India’s central bank has renewed its push for a policy that would move the country closer to prohibiting cryptocurrencies from the regulated financial system, seeking to bar banks and financial institutions from holding, trading, or gaining exposure to digital assets, according to government documents reviewed by Reuters.
The Reserve Bank of India has presented the proposal as part of a broader effort to ring-fence the banking system from cryptocurrencies, which it continues to view as a risk to monetary stability, financial oversight, and the ability of authorities to manage capital flows. The recommendation does not appear to make individual ownership of digital assets illegal, but it would significantly limit the ability of regulated financial entities to participate in or support crypto-related activity.
The central bank also raised fresh concerns about stablecoins, particularly privately issued tokens backed by foreign currencies. The RBI warned that such assets could threaten India’s monetary sovereignty by increasing reliance on non-rupee instruments for payments, savings, and cross-border transfers. It also cautioned that rupee-linked private stablecoins could reduce the government’s revenue from issuing sovereign currency and create instability during periods of market stress.
The documents point to a hardening official stance at a time when India remains one of the world’s largest cryptocurrency markets despite years of regulatory uncertainty, strict taxation, and enforcement pressure. Government data cited by Reuters showed that as of May 2026, around 39 million residents collectively held about $2.1 billion worth of digital assets.
The RBI’s proposed ring-fence
The RBI’s latest position was set out in recent submissions before the Parliamentary Standing Committee on Finance by Deputy Governor Rohit Jain and Executive Director P. Vasudevan. The central bank recommended that banks and other regulated financial institutions be barred from holding cryptocurrencies or having any exposure to them.
The approach is best understood as a ring-fencing strategy. Rather than focusing only on individual trading activity, the RBI wants to prevent crypto-related risks from entering India’s formal financial system through banks, lenders, payment firms, or other regulated institutions.
For the central bank, the concern is not just price volatility. It has repeatedly argued that privately issued digital assets can weaken monetary control, complicate enforcement, enable unregulated capital movement, and expose the wider economy to sudden shocks. By keeping regulated financial institutions outside the sector, the RBI believes it can reduce the risk that distress in crypto markets spills into the banking system.
Such a policy would mark a significant tightening from India’s current position. At present, cryptocurrency ownership and trading are not illegal. However, the sector operates without a full legal framework and is governed largely through taxation, reporting rules, anti-money laundering obligations, and enforcement actions.
That has created an unusual policy environment. Traders can buy, sell, and hold digital assets, but the rules remain restrictive and uncertain. The government taxes the activity heavily, while the central bank continues to argue that cryptocurrencies should not be integrated into the regulated financial system.
Stablecoins draw sharper scrutiny
The RBI’s warnings on stablecoins are particularly important because these assets are increasingly used worldwide for trading, settlement, savings, and cross-border transfers. Stablecoins are designed to maintain a steady value, usually by being pegged to a fiat currency such as the U.S. dollar.
The central bank’s concern is that foreign currency-backed stablecoins could become informal payment or remittance instruments inside India, reducing the role of the rupee and weakening domestic monetary control. If residents or businesses increasingly rely on dollar-linked tokens, the RBI may find it harder to manage liquidity, exchange-rate pressures, and capital flows.
The documents also show that the RBI is wary of rupee-linked private stablecoins. At first glance, a token pegged to the rupee might appear less threatening than a dollar-backed stablecoin. But the central bank warned that privately issued rupee stablecoins could still affect the state’s ability to benefit from issuing currency, a revenue source known as seigniorage.
The RBI also raised concerns that such tokens could become fragile during periods of financial stress. If users rush to redeem a privately issued stablecoin, the issuer may face liquidity pressure, and confidence in the token could fall quickly. The central bank appears to view this as an unnecessary risk, especially when India is already developing and testing its own central bank digital currency.
That position creates uncertainty for planned rupee-pegged stablecoin projects, including ARC, a proposed token developed with Polygon Labs and Anq Finance that had been expected to launch in early 2026. The project was designed to operate as a regulated rupee-linked asset and provide a domestic alternative to foreign stablecoins. But the RBI’s current policy direction makes the near-term outlook for such products unclear.
Tax data shows widespread underreporting
The documents reviewed by Reuters also show that India’s tax authority found widespread underreporting of cryptocurrency activity during the financial year that ended in March 2023.
According to the documents, fewer than 25% of the 645,000 individuals identified as having engaged in digital asset trading disclosed those transactions in their tax returns. That finding has strengthened the case among policymakers who argue that the sector is difficult to monitor and vulnerable to tax avoidance.
Officials said the use of overseas platforms and private wallets makes it harder to identify beneficial owners and recover taxes. When crypto activity moves outside domestic reporting channels, authorities have fewer tools to track trades, link wallets to individuals, and determine taxable income.
Peer-to-peer transactions using rupees have also complicated enforcement. These trades can occur directly between individuals without passing through a regulated domestic platform, making it more difficult for tax officials to monitor gains, verify transaction values, or detect underreporting.
The tax authority’s findings are likely to influence the wider policy debate. While the RBI’s main objections focus on monetary and financial stability, the tax department’s concerns highlight compliance gaps. Together, they create pressure for a stricter regulatory posture.
Taxation remains the main framework
India has not enacted a comprehensive cryptocurrency law, even though it has introduced a strict tax system for what it calls virtual digital assets, or VDAs.
