India’s RBI Renews Bitcoin Prohibition Push Affecting 39 Million Traders

Crypto News

India’s central bank has renewed its push to keep cryptocurrency outside the regulated financial system, reviving a prohibition-oriented stance that most directly affects Bitcoin (BTC) and other altcoin holdings. Internal government documents dated May and June recommend barring banks and financial institutions from holding, trading, or taking any exposure to crypto assets and privately issued stablecoins. The Reserve Bank of India (RBI) argues that isolation limits financial-contagion risk to domestic lenders. While Indian banks are technically permitted to engage with the sector, most major institutions have avoided it after years of cautionary signals, leaving the industry to operate in a persistent regulatory grey zone that neither legalises nor clearly governs digital-asset activity.

The RBI extended its warning to stablecoins, tokens pegged to fiat currencies whose stability mechanisms range from full reserves to code-based designs such as algorithmic stablecoins. Officials contend that foreign-currency-backed versions threaten India’s monetary sovereignty by displacing the rupee in settlement. Rupee-pegged tokens draw equal concern: the central bank says they could erode seigniorage — the revenue a government earns from issuing currency — and create stress points during periods of market turbulence. The documents also flag a fiscal angle, warning that broader stablecoin adoption would let users transact without converting to fiat, making crypto profits harder to detect and tax.

Tax authorities voiced parallel concern over widespread underreporting of gains. In the financial year ended March 2023, fewer than a quarter of the 645,000 individuals who transacted in crypto declared those gains on their tax returns. India currently levies a 30% tax on cryptocurrency profits and applies a 1% tax deducted at source on every trade — among the steepest regimes globally. The Income Tax Department argues the compliance gap undermines enforcement, linking weak reporting to the ease with which traders route activity beyond domestic oversight and defer or avoid declaration entirely, a pattern the documents describe as structurally difficult to close.

A second enforcement problem centres on traceability. The tax department singled out offshore exchanges, private self-custody wallets — the kind of infrastructure an AI crypto wallet now automates — and peer-to-peer trades, particularly those denominated in rupees, as channels that obscure beneficial ownership and frustrate transaction tracking. Because such flows often bypass regulated intermediaries entirely, authorities say identifying taxable income becomes difficult. Officials warned the same channels could also worsen capital outflows and widen India’s external deficit, framing crypto as a macroeconomic risk rather than merely a compliance nuisance and reinforcing the case for keeping the sector ring-fenced from banks.

The stance revives a battle the RBI lost in 2018, when it directed banks to sever ties with crypto businesses. India’s Supreme Court struck that directive down in 2020, and digital assets have occupied a legal grey zone ever since — neither outright illegal nor clearly regulated. A 2021 draft bill proposing a broad ban was never enacted. Internal documents show policymakers are still reviewing the country’s long-term framework, meaning the current prohibition lean remains a recommendation rather than law. The coming months will determine whether the government hardens that preference into statute or leaves the market suspended in the same ambiguity it has endured for years.

The friction is striking against the scale of domestic participation. Government figures count nearly 39 million crypto investors in India, a nation of roughly 1.5 billion people, holding an estimated $2.1 billion in digital assets as of the end of May. That footprint has expanded even as adoption globally accelerates through tokenization, corporate stablecoin projects, and sovereign reserve experiments — a divergence that leaves India increasingly isolated among major economies. For holders eyeing a fresh all-time high in assets like Bitcoin, the regulatory uncertainty caps how far mainstream financial rails can support their activity, pushing demand toward the very offshore venues officials want to curb.

Our reading is that India’s prohibition lean runs against the market’s own signals rather than with them. Global sentiment is already fragile: COINOTAG’s aggregate data shows a Fear & Greed Index at 20 of 100 — extreme fear — with Bitcoin dominance elevated at 69.6% as capital rotates out of riskier altcoins, and total crypto market capitalisation sitting near $1.79 trillion. In that risk-off backdrop, a hard regulatory line adds friction precisely where liquidity is already thinning. The unresolved variable is the one buried in the documents themselves — recommendation versus enacted law; until that settles, India’s 39 million holders remain in limbo.