India central bank seeks to bar financial institutions from exposure to crypto assets: Reuters

India's central bank has reasserted its support for a crypto policy "leaning towards prohibition," while tax officials have raised concerns about monitoring digital asset transactions and enforcing tax compliance, according to government documents reviewed by Reuters.

The Reserve Bank of India said banks and financial institutions should be barred from holding, trading, or gaining exposure to crypto assets as part of measures to keep cryptocurrencies outside the regulated financial system, Reuters reported on Wednesday.

The RBI has also raised concerns over stablecoins, warning that privately issued stablecoins backed by foreign currencies could pose risks to domestic monetary sovereignty. The central bank said rupee-backed stablecoins could reduce government revenue from issuing fiat currency and create financial stability risks during periods of market stress.

The documents also showed India’s tax department identified instances of cryptocurrency holdings being misreported in income tax disclosures. 

The department found that fewer than a quarter of the 645,000 individuals who conducted crypto transactions in the financial year ending March 2023 reported them on their tax returns.

According to the tax department, transactions routed through overseas exchanges and private wallets make it harder to identify beneficial owners and recover taxes, while rupee-denominated peer-to-peer transactions make taxable crypto income more difficult to track.

Despite the policy uncertainty, India remains one of the largest crypto markets by user base. The country had nearly 39 million crypto investors holding about $2.1 billion in digital assets at the end of May, per tax department estimates cited by Reuters.