The Indian government’s position on cryptocurrencies is unclear, and banks have been warned against dealing with digital tokens. Cashaa, a “new generation banking platform” located in the United Kingdom, has found a method around this in an attempt to develop a company lending against cryptocurrencies. Cashaa Goes Around The RBI to allow cryptocurrency loans.
To enable goods such as Cryptocurrency loans, the company has zoomed in on the country’s age-old credit cooperative societies, which are not regulated by the Reserve Bank of India. Kumar Gaurav, Cashaa’s founder, chief executive, and the sole owner told BloombergQuint over the phone that the company teamed with United Multi-State Credit Co-Operative Society Ltd. in October to offer “secured” loans on cryptocurrencies.
“We saw co-operative societies is one such structure, in which if we apply some technology, we may not be able to replicate the functions of a bank, but we’ll still be able to provide the basic retail banking services, which are required,” said Gaurav.
The services, which will be introduced under the Unicas brand—a joint venture between Gaurav, Cashaa’s sole owner, and United—will be available starting Aug. 15, according to Gaurav.
On Saturday, I wrote United about Unicas and received no response.
Unrestricted Meets Unrestricted
United and Cashaa’s partnership brings together two mostly unregulated aspects of the banking system.
Credit co-operative societies provide banking services to their members, such as deposits and loans, although they are not regulated by the RBI. The Registrar of Cooperative Societies of States or the Central Registrar is in charge of them. In the country, cryptocurrencies are also uncontrolled.
Bringing the two together, according to Gaurav, can help give banking-like services to the country’s cryptocurrency fans. He explains how it will function in this manner.
Unicas will be the brand name for the new venture. When a customer comes to Unicas, he or she will become a member of United Multi-State Cooperative and open an account with them. Because co-operative societies can only provide services to their members, this is the case. Customers from Rajasthan, Delhi, and Gujarat, where United has a license to operate, would be eligible for membership.
Customers can then store their crypto tokens with Unicas and borrow money from United using those tokens as collateral. “Typically, credit cooperative associations provide unsecured loans. This will be a secured loan, with crypto as collateral “Gaurav argues that this is good for business and good for society.
Loans against crypto, he claimed, may be provided for a period ranging from one day to three years, with daily interest rates ranging from 0.04c/o to 0.06 percent, depending on the customer’s loyalty tier.
Cryptocurrency loans will have a loan-to-value ratio of 50% of the underlying crypto token price, with any deficit in the LTV margin being covered by additional collateral. The mechanism will automatically liquidate the collateralized crypto tokens in the event of a price drop.
The company also intends to produce debit cards that can be used at partner merchant locations in the future.
When asked if Cashaa or Unicas would assist clients in converting rupee deposits held in United accounts, Gaurav stated that there would be no direct conversion. “Unicas or United will not engage in the conversion of cryptocurrency to Indian Rupee and vice versa, and it will be outsourced to partner crypto exchanges that will do the conversion in real-time for spending at merchant outlets,” said Gaurav.
Despite the fact that Cashaa’s Unicas does not claim to be a bank, could Gaurav’s decision to issue cryptocurrency loans raise alarm bells?
“Since United is a co-operative society and not a bank, the RBI doesn’t have any regulatory or supervisory powers over the institution,” said NS Vishwanathan, former deputy governor at RBI.
“The cooperative societies which aren’t licensed to do banking business provide loans and advances to their members out of deposits raised from their members,” he said. “Here, the risk of failure, unlike banks, is shared by its members, who are not depositors in the way they are understood in the case of banks.”
The Central Registrar of Cooperative Societies oversees multi-state co-operative societies under the Multi-State Cooperative Societies Act.
Furthermore, according to R Gandhi, former deputy governor of the Reserve Bank of India, a cooperative society is not allowed to issue cheques, provide inter-bank cash withdrawal facilities, issue debit and credit cards payable at any other bank, deal in foreign exchange, or use clearinghouse services.
“It (United) is a credit society, it can lend money to its members for their own purposes, whether it is to buy a car, to start a business, or to buy crypto tokens,” he said. “But Unicas branches should clearly mention it is a multi-state co-operative society so that members can take its services, bearing that in mind.”
According to Section 56 of the Banking Regulation Act, no co-operative society other than a co-operative bank may use the words “bank,” “banker,” or “banking” in its name or in connection with its operations.
According to Gandhi, if a primary credit society’s paid-up share capital and reserves exceed Rs 1 lakh, it must convert to a primary co-operative bank under Section 56 of the Banking Regulation Act.
Multi-state cooperative societies, on the other hand, are exempt from this requirement.
“The RBI recognizes the loophole and has appealed to the government to harmonize these rules, so those multi-state co-operative societies are required to convert into banks beyond a certain threshold, in order to avoid a systemic risk,” he said.
Increasing in Size
Gaurav, the CEO of Cashaa, is unfazed by the questions and worries and believes the model will thrive.
“We want to grow it and make it bigger,” he said. “Our services won’t remain restricted to three states, but we are already evaluating and accessing other co-operatives outside these three states, and seeing if their current modus operandi and infrastructure is suitable to work with us.”
Unicas, he predicts, would grow from its current two locations to 1,000 locations across India in the next three years. “In a year, we will have deposits worth Rs 3,000-4,000 crore in United or in Unicas business,” said Gaurav.
Given the fluctuating nature of cryptocurrencies, the entity’s operation is equally volatile, according to Hemindra Hazari, an independent banking analyst.
“Any firm that lends to individuals using cryptocurrency as collateral is fundamentally risky,” Hazari said. “Additionally, attempting to institutionalize such money lending poses a risk to the entire system and, as a result, must be regulated.”
On the liabilities side, depositors in this institution must be well informed of the risks, as any failure on Unicas’ part will be borne by United’s members. Members of a cooperative society’s deposits, unlike those of banks, are not guaranteed by the Deposit Insurance and Credit Guarantee Corporation Act, making it an even riskier venture.