Banking Relationships for Crypto Businesses

Introduction

Access to banking services is fundamental to the operation of any cryptocurrency business in India. Despite the Supreme Court's ruling in IAMAI v. RBI (2020) 10 SCC 274 striking down the banking ban, cryptocurrency businesses continue to face significant challenges in establishing and maintaining banking relationships. This practical guide addresses the legal and strategic aspects of navigating banking access for crypto businesses.

For legal practitioners advising cryptocurrency clients, understanding the nuances of bank-crypto relationships is essential. This includes knowledge of the legal framework, bank compliance concerns, documentation requirements, and remedies available when banking access is denied. This part provides actionable guidance for both preventive measures and dispute resolution.

The challenges faced by crypto businesses in accessing banking are not unique to India. The phenomenon of "de-risking" where banks refuse services to entire categories of businesses deemed high-risk has affected crypto businesses globally. However, the specific Indian context following the IAMAI judgment creates unique opportunities and constraints that practitioners must understand.

Current Banking Landscape

The banking landscape for cryptocurrency businesses in India remains fragmented and unpredictable. While the legal position is clear following the IAMAI judgment, the practical reality varies significantly across different banks and even different branches of the same bank.

Categories of Bank Responses

Banks in India can be broadly categorized into three groups based on their approach to cryptocurrency businesses:

Factors Affecting Bank Decisions

Several factors influence a bank's decision to provide services to cryptocurrency businesses:

• Risk appetite: Banks have varying tolerance for regulatory and reputational risk
• Compliance capacity: Ability to conduct enhanced due diligence on crypto clients
• Business opportunity: Revenue potential from crypto business relationships
• Regulatory guidance: Interpretation of RBI's stance and internal compliance advice
• International exposure: Banks with global operations may follow stricter standards

Services Typically Required

Cryptocurrency businesses typically require the following banking services:

• Current accounts for operational expenses
• Escrow accounts for customer funds segregation
• Payment gateway integration for INR deposits/withdrawals
• RTGS/NEFT facilities for large transactions
• Overdraft or credit facilities (rarely available)
• International wire transfer capabilities (FEMA considerations)

Bank De-risking Phenomenon

De-risking refers to the practice of financial institutions terminating or restricting business relationships with clients or categories of clients perceived as presenting high money laundering or terrorist financing risk. This phenomenon significantly affects cryptocurrency businesses in India.

Understanding De-risking

De-risking occurs when banks decide that the cost and effort of managing relationships with certain client categories exceeds the potential benefits. For cryptocurrency businesses, factors contributing to de-risking include:

• Perceived regulatory uncertainty despite IAMAI judgment
• Concerns about AML/CFT compliance complexity
• Reputational risk if the account is involved in fraud or money laundering
• High transaction monitoring costs
• Lack of clear internal guidelines for crypto-related accounts

Forms of De-risking

De-risking can manifest in several ways:

Legal Perspective on De-risking

From a legal perspective, blanket de-risking of cryptocurrency businesses is problematic:

• Violates the principle established in IAMAI v. RBI that cryptocurrency trading is not prohibited
• May constitute arbitrary denial of services under Article 14
• RBI's May 2021 clarification specifically addresses this issue
• Financial Action Task Force (FATF) has cautioned against excessive de-risking

Account Opening Challenges

Opening a bank account for a cryptocurrency business requires careful preparation and strategic approach. Understanding common challenges and preparing accordingly can significantly improve success rates.

Common Obstacles

1. KYC/AML Concerns

Banks express concerns about their ability to conduct adequate KYC on cryptocurrency businesses. Specific concerns include:

• Source of funds verification for crypto-to-fiat conversions
• Beneficial ownership identification for complex corporate structures
• Transaction monitoring capabilities for high-volume accounts
• Compliance with enhanced due diligence requirements

2. Regulatory Uncertainty Perception

Despite the IAMAI judgment, some banks perceive ongoing regulatory uncertainty:

• Absence of specific cryptocurrency regulation
• RBI's continued negative statements about cryptocurrencies
• Pending legislation (Cryptocurrency Bill)
• Taxation framework suggesting government ambivalence

3. Internal Policy Gaps

Many banks lack specific internal policies for cryptocurrency businesses:

• No standardized due diligence framework for crypto clients
• Unclear escalation procedures for crypto-related applications
• Branch managers unfamiliar with legal position post-IAMAI
• Conservative default positions in absence of clear guidance

Strategic Approach to Account Opening

Legal Position Post-IAMAI

Understanding and effectively communicating the legal position following IAMAI v. RBI is crucial for both preventing banking access denial and challenging such denials when they occur.

Key Legal Principles Established

1. Cryptocurrency Trading is Not Prohibited

The Supreme Court was explicit that cryptocurrency trading is not banned in India. The Court found no law prohibiting individuals or entities from trading in cryptocurrencies.

