India backs off crypto legislation, cites fear of systemic risk

India has dropped plans to pass any law to regulate crypto, choosing instead to keep watching the sector from a distance.

According to Reuters, a government document drafted this month says officials are afraid that regulating crypto would give it legitimacy, and that move could eventually make it 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 crypto through rules would be hard and risky.

The paper says flat out that making crypto legal would bring it into India’s mainstream financial space. That, they argue, could allow the market to grow too large and too fast.

“It may cause the sector to become systemic,” the document said. But banning crypto entirely won’t stop peer-to-peer transfers or trading on decentralized platforms either. So instead of pushing new legislation, the government has decided to sit tight… for now.

Government delays policy decisions while banks freeze access

India already tried to go after crypto once. Back in 2021, the government put together a bill to ban private coins, but it never moved forward. During the country’s G20 presidency in 2023, officials pushed for a global framework.

Then in 2024, they promised a public paper to explain India’s position on the matter, but later delayed it. The new plan? Wait and see what the U.S. does with crypto first.

Meanwhile, foreign crypto exchanges are still allowed to operate in India. They just need to register locally and go through due diligence checks to make sure money laundering laws are followed.

But taxes are brutal. The government imposes high penalties on any profits from crypto. Those tax policies, plus the lack of legal clarity, have nearly shut down trading between traditional banks and crypto companies.

The Reserve Bank keeps warning the public about the dangers. That’s led to a near-total freeze on any kind of formal financial link between the crypto industry and the regular banking system. Still, Indians have poured over $4.5 billion into crypto holdings.

But for now, officials don’t think that kind of exposure is big enough to shake up the economy.

Stablecoins raise new concerns as U.S. sets rules

The document reportedly says current tax rules and limited legal clarity are actually helping. They make speculative trading less attractive and help prevent fraud. It also adds that with different countries doing different things, coming up with one clear policy isn’t going to be easy.

U.S. President Donald Trump signed the GENIUS Act into law on July 18. That law allows stablecoins to be used more widely. India’s government says this shift could affect both advanced and developing countries.

Most stablecoins are pegged to the dollar. The paper warns that this could disrupt other countries’ payment systems. It also points out that even so-called “stable” coins can swing in value when markets are hit with liquidity shocks.

Indian officials are worried that the spread of stablecoins might mess with national systems like UPI, which handles instant digital payments between Indian banks. “Widespread use of stablecoins could fragment national payment systems,” the document said.