OPINION | India’s Crypto Dilemma: Why half-regulation is worse than a ban

The world’s top financial watchdogs are not exactly cheering crypto on.

Policymaking around emerging technologies is more like parenting teenagers. You can’t quite control them but pretending you can usually make the rebellion worse but also makes you feel good about yourself. India’s latest crypto stance being the latest such example.

Take online gaming. At first, the government flirted with responsible regulation, self-regulation and such models. Then came the headlines: bankrupt families, addiction-driven suicides, and parents watching savings vanish on fantasy games and betting sports. A hard stop came after and everything real money game was banned. But only after they were highly visible across all sporting sponsorships including Indian Premier League, no less. No shades of grey, no half-measures. A blunt instrument, but at least it drew a line.

India has been here before with other technologies too. Social media grew unchecked for a decade before we even began to talk about guardrails on data misuse and misinformation. Lending apps mushroomed until the regulator had to suddenly step in after thousands were trapped in predatory debt. AI is now racing ahead faster than rules on privacy or consent can keep up. The pattern is familiar: innovation sprints, regulation crawls, and consumers are left unprotected until the damage is already done. Crypto is simply the latest chapter.

India's Crypto Policy Needs Clarity

A government document reviewed by Reuters makes one thing clear: India does not want to build a full-fledged framework. Why? Because our regulators believe the very act of regulation could legitimise crypto and pull it deeper into the financial system. In other words, the cure may be deadlier than the disease.

The Reserve Bank has been even more direct.

* If crypto is regulated, it could become “systemic.”

* If crypto is banned, peer-to-peer transfers and decentralised exchanges will keep trading alive.

* If stablecoins take hold, especially dollar-backed ones, they could eat into India’s prized innovation - the UPI payment system.

And so, we landed in the middle. Some taxes are collected, KYC and AML rules still apply, exchanges register with authorities, but there is still no comprehensive law. This patchwork makes crypto look safer than it really is.

Crypto Dilemma and Its Consequences

The danger of that illusion is not new. Electoral bonds were once pitched as a clean and transparent way to fund elections. In practice, they created the polite fiction that political money flows only through bonds. Everyone knows it does not.  Legitimising one channel gave cover to others, and in the process, citizens were left with a distorted picture of how democracy is financed. This is more than a technical flaw. It erodes trust in institutions because voters sensed that what they see is not the whole story. Strategically, it also boxed-in the government into defending a mechanism that looked transparent on paper but deepened skepticism in practice. Once public perception turns, even the best-intentioned frameworks can be seen as tools of obfuscation rather than reform.

That is the real danger with crypto too: if citizens believe the state has blessed it, losses and instability will not be blamed on personal speculation - they will be blamed on regulators who “allowed” it.

Crypto is heading the same way. By tolerating exchanges, taxing trades and allowing advertising, we have wrapped it in the appearance of safety. Yet the guardrails are missing. Investors mistake permission for endorsement, and by the time the risks fully surface, it may be too late to limit the damage. The eventual fallout will hit not just retail investors but the reputation of India’s financial system.

India's Hesitation Could Backfire

Lost in this policy hesitation is the citizen. The average saver is not diversifying or hedging bets; they are persuaded by glossy ads, celebrity endorsements and the false comfort that if the government is taxing crypto, it must be safe. Every month of drift transfers risk from powerful corporations to ordinary households. It is citizens who end up paying the price for policy indecision.

Here is the uncomfortable truth. Half-regulation does not give balance. It gives exposure without protection. And in financial policy, exposure without protection almost always ends in crisis.

India has two clear choices.

The first is to go all in on regulation - license exchanges, police stablecoins, audit reserves, force disclosures, and make consumer protection non-negotiable.

The second is to ban crypto outright - state the decision, enforce it consistently, and accept that enforcement will never be perfect, but clarity will shield more people than drift ever could.

Lessons from the Past

What we cannot afford is more time for drifting. Crypto has the potential to combine both dangers, social harm and systemic fragility. Emerging technologies don’t wait for committees or White Papers. They spread fast, embed themselves in daily life, and become politically impossible to roll back. India needs a playbook of anticipatory regulation - rules that move at the speed of innovation, with consumer protection at the core.

The world’s top financial watchdogs are not exactly cheering crypto on. The IMF, World Bank, Financial Stability Board and Bank for International Settlements have all waved red flags. Extreme volatility can wipe out investors overnight, there is little to no consumer protection, laundering risks run high, and trouble in crypto could easily ripple into the banking system.

At heart, crypto is an anarchist fantasy wrapped in code. It seeks to sideline sovereign currency, evade central banks and operate beyond regulation. It challenges the very idea that a government-backed currency carries trust. Governments do not owe every utopian experiment a seat at the table, especially one designed to make their monetary tools irrelevant.

Some will point to the US and say, “Look, they’re suddenly all in on crypto, so why shouldn’t we be?” The US has never exactly been a model of financial virtue. Its love affair with crypto comes after repeated crises from 2008’s mortgage meltdown to exchange collapses, Ponzi schemes, hacks, and retail losses that left ordinary investors holding the bag.

The Indian government already knows that crypto is a systemic risk. That should end the debate. Policy is about drawing lines, not pushing the can of decision-making into the future. The longer India waits, the blurrier those lines become. A ban, though unpopular with speculators and startups, is the only choice that truly safeguards markets, households, and trust in the financial system. Better an unpopular clarity today than a catastrophic mess tomorrow.

(Srinath Sridharan is a corporate advisor and author of ‘Family and Dhanda’. Anand Venkatanarayanan is co-founder and CTO, DeepStrat.)

Views are personal and do not represent the stand of this publication.