India to Stick with Limited Crypto Rules Amid Systemic Risk Concerns

India maintains limited crypto rules to avoid financial risks, balancing innovation and stability amid concerns over stablecoins and systemic threats.

India has decided not to introduce a full set of laws to regulate cryptocurrencies for now. Instead, the country will continue with its limited regulatory framework. This decision is made because of fears that if cryptocurrencies were fully regulated, it could pose a threat to the country’s financial stability. The government document, viewed by Reuters, says the Indian government is cautious about taking cryptocurrencies out of the gray area and legalizing them.

Stablecoins Threaten India’s Digital Payment Dominance

To begin with, the document draws attention to the fact that the widespread use of stablecoins could negatively impact India’s existing digital payment infrastructure. These include the popular Unified Payments Interface (UPI), which is widely used across the country. If stablecoins become widespread, they could make people less dependent on systems such as the UPI, and financial control would fall out of the hands of local authorities.

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Meanwhile, the world’s attitudes towards cryptocurrency are changing. Since the coming into power of U.S. President Donald Trump, the acceptance of crypto assets has risen. In fact, the price of Bitcoin has been at record highs in recent years. Additionally, new laws have been passed in the U.S. that permit more extensive use of stablecoins. These coins are not backed by any digital currency and are instead backed by actual currencies, making them more stable and less volatile than regular cryptocurrencies.

On the other hand, there are countries such as China, which still prohibit cryptocurrency trading. However, China is now looking at creating a stablecoin that is backed by its own currency, the Yuan. At the same time, Japan and Australia are developing regulatory systems for digital assets. Yet, they are very careful and are not aggressively pushing for the use of crypto.

Crypto Rules in India Target Compliance, Avoid Total Ban

In the case of India, the government believes that the regulation of cryptocurrencies might give them “legitimacy.” This could turn into widespread applications, enough to make the crypto sector large enough to develop systemic financial risks. At the same time, a complete ban may not work, either. Banning crypto, the document warns, wouldn’t prevent people from using peer-to-peer platforms or decentralized exchanges.

As a middle way, India has opted for partial regulation. For instance, global crypto exchanges are now required to register in India with Indian regulators. They also have to comply with rigid anti-money laundering (AML) rules. In addition, the government has imposed a 30% crypto tax on the profits. This very heavy tax is intended to deter speculative trading.

Although these rules have helped to slow down crypto activity in India, they have also caused uncertainty. As a result, the Indian crypto market is still in a confused situation. Investors don’t know the future of their investments, and exchanges don’t know how long they can continue operating under the current system.

Despite the murky situation, Indian citizens still hold about $4.5 bn in crypto assets. This is a significant amount, but it is not yet being seen as a threat to the economy. Because of this, Indian regulators are of the opinion that there is no urgent need for a complete legal framework.

In conclusion, India is taking a cautious route. By maintaining relatively few rules, the country hopes to avoid financial risks without shutting off innovation entirely. However, with the rapid changes in the global crypto landscape, India needs to revise its approach in the near future.