The Reserve Bank of India (RBI) has directed all regulated entities including banks not to provide services to businesses dealing in virtual currencies (cryptocurrencies) like bitcoins. While the RBI has stopped short of banning cryptocurrencies entirely, this move will severely restrict consumers’ ability to either purchase or sell cryptocurrencies like Bitcoins.

According to the Central bank, the decision comes into effect immediately. Regulated entities which already are dealing with virtual currency shall exit the relationship within a specified time. RBI said that it will issue detailed guidelines in a separate circular soon.

In a statement on various regulatory policies, the RBI conceded that “technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system.” It goes on to say that cryptocurrencies “raise concerns of consumer protection, market integrity and money laundering, among others.”

What about those who have bought or dealt in cryptocurrencies? The RBI said it has “repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.”

Banks had begun blocking cryptocurrency purchases

Last month, HDFC Bank and Citi Bank had sent out notifications informing their customers that they have barred the use of their credit, debit and prepaid cards for the purchase or trade of cryptocurrencies like Bitcoins.

The banks had noted that the step has been taken due to increasing global apprehensions and the RBI cautioning the public regarding the financial, legal and security-related risks associated with cryptocurrency trading.

Government on cryptocurrencies

During his Budget speech in parliament in February, Finance Minister Arun Jaitley said that the government currently does not consider cryptocurrencies as legal tender and said that the government will take all measures to eliminate the use of crypto assets in the payment system.

Before that in December 2017, the ministry of finance had issued a warning on Bitcoin trading and other virtual currencies which are not backed by a government fiat. It also said that the price of Bitcoin is a matter of speculation and likened the trading of virtual currencies to Ponzi schemes.

Income tax department scrutiny

In January thousands of Indians dealing in cryptocurrency were served tax notices after a nationwide survey by the Income Tax Department showed that more than $3.5 billion (Rs 2,235 crore) worth of transactions were conducted over a 17-month period.

In December, the department had conducted surveys across nine bitcoin exchanges across the country. The I-T department reportedly sought information about transactions, parties involved and bank accounts. Business Today had reported that there are 20 lakh entities registered on these exchanges and that about 4 to 5 lakh were operational and transacting.