India crypto regulation pivots to prohibition — with 39M investors at stake

India’s crypto regulation debate just got sharper. The Reserve Bank of India is pushing to bar banks and financial institutions from holding, trading, or gaining any exposure to crypto assets — a stance that puts one of the world’s largest crypto markets squarely at odds with its own central bank.

Key takeaways

• The RBI wants banks and financial institutions barred from all crypto asset exposure as part of a policy leaning toward prohibition.
• The central bank warns that privately issued stablecoins backed by foreign currencies threaten India’s monetary sovereignty, while rupee-backed stablecoins risk eroding government revenue and financial stability.
• Fewer than 25% of the roughly 645,000 individuals who conducted crypto transactions in the financial year ending March 2023 reported them on their tax returns.
• India’s tax department flags offshore exchanges, private wallets, and rupee-denominated peer-to-peer transactions as major obstacles to tax enforcement.
• Despite this regulatory hostility, India has nearly 39 million crypto investors holding approximately $2.1 billion in digital assets as of May 2026.

RBI’s Stance on Crypto Exposure in Financial Institutions

The Reserve Bank of India wants to keep crypto entirely outside the regulated financial system. According to government documents reviewed by Reuters, the RBI’s preferred position is a policy “leaning toward prohibition” — language that signals more than just caution.

The central bank’s view is clear: banks and financial institutions should be prohibited from holding, trading, or gaining exposure to crypto assets in any form. The goal is to build a hard wall between regulated finance and the crypto market, preventing any spillover that could threaten broader financial stability.

This isn’t a new position for the RBI. The bank has long maintained an anti-crypto posture, dating back to a 2018 banking ban that India’s Supreme Court later struck down. What the latest documents confirm is that the central bank has not softened its stance — even as governments and investment banks globally move toward embracing digital assets and blockchain technology.

The persistence of this position matters enormously for the Indian financial sector. If the RBI’s recommendation were to be formalized into law, it would effectively prevent any Indian bank from participating in crypto custody, trading desks, or even crypto-linked financial products — cutting off a potential revenue stream at a time when Western banks are increasingly exploring digital asset services.

Risks Highlighted by RBI Regarding Stablecoins

The RBI’s concerns go beyond standard crypto assets. The central bank has raised pointed warnings about stablecoins on two separate fronts.

Concerns Over Privately Issued Stablecoins Backed by Foreign Currencies

Privately issued stablecoins pegged to foreign currencies pose a direct risk to India’s monetary sovereignty, the RBI warned. The concern is straightforward: if Indian residents transact heavily in dollar-pegged stablecoins, it effectively dollarizes portions of the domestic economy, weakening the RBI’s grip on monetary policy and capital flows.

This anxiety is not purely theoretical. India runs persistent current account deficits and relies heavily on energy imports priced in dollars. Any mechanism that accelerates capital outflows or undermines rupee dominance in domestic transactions would compound an already fragile external position.

Risks from Rupee-Backed Stablecoins to Government Revenue and Financial Stability

Even stablecoins denominated in rupees don’t escape the RBI’s skepticism. The central bank warned that rupee-backed stablecoins could reduce seigniorage revenue — the profit the government earns from issuing physical currency — and introduce stress points during periods of market turbulence.

During a crisis, a rapid flight out of rupee-pegged stablecoins back into fiat could create liquidity pressures that the central bank would struggle to manage. This contagion risk is why the RBI opposes both foreign-currency and rupee-pegged stablecoin models.

Crypto Tax Compliance Challenges in India

Alongside the RBI’s institutional concerns, India’s tax department is confronting a compliance problem of significant scale.

Underreporting of Crypto Gains in Tax Returns

In the financial year ending March 2023, fewer than 25% of the approximately 645,000 individuals who conducted crypto transactions actually declared those gains on their tax returns. That means roughly three in four crypto traders in India effectively went undetected by tax authorities — a gap that translates into substantial lost revenue for the government.

The tax department also flagged instances of cryptocurrency holdings being misreported in income tax disclosures, suggesting the problem isn’t only about omission but also about deliberate understatement.

Difficulties in Tracking Taxable Income from Overseas Exchanges, Private Wallets, and Peer-to-Peer Transactions

Part of the compliance gap comes down to structural difficulties. Transactions routed through overseas exchanges and private wallets make it extremely hard to identify beneficial owners or recover unpaid taxes. The decentralized nature of blockchain, combined with the use of non-custodial wallets, allows users to move assets across borders with limited visibility for regulators.

Rupee-denominated peer-to-peer transactions add another layer of complexity. When two individuals trade crypto directly using rupees without a centralized exchange as intermediary, there is no obvious reporting entity that tax authorities can compel to share records. This gap in the audit trail is a direct consequence of the regulatory grey zone India’s crypto market has operated in since the Supreme Court struck down the RBI’s 2018 banking ban.

India’s Crypto Market Size and the Policy Contradiction

The scale of India’s crypto market makes the regulatory tension harder to ignore. The country had nearly 39 million crypto investors holding approximately $2.1 billion in digital assets as of May 2026, according to tax department estimates cited by Reuters. That puts India among the world’s largest crypto markets by user base — even if the per-capita holdings remain relatively modest compared to more crypto-friendly jurisdictions.

This is the central contradiction the Indian government faces. Millions of citizens are already invested in crypto assets. Pushing activity further underground through a hardline prohibition doesn’t eliminate demand — it shifts it toward the exact channels that make tax collection harder: offshore exchanges, private wallets, and peer-to-peer platforms. A framework that neither clearly legalizes nor definitively bans crypto has, in practice, already produced the compliance problem the tax department is now struggling to resolve.

India’s 2021 draft bill to ban private cryptocurrencies was never tabled in parliament, and policy discussions have been repeatedly delayed. The gap between the RBI’s institutional preferences and any actionable legislative outcome remains wide — and with nearly four decades of millions of investors already holding digital assets, bridging that gap just became considerably more complicated.

FAQ

What is the Reserve Bank of India’s policy on crypto assets for financial institutions?

The RBI seeks to bar banks and financial institutions from holding, trading, or gaining exposure to crypto assets, as part of measures designed to keep cryptocurrencies outside the regulated financial system.

What risks does the RBI associate with stablecoins?

The RBI warns that privately issued stablecoins backed by foreign currencies threaten India’s monetary sovereignty. It also cautions that rupee-backed stablecoins may reduce government seigniorage revenue and create financial stability risks during periods of market stress.

How compliant are crypto investors with tax reporting in India?

Fewer than 25% of the approximately 645,000 individuals who conducted crypto transactions in the financial year ending March 2023 reported those gains on their tax returns, according to India’s tax department.

Why is tracking crypto-related taxable income difficult in India?

Tracking is difficult because many transactions are conducted through overseas exchanges and private wallets that obscure beneficial ownership. Rupee-denominated peer-to-peer platforms further complicate enforcement by removing centralized intermediaries that tax authorities could otherwise compel to report transaction data.

Article produced with the assistance of artificial intelligence and reviewed by the editorial team.