HDFC Bank, India's largest private lender, said bitcoin and other cryptocurrencies are a fad and too volatile to gain mainstream acceptance.

"The strong correlation between bitcoin prices and Google searches indicates that it is perhaps more of a fad," the bank said in a treasury report titled "Cryptocurrencies: Fad or Forever?" published May 27. "The bottom line is that it seems to be highly speculative."

Many private lenders, including ICICI Bank, the second-largest, have stopped serving local crypto exchanges. According to some reports, the Reserve Bank of India (RBI) has been encouraging banks to reduce ties to the exchanges.

The Economic Times reported Friday that the exchanges are planning to ask the Supreme Court for a directive on whether the central bank can ask private lenders to shut down payment gateways to merchants associated with cryptocurrency trading.

The court set aside the RBI's two-year-long banking ban on crypto exchanges in March 2020. The government has yet to clarify regulations, meaning that cryptocurrency trading is still legal in India.

According to HDFC Bank, the regulatory uncertainty will subside, bringing more investments into cryptocurrencies. While interest in the topic is often driven by "transient bouts of intense interest," cryptocurrencies are likely to remain available, and bitcoin has properties of being a good hedge from the perspective of portfolio diversification, it said.

The lender also discussed the role of a central bank digital currency in promoting financial inclusion and reducing the cost of managing and transferring cash within the country and across borders. "The virtual currency will be backed by a suitable amount of monetary reserve like gold or foreign currency reserves."

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which seeks to prohibit all cryptocurrencies in India and provide a framework for creating an official digital currency to be issued by the RBI, has yet to be brought before parliament.

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