RBI says VDAs, including cryptocurrency poses threat to emerging economies like India, opposes its legalisation

The Reserve Bank of India (RBI) appeared before the Parliamentary Standing Committee on Finance (chaired by MP Bhartruhari Mahtab) during a meeting convened ...

What Happened

The Reserve Bank of India (RBI) appeared before the Parliamentary Standing Committee on Finance (chaired by MP Bhartruhari Mahtab) during a meeting convened to deliberate on "A Study on Virtual Digital Assets (VDAs) and Way Forward."
The RBI reiterated its strong opposition to the legalisation of virtual digital assets (VDAs), including cryptocurrencies, telling the panel that VDAs pose a systemic threat to the financial stability of emerging economies like India.
Key risks cited by the RBI: potential use for terror financing and narcotics smuggling; challenges to monetary sovereignty and the effectiveness of monetary policy transmission; difficulties in regulating cross-border flows; and the threat of capital flight away from the formal banking system.
The RBI specifically opposed the current tax treatment under the Income Tax Act, which classifies VDAs as taxable assets at 30% — arguing that this framework implicitly legitimises VDAs and sends a contradictory regulatory signal.
The Institute of Chartered Accountants of India (ICAI), also invited before the panel, offered a contrasting view, supporting introduction of a comprehensive legal framework for VDAs rather than a ban.
Countries that have banned crypto (China, Qatar) were cited by the RBI as examples; the European Union's Markets in Crypto-Assets (MiCA) regulation was acknowledged as an alternative regulatory approach under which VDAs are permitted within a stringent framework.

Static Topic Bridges

VDA Definition Under Finance Act 2022 (Section 2(47A), Income Tax Act)

Section 2(47A) was inserted into the Income Tax Act, 1961 by the Finance Act, 2022 (effective April 1, 2022), providing the first statutory definition of "Virtual Digital Asset" in Indian law. A VDA is defined as: (a) any information or code or number or token — not being Indian currency or foreign currency — generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account, including its use in any financial transaction or investment, and which can be transferred, stored or traded electronically; (b) a non-fungible token (NFT) or any other token of similar nature; (c) any other digital asset that the Central Government may specify. Gift cards, vouchers, mileage/loyalty points, and NFTs whose transfer results in transfer of a tangible asset are excluded by notification.

Section 2(47A) introduced by Finance Act, 2022; operative from Assessment Year 2023-24
Section 115BBH: Income from transfer of any VDA is taxed at a flat 30% (no deductions except cost of acquisition; losses cannot be set off against other income or carried forward)
Section 194S: 1% TDS on payments for VDA transfers above Rs 10,000 (Rs 50,000 for specified persons)
The 30% flat tax rate (plus applicable surcharge and cess) is among the highest rates in any asset class — comparable to speculative income
The tax framework treats VDAs as assets for tax purposes but does not confer legal tender status or regulate them as financial instruments

Connection to this news: The RBI argued before the parliamentary panel that this tax framework inadvertently legitimises VDAs by treating them as taxable assets. The RBI's position is that legality (tax treatment) and legitimacy (legal tender/tradeable asset) should not be conflated — and that India should not cross the threshold to legalisation.

RBI's Regulatory Powers — RBI Act 1934 and FEMA 1999

The Reserve Bank of India Act, 1934 establishes the RBI as the central bank and monetary authority of India. The RBI has the exclusive right to issue currency notes (Section 22), regulate the monetary system, and maintain price stability. The Foreign Exchange Management Act (FEMA), 1999 governs cross-border capital flows and foreign exchange transactions, replacing the Foreign Exchange Regulation Act (FERA), 1973.

RBI Act, 1934, Section 22: RBI holds the exclusive right to issue bank notes — the core of its monetary sovereignty argument against crypto
RBI Act, Section 45JA: Empowers RBI to determine policy for NBFCs and payment systems — but does not currently extend to non-entity crypto transactions
FEMA 1999, Section 6: Capital account transactions are regulated by the RBI; crypto transactions involving foreign exchange flows could constitute FEMA violations
RBI's April 2018 circular banned banks from dealing in VDAs; this was struck down by the Supreme Court in Internet and Mobile Association of India vs RBI (2020) on grounds of proportionality — the SC held that the ban was disproportionate since VDAs were not illegal under any law
RBI's monetary sovereignty concern: if VDAs become a widely accepted medium of exchange, the RBI's ability to implement monetary policy through interest rates, reserve ratios, and credit controls is undermined — a phenomenon sometimes called "crypto dollarisation"

Connection to this news: The RBI's warning to the parliamentary panel is grounded in its mandate to protect monetary stability. Its argument is that legalising VDAs would create a parallel monetary system outside its regulatory reach, weakening its ability to control inflation, manage credit, and prevent capital outflows.

CBDC vs Cryptocurrency — India's Digital Rupee Pilot

A Central Bank Digital Currency (CBDC) is a digital form of sovereign currency issued and backed by the central bank — fundamentally different from decentralised cryptocurrencies. The RBI launched the e-Rupee (India's CBDC) in two variants: CBDC-W (wholesale, for interbank settlements) and CBDC-R (retail, for the general public).

