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Context
India is at the forefront of a global surge in virtual digital assets (VDAs), including cryptocurrencies and non-fungible tokens (NFTs). With over 107 million users expected by 2025 and $6.6 billion invested by retail investors, the country is witnessing a silent financial revolution. However, this rapid adoption has outpaced the development of a comprehensive regulatory framework, creating challenges for policymakers, investors, and enforcement agencies.
Understanding Virtual Digital Assets (VDAs)
- VDAs are electronically stored, transferable, or tradable digital representations of value.
- They include:
- Cryptocurrencies: Digital currencies secured by cryptography, resistant to counterfeiting.
- NFTs: Unique digital assets recorded on a blockchain, representing ownership of digital or real-world items.
- VDAs can be used for payments, investments, or as representations of property rights.
Evolution of India’s Regulatory Approach
Early Policy Responses
- The Reserve Bank of India (RBI) initially raised concerns about VDAs, citing risks to financial stability.
- In 2018, the RBI banned financial institutions from dealing with crypto-related entities, but this was overturned by the Supreme Court in 2020.
Taxation as a De Facto Regulation
- The Finance Act, 2022, introduced a 30% tax on gains from VDAs and a 1% Tax Deducted at Source (TDS) on transactions above ₹10,000, without allowing loss offsetting.
- The Income Tax Bill, 2025, further classified VDAs as property and capital assets, aligning Indian law with global practices in the UK, US, and Australia.
- Despite these measures, most crypto trading shifted to offshore platforms to evade taxes and regulatory scrutiny, leading to significant revenue losses and reduced oversight.
Legal and Judicial Developments
- In May 2025, the Supreme Court termed existing crypto laws “obsolete” and highlighted the lack of a comprehensive legal framework.
- The Court warned against outright bans, noting that such measures ignore ground realities and drive activity underground.
Key Challenges in Regulating VDAs
Regulatory Gaps and Enforcement Issues
- Absence of clear, cohesive legislation has created uncertainty for investors and businesses.
- Heavy taxation without enabling regulation has pushed users to non-compliant offshore exchanges, undermining tax collection and investor protection.
- Attempts to block offshore platforms have been ineffective, as users circumvent restrictions through VPNs and mirror sites.
Risks Associated with VDAs
- Market volatility: Unbacked crypto assets are prone to sharp price swings, posing risks to investors and the financial system.
- Liquidity and security: Centralized exchanges face liquidity risks, and the sector has witnessed major hacks, prompting calls for better cybersecurity and insurance mechanisms.
- Money laundering and illicit activity: To address these, VDAs were brought under the Prevention of Money Laundering Act (PMLA) in March 2023.
Recent Policy Initiatives
Discussion Paper and Stakeholder Consultation
- The government is set to release a much-anticipated discussion paper on crypto regulation in June 2025, seeking public and industry feedback.
- This move is expected to address key risks, propose regulatory options, and potentially lay the groundwork for future legalization and reform.
Global Alignment and Best Practices
- India’s approach is increasingly influenced by global bodies like the IMF and FATF, which advocate for risk-based, harmonized regulation and the use of Virtual Asset Service Providers (VASPs) for compliance and oversight.
- Indian VASPs are maturing, cooperating with authorities to strengthen anti-money laundering and counter-terrorism efforts.
The Way Forward
Recommendations for a Balanced Regulatory Framework
- Develop clear, forward-looking legislation that balances innovation with investor protection and systemic stability.
- Shift from a punitive tax regime to a supportive regulatory environment that encourages domestic innovation and compliance.
- Strengthen enforcement against illicit activity while facilitating legitimate use cases and technological advancement.
- Foster industry-government collaboration and public consultation to ensure regulations are practical and inclusive.
Conclusion
India stands at a crossroads in its virtual digital assets revolution. While the sector offers immense potential for innovation, jobs, and financial inclusion, the absence of a comprehensive regulatory framework risks pushing activity underground and losing economic benefits to offshore markets. The upcoming policy initiatives offer a chance to bridge the gap between rapid technological change and regulatory oversight, securing India’s leadership in the digital asset era.
Source: The Hindu
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