RBI Reasserts Push for Crypto Prohibition Policy

Synopsis

According to an internal document published by the regulators that was seen by Reuters, the Reserve Bank of India (RBI) has once again reiterated its preference for the cryptocurrency policy leaning towards prohibition, citing concerns about financial stability risks and contagion. While India's digital assets, valued at an estimated $2.1 billion, still remain with nearly 39 million users, the Income Tax Department has singled out two serious risks with offshore exchanges and peer-to-peer transactions.

The central bank reiterates stance on the issue

In a shift towards an even harder stance on cryptocurrencies, the Reserve Bank of India issued a fresh appeal to formulate a cryptocurrency policy "leaning towards prohibition," and the tax department said that cryptocurrency trading through an offshore exchange is difficult to monitor, according to government documents seen by Reuters.

Despite the lack of a formal policy by the government towards VDAs, the documents show that some key agencies have preferred stricter regulations on virtual currencies.

The current financial stability concerns are at the forefront

The RBI opposes banks' exposure to crypto and both foreign and rupee-pegged stablecoins, warning of financial contagion risks, loss of seigniorage, and stress during market turmoil. Lenders and financial institutions should not have the right to hold, trade or be exposed to crypto assets and privately issued stablecoins, the central bank said in documents from May and June.

A person familiar with the situation commented that the central bank is inclined to not include cryptocurrencies in the regulated financial system. The Reserve Bank of India is again asking for measures to be taken to curb cryptocurrencies and tax department is sounding alarm over the risk of tax evasion due to crypto activities.

Tax Department's Evasion Warnings

The Income Tax Department, via the Central Board of Direct Taxes, has separately drawn attention to the fact that virtual digital assets pose a structural tax evasion worry, as peer to peer transactions, transactions on a decentralised platform and trading on foreign platforms are based on voluntary compliance, which is cumbersome and hard to trace and verify.

There are already signs of non-compliance: only 23.7% of the 645,000 people that transacted through crypto reported those gains when filing their taxes in the financial year concluded in March 2023.

Scale of India's Crypto Market

Adoption is still high in spite of the lack of clarity in the regulation. According to the tax department, India has almost 39 million crypto traders who had an estimated $2.1 billion worth of digital assets at the end of May. Despite a conservative estimate of 119 million users, India has been the top performer in the Chainalysis Global Crypto Adoption Index for the past three years, but it hasn't yet got a comprehensive legislation for virtual digital assets.

In the Union Budget 2026-27 debates, MP Raghav Chadha pointed out that nearly 73 per cent of trading is now being conducted on foreign exchanges, more than 180 Indian start-ups in the cryptocurrency space have moved to overseas markets, and there are approximately 12 crore investors across foreign exchanges. The Reserve Bank of India (RBI) and Tax Department are urging for stricter crypto regulations as a policy is delayed.

There remains a Regulatory Vacuum

India has not had a specific cryptocurrency law since the Supreme Court invalidated RBI's banking ban in 2018 in 2020, while a draft bill banning private cryptocurrencies was drawn up in 2021 but has never been sent to Parliament.

The e-rupee is the RBI's own Central Bank Digital Currency, which has already made over 150 million transactions since its launch in December 2022, but the uptake is far from robust with only around 10 million users.