Introduction
Cryptocurrency sits at a crossroad that law,
finance and technology race toward from different directions. For innovators,
blockchain is a toolkit that promises faster payments, programmable money and
new financial products. For regulators, the same technology can be an avenue
for money-laundering, investor harm, tax leakage and threats to financial
stability. India’s story equal parts entrepreneurial frenzy and regulatory
caution illuminates the tension between encouraging innovation and enforcing
compliance. This article unpacks the Indian position, compares it with major
international approaches, and offers a practical framing for lawyers,
policymakers, entrepreneurs and informed citizens who want to understand how to
move forward without getting tripped up.
A short legal history of crypto
in India: from heavy hand to calibrated posture
India’s relationship with crypto has been episodic.
In 2018–19 the Reserve Bank of India (RBI) effectively dismayed domestic banking relationships with
crypto firms through a circular that made it hard for exchanges and wallets to
operate. In 2020 the Supreme Court struck down that RBI circular, finding the
restriction disproportionate a landmark that restored breathing room for the
industry. Despite that judgment, the RBI has repeatedly warned that
cryptocurrencies are not legal tender and remains skeptical about their use as
payment instruments. Meanwhile, Parliament and the finance ministry took a
different pragmatic approach: instead of comprehensive positive regulation, the
state first imposed a distinct tax regime in the Finance Act (2022) and
accompanying tax rules. The result: trading and gains are taxed (a flat 30% on
profits with a 1% TDS on transactions being prominent features), but there is
still no single omnibus law that comprehensively regulates issuance, custody,
intermediaries and consumer protections.
Why does this matter? Because taxation plus
cautious central bank messaging creates a hybrid regime: crypto is neither
fully embraced (not money nor legal tender) nor fully outlawed. Practically,
businesses must comply with taxes and KYC, but many of the functional elements
governing token classification, custody rules, and market conduct remain
unsettled.
The Indian regulatory choice
India’s 2022 tax measures, which remain central to
the current regime, settled one important question: the state will extract
revenue from crypto activity. A flat 30% tax on profits from virtual digital
assets and a 1% TDS on transfers were intended to (a) capture taxable events,
(b) bring transactions into the transparency net, and (c) act as a de-facto
brake on speculative churn. This approach signalled a policy preference for
dealing with the immediate fiscal and compliance problems first while deferring
or at least slowing structural regulatory design.
At the same time the RBI has kept a deliberate
distance: it has reiterated that cryptocurrencies are not authorized as
currencies and accelerated work on a Central Bank Digital Currency (the Digital
Rupee) a move that underscores central banks’ preference for controllable,
sovereign digital money rather than decentralized private tokens. The net
effect is an uneasy coexistence: crypto activity is taxed and monitored, but
key legal definitions and prudential rules for intermediaries remain fuzzy.
International models
Examining how other jurisdictions approach crypto
helps clarify policy choices and trade-offs.
- European
Union — rulebook first (MiCA): The EU adopted a comprehensive, harmonized
framework with the Markets in Crypto-Assets Regulation (MiCA), which
entered into force in 2023. MiCA aims to define asset classes, set conduct
rules for service providers, require transparency for stablecoins and create
authorization and supervision regimes across member states. It is a
classic compliance-first model: set detailed rules, then allow market
participants to innovate within that predictable legal envelope.
- United
States — enforcement + piecemeal rulemaking: The U.S. has a fragmented
federal landscape where different agencies (SEC, CFTC, Treasury, OCC)
assert jurisdiction depending on whether a token is a security, commodity,
or simply a payment instrument. The approach has often been
enforcement-led robust SEC enforcement against token issuers it views as
unregistered securities has driven court challenges and market caution.
Yet in 2024–25 federal action and legislative proposals have shifted
toward accommodating certain crypto activities (e.g., clearer rules for
spot bitcoin products, or CFTC permitting listed spot crypto trading on
registered exchanges), showing a gradual movement from confrontation to
calibrated incorporation. The U.S. model mixes aggressive enforcement with
eventual rule-making unpredictable
for innovators but strict on investor protection.
- Singapore/Switzerland
— sandbox and facilitation: Some small jurisdictions (e.g., Singapore,
Switzerland) pair well-defined licensing regimes with support structures
like regulatory sandboxes and clear token classification guidance. The
policy bet here is that strong, early clarity attracts fintech capital and
allows regulators to control risks through licensing, capital, and conduct
rules without heavy prohibition.
Policy trade-offs: what regulators
must balance
When policy makers decide where they stand on
crypto, they are effectively balancing three competing objectives:
- Innovation: Allow new business models,
tokenization, programmable finance, and competition in payments.
- Financial
stability & monetary sovereignty: Prevent unregulated tokens from undermining
the central bank’s control of the monetary system or causing systemic
shocks.
- Consumer/investor
protection & crime prevention: Guard retail investors and reduce fraud,
market manipulation, and illicit finance.
India’s current posture gives clear priority to fiscal
control and monetary caution before broader market facilitation.
