UPDATED | July 5, 2018:
The three-month deadline issued by The Reserve Bank of India (RBI) banning banks from conducting business with cryptocurrency exchanges expired on July 5, according to The Times of India.
India's supreme court failed to overturn the central bank's declaration, which outlaws financial institutions from providing services to cryptocurrency-related companies, including the exchange of cryptocurrency to fiat. Those holding cryptocurrency still have the option to trade over the counter or through a service such as PayPal, but companies dealing in cryptocurrency will no longer be eligible for bank loans or be allowed to open corporate accounts.
However, RBI has not issued a blanket ban on the use of cryptocurrency in the country.
ORIGINAL | April 5, 2018:
On Thursday, the Reserve Bank of India (RBI) – the nation's central bank – published a statement by Chief General Manager Jose J. Kattoor on development and regulatory policies.
He addressed the bank's approach to virtual currencies (VCs) like bitcoin and the prospect of a central bank digital currency (CBDC), an idea that has previously been floated in India.
Virtual Currency Policy
"It has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs," wrote Kattoor. "Regulated entities which already provide such services shall exit the relationship within a specified time."
As reported by Financial Express, Deputy Governor Bibhu Prasad "BP" Kanungo stated that RBI-regulated entities currently dealing with VC-linked individuals or businesses will have three months to end their relationships.
Today, Kattoor raised concerns about "consumer protection, market integrity, and money laundering" as well as other issues that surround cryptocurrencies. The RBI, he wrote, "has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies."
Even if this is not an explicit ban on cryptocurrencies themselves, the RBI's restrictions could severely impact the viability of cryptocurrency-linked businesses in India. A lack of banking services could seriously hamper liquidity and prevent expansion efforts.
This could prompt users of Indian cryptocurrency exchanges to shift toward over-the-counter and peer-to-peer services. This is exactly what happened in China after authorities forced the closure of several major bitcoin exchanges in 2017.
In December 2017, India's Income Tax Department visited nine cryptocurrency exchanges to collect information on investors and trading activity. Shortly thereafter, in February 2018, the department sent approximately 100,000 notices to cryptocurrency investors in India, explaining its position that trading gains constitute taxable income.
In India, the deadline for filing 2017 income tax returns is July 31, 2018, for individuals and September 3, 2018, for businesses.
The Indian government does not recognize bitcoin as legal tender and its overall legal status remains somewhat murky. However, in February, Finance Minister Arun Jaitley said the government "will take all measures to eliminate the use of these cryptoassets in financing illegitimate activities or as part of the payments system."
Central Bank Digital Currency
Even though the Indian central bank does not support stateless cryptocurrencies, today it expressed interest in exploring its own digital currency.
In its statement, the RBI said that it has created a working group to "study and provide guidance on the desirability and feasibility" of a CBDC. The group will submit a report on its findings by the end of June 2018.
Rumors of an Indian CBDC surfaced last year as well. In September 2017, RBI Executive Director Sudarshan Sen said that the bank had a "group of people" examining fiat cryptocurrencies as an alternative to the Indian rupee, but one month later, India's chief economic adviser, Arvind Subramanian, shot down reports of a government-issued "Lakshmi Coin."