India’s Cautious Crypto Path: Balancing Innovation, Risk, and Global Pressure

India is going slow on the regulation of cryptocurrencies. Instead of passing sweeping crypto legislation, the government—based on inputs from the Reserve Bank of India (RBI)—is heading towards partial regulation. A report in September 2025, seen by Reuters, summarises this approach. It warns that widespread regulation could lend legitimacy to crypto assets, fuel speculation, and possibly give rise to systemic risks if these assets become deeply entrenched in the formal financial system.

India, with its high rate of adoption, seems cautious about fully embracing cryptocurrencies within its financial system. The government’s strategy so far has been to apply regulatory friction—through taxation, strict registration rules, and periodic warnings—instead of total legal acceptance.

What Does the Government Document Reveal?

The document outlines several concerns and observations:

Systemic risk: The RBI is concerned that if cryptocurrencies become prevalent in banking, payment systems, or investment portfolios, any disaster or collapse in crypto assets could spill over into the larger financial system.

Legitimacy through regulation: The apprehension is that extensive regulation could confer implicit legitimacy on crypto assets in the popular imagination—encouraging speculative investment and heightening volatility.

Regulatory constraints: Even a complete prohibition cannot practically eliminate peer-to-peer (P2P) transactions or the use of decentralised exchanges (DEXs). Regulation would not close all loopholes, particularly in cross-border movements.

Stablecoins and payment infrastructure: The report identifies stablecoins—particularly those pegged to foreign currencies such as the U.S. dollar—as potential disruptors of national payment systems. They could fragment or bypass platforms like UPI and influence liquidity and monetary management.

Current exposure is limited: Estimated Indian holdings of cryptocurrency stand at about US$4.5 billion. The government notes that this amount is not considered a threat to financial stability in current circumstances. Tax regulations (a 30% tax on gains) and strict oversight have curbed speculative trading through formal channels.

Current Regulatory Environment and Contrast with International Trends

Despite the absence of full regulation, India has developed a system that keeps crypto partially under control:

Registration and AML/KYC: Exchanges are required to register domestically and comply with anti-money laundering (AML) and know-your-customer (KYC) standards. This helps track flows and deter illegal activity.

Taxation system: Profits from cryptocurrency transactions are taxed at 30%, and deductions are capped with limited allowances. Losses generally cannot be offset.

Regulatory warnings and public awareness: The RBI and the Ministry of Finance periodically issue public advisories cautioning users about the speculative and high-risk nature of crypto assets.

By contrast, other nations are moving ahead with more definitive regulatory frameworks:

• United States: Recently enacted the Stablecoin Legislation (the GENIUS Act), which seeks to create legal clarity for stablecoins and bridge existing regulatory gaps.
• Japan and Australia: Are establishing systems for virtual asset service providers, including tighter licensing, custody norms, and disclosure regulations.
• European Union: With the Markets in Crypto Assets Regulation (MiCA) nearing full implementation, EU nations are setting rules for digital asset issuers, stablecoins, and exchanges.
• China: Continues to prohibit private cryptocurrencies but is advancing its own central bank digital currency (CBDC) and exploring stablecoin alternatives.

India appears to be waiting to see how these international regulatory experiments unfold, particularly in major economies that shape global capital flows.

Crypto Adoption in India: Reality and Patterns

While regulation remains incomplete, adoption is expanding steadily. Notable characteristics include:

Retail interest: Most individuals hold small positions in crypto. There is active retail participation, as shown by wallet data, surveys, and blockchain analytics. However, many users avoid formal exchanges due to concerns over taxes, regulatory clarity, and risk.

Investment community and startups: Increasingly, Indian startups are involved in blockchain technology, crypto development tools, NFTs, DeFi protocols, and digital asset solutions. They remain cautious but curious, especially regarding Web3, the metaverse, and digital infrastructure.

