The cryptocurrency policy of India remains uncertain, but internal sources from the government suggest that authorities continue to favor stricter control on digital assets. The Reserve Bank of India (RBI) has reiterated its stance toward a crypto policy ‘leaning toward prohibition’, according to documents reviewed by Reuters, and the Income Tax Department has expressed concerns around regulating transactions by ‘offshore exchanges’ and ‘private wallets’.
The RBI believes that banks and financial institutions should be barred from holding, trading, or gaining exposure to cryptocurrencies and privately issued stablecoins. The central bank is concerned about the potential effects of crypto-related exposures on the financial system. While there is no official ban on Indian banks transacting with crypto assets, most top lenders avoided the sector after various RBI alerts.
A source familiar with the RBI's thinking told Reuters that the central bank prefers keeping cryptocurrencies outside the regulated financial system. The source spoke on the condition of anonymity as they were not authorised to speak publicly.
Stablecoins continue to be a huge worry. Foreign currency-backed stablecoins may be a threat to monetary sovereignty; rupee-backed tokens will result in a loss of revenue for the government from issuing currency and will pose risks in periods of market stress, the RBI says.
The Income Tax Department has also warned that trading in cryptocurrencies by an overseas exchange is difficult to monitor. As of May 31, India's total cryptocurrency traders stood at around 39 million, holding around $2.1 billion in digital assets, according to the documents.
The department also found gaps in tax reporting. Less than 25% of the 645,000 people who made crypto transactions during the financial year that ended March 2023 reported them in their tax returns. Foreign exchanges, private wallets and peer-to-peer rupee trades make it difficult to identify beneficial owners and collect taxes.
Also Read: Can the Income Tax Department Track Bitcoin and Crypto Transactions in India?
India's current tax regime on crypto assets pegs the taxation rate at 30%, with volatility and the lack of uniformity in valuation making it difficult to assess. The Ministry of Corporate Affairs is also reviewing the accounting standards and guidance for virtual digital assets.
India has allowed cryptocurrencies to exist in a grey zone since a court in 2018 struck down Reserve Bank of India (RBI) policies that effectively banned them. A 2021 draft Bill to ban private cryptocurrencies was never introduced in Parliament, while a broader discussion paper has been repeatedly delayed.
New documents suggest the policy debate in India is moving from light to tighter restrictions, given that issues of financial stability, tax compliance and monetary sovereignty have not been addressed.