Under existing rules, gains from digital assets are taxed at a flat rate of 30%. A 1% tax deducted at source applies to transactions. Losses cannot be offset against gains from other digital assets or other income. This structure is among the most stringent in major markets and has changed trading behavior significantly.
The government’s approach has often been described as regulation through taxation. By taxing the activity, authorities acknowledge that digital asset trading exists, but they have not granted cryptocurrencies the status of legal tender or placed them under a specialized licensing regime.
For traders, the result is a difficult operating environment. They face high tax costs, limited flexibility in offsetting losses, and growing reporting obligations, while the long-term legal status of the sector remains uncertain.
The compliance burden is now increasing further. For the tax season that began on April 1, 2026, authorities require every digital asset transaction to be reported in the newly introduced Schedule VDA of the income tax return. This includes trades, conversions, disposals, and other transfers.
That marks a major shift from reporting only summarized gains. Traders must now maintain detailed records of individual transactions, including dates, values, acquisition costs, sale prices, tax deducted, and gains or losses. Tax authorities are expected to cross-check these filings against information collected from domestic platforms to identify mismatches.
For casual traders, this creates a substantial record-keeping challenge. For high-frequency traders, the challenge may be even greater because a large number of small transactions must be reported accurately.
Enforcement focus expands beyond taxes
The government’s scrutiny is not limited to income tax compliance. Enforcement agencies have also become more active in examining cross-border fund flows involving digital assets, especially stablecoins.
In June, the Enforcement Directorate launched an investigation into several Bengaluru-based firms for alleged violations of the Foreign Exchange Management Act. The probe centers on the alleged unauthorized movement of more than ₹2,500 crore, or about $300 million, using stablecoins to avoid RBI-approved remittance channels.
Authorities froze bank assets as part of the investigation, signaling a tougher approach toward crypto-linked foreign exchange violations. The case is important because it reflects one of the RBI’s central concerns: that digital assets can be used to bypass established controls on international transfers.
India maintains a regulated system for foreign exchange transactions, including limits and documentation requirements for remittances. If stablecoins are used to move funds outside those channels, authorities may view them as a direct challenge to the country’s capital control framework.
The case also illustrates why stablecoins receive special attention from regulators. Unlike more volatile cryptocurrencies, stablecoins can be attractive for moving value because their prices are designed to remain relatively steady. That usefulness in payments and transfers is precisely what makes them a regulatory concern.
A large market despite uncertainty
India’s cryptocurrency market remains large even under strict taxation and uncertain rules. The government data cited by Reuters, showing 39 million residents holding about $2.1 billion in digital assets as of May 2026, indicates that interest in the sector has not disappeared.
The numbers also highlight the challenge facing policymakers. A full prohibition on regulated financial involvement may reduce systemic risk from the RBI’s perspective, but it may not eliminate trading activity. Instead, activity could continue through offshore platforms, private wallets, and peer-to-peer networks, which are harder for authorities to supervise.
That tension has shaped India’s crypto policy for years. The central bank has pushed for strong restrictions, while other parts of the government have used taxation, reporting, and enforcement to bring the sector under closer observation. The result has been a policy mix that discourages activity without fully banning it.
Domestic industry groups have argued that excessive restrictions can drive activity offshore and reduce transparency. Professional bodies including the Institute of Chartered Accountants of India have supported the idea of a comprehensive VDA law that would improve oversight while allowing responsible innovation. The RBI, however, remains firmly opposed to integrating private cryptocurrencies into the formal financial system.
Parliament report may shape the next phase
Attention now turns to the Parliamentary Standing Committee on Finance, which is expected to table a comprehensive report on virtual digital assets during the upcoming Monsoon Session of Parliament.
The report follows months of consultations with government officials, regulators, professional bodies, and market stakeholders. It is expected to become a key reference point for the next stage of India’s cryptocurrency policy.
The committee faces a difficult task. It must weigh the RBI’s warnings about financial stability, monetary sovereignty, and capital flows against arguments that a clear legal framework could improve compliance, protect traders, and reduce the movement of activity to offshore or informal channels.
A strict ring-fencing policy would satisfy the RBI’s demand to keep banks and regulated institutions away from digital assets. But it may leave unresolved questions about taxation, consumer protection, enforcement, and the treatment of stablecoins. A broader law could address those issues, though it would require the government to define which digital asset activities are permitted, which are restricted, and which are prohibited.
For now, the direction of policy appears increasingly restrictive. The central bank’s latest submissions make clear that it does not want cryptocurrencies or private stablecoins to become part of India’s regulated financial architecture. Tax authorities are tightening reporting rules. Enforcement agencies are scrutinizing cross-border flows. Parliament is preparing to weigh formal recommendations.
For India’s crypto traders, the message is clear: the sector may remain accessible, but it is becoming more closely monitored, more heavily taxed, and more difficult to operate in without detailed compliance.
Amid India’s tightening rules, learn how stablecoins shape Asia’s crypto ecosystem and influence regional monetary dynamics.
Disclaimer: The content on this page is provided for general informational purposes only and does not represent the views or financial advice of Toobit. We make no guarantees regarding the accuracy or completeness of this information and shall not be held liable for any errors, omissions, or outcomes resulting from its use. Investing in digital assets involves risk; users should independently evaluate their financial situation and the risks involved. For further details, please consult our Terms of Service and Risk Disclosure.
