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India’s Crypto Paradox
Regulating India’s virtual digital assets revolution
Context: India has once again emerged as a global leader in grassroots cryptocurrency adoption, according to the 2024 Geography of Crypto report by Chainalysis.
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- For the second consecutive year, the country tops the global charts in retail crypto activity.
- A report by the National Association of Software and Service Companies (NASSCOM) further highlights this trend, revealing that Indian retail investors invested $6.6 billion in crypto assets.
- The report also predicts that the Web3 and crypto industry could generate over 800,000 jobs in India by 2030.
- India is also home to one of the world’s largest and fastest-growing communities of Web3 developers.
Regulatory Status
- This explosive growth, however, stands in stark contrast to India’s complex and often ambiguous crypto regulatory landscape.
- In May 2025, the Supreme Court of India openly questioned the lack of comprehensive regulation for crypto assets—referred to in India as Virtual Digital Assets (VDAs)—warning that banning the sector could mean “shutting your eyes to ground reality.”
- This statement underscores the significant disconnect between India’s thriving VDA market and its current policy framework.
India’s VDA Policy Challenges
- Strict Control: India operates under strict capital controls and a highly regulated financial ecosystem, making it difficult to integrate the decentralised nature of cryptocurrencies.
- RBI’s Stands: The Reserve Bank of India (RBI) has long expressed concerns about crypto, starting in 2013, citing risks due to the lack of centralised oversight.
- In 2018, the RBI went as far as banning financial institutions from dealing with VDA-linked entities. This ban was overturned by the Supreme Court in 2020.
- Taxation: Subsequently, the Indian government introduced taxation as a temporary measure to regulate the sector. Two major tax policies were rolled out in 2022 under the Income Tax Act:
- A 1% Tax Deducted at Source (TDS) on VDA transactions exceeding ₹10,000 (Section 194S)
- A 30% capital gains tax with no offsetting of losses (Section 115BBH)
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- Limited Success: While intended to bring transparency and discourage speculative trading, these tax measures have had limited success.
- According to industry estimates, between July 2022 and December 2023, Indian investors traded over ₹1.03 trillion worth of crypto on offshore, non-compliant platforms.
- Limited Success: While intended to bring transparency and discourage speculative trading, these tax measures have had limited success.
- Only 9% of an estimated ₹1.12 trillion in VDAs were held on Indian exchanges.
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- Offshore trading led to a tax loss of ₹2,488 crore during this period. From December 2023 to October 2024, offshore crypto trading volumes soared to ₹2.63 trillion, with uncollected TDS revenue surpassing ₹60 billion.
VASPs: The Missing Link in India’s Crypto Regulation
- Global regulatory bodies like the IMF, Financial Stability Board, and the Financial Action Task Force (FATF) endorse risk-based, internationally harmonised crypto regulations.
- Central to these frameworks are compliant Virtual Asset Service Providers (VASPs), which serve as intermediaries that align the crypto industry with domestic regulations.
- India’s current policy setup, however, unintentionally incentivises users to shift to non-compliant offshore platforms, undermining both regulatory oversight and potential tax revenues.
- In contrast, Indian VASPs are rapidly maturing and demonstrating robust compliance frameworks.
- Their collaboration with the Financial Intelligence Unit-India (FIU-IND) has significantly strengthened India’s anti-money laundering and counter-terrorism financing measures, earning praise from the FATF.
Way Ahead
- India’s VDA ecosystem has the potential to drive economic growth, create employment, and position the country as a global Web3 hub. However, the current regulatory vacuum—where taxation exists without meaningful policy clarity—risks stifling innovation and encouraging capital flight.
- To unlock the sector’s full potential, India needs a comprehensive, future-ready regulatory framework. Such a framework should be balanced and pragmatic, providing clear guidelines for compliance, fostering innovation, protecting consumers, and ensuring that financial and systemic risks are effectively managed.
India stands at a critical crossroads in crypto regulation. With global leadership in retail adoption and a strong base of developers and VASPs, the country has the tools it needs to build a thriving, regulated VDA ecosystem. What’s missing is decisive legislative action. A forward-thinking regulatory framework can transform India from a crypto leader by default into a crypto leader by design.
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The Source’s Authority and Ownership of the Article is Claimed By THE STUDY IAS BY MANIKANT SINGH
