Media365
India’s central bank has renewed its call for a policy that leans towards banning cryptocurrencies, while the country’s tax authorities have warned that digital asset trading through offshore exchanges is making tax compliance increasingly difficult, Reuters reported on Wednesday, citing internal government documents.
According to the report, the documents suggest that key government agencies are favouring tighter restrictions on virtual digital assets, signalling a shift from earlier discussions that focused on providing limited regulatory clarity. The tougher stance comes even as the Centre has yet to introduce a comprehensive law governing cryptocurrencies.
The Reserve Bank of India (RBI), which has consistently cautioned against cryptocurrencies, has reiterated that India’s policy should be “leaning towards prohibition” to keep digital assets outside the regulated financial system, Reuters reported.
The central bank has recommended that banks and other regulated financial institutions be barred from holding, trading or gaining exposure to cryptocurrencies and privately issued stablecoins to minimise financial contagion risks, according to documents dated May and June reviewed by the news agency.
While Indian banks are not formally prohibited from dealing with cryptocurrencies, most lenders have avoided the sector following repeated warnings from the RBI.
The RBI continues to favour prohibition as the most effective way to shield the country’s regulated financial system from risks associated with crypto assets, the report said.
Government yet to finalise crypto policy
India has maintained an ambiguous regulatory approach towards cryptocurrencies since the Supreme Court in 2020 struck down an RBI circular that had effectively prevented banks from providing services to crypto businesses.
A draft Bill proposing a ban on private cryptocurrencies, prepared in 2021, was never introduced in Parliament. Likewise, a discussion paper outlining the government’s broader policy on virtual digital assets has been delayed several times.
The government has repeatedly said that any framework for cryptocurrencies must balance innovation with safeguards for financial stability, consumer protection and India’s monetary sovereignty.
However, the latest documents reviewed by Reuters indicate that concerns over financial stability and regulatory oversight are gaining greater prominence within policymaking circles.
India currently has nearly 39 million cryptocurrency investors holding digital assets worth an estimated $2.1 billion as of the end of May, according to estimates prepared by the Income Tax Department.
Stablecoins also under scrutiny
The RBI has also expressed fresh concerns about stablecoins, arguing that tokens backed by foreign currencies could undermine India’s monetary sovereignty.
Even rupee-backed stablecoins could pose risks, the central bank believes, by reducing the government’s income from issuing sovereign currency and creating financial stability concerns during periods of market stress.
According to the report, the RBI also warned that widespread use of stablecoins could make cryptocurrency gains harder to detect and tax because investors would have less need to convert their digital assets into traditional currencies.
India currently levies a 30 per cent tax on gains from virtual digital assets.
Tax department flags under-reporting
Separately, the Income Tax Department has highlighted significant gaps in the reporting of cryptocurrency transactions.
According to the documents reviewed by Reuters, fewer than one-fourth of the roughly 645,000 individuals who carried out cryptocurrency transactions during the financial year ended March 2023 disclosed those transactions in their income tax returns.
The department warned that transactions routed through overseas exchanges and private wallets make it difficult to identify beneficial owners and recover taxes.
It also pointed to challenges arising from peer-to-peer transactions conducted in rupees, which can make taxable income harder to trace.
The tax department further noted that the absence of uniform valuation standards and the sharp price volatility of cryptocurrencies complicate the assessment of digital assets for taxation purposes.
Global cryptocurrency exchanges such as Binance and Coinbase are currently allowed to operate in India after registering with the country’s financial intelligence authorities.
Industry welcomes distinction between crypto and tokenisation
The RBI’s renewed stance has drawn reactions from the crypto industry, which has welcomed indications that policymakers are distinguishing between speculative cryptocurrencies and the tokenisation of real-world assets (RWAs).
Edul Patel, CEO of crypto investment platform Mudrex, said it was encouraging that the RBI had reinforced the distinction between speculative crypto assets and RWA tokenisation before the Parliamentary Standing Committee on Finance.
“That distinction is important because it ensures innovation in the tokenisation of regulated financial assets is not inadvertently constrained by broader crypto policy,” Patel said.
He added that tokenisation has the potential to modernise capital markets and improve efficiency without necessarily creating the same policy concerns associated with privately issued cryptocurrencies.
“As with existing financial markets, the private sector has an important role to play in building the infrastructure and products that will unlock the full potential of RWA tokenisation, within an appropriate regulatory framework,” Patel said.
Welcoming the government’s consultative approach, Patel said engaging regulators, industry participants and other stakeholders before finalising a framework would help create a more balanced digital asset ecosystem.
“India has the opportunity to develop differentiated policy frameworks ensuring that while we structurally address investor protection and macroeconomic safeguards, we do not close the door on India’s private sector leading global blockchain innovation,” he said.
Shift from earlier policy thinking
The latest developments appear to mark a shift from discussions held within the Finance Ministry last year.
Reuters had reported in September that, following consultations with the RBI, the ministry favoured providing limited regulatory clarity for virtual digital assets, arguing that existing tax provisions and enforcement measures had helped contain risks associated with cryptocurrencies.
The newly reviewed documents, however, indicate that government agencies are increasingly concerned about the continued growth of cryptocurrency trading without a dedicated regulatory framework.
The Ministry of Corporate Affairs is also examining accounting standards and other reporting guidance for virtual digital assets, according to the documents.
The renewed push for tighter restrictions comes at a time when cryptocurrencies are gaining wider acceptance in several major economies following policy changes in the United States. While countries such as Japan and Singapore have opted to regulate digital assets, China continues to prohibit cryptocurrency transactions.
