Digital assets, cryptocurrencies, and decentralised finance create risk exposure for Indian BFSI institutions through customer due diligence, payment rail connections, fintech partnerships, and banking relationships with crypto exchanges, even when the institution itself holds no digital assets directly. In India, cryptocurrencies are legally classified as Virtual Digital Assets under the Income Tax Act, taxed at a flat 30 percent with no loss offset and a 1 percent TDS on transactions, and all exchanges must register with the Financial Intelligence Unit under anti-money laundering rules. The Reserve Bank of India has historically taken a cautious stance and promotes its own Central Bank Digital Currency, the Digital Rupee, as the regulated alternative. Decentralised finance and staking remain a largely unregulated grey area as of 2026, which is precisely where the most significant unmanaged risk for BFSI institutions currently sits.
TABLE OF CONTENTS
- Why This Topic Belongs on a BFSI Risk Agenda
- India’s Current Regulatory Position, Plainly Explained
- Where Digital Asset Risk Actually Touches Traditional BFSI Institutions
- The Five Risk Categories Risk Teams Need to Track
- Why DeFi Is the Real Blind Spot
- The Digital Rupee and What It Signals About RBI’s Direction
- A Practical Risk Framework for BFSI Institutions
- Frequently Asked Questions
- Build This Capability with RMAI and Smart Online Course
- Why This Topic Belongs on a BFSI Risk Agenda
It is tempting for a traditional bank, NBFC, or insurer with no direct cryptocurrency holdings to treat digital asset risk as someone else’s problem. That assumption is increasingly wrong.
A bank does not need to hold a single Bitcoin to be exposed to digital asset risk. It is exposed the moment it provides banking services to a registered crypto exchange, processes payments that ultimately fund a customer’s crypto purchase, partners with a fintech that touches digital asset infrastructure, or onboards a high-net-worth customer whose wealth includes significant Virtual Digital Asset holdings that need to be understood for KYC and source-of-funds purposes.
This guide is written specifically for BFSI risk, compliance, and credit professionals who need to understand this space well enough to ask the right questions, not for individuals deciding whether to invest in crypto personally.
India’s Current Regulatory Position, Plainly Explained
India’s approach to digital assets as of 2026 can be summarised in one sentence: cryptocurrency is legal to buy, sell, and hold, but it is taxed heavily, monitored closely, and is not recognised as legal tender.
Cryptocurrencies and other digital assets are legally defined as Virtual Digital Assets, or VDAs, under the Income Tax Act, a classification introduced through the Finance Act of 2022. This was a deliberate legal choice. Calling crypto a VDA rather than currency allows the government to tax it heavily without granting it the legitimacy of being treated as money.
The tax treatment is genuinely punitive by global standards. Gains from VDA transactions are taxed at a flat 30 percent, with no deductions permitted beyond the cost of acquisition, and losses from one digital asset cannot be offset against gains from another or against any other income category. A 1 percent TDS applies to transactions above a specified threshold, and an 18 percent GST applies to exchange fees and related services.
On the compliance side, all crypto exchanges and Virtual Digital Asset Service Providers operating in India, including wallet providers, must register with the Financial Intelligence Unit, or FIU-IND, under the Prevention of Money-Laundering Act. This brings full KYC obligations, transaction record-keeping, and Suspicious Transaction Report filing requirements squarely into the same compliance universe that traditional BFSI institutions already operate within.
Regulatory oversight is currently split across multiple bodies rather than concentrated in one. RBI has historically taken the most cautious position, having imposed a banking-access ban on crypto businesses in 2018 that was struck down by the Supreme Court in 2020. SEBI has been moving toward overseeing tokens that behave like securities, such as those offering profit-sharing or investment-like returns, while leaving assets like Bitcoin and Ethereum, which function more like digital commodities, outside that specific scope. A comprehensive, dedicated Crypto Bill has been discussed since 2021 but has not yet been passed into law, and reports through 2026 indicate the bill and an associated DeFi and staking discussion paper have faced repeated delays.
Given how actively this regulatory picture continues to shift, risk teams should treat the specific institutional split of authority between RBI, SEBI, and the Finance Ministry as a moving target, and verify the current position directly against RBI and SEBI’s official publications before finalising any internal policy that depends on precise regulatory boundaries.
