Fresh Crypto Investments In India At Near Halt As Banks Cut Ties

“I wanted to buy more Ether as it was gaining price, but my deposit did not go through, and since then Ether’s price has gone up further,” he told BloombergQuint over a call. “Even if deposits start working now, I will not be able to buy it at my desired price.”

Raut isn’t the only one to have faced this issue. Many others are not being able to deposit funds in their crypto wallets, preventing them from making any fresh investments. This issue has persisted over the weekend for most crypto users.

Why Are Deposits Not Working?

Most cryptocurrency exchanges such as WazirX, CoinDCX, ZebPay, BuyUCoin and Coin Switch Kuber, among others, began informing their customers on Saturday that deposits on their platforms have been disabled due to issues with their payments partner.

According to at least five people within the industry, who spoke to BloombergQuint on condition of anonymity, most crypto exchanges were working with a payments partner called Hypto for facilitating instant deposits and withdrawals.

Hypto, in turn, ties up with multiple banks and assigns unique virtual accounts to crypto exchanges’ customers, who then deposit funds into these accounts. Once the deposit is made into a virtual account, the money goes through to Hypto's partner bank's nodal account that holds these funds, before finally being routed to crypto exchanges, which then credit the money into their users' wallets.

Citing regulatory uncertainty, banks have started pushing payment processors to stop using their nodal accounts for facilitating crypto transactions, one of the persons cited earlier said. The communication has been verbal and no written direction from banks has come so far, he said.

While some banks have stopped all crypto-related transactions immediately, others are asking payment processors to phase them out over time, explained the person cited earlier.

• In the first phase, new virtual accounts for crypto users will not be created so that no new deposits are made.
• In the second phase, deposits made by existing crypto customers will be stopped by suspending their virtual accounts.
• In the final phase, all withdrawals routed via payment aggregators to crypto exchanges will also be suspended.

While the timeline for suspending crypto transactions at the payment processor level is still being worked out, the person said, one of the banks that supported crypto exchanges had given Hypto a week to 10 days’ time to phase out all its crypto transactions, including withdrawals and deposits.

An e-mail query sent to Hypto didn’t elicit a reply.

What Are The Alternatives?

With operational difficulties resurfacing, both crypto exchanges and users are looking for options.

For exchanges, one option is to reduce their reliance on payment processors. This will allow them to continue servicing clients unless banks take even more stringent action.

For example, Bengaluru-based Bitbns has not faced an issue with deposits and withdrawals because it has an internal system for direct funds collection and transfer. “We do it internally and there has not been an issue with deposits and withdrawals so far,” said Gaurav Dahake, chief executive at the exchange. “But if our own bank account is frozen, then there will not be much that we can do.”

ZebPay, another crypto exchange, is also trying to work around the problem by speeding up its internal infrastructure to automate deposits and withdrawals.

“While withdrawals have not been affected at this time, our payment processors for deposits face additional challenges since the process is a bit more complex,” said Vikram Rangala, chief operations officer at ZebPay.

As payment gateways are not able to operate smoothly, Rangala said, the exchange has to go back to processing deposits manually. "It takes longer since it involves matching of transaction details with each user, which payment processors do automatically. We are developing some automation of our own and may also hire more accounting staff to enable a smooth service," he said.

Besides these options, some exchanges such as CoinDCX, ZebPay and BuyUcoin, among others, have partnered with payments firm Mobikwik to facilitate deposits. But, to be able to make these deposits via Mobikwik, crypto investors would first need to register and become Mobikwik users, said a person aware of the matter, who spoke on condition of anonymity.

When contacted, Mobikwik refused to comment on BloombergQuint's emailed query.

Meanwhile, crypto users are moving to alternate options such as:

• Using the funds already available in their crypto wallets.
• Liquidating some of the existing crypto holdings and using funds from the sale to carry out further trades.
• Using stablecoins, commonly known as crypto cash, to buy altcoins. These are tokens backed by fiat currency.

A Cat And Mouse Game

The development comes despite the Supreme Court's March 2020 order, which set aside the Reserve Bank of India’s 2018 circular that barred banks and other financial institutions from facilitating transactions involving cryptocurrencies.

“There seems to be confusion among the banking industry because they are not giving banking access to the crypto industry in India despite the SC verdict,” said Nischal Shetty, founder and chief executive at WazirX, which claims to be India's largest crypto exchange by trading volume.

But this disruption, said Dahake, is not new, as Indian crypto exchanges have been facing these issues for some time now. “Every time the service is shut by a partner payments processor or a bank, the hunt for finding a new one begins.”