Cutting Crypto Off From Banks Slashed Trading in India, and the Rebound Was Slow

Governments that want to curb retail cryptocurrency trading face a practical question. Outright bans are hard to enforce against a borderless asset. But what if the state simply cuts crypto off from the banking system? A new study of India’s experience shows that this lever works, and that it has effects that persist long after it is released.

The authors are Matthew James Flynn and Ishitha Kumar, both Assistant Professors of Finance in the Department of Finance and Economics at McCoy College of Business, Texas State University, and Anish Shankar Menon of Prairie View A&M University. The paper appears in Finance Research Letters.

The study

In 2018, India’s central bank directed regulated banks to stop providing services to businesses dealing in virtual currencies. Exchanges could no longer accept deposits or process withdrawals through bank accounts. Trading itself was not illegal, but the on-ramp from rupees to crypto was closed. In 2020, the Supreme Court of India struck the order down, and banks were free to serve crypto firms again.

The two events give the researchers a natural experiment. They can watch what happens to retail crypto participation when banking access is switched off, and then again when it is switched back on. They also track measures of the formal financial system over the same period, including bank-account ownership, household deposit accounts, and payment-system activity. That lets them ask whether money and users pushed out of crypto went somewhere else.

What the researchers found

The first result is stark. Restricting banking access produced a large and immediate contraction in retail crypto activity. Without a way to fund accounts through banks, ordinary users largely stopped participating.

The second result is the more surprising one. When the Supreme Court reversed the ban, activity did not snap back. The recovery was gradual rather than immediate. A restriction that took effect overnight took much longer to unwind. Users who left did not all return, and those who did came back slowly.

The third result concerns spillovers. During the restriction, measures of the formal financial system improved. Bank-account ownership rose, household deposit accounts rose, and some payment-system measures rose as well. Cutting off crypto appears to have redirected some household finance into regulated channels.

Together, the findings identify banking access as a key transmission channel for retail crypto participation. Control the rails and you control much of the retail flow.

What it means for policymakers and the industry

For policymakers, the study offers evidence on a tool that many jurisdictions have considered. Debanking crypto works quickly and at scale, at least for retail participation. But the effect is sticky. Governments that see such a restriction as temporary, or that expect a court to reverse it, should know that the market does not simply reset. Persistent effects are part of the cost, or the benefit, depending on the goal.

The spillover finding cuts both ways. Financial inclusion advocates may welcome higher bank-account ownership and deposits. Crypto industry advocates will note that the gain came at the expense of a market that had been legal.

For crypto exchanges and payment firms, the lesson is about dependency. Access to regulated banking is the single point of failure for retail participation. Firms that rely on it should plan for the possibility that it disappears, and for a slow rebuild if it returns.

For investors in emerging markets, India’s case is a template. Where regulators are hostile, the risk is not only a legal ban but a quiet closure of banking access, and that closure can last.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• Banking access is the choke point. When Indian banks were told to stop serving crypto businesses, retail crypto activity contracted sharply and at once.
• Reversals do not undo the damage quickly. Lifting the ban in 2020 brought only a gradual recovery, not a mirror-image rebound, so policy effects can outlast the policy.
• Restrictions push money into the formal system. The ban period saw higher bank-account ownership, more household deposit accounts, and gains in some payment-system measures.

Flynn, M. J., Kumar, I., & Menon, A. S. (2026). Banking access and crypto participation: Evidence from India's crypto ban. Finance Research Letters, 106, 110289. 10.1016/j.frl.2026.110289