How Banks React to Crypto Withdrawals in India: Regulations and Real-World Challenges

In 2024, the Indian government blocked 25 major crypto exchanges overnight, wiping out access to $9 billion in assets for millions of users. If you've tried to withdraw cryptocurrency to cash in India recently, you've likely faced this reality: banks often freeze transactions, demand endless paperwork, or flat-out refuse service-even though owning crypto is technically legal. Why? Because RBI regulations are the Reserve Bank of India's strict guidelines governing financial transactions involving cryptocurrencies creating a dangerous gray zone between legality and bank compliance.

Current Legal Status of Cryptocurrency in India

Here's the simple truth: cryptocurrency is a digital asset not recognized as legal tender in India, but it's also not illegal. The Supreme Court overturned the RBI's 2018 ban in 2020, allowing citizens to buy, sell, and hold crypto. However, this legal freedom comes with major caveats. The RBI still views crypto as a threat to financial stability, and banks operate under intense pressure to avoid any crypto-related activity. This creates a paradox: you can legally own crypto, but banks treat transactions like radioactive material.

How Banks Actually React to Crypto Withdrawals

Banks in India don't have a unified policy for crypto withdrawals. Instead, they react based on three factors: RBI pressure, fear of regulatory fines, and the exchange's compliance status. For example:

1. High-risk flagging: A user in Mumbai tried withdrawing $8,000 from CoinSwitch to their SBI account. The bank immediately flagged it as "suspicious" and demanded tax records, wallet transaction history, and a signed affidavit explaining the source of funds. After 12 days of delays, the funds released-but only after the user provided every document imaginable.
2. Complete rejection: In 2024, HDFC Bank froze accounts for users withdrawing from unregistered exchanges like LBank. The bank cited "regulatory compliance concerns" and refused to process any further transactions until the user moved assets to a FIU-IND registered platform.
3. Hidden fees and limits: Some banks like ICICI allow crypto withdrawals but impose strict limits ($500/day) and charge 5% transaction fees. They also require users to visit a branch in person for verification, making small withdrawals practically impossible.

This inconsistency isn't random. Banks are caught between the Supreme Court's ruling (which says crypto is legal) and the RBI's public warnings (which say crypto is dangerous). As a result, they default to extreme caution to avoid regulatory blowback.

Why Banks Fear Crypto Transactions

The RBI's stance is crystal clear: cryptocurrency is a threat to India's monetary policy and financial sovereignty. Former Governor Shaktikanta Das called crypto "a danger to the financial system," and current Governor Sanjay Malhotra recently stated: "We believe that in India, it is the CBDC and not crypto that holds promise." This isn't just rhetoric-it drives real-world banking behavior.

Here's what banks fear:

• Money laundering risks: Under the Prevention of Money Laundering Act (PMLA), banks must report any crypto transaction that could be linked to illicit activity. They don't want to accidentally facilitate criminal activity and face massive fines.
• Regulatory backlash: In 2024, the FIU-IND issued notices to 25 offshore exchanges for failing to comply with AML rules. Banks that processed transactions for these platforms risked losing their licenses. This forced banks to freeze all crypto-related accounts proactively.
• CBDC competition: The RBI is aggressively pushing its own digital rupee (CBDC), which gives them full control over transactions. Crypto's decentralized nature threatens this control, so banks are incentivized to block it.

For practical purposes, this means banks treat crypto withdrawals like nuclear waste: they'll handle them only with extreme precautions, and even then, often with reluctance.

What You Must Do to Withdraw Successfully

If you're determined to convert crypto to cash in India, follow these steps exactly:

1. Use only FIU-IND registered exchanges: Check the official FIU-IND website for the current list of approved platforms. Unregistered exchanges like BingX or CoinW are blocked entirely-your bank will reject any withdrawal from them.
2. Complete full KYC: Provide government-issued ID, proof of address, and a selfie video verifying your identity. Banks will ask for this documentation when processing withdrawals.
3. Prepare tax records: India taxes crypto gains at 30% plus cess. Have your income tax return ready showing crypto transactions. Banks will demand this to prove you're not evading taxes.
4. Document the source of funds: If you bought crypto from a foreign exchange, provide transaction history showing the purchase. Banks need to trace every step to comply with AML rules.
5. Withdraw small amounts: Avoid large transfers. Split $10,000 into five $2,000 transactions over a week. Large sums trigger automatic fraud alerts.

Failure to follow these steps means your bank will likely freeze your account for weeks while they investigate. One user in Bangalore had their ₹5 lakh withdrawal blocked for 18 days because they didn't provide wallet transaction history.

Recent Enforcement Actions and Their Impact

In 2024, the Indian government took unprecedented action: 25 offshore exchanges were blocked for non-compliance, including major platforms like LBank, CoinW, and ProBit Global. These exchanges held over $9 billion in assets and processed $20 billion daily in trades. The result? Millions of Indian users suddenly couldn't withdraw funds from these platforms.

Here's what happened in practice:

• Users with funds on blocked exchanges had to transfer assets to compliant platforms like WazirX or CoinDCX before withdrawing. This process often took 7-10 days due to extra KYC checks.
• Banks immediately froze accounts linked to blocked exchanges. One trader in Hyderabad lost access to ₹12 lakh for 3 weeks while proving their assets were transferred to a compliant platform.
• The government made it clear: any exchange not registered with FIU-IND under PMLA will be banned. This forced all major Indian exchanges to implement stricter AML systems and report every transaction to authorities.

This enforcement wave shows that compliance isn't optional-it's mandatory. Banks now actively check if exchanges are registered before processing withdrawals. If they're not, they'll refuse service immediately.

RBI's Stance on Cryptocurrency

The RBI's opposition to crypto is unwavering. Despite the Supreme Court ruling, they've issued multiple public cautions (including RBI Public Caution 2 and 3 in 2017) warning about "high volatility," "security vulnerabilities," and "lack of legal recourse" for crypto losses. Their core argument is simple: cryptocurrency lacks intrinsic value and threatens India's financial sovereignty.

This stance directly impacts banking behavior:

• Banks must follow RBI directives, even if crypto is legal. The RBI can revoke a bank's license for handling crypto transactions, so they avoid it entirely when possible.
• For example, when the RBI issued a circular in 2023 requiring all crypto-related transactions to undergo enhanced due diligence, banks immediately implemented stricter verification processes for withdrawals.
• The RBI also pushed for the Financial Action Task Force (FATF) Travel Rule in India, which requires exchanges to share sender/receiver details for every crypto transaction. This makes it harder for banks to process anonymous transfers.

In short, the RBI's position creates a regulatory environment where banks are forced to treat crypto withdrawals as high-risk activities-even when users follow all legal requirements.

What's Next for Crypto in India?

Parliament is currently debating new legislation that would place cryptocurrencies under SEBI's control while leaving NFTs unregulated. If passed, this would create clearer rules for banks but also more oversight. However, experts warn that the government's focus on CBDC over private crypto means banks will likely keep treating crypto withdrawals as problematic for years.

For now, the best advice is simple: only use FIU-IND registered exchanges, maintain meticulous documentation, and expect delays. The RBI's skepticism isn't changing soon, and banks will continue to act as gatekeepers for your crypto-to-fiat withdrawals.