India is leaning towards maintaining its existing limited regulatory model rather than enacting comprehensive cryptocurrency legislation, a government document shows, citing concerns that digital assets could pose systemic risks to the financial system.
According to media reports on the 10th, a new government document, citing recent comments from the Reserve Bank of India, stated that regulating cryptocurrencies "will be difficult to effectively contain risks," and that their integration into the mainstream financial system could exacerbate systemic concerns. This policy shift will have a direct impact on both domestic and international investors, as well as India's rapidly growing digital payments ecosystem. This marks the first time the Indian government has officially expressed its views on the issue.
The aforementioned government document states that regulating cryptocurrencies would grant them "legitimate status," leading to the industry becoming "systemic." Meanwhile, while a blanket ban could curb high-risk speculation, it would be difficult to combat peer-to-peer (P2P) trading and decentralized exchanges. The Reserve Bank of India has also repeatedly stated that crypto assets pose financial stability risks.
Currently, India allows global cryptocurrency exchanges to operate after registering locally, but it discourages speculative trading through high taxes. Market data shows that Indian residents' investment in crypto assets has reached $4.5 billion, but the impact on financial stability appears to be limited. India's cautious approach, which differs significantly from the regulatory models of many other countries, is expected to remain the same in the short term.
The regulatory dilemma: balancing legalization with loss of control
The Indian government's core concern is that formulating detailed regulations for cryptocurrencies will inadvertently endorse them, thereby attracting more capital inflows and ultimately threatening the stability of the entire financial system. The document warns that once the scale of crypto assets becomes systemically important, any potential risks will be magnified.
In contrast, the other extreme option—an outright ban—is also considered to have significant flaws. The document analyzes that while a ban could address the "egregious" risks posed by highly speculative crypto assets, it would be ineffective against peer-to-peer transfers and decentralized finance activities that are not centrally controlled.
Therefore, India appears to have chosen a middle path. The document states that the current limited regulatory clarity helps manage the risks of cryptocurrencies to the regulated financial system. Meanwhile, existing tax and other laws serve as a deterrent to speculative trading and penalize fraudulent and illegal activity. Currently, India holds approximately $4.5 billion in investments in various cryptocurrencies, which do not pose a significant or systemic risk to financial stability.
Potential impact of stablecoins: concerns about the payment system
The recent breakthrough in the United States regarding stablecoin regulation is a key external factor prompting India to conduct a careful assessment. On July 18, President Trump signed the GENIUS Act, which sets federal rules and guidelines for crypto tokens pegged to the US dollar (i.e., stablecoins).
In this regard, the Indian government document pointed out that the United States' promotion of dollar-backed stablecoins and their use as a payment tool will have a profound impact on developed and emerging economies. Given that most stablecoins in circulation globally are pegged to the US dollar, the Indian government believes that this needs to be "closely reviewed."
The document further expresses concerns about the potential impact of stablecoins on the country's payment system. While stablecoins are designed to maintain price stability, they can still experience volatility due to market shocks or liquidity constraints, impacting financial markets. More importantly, widespread stablecoin use could fragment national payment systems like fast interbank transfers and undermine India's vaunted Unified Payments Interface (UPI) system.
Global divisions and India's cautious approach
India's current stance comes amidst a significant divergence in the global regulatory path for cryptocurrencies. The document notes that due to differing regulatory approaches across countries, "charting a clear path forward or defining a unified policy approach is not an easy task."
For example, the United States is moving towards regulation, while Japan and Australia are developing regulatory frameworks but remain cautious and are not actively promoting the development of the industry.
Looking back at India's policy trajectory, its stance has evolved. In 2021, the government prepared a bill aimed at banning private cryptocurrencies, but did not proceed. During its 2023 G20 presidency, India called for the establishment of a global regulatory framework for digital assets. By 2024, the government had planned to release a discussion paper on its stance on cryptocurrencies, but later postponed it, stating that it would reassess the matter after the United States formalized its cryptocurrency policy.
Currently, global cryptocurrency exchanges can operate in India after registering with a government agency responsible for anti-money laundering risk due diligence. In the future, as the international stablecoin regulatory system takes shape and national industrial policies evolve, India may further review and adjust its position.
