RBI reiterates push for crypto 'prohibition', cites financial risks and tax evasion

The Reserve Bank of India (RBI) has reiterated its view that the country’s cryptocurrency policy should move towards a “prohibition” approach, while the income tax department has warned that crypto transactions conducted through offshore platforms are difficult to monitor and tax, according to government documents cited by Reuters.

The documents indicate that several key government agencies continue to favour stricter controls on virtual digital assets, even as India has not yet finalised a clear regulatory framework for cryptocurrencies. The government remains caught between concerns over financial risks and the need to support technological innovation.

Cryptocurrencies have operated in a regulatory grey area in India since 2018, when the Supreme Court overturned RBI restrictions that had effectively prevented banks from providing services to crypto businesses. Although a draft bill in 2021 proposed banning private cryptocurrencies, it was never introduced in Parliament, and subsequent discussions on crypto regulation have repeatedly been delayed.

The government has maintained that any cryptocurrency policy must strike a balance between encouraging innovation and managing risks related to monetary sovereignty, financial stability and consumer protection.

In internal discussions held in September, the Finance Ministry, after consultations with the RBI, supported providing limited regulatory clarity for virtual assets, arguing that existing taxation rules and other measures had helped reduce potential risks, Reuters reported.

However, the latest documents show that major authorities remain concerned about the impact of unregulated cryptocurrency activity on India’s financial system. The RBI has continued to highlight risks associated with digital assets and has suggested that banks and financial institutions should not be allowed to hold, trade or gain exposure to cryptocurrencies and privately issued stablecoins.

While Indian banks are not legally prohibited from engaging with cryptocurrencies, most major lenders have avoided direct involvement due to repeated warnings from the central bank.

The RBI has also raised concerns over stablecoins, warning that tokens linked to foreign currencies could challenge India’s monetary independence. It has also cautioned that rupee-backed stablecoins could reduce government revenue from issuing traditional currency and create financial stability risks during periods of market stress.

Another concern is taxation. The tax department said stablecoins and other digital assets could make it harder for authorities to identify cryptocurrency gains, as investors may not need to convert their holdings into traditional currencies. India currently taxes cryptocurrency profits at 30%.

According to estimates from the tax department, India had nearly 39 million cryptocurrency traders holding around $2.1 billion worth of digital assets by the end of May. However, authorities found significant gaps in tax reporting.

The department identified cases of inaccurate disclosures and noted that fewer than one-fourth of the 645,000 individuals who conducted cryptocurrency transactions during the financial year ending March 2023 reported them in their income tax filings.

The tax department said transactions through overseas exchanges, private wallets and peer-to-peer platforms make it difficult to identify beneficial owners and recover unpaid taxes.

It also pointed to challenges in valuing crypto assets due to price volatility and the absence of standard valuation methods.

Globally, cryptocurrency regulation has taken different paths. Countries such as Japan and Singapore have introduced regulatory frameworks, while China has banned the use of cryptocurrencies. In the United States, recent policy moves supporting broader stablecoin adoption have increased expectations of wider acceptance of digital assets.

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