the incident.

industry fall

These stocks put further pressure on already slumping trading volumes, exchange executives said. The industry is also gearing up 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% tax on income from investments in digital assets.

Daily trading volumes on Indian cryptocurrency exchanges, which collectively serve around 15 million people, have dropped by between 88% and 96% since last year’s peak, data from CoinGecko shows. WazirX, India’s largest cryptocurrency exchange, saw volumes down 93% from their October high, according to the data.

Investors who profit from crypto positions on an exchange can still withdraw their fiat currency. Coinbase already offered cryptocurrency pair trading in India, which does not require customers to deposit rupees into their accounts.

“Following Coinbase’s announcement, whoever was providing industry support withdrew their support,” Vikram Subburaj, CEO of cryptocurrency exchange Giottus, said in an April 12 interview. Giottus’ payment gateway stopped working on him, he said, declining to name the company. Trading volume on the platform has dropped by around 70% as a result, Subburaj said.

Local rival BuyUcoin also stopped UPI payments following the NPCI’s warning, said co-founder Atulya Bhatt.

restless relationship

The NPCI, an initiative of the central bank and the Indian Banks’ Association, is a comprehensive organization for retail payments and settlements in the country of 1.4 billion people. It did not respond to requests for comment.

CoinSwitch Kuber, a Bengaluru-based cryptocurrency exchange, has temporarily stopped accepting rupee deposits via UPI and other banking channels, the Economic Times reported on April 12. CoinSwitch did not respond to an emailed request for comment.

Cryptocurrency trading companies in India have had a difficult relationship with banks and payment service providers since 2018, when the central bank issued a directive for 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 cryptocurrency industry — in part because top officials at the Reserve Bank of India continued to publicly call for cryptocurrencies to be banned.

As a result of the caution of the traditional banking industry, payment gateways such as MobiKwik have become a crucial link between cryptocurrency exchanges and customers looking to deposit fiat currency. Without your cooperation, investors are limited to using methods such as transferring money to exchange checking accounts, a time-consuming and error-prone manual process. Coinbase does not offer this option in India.

Peer to peer

Investors can also engage in peer-to-peer trading, where fiat currency transfers are handled directly between counterparties, although this represents a small share of the market in India.

A payment service provider stopped working with cryptocurrency exchanges last year after being instructed by banks to do so, its CEO said, asking that he and his company not be identified due to the sensitivity of the issue.

MobiKwik, a local payment service provider, stopped working with Indian exchanges on April 1, according to a report by news channel Moneycontrol. MobiKwik declined to comment. WazirX and CoinDCX, another Indian cryptocurrency exchange, announced that rupee deposits via MobiKwik have been temporarily suspended.

Selected

Restricting access to payment without a legal basis for doing so means unfairly singling out the digital asset industry, said Jaideep Reddy, a technology attorney at Nishith Desai Associates.

“If a bank denies service to a cryptocurrency business, there must be a valid reason beyond the mere fact that it is a cryptocurrency business,” said Reddy. “Banks need to be transparent as account holders also have a bill of rights that includes service provider transparency.”

Edul Patel, co-founder and CEO of algorithmic cryptocurrency trading company Mudrex, said that payment gateways in India started to withdraw support after the Coinbase episode. This also happened with Mudrex, Patel said in an April 12 interview, declining to name his partner.

The moves didn’t just affect trading, he said: inflows into Coin Sets, a mutual fund-like cryptocurrency product that the Y Combinator-backed startup offers, dropped by about half in the previous two to three days.

“While exchanges around the world are innovating on Web 3.0, Indian exchanges are busy finding the next payment provider,” said Giottus’ Subburaj.