A man walks past the Reserve Bank of India head office in Mumbai. Photo: Reuters/Danish Siddiqui

The Reserve Bank of India (RBI) has announced new measures banning banks under its control from investing in crypto-currency markets, while at the same time launching a study on a crypto-currency it will back.

“In view of the associated risks,” the RBI said in a statement, “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.”

Indian financial services businesses regulated by the RBI that are now providing crypto-currency services will have to cease doing so, reportedly within the next three months.

However, the RBI says it is still going ahead with a study examining a digital currency backed by the central bank. “This will be in addition to the paper currency that we have. It also holds the promise of reducing the cost of printing of notes,” BP Kanungo said. The bank will publish its findings in June 2018.

Meanwhile, it issued a warning. “Internationally, while the regulatory response to these tokens are not uniform, it is universally felt that they can seriously undermine the anti-money laundering … framework, adversely impact market integrity and capital control,” RBI deputy governor BP Kanungo said at a press conference on April 5. “And if they grow beyond a critical size, they can endanger financial stability as well.”

The news saw prices on Indian crypto exchanges fall, which caused knock-on effect drops on exchanges across the world, with bitcoin trading as low as $6,500 on some exchanges last week, although it did later rally slightly and was hovering near $6,500. The latest drop means bitcoin has fallen more than 60% from its all-time high at the end of 2017, when it climbed to almost $20,000.

The news from the RBI follows the tough line the Indian government has taken on cryptos in the last few months.

In December, finance minister Arun Jaitley said: “There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money. Consumers need to be on alert and extremely cautious as to avoid getting trapped in such Ponzi schemes.”

In February Jaitley spoke out again, telling Indian lawmakers to “take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system.”

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