Indian Authorities Asked to Restore Crypto Exchanges' Access to UPI

India's government and central bank have received proposals asking to restore access of the Unified Payments Interface (UPI), a widely popular real-time payment system, to the crypto industry, several sources familiar with the matter have told CoinDesk.

Two proposals have already been made. A third proposal will be made "in the coming few weeks" by India's newly formed crypto policy advocacy group, the Bharat Web3 Association (BWA), one individual familiar with the decision told CoinDesk.

The proposals, while not coordinated, appear to be the first major push by India's crypto stakeholders to seek policy changes that govern the burgeoning industry since it suffered a series of blows in the form of harsh taxes, a crypto winter, and a "shadow ban." The shadow ban saw Indian payment processors cut off banking access to crypto exchanges. UPI services were ostensibly suspended around the same time last year.

Since the pandemic, UPI adoption in India has rapidly increased with approximately 74 billion UPI transactions worth $1.5 trillion conducted in 2022. UPI allows citizens to pay for groceries and other goods using a QR code linked to their bank account. The system is used nationwide because merchants aren’t charged any fee for accepting UPI payments.

How Indian exchanges lost UPI access

The trigger for the payment rail crisis appeared to be Coinbase's launch in India. On April 7, 2022, Coinbase launched its India operations with executives touting how easy it would be to trade on the company app with payments being processed by UPI. Hours after the event, the National Payments Corporation of India (NPCI) – the entity that governs UPI – tweeted to clarify that it was “not aware of any crypto exchange using UPI.” The NPCI is under the aegis of the nation's central bank, the Reserve Bank of India (RBI).

Read More: UPI Was Central to Coinbase India Launch; Now the Crypto Exchange Says It's 'Unavailable'

One proposal to restore UPI access was made by an Indian crypto exchange that asked not to be identified because the matter hasn't been made public. "We have submitted a representation with the NPCI, seeking the removal of restrictions on use of UPI services," the crypto exchange said in a statement shared with CoinDesk.

The proposal was made shortly after India added crypto to anti-money laundering rules (PMLA or Prevention of Money Laundering Act), making crypto exchanges, non-fungible token (NFT) marketplaces and custody service wallet providers legally responsible for monitoring suspicious financial activities in March 2023. The jury on what this meant for India was divided. Legal experts said this gave teeth to the regulators overseeing the industry for the first time. At the same time, advocates of the crypto industry said this gave "more legitimacy" to the sector because "adding crypto to anti-money laundering rules is some semblance of regulation," a senior industry participant said Monday.

"Our submission highlights that VDA (Virtual Digital Assets) service providers are now covered as ’reporting entities’ under the PMLA and are also registered with the FIU (Financial Intelligence Unit). We believe that these guardrails go a long way in helping secure VDA transactions and arresting malfeasance, if any," the same crypto exchange's statement said.

The second proposal, made in tranches over the past few weeks – both before and after India added crypto to anti-money laundering rules to different authorities – came from public policy advisory firm Black Dot, its founder Mandar Kagade told CoinDesk. The firm has previously collaborated with the Indian government. CoinDesk has seen an email from the Finance Ministry acknowledging Black Dot's proposal and other emails confirming the firm sent the proposal to entities like the NPCI, the RBI and Jayant Sinha, the chairperson for the Standing Committee on Finance.

What Black Dot's proposal contains

Black Dot's proposal argues that UPI's seamless user experience encourages transactions to remain onshore providing a visibility trail for regulators and law enforcement. Citing the Economic Times, it said 80% of digital asset transactions may be conducted on a peer-to-peer basis since the closure of UPI access. The proposal also says "arbitrarily denying a class of investors from accessing instruments of their choice via UPI when another group of investors has access to their choice (e.g., IPO) may also violate Article 14 (equality before the law)."

The proposal asks NCPI to group crypto exchanges based on how they meet agreed norms among banks.

It's unclear whether authorities will restore UPI access to crypto exchanges but doing so would lend credibility to the space while making it much easier for retailers to start or continue trading on crypto exchanges.

CoinDesk has reached out to the Finance Ministry, RBI, NPCI and BWA for comment.

Read More: India Has Clamped Down on Crypto. What Will It Do With Its G-20 Power?