Where Digital Asset Risk Actually Touches Traditional BFSI Institutions
Banking relationships with crypto exchanges. Even where a bank does not hold digital assets itself, providing current accounts, payment gateway access, or settlement banking to a registered crypto exchange creates a customer due diligence and reputational risk relationship that needs the same rigour as any other high-risk customer category.
Payment rail exposure. UPI, IMPS, and card rails are frequently the on-ramp and off-ramp through which customers move rupees into and out of crypto exchanges. A bank’s transaction monitoring systems need to be tuned to recognise this flow pattern, since it carries different risk characteristics than an ordinary retail payment.
Wealth and credit assessment. Relationship managers and credit officers assessing a high-net-worth customer’s net worth, or a business borrower’s balance sheet, increasingly need to understand and properly value Virtual Digital Asset holdings disclosed as part of that assessment, including how volatile and how liquid those holdings genuinely are.
Fintech and BaaS partnerships. Banking-as-a-Service arrangements and fintech partnerships increasingly sit adjacent to digital asset infrastructure, even when the bank’s own product does not directly touch crypto, creating third-party and reputational risk that needs specific contractual and oversight attention.
Insurance and digital asset custody. As digital asset adoption grows, insurers are beginning to face questions about whether and how to cover digital asset custody risk, theft, and smart contract failure, an emerging product and underwriting risk category with very little historical loss data to price against.
The Five Risk Categories Risk Teams Need to Track
Market and valuation risk. Digital assets are significantly more volatile than traditional asset classes, which directly affects how reliably they can be valued for lending collateral, net worth assessment, or insurance coverage purposes.
Money laundering and financial crime risk. The pseudonymous nature of many blockchain transactions, combined with the ease of moving value across borders, makes digital assets a recognised vector for layering and integration stages of money laundering, which is precisely why FIU-IND registration and AML obligations apply to exchanges operating in India.
Operational and custody risk. Private key management, wallet security, and exchange custody failures have produced some of the largest single losses in the digital asset space globally, and represent an operational risk category with very different failure modes than traditional banking operations.
Third-party and counterparty risk. A bank’s relationship with a crypto exchange customer, a fintech partner touching digital asset infrastructure, or a technology vendor providing blockchain-related services all carry counterparty risk that traditional third-party risk frameworks were not originally designed to assess.
Regulatory and reputational risk. Given how actively India’s digital asset regulatory framework continues to evolve, an institution’s policies and customer relationships in this space need to be revisited regularly, since a position that was compliant and low-risk eighteen months ago may no longer be once new guidance is issued.
Why DeFi Is the Real Blind Spot
Most of the regulatory attention to date has focused on centralised crypto exchanges, which is understandable, since they are identifiable entities that can be required to register with FIU-IND and comply with KYC obligations.
Decentralised finance, or DeFi, is structurally different. DeFi platforms allow users to lend, borrow, trade, and earn yield through smart contracts and automated protocols, often without any centralised entity controlling the platform, and frequently without the platform requiring the kind of identity verification a registered exchange must perform.
This creates a genuine regulatory gap. Reports through 2026 indicate that a government discussion paper specifically addressing DeFi and staking has been anticipated for some time but has faced repeated delays, leaving this category in what most analysts describe as a regulatory grey zone, with no specific guidance comparable to what applies to registered exchanges.
For BFSI risk professionals, this gap matters for a practical reason. A customer or counterparty engaging with DeFi protocols is operating in a space where the usual due diligence anchors, a registered exchange, a documented KYC process, an identifiable compliance officer, often simply do not exist in the same form. Risk teams assessing exposure to customers or partners with significant DeFi activity need to apply additional scrutiny precisely because the structural protections that exist elsewhere in the regulated digital asset space are largely absent here.
The Digital Rupee and What It Signals About RBI’s Direction
While RBI has remained cautious toward private cryptocurrencies, it has been actively developing and expanding its own Central Bank Digital Currency, the Digital Rupee, since launching pilot programmes in late 2022.
The strategic signal here is clear and consistent across RBI’s public statements. The Digital Rupee is positioned as the state-backed, fully regulated, traceable digital payment instrument that the government wants to see grow, operating entirely within the existing banking system. Private cryptocurrencies, by contrast, continue to be characterised by RBI officials as speculative assets that sit outside that regulated framework, with senior RBI officials on record describing limited justification for private stablecoins specifically within the existing financial system.
