The Reserve Bank of India (RBI) is maintaining a vigilant watch on rapidly evolving global cryptocurrency developments, even as the Indian government is set to release a comprehensive policy paper on digital assets. This ongoing scrutiny, coupled with the forthcoming paper, signals India's continued cautious but deliberate approach to regulating the nascent yet impactful crypto sector.

RBI Governor Sanjay Malhotra recently informed a parliamentary panel that the central bank is closely monitoring international trends in cryptocurrency. This comes amidst a significant shift in global sentiment, particularly with the United States' more pro-crypto stance under President Donald Trump, who is reportedly advocating for a Bitcoin reserve and pushing for crypto-friendly legislation.

For years, the RBI has voiced strong concerns regarding cryptocurrencies, primarily citing risks to financial stability and monetary policy. Governor Malhotra reiterated these apprehensions, stating that cryptocurrencies "can hamper financial stability and monetary policy." The central bank has consistently argued that privately issued digital assets could undermine the sovereign function of currency issuance and potentially lead to an unregulated parallel monetary system, making it difficult to control money supply and maintain economic stability. The effectiveness of India's Unified Payment Interface (UPI) for internal digital transactions has also been cited by the RBI as a reason why cryptocurrencies are not "needed" in India.

Despite these reservations, the Indian government appears to be moving towards a more structured regulatory approach. Sources indicate that a policy paper on crypto, a "work in progress" as described by the Governor, is expected to be floated soon after receiving approval from the highest levels of government. This paper is anticipated to cover key risks associated with the sector and seek public comments, allowing for a more consultative and inclusive policymaking process.

India has already taken steps to address some concerns, albeit without full legal recognition of cryptocurrencies. A flat 30% tax is levied on gains from virtual digital assets, and a 1% Tax Deducted at Source (TDS) applies to transactions above a certain threshold. Furthermore, crypto exchanges operating in the country are mandated to register with the Financial Intelligence Unit (FIU-IND) under the Prevention of Money Laundering Act (PMLA), aiming to curb illicit activities like money laundering and terror financing.

The Supreme Court of India has also expressed its dissatisfaction with the delay in formulating a comprehensive regulatory framework, highlighting that the current vacuum in legislation has enabled widespread abuse and financial misconduct, comparing unregulated crypto trade to "hawala" business. This judicial push adds urgency to the government's efforts.

As a safer alternative, the RBI is actively developing and piloting its own Central Bank Digital Currency (CBDC), the Digital Rupee (e₹). This initiative reflects a global trend among central banks to explore sovereign digital currencies as a way to leverage the benefits of digital assets while retaining central control.

The upcoming policy paper is expected to present various regulatory options, aiming to balance innovation with financial stability and investor protection. India's final stance will likely be a result of careful consideration of global best practices, domestic economic realities, and stakeholder feedback, as the country navigates the complex and ever-evolving world of digital assets.