India's central bank bans financial firms from dealing with cryptocurrency

  • Regulated financial institutions in India can no longer provide services to companies or individuals dealing with virtual currencies, the Reserve Bank of India says.
  • The statement comes as other regulators around the world are grappling with how to regulate digital assets like bitcoin.
  • The Reserve Bank of India was more open to blockchain, the technology that underpins virtual currencies, and says in the statement that it has the potential to improve the financial system.
An Indian policeman stands guard at the entrance of the Reserve Bank of India (RBI) head office in Mumbai on October 4, 2017.
Punit Paranjpe | AFP | Getty Images
An Indian policeman stands guard at the entrance of the Reserve Bank of India (RBI) head office in Mumbai on October 4, 2017.

Regulated financial institutions in India can no longer legally deal with cryptocurrencies, the Reserve Bank of India announced Thursday.

"In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling [virtual currencies]," the bank said in a statement.

Those that already provide cryptocurrency services will need to end the relationships within a specified time, which the bank said will be announced separately.

Cryptocurrencies caught the attention of regulators after bitcoin's price rose more than 1,300 percent last year, near $20,000 in December. The cryptocurrency was trading near $6,887 as of 10:20 a.m. Thursday.

Most digital currencies, such as bitcoin, are not backed by any central government, meaning each country has different standards and regulations.

Bitcoin and other cryptocurrencies are not legal tender in India. Before Thursday's statement, the Indian government had issued warnings about the risk associated with trading. The digital assets also raised flags over consumer protection, market integrity and money laundering, the bank said.

The government had planned to "take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system," India's finance minister told lawmakers in New Delhi in February, according to a transcript by The Hindu newspaper.

The country's tax department sent notices about cryptocurrency investing to tens of thousands of citizens after a national survey showed more than $3.5 billion worth of transactions have been conducted over a 17-month period.

Thursday's statement was part of an announcement about broader regulatory policy measures for strengthening financial market regulation.

The Reserve Bank of India was more open to blockchain, the technology that underpins virtual currencies, which it said has the potential to improve the efficiency and inclusiveness of the financial system.