Introduction 

India’s legal treatment of cryptocurrencies is like a messy patchwork trying to fix a broken armor on the eve of war. This patchwork includes court rulings, tax provisions, anti–money laundering obligations, and evolving global policy alignment, which altogether has amounted to clarity in some areas and persistent ambiguity in others.

Invading of the Curtain Wall of RBI

Reserve Bank of India had barred banks from servicing crypto businesses by passing a circular in 2018. But the legal curveball arrived on March 4, 2020, when Supreme Court of India passed its judgement in the case of Mobile Association of India v. Reserve Bank of India[1]. The Apex Court struck down the RBI circular, holding the measure disproportionate while affirming RBI’s power to regulate activities that function “as money” under certain circumstances. The Court explicitly recognized that cryptocurrencies are not legal tender, but the Central Bank of India shall still regulate them. As such regulations are indispensable in pursuit of monetary and financial system integrity. And thus came the end to the banking blockade and the curtain wall of RBI was breached. But as the saying goes “the battle has been won, the war goes on,” cryptocurrencies may not be beyond regulatory reach of the central bank anymore but it still is not a legal tender. The decision of the Court puts heavy emphasis that none of RBI’s regulated entities demonstrated loss due to exchange interfaces, and that less intrusive measures existed compared to a blanket prohibition.

Tactical Deployment of Bills and Notifications

While cryptocurrencies may not be a legal tender in India it does not mean the government will not levy tax on it. Holding and trading such assets is not a crime, and a transaction that’s not an offence shall be taxed. And thus enters the Union Budget 2022 in the battlefield with the weapon of a bespoke tax regime i.e. Section 115BBH. The section imposes a flat 30% tax on gains from “virtual digital assets” (VDAs), and Section 194S mandates a 1% TDS on qualifying transfers from July 1, 2022[2]. The definition of virtual digital assets was also added via Section 2(47A). The bill brings all cryptocurrencies and similar tokens within scope of the tax regulations by embedding it in new Income Tax Rules.

The Ministry of Finance notified in March 2023 that entities dealing in VDAs are “reporting entities” under the Prevention of Money Laundering Act, 2002. Thus extending KYC/AML/CFT obligations to crypto exchanges, custodians, and related intermediaries. The Financial Intelligence Unit-India (FIU-IND) issued AML/CFT guidelines specific to VDA service providers and required registration, recordkeeping, STR reporting, and appointment of designated officers, bringing the sector into India’s financial integrity perimeter. Subsequent FIU circulars and revisions reinforced that VDA service provider whether domestic or offshore, if they are serving Indian users then they must register and comply and non-compliance shall invite penal action.

Many proposals has been made to make a codified law in order to regulate cryptocurrencies most notably the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, but none of them have been passed to date. This has left us in a continuing limbo without any specific crypto law. When analysis of current policies is conducted is constantly described that the current framework is uncertain as cryptocurrency without being recognized as a legal tender is already taxed and AML-regulated. It has till date not been governed by a unified statutory regime which has resulted in fragmented obligations and interpretive gaps for issues like investor protection, insolvency treatment, advertising standards, and cross-border supervision[3].

Adhering to International treaties

In the presidency of India the leaders of the G20 nations has endorsed the IMF-FSB Synthesis Paper and a policy implementation roadmap that urges coordinated risk based regulation rather than blanket bans. The paper also suggests additional targeted measures for emerging markets who are facing heightened risks. Government of India has made statement in the Parliament emphasizing that India will calibrate its measures consistently with the framework that is endorsed by the G20 nations.

Key Legal Challenges

India faces several major legal problems when it comes to regulating cryptocurrencies, and most of these issues exist because there’s still no single, clear law that covers all aspects of crypto. Some of these problems are,

1.     Unclear Rules about Crypto Tokens

Indian law as of right now only covers cryptocurrencies for basic purposes like taxing and tackling money laundering. Beyond that, it’s still not obvious if a token should be considered a commodity, a type of security (like shares in a company), or something else entirely. Even the Supreme Court has said crypto can fit into more than one category but didn’t decide exactly specify which are those categories. This uncertainty leads to difficulty for investors to know what rules apply when it comes to advertising, providing custodian services, or handling customer complaints because there is no specific law to follow.