CBDC-W pilot launched: November 1, 2022 (initial use case: government securities settlement)
CBDC-R pilot launched: December 1, 2022 (initially in 4 cities with 4 banks; expanded to 13 banks and 26 cities)
By December 2023, CBDC-R achieved 1 million daily transactions (a stress-testing milestone); regular daily volume subsequently reduced to ~100,000 transactions as of mid-2024
CBDC-R circulation reached INR 2.34 billion in FY 2023-24; approximately 5 million users enrolled as of 2024
Key distinctions from cryptocurrency: e-Rupee is legal tender, issued by RBI, denominated in Indian Rupees, centralised and fully traceable, and maintains 1:1 parity with currency; cryptocurrencies are decentralised, pseudonymous, price-volatile, and not legal tender anywhere in India
The Finance Committee chairman noted in July 2026 that the e-Rupee is struggling with low adoption and organic usage

Connection to this news: The RBI's consistent message is that the e-Rupee (CBDC) is the legitimate path to digital currency — not private cryptocurrencies. The parallel existence of a thriving crypto market would undermine the case for CBDC adoption and complicate the RBI's digital currency strategy.

FATF Recommendation 15 — Virtual Assets and Terror Financing

The Financial Action Task Force (FATF), the global standard-setter for anti-money laundering (AML) and counter-terrorist financing (CTF), updated Recommendation 15 in 2019 to bring virtual assets (VAs) and Virtual Asset Service Providers (VASPs) within the AML/CTF regulatory perimeter. India is a member of FATF (since 2010) and is subject to periodic mutual evaluations.

FATF Recommendation 15 (updated 2019): Requires countries to assess and mitigate risks associated with virtual assets; VASPs must be licensed or registered, subject to customer due diligence (CDD), transaction monitoring, record-keeping, and suspicious transaction reporting
Travel Rule (FATF Recommendation 16 applied to VAs): VASPs must obtain, hold, and transmit originator and beneficiary information for VA transfers above USD 1,000 — directly analogous to the wire transfer rule for banks
FATF's 2024 and 2025 reports found that terrorist groups including ISIL, Al-Qaeda, and their affiliates are increasingly using VAs to raise and transfer funds; lack of global VASP regulation creates exploitable loopholes
India's AML/CFT framework for VDAs currently exists only through the PMLA (Prevention of Money Laundering Act, 2002): the Finance Ministry in March 2023 brought VDA service providers under PMLA reporting obligations
However, VASPs are not comprehensively regulated as financial entities in India — there is no licensing/registration framework, which means India is only partially compliant with FATF Recommendation 15

Connection to this news: The RBI's terror financing concern before the parliamentary panel is directly grounded in FATF's findings. The absence of a comprehensive VASP regulatory framework in India makes it difficult to enforce AML/CTF norms — supporting the RBI's position that legalising VDAs without a robust regulatory architecture would be premature and dangerous.

Global Regulatory Comparison — China's Ban and EU's MiCA

China's ban: In September 2021, China declared all cryptocurrency transactions illegal and banned crypto mining entirely, making it the most comprehensive prohibition globally. China's rationale was similar to the RBI's: protection of monetary sovereignty, prevention of capital flight, and financial stability. China already operates a state CBDC (digital yuan/e-CNY).
EU's MiCA (Markets in Crypto-Assets Regulation): Entered into force June 2023; fully applicable from December 30, 2024. MiCA provides a comprehensive licensing and regulatory framework for crypto-asset issuers and service providers across all 27 EU member states. It requires whitepapers, reserve requirements for stablecoins, AML compliance, and investor protection disclosures.
El Salvador: Adopted Bitcoin as legal tender in 2021; reversed the mandatory acceptance requirement in early 2025 under pressure from IMF.
USA: No comprehensive federal VDA framework as of 2026; regulatory jurisdiction contested between SEC (treating some as securities) and CFTC (treating some as commodities).
Qatar: Banned cryptocurrency trading and crypto-related activities, cited by the RBI before the parliamentary panel.
PMLA Amendment, 2023: India brought VDA service providers under PMLA as "reporting entities" — requiring them to maintain records and file suspicious transaction reports with the Financial Intelligence Unit (FIU-IND), but stopped short of creating a licensing framework.

Connection to this news: The RBI is arguing against following the MiCA model of regulated legalisation and for maintaining a position closer to China's prohibition stance. The parliamentary panel will need to weigh these contrasting models in framing India's VDA policy.

Key Facts & Data

Section 2(47A) Income Tax Act: VDA definition inserted by Finance Act, 2022; effective AY 2023-24
Tax rate on VDA transfers: 30% flat (Section 115BBH) + 1% TDS on transfers above Rs 10,000 (Section 194S)
Supreme Court Internet and Mobile Association of India vs RBI (2020): struck down RBI's 2018 bank-crypto circular as disproportionate
CBDC-R pilot launched December 1, 2022; achieved 1 million daily transactions December 27, 2023
CBDC-R enrolled users: approximately 5 million (2024); 16 banks participating
FATF Recommendation 15 updated 2019; India is a FATF member since 2010
India brought VDA service providers under PMLA in March 2023 (gazette notification)
China banned all crypto transactions: September 2021
EU MiCA: fully applicable from December 30, 2024
Parliamentary committee hearing: Standing Committee on Finance, chaired by MP Bhartruhari Mahtab, July 3, 2026