That choice reduces immediate risks but may also restrict market development
and push activity offshore, or into decentralized forms harder for authorities
to monitor.
The compliance puzzle for Indian
startups and exchanges
For Indian companies the practical checklist is now
a mix of tax, KYC/AML, corporate and contractual considerations:
- Tax
compliance:
Apply the 30% tax on profits (Section 115BBH-style treatment) and ensure
1% TDS mechanisms are correctly implemented; maintain meticulous books
because losses are generally not set off in the conventional manner.
- KYC/AML
& FATF obligations: Exchanges must align with anti-money-laundering
rules and international standards — this is non-negotiable and often the
focus of bank relationships and payment rails.
- Consumer
disclosures and smart contract risk: Platforms that create or host token contracts
must assess ongoing legal duties to disclose risks, maintain security
practices and have contingency plans for smart contract failures.
- Cross-border flows and
custody: Unclear rules on custody and foreign exchange treatment mean
counsel must design operational structures that are flexible and accommodating.
- Regulatory
engagement:
Proactive dialogue with the finance ministry, RBI and other regulators including
participation in proposed sandboxes and industry consultative forums is
essential. The absence of a central crypto law increases the value of
regulatory engagement.
Why India’s hybrid route might be
defensible — and where it risks missing out
There are persuasive reasons India has taken this
path. First, the fiscal imperative: tax revenue from structural economic
activity matters for public finances capturing crypto transactions reduces tax
avoidance. Second, the RBI’s valid prudential concerns: large unregulated
stablecoins or tokenized bank deposits could, in worst cases, erode monetary
control. Third, political economy Indian regulators tend to favor caution
around nascent financial experiments that could affect large, retail
populations.
But the risks are real. An uncertain legal
environment may drive talent and capital to favourable jurisdictions; domestic
firms may become service providers to foreign platforms rather than building
globally competitive Indian players. And regulatory lag can increase systemic
risk if activity migrates to opaque or offshore channels.
Lessons from abroad that India
could apply
If India wants to tilt the balance toward
innovation while preserving compliance, it can borrow tested elements from
other jurisdictions:
- Clear
taxonomy and definitions (like MiCA): Start with legislative clarity on what counts
as a “crypto-asset”, “utility token”, “security token” and “stablecoin”.
Legal certainty reduces litigation and helps exchanges design compliant
products.
- Proportionate
licensing & sandboxing (Singapore/SW model): Create tiered licences
where small innovators have a path to test products with limited exposure
while larger systemic providers face stricter capital and conduct rules.
- Regulatory
coordination and single points of contact: Reduce inter-agency
ambiguity by designating lead authority for specific token classes —
whether the RBI (payments/stablecoins), SEBI (security tokens) or another
consolidated regulatory vehicle.
- Consumer
disclosures and mandatory insurance/custody standards: Require custody standards,
segregation of client assets and minimum technology audits to protect retail
users.
- International
cooperation and data sharing: Given crypto’s borderless nature, India must
invest in cross-border supervisory cooperation and information exchange on
suspicious flows.
A pragmatic pathway: three policy
recommendations
- Adopt
a phased regulatory framework: Begin with bright-line rules for stablecoins,
followed by licensing for custodians and exchanges; defer complex
tokenized securities until basic market conduct rules are laid down.
- Make
taxation predictable and administrable: The 30% tax and 1% TDS addressed revenue and
traceability — now refine reporting templates and provide clear guidance
on set-offs, staking income, airdrops and cross-token swaps to avoid
compliance headaches and litigation.
- Enable
regulated experimentation: Launch a national crypto sandbox with
time-bound exemptions and supervision for promising use cases (e-KYC,
supply chain tokenization, tokenized bonds). This helps authorities
calibrate risk without wholesale prohibition.
For the lawyer, entrepreneur and
policymaker: how to think about compliance as a competitive advantage
Compliance is not just a cost to be managed — it
can be a market differentiator. Platforms that build robust KYC/AML, clear
client disclosures, institutional custody, and tax-aware reporting can attract
institutional capital, banking partners and retail users who value safety.
Compliance also reduces the risk of sudden enforcement actions that can destroy
value overnight.
Conclusion
India is at an inflection point. The tax-first, caution-heavy
approach has brought order to a chaotic fiscal and accounting problem, while
the RBI’s circumspection preserves monetary sovereignty. But the lack of a
comprehensive, innovation-friendly regulatory framework also risks stunting
domestic entrepreneurship and allowing activity to flow offshore. International
models (MiCA, U.S. enforcement + market integration, and Singapore’s measured
facilitation) offer lessons that can be selectively adopted: clarity,
proportionality and supervised experimentation.
Regulators and industry alike must move from
reaction to structured design. For India to realize the promise of blockchain
and tokenization whether for trade finance, efficient government payments, or
new financial instruments it will need rules that are clear, internationally
interoperable, and flexible enough to evolve with technology. Innovation and
compliance are not enemies; they are two sides of a policy coin. Flip it
wisely.