India's central bank is informally urging lenders to cut ties with cryptocurrency exchanges and traders as the highly speculative market booms, despite a Supreme Court ruling that banks can work with the industry, three sources told Reuters

The guidance comes as India is crafting a law to ban cryptocurrencies and penalise anyone dealing in them, which would be among the most sweeping crackdowns on the new investing fad in the world. But with the Covid-19 crisis engulfing the country, no one is sure when such a bill may be passed, adding to investors' confusion.

The Reserve Bank of India (RBI) in 2018 had forbidden banks from dealing in all transactions related to bitcoin and other such assets. That diktat was challenged by the crypto exchanges and in March 2020, India's top court overturned the RBI ban and allowed lenders to extend banking facilities to them.

With investors continuing to rush into the hot new asset class, however, regulators appear to be gearing up for another try.

Thousands of new users are piling into the system every day at a time when the prices of major digital currencies have been on the rise. There are over 10 million crypto investors in India with total holdings of over 100 billion rupees ($1.36 billion), according to industry estimates. No official data is available.

“The regulator has been unofficially asking us that why are we dealing in such business when it is ultra speculative. A lot of money flows overseas via this trade which the RBI is not comfortable with as it may lead to money laundering,” said a senior executive at one of the banks which was contacted.

RBI did not respond to a request for comment.

Private lender ICICI Bank has already asked payment service companies that it works with to stop all crypto-related payment transactions, three sources said, while other lenders are also following suit.

ICICI Bank did not respond to an email seeking comment.

None of the sources wanted to be identified as the discussions with RBI were private and no official order has been issued yet.

“Even though the discussions are informal that is enough. No one wants to go against the regulator,” said another source.

The central bank has often voiced its apprehension about digital currencies. Earlier this year, RBI Governor Shaktikanta Das said that they have “major concerns (around crypto) from the financial stability angle.”

The Crypto Conundrum

With Indian banks increasingly wary of dealing with them, crypto exchanges are scrambling to find new business partners.

Axis Bank, Citibank, Kotak Mahindra Bank and others are limiting their exposure to the cryptocurrency market, sources said.

“Axis Bank has taken a fairly negative stance against crypto. They are citing internal policy and risk measures and have stopped transactions with crypto exchanges,” said the CEO of a global crypto exchange with presence in India.

IndusInd Bank is also in the process of stopping all crypto-related transaction, said two sources.

Axis, Kotak and IndusInd did not reply to an email seeking comment while Citibank declined to comment.