The federal cabinet is expected to soon discuss a new bill before passing it to the parliament, people familiar with the matter told Bloomberg.
While the government is exploring the possible uses of blockchains to manage land records, pharmaceutical drugs supply chain or records of educational certificates, it is against cryptocurrency trading, according to the two sources.
The Reserve Bank of India had banned commercial banks from servicing to crypto traders and exchanges in 2018.
The nation's supreme court overruled the central bank's ban in March.
Since then, trading volumes on cryptocurrency exchanges servicing Indian clients have picked up sharply.
A private think tank recently said the Indian government should regulate bitcoin like a corporate stock.
If the ban is passed it would be a blow to the rapidly growing crypto scene in India that has flourished since the banking ban was overturned.