Trading volumes and exchanges: Official exchanges operating in India continue to be regulated. Yet much trading takes place over P2P networks, decentralised platforms, and sometimes through foreign services—making monitoring and enforcement challenging.

Stablecoin usage: Not yet widespread in India, largely due to regulatory uncertainty. Some businesses explore stablecoins for remittances or international trade, but the government’s concerns over payment system integrity and foreign currency exposure limit growth.

Expert Views: Innovation vs Prudence

A range of expert opinions provides perspective:

Regulation vs speculation balance: Some economists believe a structured regulatory framework could reduce fraud and protect consumers, but over-legitimisation might also attract speculative capital and create bubbles.

Technological innovation imperative: Legal experts, tech entrepreneurs, and blockchain developers argue that regulatory clarity is essential for innovation. Without it, investment in infrastructure, talent, and startups could slow down or move abroad.

Enforcement and resource constraints: Regulators highlight the lack of full oversight over decentralised systems and limited legal precedent for crypto-related cases. Building institutional capacity will take time.

Comparative global watching: Policymakers in India are closely observing regulatory outcomes in the U.S., EU, and Japan. If those frameworks succeed in minimising risk while fostering innovation, India may adopt similar models.

Potential Directions Ahead

Based on the current situation, several potential policy developments could emerge:

• Incremental regulation: Strengthening existing norms (AML, KYC, disclosure) without granting full legal status, while monitoring DEXs and P2P transfers more closely.
• Stricter regulation of stablecoins: Possible restrictions on cross-border stablecoin flows, caps on foreign-pegged stablecoins, and enhanced reserve and transparency requirements.
• Global coordination: India may push for global standards through platforms such as the G20 or the Financial Action Task Force (FATF) to prevent regulatory arbitrage.
• Future legislation with safeguards: If adoption accelerates or speculative activity rises, India may introduce detailed laws with robust safeguards—covering licensing, consumer protection, and phased implementation.

FAQs

Q1: Is cryptocurrency currently legal in India?
Partially. There is no blanket ban, but regulations are stringent. Locally registered exchanges operating under AML/KYC norms can function. Crypto use is taxed and monitored, though some transactions (P2P or DEX-based) remain outside formal oversight.

Q2: Why is full regulation avoided?
Concerns include legitimising crypto assets, fuelling speculation, systemic risks, and enforcement challenges in decentralised or informal markets.

Q3: How do stablecoins factor in?
Stablecoins, particularly dollar-pegged ones, are viewed with caution due to potential disruption to payment systems like UPI, risks of liquidity mismatches, and implications for monetary control.

Q4: What is the scale of crypto adoption in India?
Estimates suggest Indian users hold about US$4.5 billion in cryptocurrencies. While not trivial, authorities believe this level does not currently threaten financial stability.

Q5: Have other countries taken different approaches?
Yes. The U.S., EU, Japan, and Australia are setting formal regulatory frameworks for digital assets and stablecoins. China remains largely restrictive but continues to develop its digital currency systems.

Q6: What are the risks of too little regulation?
Without clear rules, risks include fraud, scams, lack of investor protection, illegal money flows, high volatility, and reputational risks for India’s financial markets globally.

Conclusion

India’s reluctance to adopt sweeping crypto legislation—at least for now—reflects a careful balancing act. The government, in coordination with the RBI, is weighing innovation and investor appetite against speculation, systemic risk, and regulatory overreach.

While stablecoins, decentralised exchanges, and speculative trading pose clear challenges, India’s current framework of taxation, AML/KYC, and limited regulation has so far contained much of the risk. As international norms evolve—from the U.S. to the EU and Asia—India is likely to follow suit, albeit cautiously and with strong safeguards. The nation’s crypto ecosystem remains nascent but vital: innovation continues in tech infrastructure and startups, while broader legitimacy is withheld until firmer rules, stronger enforcement, and clearer global precedents emerge. For now, India’s partial regulation strategy may well prove to be the most viable path—leveraging crypto’s potential without succumbing to its risk.