RBI, Tax Department Push for Tighter Crypto Curbs Amid Policy Delay

The RBI has reasserted its call for a cryptocurrency policy that leans towards prohibition, while the country's tax department has flagged that trading through offshore exchanges is difficult to track, according to government documents reviewed by news agency Reuters.

The documents show that key Indian agencies favour tighter curbs on virtual digital assets, even though the government has not yet adopted a formal policy to ban or regulate them.

India has allowed cryptocurrencies to exist in a grey zone since 2018, when a court struck down RBI policies that had effectively banned them. A draft law to ban private cryptocurrencies, prepared in 2021, was never introduced in Parliament and a related discussion paper has been deferred repeatedly.

The government has said any policy on virtual assets should balance innovation with risk management, while protecting monetary sovereignty, financial stability, and consumer interests and has delayed finalising such a policy on these grounds.

The finance ministry, in internal discussions held in September and after consultations with the RBI, backed limited regulatory clarity for virtual assets, according to Reuters. The ministry argued that existing tax and other laws had helped contain risks from the asset class.

The documents reviewed by the news agency suggest that authorities remain concerned about growing risks to the country's financial stability, as cryptocurrencies continue to be traded without clear rules.

Cryptocurrencies have gained wider acceptance globally following recent policy changes in the United States, where legislation supporting broader use of stablecoins has raised expectations of increased adoption. Countries such as Japan and Singapore have moved to regulate cryptocurrencies, while China has banned their use altogether.

Despite the policy uncertainty in India, the country has close to 39 million crypto traders, who together held about $2.1 billion in digital assets at the end of May, according to the report.

RBI's Stance on Banks and Stablecoins

The RBI has repeatedly flagged risks associated with cryptocurrencies and reiterated that a policy leaning towards prohibition may be necessary. According to documents from May and June, the apex bank said lenders and financial institutions should be barred from holding, trading, or gaining exposure to crypto assets and privately issued stablecoins, in order to limit contagion risks.

Currently, Indian banks are not formally barred from dealing in cryptocurrencies, but major lenders have largely stayed away from them following repeated warnings from the central bank. Notably, RBI's inclination is to keep cryptocurrencies outside the regulated financial system, as per the report.

The RBI has also raised concerns about stablecoins. It said stablecoins backed by foreign currencies pose a threat to domestic monetary sovereignty, while rupee-backed tokens could lower the government's income from issuing its own currency and create risks to financial stability during periods of market stress. The central bank added that allowing stablecoins could also make crypto gains harder to detect and tax, since they would reduce the need to convert holdings into fiat currency. India currently taxes gains from cryptocurrencies at 30%.

India's tax department has found instances of misreporting of cryptocurrency holdings in income tax filings, the documents reviewed by Reuters showed. Its findings revealed that fewer than a quarter of the 645,000 individuals who carried out cryptocurrency transactions in the financial year ended March 2023 reported these transactions in their tax returns.

The department said that transactions routed through overseas exchanges and private wallets make it difficult to identify beneficial owners and recover taxes, while rupee-denominated, peer-to-peer trades make taxable income harder to track. Global exchanges such as Binance and Coinbase are allowed to operate in India after registering with a government agency.

The tax department further noted that price volatility and the lack of uniform valuation standards make it difficult to assess crypto assets for tax purposes. The documents reportedly also showed that the Ministry of Corporate Affairs is currently examining accounting standards and other guidance for virtual digital assets.