The Reserve Bank of India (RBI) head office in Mumbai. File photo/AFP

India's Supreme Court on Wednesday allowed banks to handle cryptocurrency transactions from exchanges and traders, overturning a central bank ban that dealt the thriving industry a major blow.

The Reserve Bank of India (RBI) had in April 2018 ordered financial institutions to break off all ties with individuals or businesses dealing in virtual currency such as Bitcoin within three months.

The ban led to plummeting trade volumes and exchanges shutting their businesses.

A three-judge Supreme Court bench said in their ruling that while the central bank had the power to take pre-emptive action, the court questioned the "proportionality" of such measures.

"RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none," the court said in a 180-page ruling.

Nischal Shetty, chief executive of the WazirX cryptocurrency exchange, welcomed the ruling saying investment had stopped "in the crypto and blockchain space in India", but that would now change.

However, the industry still faces hurdles as a government panel has recommended a ban on all private cryptocurrencies.

In July, the panel also recommended jail of up to 10 years and heavy fines for anyone dealing in digital currencies.

The government has yet to act on those recommendations or to finalise regulations around cryptocurrencies.

The government and central bank have repeatedly warned the public about the risk of cryptocurrencies.

If the government were to follow the panel's recommendations, it could signal the end of digital currencies in India.

Anirudh Rastogi, the founder of Ikigai Law, a firm that represented crypto exchanges in the lawsuit, said there was an "overarching fear" that the government might still introduce a law against cryptocurrencies.

"But for now, this is a good move as the exchanges can go back to crypto-to-fiat trade which had stopped," Rastogi said.

Reuters