2.     Safeguarding The Financial System

Government and its institutions are trying their level best in order to protect the banks and economy of the country from irregular and unstable nature of crypto markets. But at the end of the day they also require specialized tools to control risks that arises from cryptocurrencies owned by bank or from situations where people borrow or lend huge amounts using crypto. While the RBI can regulate some of these risks. It has to be done in a way which does not shut down the industry completely as per the order of the court.

3.     Required Checks to Prevent Crime

It is mandatory for all crypto service providers in India to check customer identities and monitor transactions for signs of criminal activity due to applicable money laundering laws. But following these rules is tough, especially when exchanges need to share information with each other or block illegal activity from companies based outside India. The Financial Intelligence Unit (FIU) has begun forcing both local and foreign crypto businesses to not only register and comply but also block or penalize those who don’t. But one of the major challenges arise when legal standards are to be coordinated and cooperation with foreign agencies is to be stablished.

4.     Complicated Tax and Reporting Rules

The Government of India taxes profit made on cryptocurrencies at 30% and takes 1% of transactions as tax (TDS). While this helps in tracking online activity of such digital tenders it also makes trading expensive, especially for those who trade often. There are still multiple unanswered questions about loss incurred in trading, rewards from staking and airdrops. The strict rules might have helped with transparency but it has made it tougher for regular people to use or understand crypto trading.

5.     Gaps in Consumer Protection

There’s no special law protecting crypto users from bad business practices or bankrupt companies like bank or stock accounts. There’s no set way for exchanges to disclose risks, separate customer money from company money, or fix things when something goes wrong. Even when anti-money laundering rules have made businesses more honest. While laws are still needed in order to protect customers and to answer their complaint, but we also need to make sure that risks are explained to them clearly.

6.     Problems with Enforcing Rules Across Borders

Many cryptocurrencies are operated from foreign countries but they serve Indian customers. That makes it much harder for Indian authorities to not only to punish crime but also to recover money lost to scams, or control risky behaviour. Regulators shall rely on measures such as blocking websites, working with international partners, and aligning with global rules. But getting everyone on the same page remains a key challenge for a country like India.

Mobilizing Statutes for a Way Forward

Due to lack of legal clear and unified regulatory framework major hurdles are faced by the cryptocurrency sector of. For tackling these problems India needs to enact laws or statutes that clearly define types of crypto assets, while also providing guidance for regulators as well as investors. A collaborative approach between Reserve Bank of India and the Securities and Exchange Board of India can manage diverse cryptocurrencies by drawing from global models like the European Union’s MiCA Regulation

In order to achieve financial stability in the market after the influx of cryptocurrencies, RBI needs to implement tools limiting risks from crypto holdings and lending. Meanwhile regulatory sandboxes will promote innovation in the market under the supervision of the central bank. Illicit activity can be brought to a halt by strengthening anti-money laundering rules. Registration on crypto platform shall be made mandatory. Another way to stop such activity is through international cooperation.

Whenever the Government of India provide further tax rules with regards to cryptocurrencies they should provide simple and clear guidance on gains losses and staking income. Consumer protections laws shall also be amended for transparent and swift dispute resolution to safeguard the users of Cryptocurrencies.

For regulating foreign platforms the regulators in India needs to build strong international collaboration. They need to implement geo-blocking if necessary and also adopt global standards such as FATF Travel Rule. These measures when combined altogether will help India build a safe, clear and more robust crypto environment which will balance innovation and protection

The Practical Bottom line                                            

India’s approach as of now with regards to cryptocurrencies is shaped by a Supreme Court ruling that rejected outright bans but confirmed the Reserve Bank of India’s authority to regulate cryptocurrencies. The new tax rules impose 30% tax on income earned out of cryptocurrencies and a 1% TDS is levied on transactions involving cryptocurrencies. The policy drafted by the Government of India aligns with global standards promoted by G20 nations and the International Monetary Fund for risk-based regulations. Even after that many challenges remain such as the absence of a single and comprehensive legal framework to license and regulate crypto businesses. Other problems in this sector are also found such as limited investor protections and problems enforcing rules on foreign platforms. While it can be clearly seen that India is moving towards stronger supervision and better international cooperation but a clear and comprehensive legal structure that covers all the facets of cryptocurrencies is still lacking.