For BFSI institutions, this distinction matters practically. As Digital Rupee functionality expands, including programmability features being piloted for specific use cases, institutions should expect RBI to continue actively encouraging Digital Rupee adoption as the preferred digital payment rail, while maintaining a watchful, tax-and-monitor posture toward private digital assets rather than either banning or fully embracing them in the near term.
A Practical Risk Framework for BFSI Institutions
Start with an honest exposure map. Before building controls, identify every point where your institution actually touches digital asset activity, including banking relationships with exchanges, payment flows to and from known crypto platforms, and any fintech partnerships with digital asset adjacency, even indirect.
Apply enhanced due diligence to identifiable touchpoints. Customers and counterparties with significant digital asset activity warrant the same enhanced due diligence rigour applied to other high-risk customer categories, including verifying which platforms they use, whether those platforms are FIU-IND registered, and how source-of-funds can genuinely be evidenced for assets that may have moved across multiple wallets and exchanges.
Train transaction monitoring teams on the specific patterns. Generic AML training does not adequately prepare transaction monitoring analysts to recognise crypto on-ramp and off-ramp transaction patterns, which often look different from traditional money laundering typologies.
Treat DeFi exposure as a distinct, higher-scrutiny category. Given the absence of the structural protections present in regulated exchange relationships, any known customer or counterparty exposure to DeFi protocols specifically should trigger a higher level of scrutiny than exposure to a registered, FIU-IND compliant exchange.
Build a review cadence, not a one-time policy. Given how actively this regulatory space continues to evolve, institutions should formally revisit their digital asset risk policies at least every six months, rather than treating an initial policy as a fixed, long-term position.
Frequently Asked Questions
Q1: Is cryptocurrency legal in India in 2026?
Yes, buying, selling, and holding cryptocurrency is legal in India as of 2026, but it is not recognised as legal tender. Cryptocurrencies are legally classified as Virtual Digital Assets under the Income Tax Act, subject to a flat 30 percent tax on gains with no loss offset, and a 1 percent TDS on transactions. The legal position has evolved through a Supreme Court ruling in 2020 that struck down an earlier RBI banking ban on crypto businesses.
Q2: Why should a bank with no crypto holdings care about digital asset risk?
A bank can be exposed to digital asset risk without holding any digital assets directly, through banking relationships with registered crypto exchanges, payment rail flows that fund customer crypto purchases, fintech partnerships adjacent to digital asset infrastructure, and credit or wealth assessments involving customers with significant Virtual Digital Asset holdings. Each of these touchpoints carries due diligence, transaction monitoring, and reputational risk considerations that traditional risk frameworks need to be deliberately extended to cover.
Q3: What is the difference in regulatory risk between a centralised crypto exchange and a DeFi platform?
A centralised crypto exchange operating in India must register with the Financial Intelligence Unit under anti-money laundering rules, conduct KYC, and maintain transaction records, giving BFSI institutions a clear compliance anchor when assessing exposure. Decentralised finance platforms typically operate through smart contracts without a centralised, identifiable entity, and often without comparable identity verification, leaving this category in a regulatory grey area as of 2026 with significantly less structural protection for risk assessment purposes.
Q4: What is the Digital Rupee and how is it different from cryptocurrency?
The Digital Rupee, or e-rupee, is India’s Central Bank Digital Currency, issued and fully controlled by the Reserve Bank of India, and it is legal tender. It is centralised, traceable, and operates within the regulated banking system, in direct contrast to private cryptocurrencies, which are decentralised, not legal tender, and treated by Indian regulators as speculative digital assets rather than money.
Q5: Has India passed a comprehensive cryptocurrency law?
As of 2026, India has not passed a comprehensive, dedicated cryptocurrency law. A Crypto Bill has been discussed since 2021, and reports indicate it remains under discussion between the Finance Ministry, RBI, and SEBI without a finalised timeline for introduction in Parliament. Current regulation instead operates through a combination of the Income Tax Act’s Virtual Digital Asset provisions, the Prevention of Money-Laundering Act’s requirements for exchange registration, and evolving SEBI guidance for security-like tokens, rather than a single unified statute.
Q6: What risk category does DeFi exposure fall under for a BFSI institution’s risk register?
DeFi exposure is best treated as a distinct risk category that combines elements of third-party and counterparty risk, money laundering and financial crime risk, and regulatory risk, given the absence of a centralised, registered entity comparable to a traditional exchange. Many institutions are choosing to track DeFi-related customer or counterparty exposure separately from general digital asset exposure precisely because the risk profile and available mitigants are meaningfully different.
