Why India's Caution on Crypto Makes Sense — And What Kind of Clarity I Would Still Demand

I read the government document with the same mix of curiosity and unease that most of us feel when unfamiliar forces threaten a system that has worked well for millions. Reuters reported that India is leaning away from a full legal framework for cryptocurrencies, preferring partial oversight because of fears that full legitimisation could create systemic risks to the financial system Exclusive-India resists full crypto framework, fears systemic risks, document shows. Local outlets note the same worry: stablecoins in particular could fragment the UPI-led digital payments ecosystem and increase dollar dependence India resists full crypto framework, use of stablecoins can hurt country's digital payments system, document shows.

I want to be clear: I respect precaution when the stakes are systemic. The government’s unease is not ideological theatre — it is a sober assessment about stability, monetary sovereignty and the hard-to-reverse effects of "legitimacy".

What I see in the document — the core risks

The analysis resonates with perspectives I’ve carried for a while. In short:

• Regulating crypto wholesale confers legitimacy. That legitimacy can attract scale, leverage and interconnectedness — precisely the ingredients that transform something marginal into a systemic vulnerability. The government document captures this concern succinctly Reuters.

• The present hybrid posture — limited oversight, strong tax disincentives and due-diligence requirements for exchanges — has so far contained risks within acceptable bounds. With roughly $4.5 billion of Indian holdings cited in reporting, the exposure is real but not yet systemic Reuters.

• Stablecoins — especially dollar-pegged ones gaining traction through recent U.S. legislation — pose a different class of risk. They could erode the primacy of national rails like UPI, introduce foreign currency dependence into everyday payments, and fragment monetary control Telegraph India.

• Finally, an outright ban is a blunt instrument. Peer-to-peer transfers and decentralised exchanges can continue regardless; bans can push activity underground without truly eliminating risk.

Historical perspective — a note from my earlier blog (2018)

For context, I have written on similar themes before. In a 2018 blog post titled "Bitcoin : Illegal in India" I discussed the then-Finance Minister Arun Jaitley’s statement that bitcoins and similar crypto-currencies were not legal tender and that the government was examining the matter via a committee. I noted the important distinction between "not legal tender" and "illegal": a claim that something is not legal tender does not automatically identify which law, if any, has been broken. That ambiguity can produce regulatory paralysis, enforcement confusion, and perverse incentives for both regulators and market participants.

The 2018 piece raised practical questions that remain relevant today: if authorities say an asset is not legal tender, what specific prohibitions or obligations (if any) apply to miners, traders, custodians and platforms? Without clear statutory footing, enforcement becomes ad hoc, and market actors operate in gray zones. You can read the original post here: https://myblogepage.blogspot.com/2018/01/bitcoin-illegal-in-india.html

My view: cautious, but not timid — seek clarity, not laissez-faire

If you ask whether India should be more proactive or stay cautious, I give a nuanced answer: remain cautious in recognising systemic risk, but be proactively clear in policy. Caution and proactivity are not opposites; one can be prudent about systemic exposure while being decisive about legal clarity, consumer protection and strategic innovation.

Here’s the lens I use when weighing the trade-offs:

• Financial stability first. Any policy that meaningfully increases the chance of capital flight, payment fragmentation or hidden leverage should be rejected or tightly constrained. When a domestic instrument becomes a vector for foreign-currency-denominated settlement at scale, central bank control and monetary transmission can be impaired.

• Legitimacy is powerful. A statute that recognises an asset class sends a signal to institutions, banks and retail. If that signal invites a rapid build-up of exposures before supervisory frameworks, stress tests and resolution tools exist, we invite systemic fragility.

• But ambiguity is its own tax. Unclear or ad-hoc policy invites rent-seeking, regulatory arbitrage, and platforms operating in gray zones. That harms consumers, slows responsible innovation and increases illicit flows.

What a prudent, proactive posture looks like to me

I would therefore support a middle path: maintain the deliberate caution the government has shown, while using that time to harden the edges of regulation so we are not simply “waiting” but preparing. Practically, that means:

• Clear taxonomy: define what counts as a commodity, a security, a payment instrument, a settlement asset, and a stablecoin — because laws and prudential tools differ for each.

• Protect the payments backbone: prohibit or tightly control foreign-backed stablecoins from displacing domestic rails until safeguards for liquidity, reserves, and legal recourse are robust.

• Sandboxes and pilots: permit controlled experiments with reporting, capital, and custody standards so we learn without systemic exposure.

• Consumer protections and custody rules: mandate segregation, insurance or minimum reserve standards for custodians; require clear disclosures about volatility, liquidity and settlement risk.

• International coordination: currencies and payments are global. India should press for multilateral guardrails around widely used stablecoins and cross-border settlement practices.

These are not calls for full legitimisation. They are calls for clarity — a regulatory architecture that prevents sudden scale without supervision, while allowing measured experimentation under strict controls.

A closing thought — sovereignty, prudence and imagination

Technology often arrives like a storm: it sweeps through existing institutions and asks them either to bend or to break. We have a responsibility — to citizens, to savers, to a payments ecosystem that serves millions — to avoid being swept away. But prudence should not become paralysis. If India can be both judicious and decisive — protecting stability while building frameworks that channel innovation safely — we will have chosen wisely.

I lean toward keeping the current cautious stance on full-scale legitimisation, while insisting on urgent regulatory clarity and defensive measures for our payments system and monetary sovereignty. That balanced posture protects what works today and prepares us to adopt what works tomorrow — on our terms.

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Regards,
[Hemen Parekh] Any questions? Feel free to ask my Virtual Avatar at hemenparekh.ai