RBI urges India to isolate banks from crypto, allow tokenization
In brief
- RBI Deputy Governor Rohit Jain presented containment strategy to Parliamentary Standing Committee on Finance Thursday
- RBI recommended blocking crypto payments and restricting banking-sector exposure to digital assets
- Central bank urged policymakers to distinguish crypto from tokenized securities to preserve regulated tokenization
Containment and Tokenization
The RBI recommended preventing the use of crypto in payments and settlements while restricting banking-sector exposure. The proposal aims to insulate the regulated financial system from speculative digital assets without outright prohibition.
The central bank's position draws a sharp line between crypto and tokenized instruments. It urged policymakers to distinguish crypto from tokenized government securities, corporate bonds and other regulated financial instruments so that restrictions would not hinder tokenization. This distinction matters: the RBI wants to block speculative assets while leaving room for legitimate blockchain-based finance.
Why Regulation Alone Won't Work
The central bank reportedly warned that applying traditional regulation to crypto could legitimize speculative assets and create a false perception of safety among users. Kicking crypto into a regulatory framework, the RBI argued, risks normalizing instruments with no underlying collateral or cash flows.
This stance echoes the central bank's 2018 approach. In 2018, the RBI directed regulated financial institutions to stop dealing in crypto or providing services to individuals and businesses involved in them. That move backfired. India's Supreme Court overturned the RBI's 2018 circular in March 2020, following a challenge brought by exchanges and the Internet Mobile Association of India. The court found that the measure failed the test of proportionality, noting that the central bank had not shown harm suffered by entities it regulated.
Compliance Without Ban
The RBI's recent clarifications suggest it learned from that defeat. In May 2021, the RBI clarified that banks could no longer cite the invalidated circular when cautioning customers against crypto transactions. Instead, regulated institutions could continue applying know-your-customer, anti-money laundering and foreign-exchange compliance requirements.
The timing of this renewed push is notable. India ranked first in Chainalysis' 2025 Global Crypto Adoption Index, yet the RBI challenged the methodology behind private-sector adoption rankings. The RBI's containment strategy appears designed to slow adoption at the institutional level while the central bank said prohibition remained a recognized policy option if the strategy fails.