2. Banking Restriction Struck Down

The 2018 RBI circular has been set aside and has no legal effect. Banks cannot cite this circular as a basis for refusing services.

3. RBI Can Still Regulate Through Proper Means

The judgment does not prevent RBI from issuing future regulations through appropriate legal channels. However, such regulations must be proportionate and not arbitrary.

4. Enhanced Due Diligence is Permissible

Banks can apply enhanced KYC/AML procedures to cryptocurrency businesses. This is different from blanket refusal of services.

Distinguishing Lawful Refusal from Arbitrary Denial

It is important to distinguish between lawful exercise of commercial discretion and arbitrary denial of services:

Practical Strategies

Pre-emptive Measures

When Approaching Banks

1. Research the bank's stance on fintech and crypto businesses
2. Prepare a comprehensive business presentation
3. Include legal opinion on regulatory compliance
4. Offer enhanced transaction monitoring cooperation
5. Propose periodic compliance reporting
6. Be prepared for extensive due diligence

Documentation Package

Prepare a comprehensive documentation package including:

Compliance Framework for Banking Relationships

Implementing a robust compliance framework not only helps secure banking relationships but also protects the business from regulatory actions and legal liability.

AML/CFT Compliance

A comprehensive AML/CFT program should include:

• Written AML/CFT policy approved by Board
• Designated Principal Officer for compliance
• Customer Due Diligence (CDD) procedures
• Enhanced Due Diligence (EDD) for high-risk customers
• Transaction monitoring system
• Suspicious Transaction Reporting (STR) procedures
• Record keeping for minimum 5 years
• Regular training for staff

KYC Implementation

Align KYC procedures with RBI Master Direction on KYC:

• Customer identification and verification
• Risk categorization of customers
• Periodic KYC updates
• Beneficial ownership identification
• PEP (Politically Exposed Person) screening
• Sanctions list screening

Transaction Monitoring

Implement systems to monitor transactions for:

• Unusual transaction patterns
• Large value transactions
• Rapid movement of funds
• Transactions with high-risk jurisdictions
• Structuring to avoid reporting thresholds

Dispute Resolution

When banking services are denied or accounts are closed arbitrarily, several dispute resolution mechanisms are available.

Step 1: Internal Escalation

Before pursuing legal remedies, escalate within the bank:

• Request written reasons for denial
• Escalate to branch manager, then regional manager
• Contact bank's nodal officer for grievances
• Submit formal complaint through bank's grievance mechanism

Step 2: Banking Ombudsman

If internal escalation fails, approach the Banking Ombudsman:

• Complaint can be filed online at RBI's CMS portal
• Available for deficiency in banking services
• Free of cost and time-bound resolution
• Can award compensation up to Rs. 20 lakhs

Step 3: Legal Notice

Issue a formal legal notice to the bank:

Step 4: Writ Petition

If other remedies fail, consider filing a writ petition:

• Article 226 petition before High Court
• Challenge denial as arbitrary and violative of Article 14
• Seek mandamus directing bank to provide services
• Request interim relief to maintain status quo

Sample Arguments for Writ Petition

1. RBI circular was struck down by Supreme Court in IAMAI v. RBI
2. RBI clarified on May 31, 2021 that banks cannot cite struck-down circular
3. Petitioner is engaged in lawful business not prohibited by any law
4. Denial based solely on nature of business is arbitrary (Article 14)
5. Right to practice trade includes necessary banking access (Article 19(1)(g))
6. Bank is discharging public function and subject to public law principles

Alternative Solutions

While traditional banking access remains the primary goal, cryptocurrency businesses may need to consider alternative solutions.

Payment Aggregators

Partner with RBI-licensed payment aggregators who may have different risk appetite:

• Payment aggregators handle banking relationship on behalf of merchants
• May be more willing to serve crypto businesses
• Higher transaction costs but reliable service
• Ensure aggregator has necessary RBI authorization

Neo-Banks and Fintech Partners

Some fintech companies offer banking-as-a-service:

• Operate through partner bank's license
• May have crypto-friendly policies
• Verify regulatory compliance before engaging
• Understand limitations compared to direct banking

Multiple Banking Relationships

Diversify banking relationships to reduce single-point-of-failure risk:

• Maintain accounts with multiple banks
• Use different banks for different functions
• Have backup payment processing arrangements

Corporate Structure Alternatives

Consider restructuring to improve banking access:

• Separate holding and operating companies
• Create clean subsidiary for banking relationships
• Partner with established fintech for banking access

International Comparison

Examining international approaches provides context and potential solutions.

The international comparison suggests that clear regulatory frameworks correlate with better banking access for cryptocurrency businesses. India's regulatory ambiguity contributes to banking challenges.

Practice Tips for Banking Lawyers