India's central bank supports a cryptocurrency ban, citing risks to financial stability, while the tax department highlights challenges in tracking crypto transactions.
New Delhi, India Jul 8, 2026 ALN: India's central bank, the Reserve Bank of India (RBI), has reiterated its stance advocating for a cryptocurrency policy that leans towards prohibition. This position comes amidst growing concerns from the country's tax department regarding the risks of tax evasion associated with trading in cryptocurrencies, particularly through offshore exchanges. These insights are drawn from internal government documents that have been reviewed by Reuters, revealing a consensus among key Indian agencies favoring stricter regulations on virtual digital assets.
The backdrop of this situation is significant. Following a landmark ruling by the Supreme Court of India in 2018, which overturned the RBI's previous ban on cryptocurrencies, these digital assets have existed in a regulatory grey area. The court's decision was a pivotal moment for the cryptocurrency landscape in India, as it allowed the burgeoning market to flourish, albeit without formal regulatory oversight. Since then, the Indian government has been in a state of indecision regarding the adoption of a clear policy framework for cryptocurrencies.
In 2021, a draft legislation aimed at banning private cryptocurrencies was proposed but ultimately never introduced in Parliament. This has led to ongoing discussions and deferrals, with various stakeholders emphasizing the need for a balanced approach that fosters innovation while managing risks effectively. The government has publicly stated that any forthcoming policy must prioritize monetary sovereignty and financial stability, indicating the complexities involved in regulating such a rapidly evolving sector.
In recent discussions, particularly in September, there has been a notable shift within India’s finance ministry. After consultations with the RBI, officials expressed support for providing limited regulatory clarity for virtual assets. This suggests a recognition of the need to address the risks associated with cryptocurrencies, while also acknowledging the potential for innovation within the sector. The existing framework of tax laws and regulations has been cited as a means to mitigate some of the risks inherent in cryptocurrency trading.
The documents reviewed indicate a rising concern among key authorities regarding the potential threats to India’s financial stability posed by the unregulated trading of cryptocurrencies. The RBI has consistently raised alarms about the risks associated with crypto assets, advocating for policies that may need to lean towards prohibition to safeguard the financial system. This perspective is rooted in the central bank's mandate to maintain monetary stability and protect consumers.
According to the internal documents, the RBI believes that banks and financial institutions should be barred from holding, trading, or gaining exposure to cryptocurrencies and privately issued stablecoins. This recommendation is aimed at limiting the contagion risks that could arise from the integration of cryptocurrencies into the traditional banking system. Currently, while there are no explicit prohibitions against Indian banks dealing in cryptocurrencies, major financial institutions have largely steered clear of this asset class due to the RBI's repeated warnings.
The RBI's inclination towards a prohibitionist approach reflects a desire to keep cryptocurrencies outside the regulated financial ecosystem. This stance is not merely a reflection of apprehension but is also informed by the need to ensure that the monetary system remains robust and that financial stability is preserved in the face of increasing cryptocurrency adoption.
One of the specific areas of concern highlighted by the RBI is the emergence of stablecoins. These digital currencies, designed to maintain a stable value by being pegged to a reserve of assets, can pose unique challenges to domestic monetary policy. The RBI has articulated that stablecoins backed by foreign currencies could undermine India's monetary sovereignty. Furthermore, the introduction of rupee-backed stablecoins could diminish the government's income from issuing its fiat currency, introducing additional risks to financial stability, particularly during periods of market stress.
Moreover, the use of stablecoins could complicate the detection and taxation of cryptocurrency gains. In India, gains from cryptocurrency transactions are taxed at a rate of 30%. The ability to transact in stablecoins may reduce the necessity for converting digital assets into fiat currency, thereby obscuring taxable events and complicating compliance for both traders and tax authorities.
The tax department has identified significant challenges in ensuring tax compliance among cryptocurrency traders. Internal findings reveal that there have been instances of misreporting regarding cryptocurrency holdings in disclosures submitted under income tax laws. Alarmingly, fewer than a quarter of the 645,000 individuals who engaged in cryptocurrency transactions during the financial year ending in March 2023 reported these transactions on their tax returns.
The complexity of tracking transactions is exacerbated by the routing of trades through overseas exchanges and the use of private wallets, which obscure the identities of beneficial owners and hinder tax recovery efforts. Additionally, the prevalence of rupee-denominated, peer-to-peer trades further complicates the ability of tax authorities to monitor taxable income effectively. The tax department has also pointed out that the inherent price volatility of cryptocurrencies, coupled with the lack of uniform valuation standards, complicates the assessment and taxation of these assets.
Despite the regulatory ambiguity surrounding cryptocurrencies in India, the market has continued to grow. Estimates from the tax department indicate that there are nearly 39 million crypto traders in the country, collectively holding approximately $2.1 billion in digital assets as of the end of May 2023. This growth underscores the urgency for the government to establish a clear regulatory framework that addresses both the opportunities and risks associated with cryptocurrencies.
Global cryptocurrency exchanges, such as Binance and Coinbase, have the potential to operate in India, provided they register with a relevant government agency. The Ministry of Corporate Affairs is currently evaluating accounting standards and other guidance for virtual digital assets, which could pave the way for clearer regulations in the future.
In conclusion, as India navigates the complexities of cryptocurrency regulation, the RBI's preference for prohibition and the tax department's concerns about compliance present significant challenges. The evolving landscape of digital assets necessitates a thoughtful and comprehensive approach to regulation that balances innovation with the imperative of safeguarding financial stability and ensuring tax compliance. The future of cryptocurrency regulation in India remains uncertain, yet it is clear that proactive measures will be essential to address the risks and harness the potential benefits of this dynamic asset class.
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