RBI Pushes to Isolate Crypto From Banks in India

RBI Urges Lawmakers to Isolate Banks From Crypto – India Debates Legal Separation Instead of Formal Regulation

Key Takeaways

• The Reserve Bank of India told a parliamentary panel that cryptocurrencies should be kept out of the banking system and not used as payment instruments.
• The central bank favors a containment strategy over formal regulation, arguing that clear rules could legitimize speculative assets.
• The proposal includes limiting direct bank exposure to digital assets and prohibiting their use for payments and settlements.
• India already imposes a 30% tax on crypto gains and a 1% levy on each trade.
• The parliamentary panel will meet the Department of Economic Affairs on July 15 before finalizing its recommendations.

RBI Calls for Legal Separation Between Crypto and the Banking System

India’s central bank has asked lawmakers to create a legal barrier between cryptocurrencies and the country’s banking sector. During a hearing before the Parliamentary Standing Committee on Finance, the Reserve Bank of India stated that digital assets should not function as payment instruments and should be kept outside the formal banking system.

The committee is currently preparing a report on virtual digital assets, which is expected to be tabled during the monsoon session of Parliament. According to committee members cited in local reporting, the RBI argued that a containment approach would be more appropriate than introducing a conventional regulatory framework.

The central bank’s position is that formal regulation could grant speculative digital assets a degree of legitimacy. Officials warned that detailed rules might create a false sense of security among retail investors, who could interpret regulation as an endorsement of safety.

No Payments and Restricted Bank Exposure Proposed

In its presentation to lawmakers, the RBI advised prohibiting the use of cryptocurrencies for payments and settlements. It also recommended strict limits on direct exposure of banks to digital assets.

This approach would effectively prevent crypto assets from integrating into mainstream financial infrastructure. Instead of licensing exchanges or creating a supervisory regime for crypto service providers, the central bank is advocating structural separation between digital assets and the regulated banking system.

Committee members reportedly questioned how India could maintain such a stance while other jurisdictions, including Indonesia, Hong Kong, and the United Arab Emirates, have opted to regulate the sector. According to the 2025 Global Crypto Adoption Index published by Chainalysis, India ranked first, ahead of the United States and Pakistan.

In response to questions about the absence of a comprehensive policy, RBI officials stated that not having a policy is also a policy. The comment reflects the central bank’s preference for limiting integration rather than building a regulatory framework that could formalize the sector.

Ongoing Institutional Debate Between RBI and SEBI

The hearing also highlighted institutional differences within India’s regulatory landscape. The Securities and Exchange Board of India has previously indicated that it could regulate tokens that qualify as securities.

When asked about this possibility, the RBI did not provide a direct answer during the session and said it would submit a written response. The exchange underscores that the question of which authority should oversee parts of the crypto market remains unresolved.

The current discussion revives a longstanding conflict. In 2020, India’s Supreme Court struck down a previous RBI measure that had effectively banned banks from servicing crypto businesses. This time, the central bank is seeking legislative backing from Parliament to formalize a separation.

Tokenized Government Securities Excluded From Proposed Restrictions

While advocating limits on cryptocurrencies, the RBI’s proposal distinguishes between speculative digital assets and tokenized government securities. According to the information presented to the committee, tokenized bond markets would remain on a regulated infrastructure track and could continue to develop.

This distinction indicates that the proposed restrictions target privately issued cryptocurrencies rather than blockchain-based financial infrastructure more broadly. The focus is on containing speculative activity rather than restricting distributed ledger technology itself.

India already applies a 30% tax on crypto gains and imposes a 1% levy on every transaction. These measures remain in place as the broader policy debate continues. Industry representatives have called for a more accommodative approach, including proposals such as promoting domestic Bitcoin mining as an alternative to gold imports. However, these suggestions were not part of the RBI’s recommendation to the committee.

Next Steps in the Parliamentary Process

The Parliamentary Standing Committee on Finance is scheduled to meet the Department of Economic Affairs on July 15 before finalizing its recommendations. The outcome of these discussions will determine whether lawmakers move toward codifying a banking separation or consider a regulatory framework comparable to models adopted in other jurisdictions.

The decision carries practical implications for financial institutions, crypto service providers, and users. A legal barrier between banks and crypto businesses would shape how exchanges operate, how funds move between fiat and digital assets, and whether cryptocurrencies can be integrated into payment systems.

Our Assessment

The RBI has formally presented a containment strategy that seeks to isolate cryptocurrencies from India’s banking system and prohibit their use in payments. Lawmakers are reviewing this proposal as part of a broader study on virtual digital assets. The coming parliamentary discussions will determine whether India adopts a legally enforced separation model or moves toward a structured regulatory framework. For market participants and users, the legislative outcome will define how digital assets interact with the country’s financial infrastructure.