"They are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind the existing relationship within a period of three months", BP Kanungo, the deputy governor of RBI, said.
This could slow down exchange operations in the country significantly, potentially bringing the cryptocurrency market to a crawl.
The decision came on back of the RBI's observation that only certain payment system operators and their outsourcing partners in the country store the payment system data.
The Reserve Bank of India (RBI) on Thursday directed all regulated entities including banks, not to provide services to businesses dealing in virtual currencies like bitcoin, so as to protect consumer interest and check money laundering.
In an official statement issued to the media, RBI said that in the wake of huge financial risks, it has been unilaterally decided that no institution coming under the supervision of RBI shall be allowed to offer any financial services related to cryptocurrencies.
"Regulated entities which already provide such services shall exit the relationship within a specified time", RBI said in a notice.
Mumbai: The Reserve Bank on Thursday tightened the rules to discourage use of virtual currencies like Bitcoins and also announced a study to explore introduction of "fiat" digital currencies which can be issued by it.
India's Finance Ministry had criticized Bitcoin (BTC) and cryptocurrencies for their "lack of intrinsic value" in January of this year, and the month saw several large Indian banks close or limit the functionality of crypto exchange accounts. "More Indian crypto exchanges and traders might also see moving to other countries as a viable option in the coming days", said Hesham Rehman, CEO and co-founder of Bitxoxo, speaking to The New Indian Express. The report will be submitted by end-June 2018. "It also holds the promise of reducing the cost of printing notes".
In the statement, the RBI deputy governor added that "digital tokens issued by private parties are getting worldwide attention for quite some time for their speculative value".
"In fact, the Indian government has gone as far as issuing a statement that reads out as follows, "(Government will) take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system". Fiat currency is currency that a government has declared to be legal tender.