If the government declares Bitcoin to be illegal in India, then the exchanges will have to shutdown, the source said.
An inter-ministerial committee set up to study the legality of bitcoins will give its response on April 20.
A government official privy to the developments on the digital currency told Moneycontrol that it was highly unlikely that a final decision on the fate of bitcoin in India would be announced on the April 20 meeting.
"There will be more discussions; a verdict will be declared soon on the legality of the cryptocurrency in India," the official said, adding that transactions in bitcoins have surged since demonetization, stoking concerns that it (bitcoin) could be a store for unaccounted money.
If the government declares Bitcoin to be illegal in India, then the exchanges will have to shutdown, the source added.
Some countries have clearly defined rules under which Bitcoin businesses function, the regulations are hazy in most others.
In India, bitcoins have drawn flak from the Reserve Bank of India and many politicians, but there is no prohibition to bitcoin mining, trading or transfer of it.
Recently, after being called as pyramid-ponzi scheme by BJP MP Kirit Somaiya, the fate of the digital currency has been a major concern for businesses and people who have bought some of it on various Indian exchanges.
Minister of State for Finance, Arjun Ram Meghwal said on Tuesday that the use of virtual currencies like Bitcoins is not authorised by the RBI and could result in a breach of anti-money laundering provisions.
Policy makers and bureaucrats are wary about bitcoins on concerns that it could be a conduit for siphoning money out of the country, and also for laundering undisclosed income, the source said.
Last month, bitcoin startups in the country joined hands to form Digital Asset and Blockchain Foundation of India (DABFI) to promote virtual currency market.
They had approached the government but are yet to get a response.
When asked if there is hope for these ventures, the source said that if the government and DABFI workout a proper compliance framework and documentation requirements for customers then these businesses might survive.
Jaideep Reddy, Technology Lawyer at legal and tax consulting firm Nishith Desai, which has been appointed by DABFI to develop self-regulations for the industry, said: "The Minister of State's statement in the Rajya Sabha seems to have been widely misinterpreted. He only indicated that the use of virtual currency for illegal purposes is illegal, and not that bitcoin per se is illegal."
"It is not likely that the government, in promoting technology, innovation, and financial inclusion, will resort to a knee-jerk ban of bitcoin as such. No major economy has done this. However, if there is a ban, all parties will have to comply with the same, subject to their remedies under law," he added.
When asked what will happen in the worst case scenario, if bitcoin is banned in our sovereign borders, he said: "Just like with the encryption and “back doors” debate, bad actors will continue to find means of using bitcoin through circumvention technologies, and law-abiding users of virtual currencies will bear the brunt of the action."
"Rather, through self-regulation with KYC, AML, CFT, STR, certification, and prudential norms, the industry can minimize fraud and co-operate with the government in law enforcement," he added.Follow @shukla_05sid