Regulating India’s virtual digital assets revolution
Context:
India leads in grassroots crypto adoption globally but faces significant policy gaps. This article examines India’s regulatory challenges, tax regime, and the role of VASPs.
Navigating India’s VDA regulatory gaps
- Definition of VDA: Virtual Digital Assets (VDAs) refer to cryptocurrencies and similar blockchain- based digital tokens not backed by any central bank or government.
- Judicial Concern: In May 2025, the Supreme Court of India remarked on the absence of clear crypto laws, stating that “banning may be shutting your eyes to ground reality”, urging comprehensive
- RBI’s Position:
- Reserve Bank of India (RBI) has expressed concern since 2013 about the systemic risks of VDAs. In 2018, RBI issued a circular banning banks from dealing with crypto entities.
- Supreme Court overturned this in 2020 citing violation of Article 19(1)(g) (right to practice any profession).
- Taxation as a Policy Tool:
- Income Tax Act Amendments (2022):
- Section 194S: 1% TDS on crypto transactions above ₹10,000.
- Section 115BBH: 30% capital gains tax; no loss offsetting allowed.
2. These aimed at transparency but led to unintended offshore migration of
- Offshore Trading Trends: ₹1.03 trillion traded on non-compliant platforms (Jul 2022–Dec 2023); only 9% on domestic exchanges. ₹2.63 trillion traded offshore (Dec 2023–Oct 2024).
- Estimated ₹60 billion in uncollected TDS since July
- URL blocking ineffective due to VPNs, mirror platforms, and migration to other
- Illustrates the limits of punitive-only approaches.
Role of VASPs (Virtual Asset Service Providers)
- International Best Practices: IMF, Financial Stability Board (FSB), and Financial Action Task Force (FATF) recommend risk-based, harmonised, and comprehensive regulations aligned with global FATF guidelines emphasize regulation of VASPs for effective anti-money laundering (AML) and counter-terrorism financing (CTF).
- Importance of Domestic VASPs:
- Act as compliant intermediaries enhancing regulatory visibility.
- Play a bridge role between users and government enforcement agencies.
- Support tax collection, cybersecurity, and consumer protection.
- India’s Missed Opportunity: Lack of enabling framework is pushing users to unregulated offshore exchanges, leading to revenue loss and increased risk.
- Examples of Good Practices by Indian VASPs: Cooperation with Financial Intelligence Unit – India (FIU-IND) to strengthen AML/CTF systems.
- After 2024 hack (loss of $230 million), Indian exchanges:
- Improved cybersecurity.
- Created insurance funds.
- Initiated industry-wide cybersecurity guidelines.
- After 2024 hack (loss of $230 million), Indian exchanges:
Need for a framework
- Current Scenario:
- Taxation without regulation leads to policy stasis.
- India is caught between reaping economic benefits and managing associated risks.
- Future Outlook:
- A pragmatic, forward-looking, and balanced regulatory framework is essential.
- Such a framework will:
-
- Enable effective oversight.
- Reduce illicit transactions.
- Attract innovation and global investments.
- Ensure sovereign digital financial stability.
- Strategic Significance: India is one of the largest Web3 developer hubs NASSCOM predicts crypto industry could generate over 8 lakh jobs by 2030.
- Retail investors invested $6.6 billion in crypto assets.
