India’s central bank has renewed calls for a cryptocurrency policy that favours prohibition, while tax authorities have warned that offshore crypto trading is making compliance and enforcement increasingly difficult, according to government documents reviewed by Reuters.
The tougher stance comes even as India has become one of the world’s largest cryptocurrency markets, with an estimated 39 million investors holding digital assets worth around $2.1 billion.
The Reserve Bank of India (RBI) has once again raised concerns about the risks associated with cryptocurrencies, arguing that a policy leaning towards prohibition may be necessary to protect the financial system.
Internal government documents dated May and June show that the central bank wants banks and financial institutions barred from holding, trading or gaining exposure to cryptocurrencies and privately issued stablecoins.
The RBI believes stronger links between digital assets and the regulated financial sector could increase the risk of financial contagion and threaten stability during periods of market stress.
Although there is currently no formal ban preventing Indian banks from dealing with cryptocurrencies, most major lenders have largely stayed away from the sector following repeated warnings from the central bank.
The position represents a shift from earlier discussions within the finance ministry, which had considered providing limited regulatory clarity for virtual digital assets instead of imposing stricter restrictions.
India’s cryptocurrency sector has operated without a dedicated regulatory framework since 2018, when the Supreme Court struck down RBI measures that had effectively restricted banking services for crypto businesses.
A draft bill proposed in 2021 that sought to ban private cryptocurrencies was never introduced in Parliament, while a long-awaited consultation paper on digital asset regulation has been postponed several times.
Successive governments have said any future policy must balance innovation with the need to safeguard financial stability, monetary sovereignty and consumer interests.
However, the latest documents suggest regulators are becoming increasingly concerned that existing safeguards may not be enough as crypto adoption continues to expand.
India’s tax department has also raised concerns over cryptocurrency tax compliance, pointing to widespread underreporting among investors.
Government data shows that fewer than one in four of the 645,000 individuals who carried out cryptocurrency transactions during the financial year ending March 2023 disclosed those activities in their income tax returns.
Officials say transactions conducted through offshore exchanges and private wallets make it more difficult to identify beneficial owners and recover unpaid taxes.
The findings come as tax authorities increase scrutiny of crypto investors, including issuing notices to taxpayers whose reported income does not match transaction data obtained from exchanges.
India currently levies a 30 per cent tax on cryptocurrency gains, alongside a 1 per cent tax deducted at source (TDS) on transactions.
Regulators are paying particular attention to offshore cryptocurrency exchanges, which they believe can make monitoring and enforcement more challenging.
While global platforms such as Binance and Coinbase are permitted to operate in India after registering with the relevant authorities, officials remain concerned about the transparency of transactions routed through overseas entities.
According to tax authorities, offshore trading structures make it harder to track taxable income, monitor compliance and detect suspicious activity.
The concerns echo discussions held by the Parliamentary Standing Committee on Finance, where government officials reportedly classified the virtual digital asset sector as “high risk” because of potential links to money laundering, cybercrime, human trafficking, drug networks and other illegal activities.
The central bank has also stepped up its criticism of stablecoins, warning that both foreign currency-backed and rupee-backed versions could create economic risks.
The RBI argues that stablecoins tied to foreign currencies could weaken India’s monetary sovereignty by encouraging the use of privately issued alternatives to the rupee.
At the same time, rupee-backed stablecoins could reduce revenue generated through sovereign currency issuance and potentially create additional risks during periods of financial stress.
Officials have also warned that wider stablecoin adoption could make cryptocurrency gains harder to track and tax by reducing the need for investors to convert digital assets into traditional currencies.
The increasingly cautious approach towards cryptocurrencies follows a recent ruling by the Orissa High Court, which made clear that the legality of crypto trading does not protect individuals accused of defrauding investors.
The court declined to quash proceedings in a case involving an alleged cryptocurrency investment scheme that reportedly collected more than ₹5 crore ($523,500) from investors through a digital asset project.
The ruling reinforced the view that while cryptocurrency trading itself may not be illegal, it cannot be used as a cover for fraudulent activity.
As policymakers consider the future of cryptocurrency regulation, India continues to examine how other countries have approached the sector.
Nations such as Japan and Singapore have introduced regulatory frameworks for digital assets, while China has adopted a much stricter approach and largely prohibited cryptocurrency activity.
Meanwhile, policy developments in the United States have encouraged wider acceptance of digital assets and stablecoins, prompting expectations of broader global adoption.
India has yet to settle on a definitive regulatory model. However, recent signals from both the RBI and tax authorities suggest the government may be leaning towards tighter controls rather than a comprehensive regulatory framework for the industry.
