The documents reveal a preference among key Indian agencies to use tighter curbs on virtual digital assets, even though the government has yet to adopt a policy to ban or regulate them.
India has allowed cryptocurrencies to exist in a grey zone since a court in 2018 struck down Reserve Bank of India (RBI) policies that effectively banned them.
A 2021 draft legislation to ban private cryptocurrencies was never introduced in Parliament, and a discussion paper on the matter has been deferred repeatedly. The government has delayed implementing a formal policy on virtual assets, saying any plan should balance innovation with risk management while protecting monetary sovereignty, financial stability and safeguarding against consumer losses.
In September in internal discussions, India’s finance ministry, after consultations with the RBI, backed limited regulatory clarity for virtual assets, arguing that existing tax and other laws had helped contain risks from the asset class, Reuters reported.
The latest documents signal that key authorities are concerned about growing risks to the country’s financial stability as cryptocurrencies continue to be traded without clear rules.
India’s finance ministry and the RBI did not respond to Reuters requests for comment. Cryptocurrencies have gained greater acceptance globally following policy changes in the U.S., where legislation backing broader use of stablecoins has fuelled expectations of wider adoption.
While countries like Japan and Singapore have moved to regulate cryptocurrencies, China has prohibited the use of such tokens.
Despite India’s policy ambiguity, the country has nearly 39 million crypto traders who held about $2.1 billion in digital assets at the end of May, according to estimates from the tax department.
‘Leaning towards prohibition’
The RBI, which has repeatedly warned about crypto-related risks, reasserted that policies “leaning towards prohibition” may be warranted.
It said banks and financial institutions should be barred from holding, trading or gaining exposure to crypto assets and privately issued stablecoins to limit contagion risks, documents from May and June showed.
At present, Indian banks are not prohibited from dealing in cryptocurrencies, but major lenders have avoided them following repeated warnings from the RBI.
The central bank’s inclination is towards prohibition to keep cryptocurrencies outside of the regulated financial system, a source familiar with the RBI’s thinking said, requesting anonymity as they were not authorised to speak to the media.
The RBI has warned against stablecoins as well.
While stablecoins backed by foreign currencies pose a threat to domestic sovereignty, rupee-backed tokens could reduce the government’s income from issuing its fiat currency and pose risks to financial stability during times of market stress, according to the RBI.
Allowing stablecoins could also make cryptocurrency gains more difficult to detect and tax by reducing the need to convert holdings into fiat currencies. India imposes taxes on gains made from cryptocurrencies at 30%.
Misreporting crypto gains
India’s tax department has found instances of misreporting of cryptocurrency holdings in disclosures filed under income tax laws, according to the documents.
The department’s findings showed that fewer than a quarter of the 645,000 individuals who made cryptocurrency transactions in the financial year that ended in March 2023 reported them on their tax returns.
Transactions routed through overseas exchanges and private wallets make it harder to identify beneficial owners and then recover taxes, while rupee-denominated, peer-to-peer trades make taxable income harder to track, the tax department said.
Global crypto exchanges like Binance and Coinbase can operate in India after registering with a government agency.
The tax department also warned that price volatility and the absence of uniform valuation standards complicated the assessment of crypto assets for tax purposes.
The documents showed that the Ministry of Corporate Affairs is examining accounting standards and other guidance for virtual digital assets.