India Holds Back on Full Crypto Regulation, Citing Systemic Risks and UPI Impact: Report

India is opting for partial oversight instead of full legislation for cryptocurrencies by citing concerns that fully integrating digital assets into the mainstream financial system could create systemic risks.

RBI and Regulatory Challenges

Government documents seen by Reuters highlight that the Reserve Bank of India (RBI) considers regulating crypto risks difficult in practice. Providing full legitimacy to cryptocurrencies could make the sector systemic, while an outright ban may not prevent peer-to-peer transfers or trades on decentralised exchanges.

Globally, regulatory approaches are evolving. In U.S., the GENIUS Act has been passed to provide federal guidelines for stablecoins that allows broader use of these digital currencies pegged to fiat money to reduce volatility. While China is exploring a Yuan-backed stablecoin while maintaining its crypto ban, and Japan and Australia are cautiously developing regulatory frameworks.

Most stablecoins in circulation are backed by the U.S. dollar. The Indian government flagged in document that widespread adoption of dollar-backed stablecoins could affect domestic payment systems, including the Unified Payments Interface (UPI), and potentially weaken the efficiency of India’s digital payments ecosystem.

Current Status and Market Overview

A bill to ban private cryptocurrencies was proposed in India in 2021, but it was never put into effect. As G20 presidency in 2023, India called for a global cryptocurrency framework. Also, the government planned a discussion paper in 2024 to reassess its stance after the U.S. clarified its crypto regulation, but postponed it.

Presently, global crypto exchanges can operate in India after registering with the Financial Intelligence Unit – India (FIU-IND) and completing due diligence to mitigate money laundering risks. Gains earned from cryptocurrency transactions are subject to taxation under existing laws, with the aim of regulating the market and curbing speculative trading.

According to a report, Indian investors hold an estimated $4.5 billion in cryptocurrencies, which the government currently views as not posing a systemic risk. Along with current tax and legal measures, limited regulatory clarity has assisted in risk containment, discouraging speculative trading, and penalising fraud.

The documents stress that creating a uniform crypto policy is challenging due to varying global approaches. India’s current stance seeks to limit systematic risk by permitting partial engagement with the global crypto market.