India rejects new crypto legislation over fears of systemic risk

India has abandoned its plans to regulate cryptocurrencies, opting to maintain a stance of distant observation of the sector.

According to Reuters, a government document drafted this month reveals that officials fear that regulating cryptocurrencies would grant them legitimacy, which could eventually turn them into a threat to the country's financial system.

The Reserve Bank of India, led by Governor Shaktikanta Das, made it clear that trying to control cryptocurrencies through regulations would be complicated and risky.

The document directly states that legalizing cryptocurrencies would introduce them into India's conventional financial space. This, they argue, would allow the market to grow too quickly.

“It could cause the sector to become systemic,” the document states. But completely banning cryptocurrencies would not stop peer-to-peer transfers or trading on decentralized platforms either. So instead of pushing new legislation, the government has decided to wait… for now.

Government delays decisions as banks freeze access

India has previously attempted to attack cryptocurrencies. In 2021, the government prepared a bill to ban private coins, but it never progressed. During its G20 presidency in 2023, officials pushed for a global framework.

In 2024, they promised a public document to explain India's position, but they postponed it. What's the new plan? Wait and see what the United States does first.

Meanwhile, foreign exchanges can operate in India if they register locally and pass due diligence checks to comply with anti-money laundering laws.

But the taxes are brutal. The government imposes high penalties on any crypto profit. These tax policies, along with the lack of legal clarity, have almost completely paralyzed trade between traditional banks and crypto companies.

The Reserve Bank continues to warn about the dangers. This has led to an almost total freezing of any formal financial link between the crypto industry and the regular banking system. Still, Indians have invested over $4.5 billion in cryptocurrencies.

For now, officials do not believe that this level of exposure is sufficient to destabilize the economy.

Stablecoins raise new concerns as the U.S. sets rules

The document notes that current fiscal rules and limited legal clarity are helping. They make speculative trading less attractive and prevent fraud. It also adds that with different countries doing different things, creating a clear policy will not be easy.

President Donald Trump signed the GENIUS Act on July 18, allowing for a broader use of stablecoins. The Indian government warns that this change could affect both advanced and developing countries.

Most stablecoins are pegged to the dollar. The document warns that this could disrupt the payment systems of other countries. It also points out that even supposedly “stable” coins can fluctuate when markets experience liquidity crises.

Indian officials fear that the proliferation of stablecoins could interfere with national systems like UPI, which handles instant digital payments between Indian banks. “The widespread use of stablecoins could fragment national payment systems,” the document states.