RBI seeks ban on banks’ crypto exposure

The Reserve Bank of India recommended that banks and regulated financial firms be barred from holding, trading or gaining exposure to crypto assets and flagged risks from privately issued stablecoins to India's monetary sovereignty, according to government documents.

The central bank argued that allowing regulated firms to provide crypto services would create channels of exposure that could affect financial stability and the transmission of monetary policy. It warned that stablecoins backed by foreign currency could undermine domestic monetary policy, while rupee-backed stablecoins could reduce government revenue from issuing cash and raise risks during periods of market stress.

The documents say measures are needed to keep cryptocurrencies outside the regulated financial system and recommend limiting interactions between banks and digital-asset markets.

India’s tax department reviewed transaction data for the year ending March 2023 and found fewer than a quarter of about 645,000 people who engaged in crypto transactions had reported them on income tax returns. The department noted that transactions routed through overseas exchanges and private wallets make it harder to identify beneficial owners and to collect taxes, and that rupee-denominated peer-to-peer trades complicate detection of taxable crypto income.

Tax officials recorded instances of misreported holdings and urged stronger information sharing and improved tracing technology to increase compliance. The papers identify enforcement challenges, saying cross-border exchange use and non-custodial wallets reduce transparency, while peer-to-peer payments in local currency can bypass traditional banking trails.

Government material cited an estimate of nearly 39 million crypto investors in India holding about $2.1 billion in digital assets at the end of May, underlining the scale of activity regulators and tax authorities aim to address.

Policy papers show officials are considering options ranging from tighter regulation to an outright ban. The Reserve Bank recommended measures to keep crypto activity outside entities subject to banking regulation and consumer protection frameworks, and called for enhanced monitoring tools, greater information sharing and improved technical capabilities to trace transactions and identify owners when exchanges operate abroad or users hold assets in private wallets.