The significant growth in DeFi has a major change in financial system. Now there is an alternative for centralized finance system which helps in services like lending, borrowing, trading and insurance. It is backed by public blockchain and smart contracts. The main advantage of DeFi system is that it removes unnecessary intermediaries and is a direct transaction between bank institutions and consumer. It helps user to operate in transparent and permission less system. As it is a borderless system which can pose a serious threat to regulate it and address the matter effectively. In India where financial regulations are done by Reserve bank of India and Securities and Exchange Board of India DeFi system can be very challenging. As India has not banned Cryptocurrency also has not introduced any regulations to regulate Cryptocurrency which leads to uncertainty. DeFi system faces legal ambiguities like taxation issues, anti-money laundering and Know Your Customer norms. In the above challenges it is very important for Indian business to do some developments, adapt regulatory changes and prepare a legislation to avoid legal ambiguities and ensure compliance.

DeFi is a rapidly growing ecosystem that offers financial services without the need for centralized authorities by utilizing blockchain technology and smart contracts. Instead of using conventional middlemen like banks or stock exchanges, DeFi systems conduct financial transactions using decentralized networks and algorithms. Developers can create decentralized apps (DApps) that provide services like decentralized exchanges (DEXs), lending and borrowing platforms, yield farming, and liquidity pools using Ethereum, the biggest and most well-liked blockchain for DeFi applications. The current financial system mostly revolves around government-issued currencies and large banking institutions that act as trusted third parties in between transactional relationships, fiat currency provides stability to financial markets, while banks expand productivity by issuing credit, assuming counterparty risk, and streamlining payments, without these two institutions providing liquidity and critical business infrastructure, the velocity of markets and the rate of innovation would be substantially slower than current rates . Looking into the DeFi system, Indian business can avoid intermediaries, also will have access to different markets and offer better financial system. For the DeFi system need to navigate regulatory landscape to ensure a suitable future in Decentralised Finance system.

The last two decades are known for the birth and evolution of Cryptocurrency and its impact on the banking and financial services sector, in a way Cryptocurrency has emerged and started disrupting the financial services ecosystem has been a focal point for a lot of governments and regulators across the globe . By 2022, there will be more than 300 million cryptocurrency users or owners, per publicly accessible research. With a market value of USD 1.06 trillion, there are nearly 6000 distinct Cryptocurrency types available (Tuwiner, 2023). The widespread use of cryptocurrencies is evidenced by the fact that approximately 18,000 businesses worldwide accept cryptocurrency payments. India, which has become the largest cryptocurrency holder in the world, is not exempt from this development. DeFi shifts ownership of banking and monetary infrastructure from centralized authorities to market participants' decentralized infrastructure. Users can self-operate money and markets using distributed software protocols like Avalanche, BNBChain, Ethereum, Fantom, Polkadot, Polygon, and Solana, which can continuously reach dependable consensus about the state of the network, as an alternative to issuing money on authority and operating financial networks on centralized servers .

Indian business should follow 2 important norms in DeFi system which are Anti-Money Laundering and Know Your Customer. The main is that as DeFi is a modern system so it is difficult to implement these norms. Pseudonymous transactions are by definition permitted on DeFi platforms, meaning that participant names are kept secret during transactions. Because of the decentralized nature of the technology, it is impossible to track and validate transactions, which poses serious problems for both businesses and authorities. In India, traditional financial institutions like banks and exchanges are mandated by law to follow strict anti-money laundering and know your customer procedures. However, DeFi services create regulatory ambiguity because they often allow users to trade without verifying their identities. Organizations currently need to be cautious and think about implementing measures like transaction monitoring, which can help track suspicious activity even if the user's name is kept anonymous. India is anticipated to enforce more stringent regulations for DeFi platforms in the future due to the increased international regulatory scrutiny of AML and KYC compliance.

India’s Income Tax Department has not issued explicit guidelines for DeFi transactions. However, the general rules under the Income Tax Act apply based on the nature of income and transaction type . Although cryptocurrencies like Bitcoin and Ethereum are not accepted as legal tender in India, the government has not yet decided how to tax transactions involving digital assets. The idea that cryptocurrencies should be regarded as capital assets and be liable to capital gains tax when sold for a profit has historically served as the basis for cryptocurrency taxation in India. The numerous other activities that take place on DeFi platforms, like yield farming, staking, and liquidity provisioning, are not included in this classification, though, and they may have intricate tax implications. DeFi's decentralized structure, which allows users and platforms to be spread across several jurisdictions, may make it challenging for Indian businesses operating in the sector to figure out how to report their profits and pay taxes. Indian businesses could be subject to fines, penalties, or accusations of tax evasion in the absence of a clear taxation system. The government must enact comprehensive tax laws that provide businesses with clear instructions on how to file and pay taxes while also taking into account the unique features of DeFi.

Smart contracts, which are self-executing agreements that start transactions when certain conditions are met, are used in DeFi systems. DeFi ecosystems depend on effective risk management strategies to ensure stability and sustainability, risk management identifies, assesses, and controls risks (IBM, n.d.). DeFi requires risk management because its technology is decentralized because there is no central authority, it is up to individual users and organizations taking part in DeFi transactions to monitor risks . Although smart contracts increase transparency and efficiency, they also present security risks. Smart contract technology flaws, weaknesses, or exploits can cost businesses and clients’ money. This is a significant regulatory obstacle for Indian businesses. DeFi businesses are responsible for ensuring the safety of their platforms and the assets stored on them in numerous jurisdictions.

DeFi protocols are vulnerable to hacking, smart contract attacks, and malfunctions. Prioritizing Cybersecurity and putting best practices for incident response and safe key management into practice are imperative for Indian organizations . Operational risk encompasses financial losses due to cyber threats, fraud, and inadequate risk management processes (BCBS, 2022; Adeabah et al., 2023), previous studies (Fiordelisi et al., 2013; Pollmeier et al., 2023) highlight the increasing financial and reputational costs of Cybersecurity breaches .

With protocols accessible to users worldwide, DeFi is essentially global. Indian businesses have to deal with a patchwork of international standards in addition to domestic limitations. This complexity increases operational and legal risks. Conventional financial systems function within predetermined geographic boundaries, enabling national governments to enact and implement laws pertaining to financial services. DeFi platforms operate from multiple locations and are accessible worldwide. The task of determining which laws apply to cross-border DeFi activity presents a challenge for authorities. Among the challenges is that these transactions result in significant expenses for both financial institutions and users, though the system has improved over the years, it remains far from perfect, and payers and payees would welcome a new way of cross-border payment .

Regulators are taking a more active stance when it comes to DeFi regulation globally. For instance, the significance of AML and KYC compliance is emphasized in recommendations issued by the Financial Action Task Force (FATF) for virtual asset service providers (VASPs). India's regulatory approach may be impacted by these global trends, necessitating that Indian businesses align their operations with international standards in order to maintain compliance and promote cross-border cooperation.

The regulatory environment surrounding digital assets in India is greatly influenced by the Reserve Bank of India (RBI). The potential effects of cryptocurrencies on monetary policy and financial stability have alarmed the RBI. Despite the Supreme Court's 2020 ruling that overturned the RBI's banking ban on cryptocurrencies, the central bank has maintained a cautious stance. Recently, the RBI Governor reiterated concerns about crypto trading, highlighting potential threats to financial stability and indicating that no new legislation has been introduced to address these issues. Despite the Supreme Court's 2020 ruling that overturned the RBI's banking ban on cryptocurrencies, the central bank has maintained a cautious stance, the RBI Governor reiterated concerns about crypto trading, highlighting potential threats to financial stability and indicating that no new legislation has been introduced to address these issues .

Indian businesses that are currently in the DeFi industry or wish to enter it may want to think about the following tactics to get past regulatory obstacles:

1. Engage with Regulators: Take an active part in discussions with regulatory authorities to advocate for a transparent and helpful regulatory system and to stay informed on upcoming regulatory changes.

2. Put Strict Compliance Measures in Place: Develop and put into place comprehensive AML and KYC protocols to lower the likelihood of criminal activity and promote trust between users and authorities.

3. Making customer aware about the Decentralized Finance system which will help them to operate it more carefully and efficiently.

In India, the DeFi ecosystem offers enormous opportunities for financial inclusion and innovation. However, organizations wishing to work in this field face challenges due to the absence of a clear legislative framework. Indian businesses can negotiate the regulatory framework and help India's DeFi sector grow and mature by proactively interacting with regulators, putting strict compliance procedures in place, and keeping abreast of international trends.