Author: Akhilesh Kakade
I. Introduction
Cryptocurrency is a form of digital asset which utilizes cryptography and blockchain technology to make peer-to-peer transfers without a traditional intermediary such as a bank. Unlike normal money, most cryptocurrencies are not issued by a government and its value could increase or decrease sharply in a matter of hours. This combination of innovation and uncertainty is precisely why crypto has been so controversial: It has the potential to facilitate faster, borderless payments and to deliver new financial products, but is also associated with fraud, extreme volatility, consumer losses and money-laundering risks that have been pointed out by global standard-setters.
The legal position in India is a manifestation of this tension. On the one hand, regulators have on several occasions indicated that cryptocurrencies are not “legal tender” and should not be considered official currency. On the other hand, India has devised a detailed taxation framework by placing crypto in the category of “Virtual Digital Assets (VDAs) and taxing gains at the flat rate of 30% plus 1% TDS on many transfers effectively taxing an activity which is yet to be clearly recognized or regulated in a dedicated statute. This policy “middle path” has created a practical confusion for common users: If it is taxable, is it legal? If it is risky, why not regulate that like other financial products?
This article looks at the basic policy choice in India of ban, regulate or tax (without recognition) and suggests that a clear and proportionate regulatory framework with robust consumer and AML safeguards is more sustainable than either a ban or tax-only approach.
II. Evolution of Cryptocurrency Regulation in India
India’s cryptocurrency policy has evolved in a patchwork manner via central bank directions, constitutional adjudication, and tax legislation as opposed to one and single comprehensive statute. The first significant regulatory turning point is the Reserve Bank of India’s (RBI) April 6, 2018 circular, which instructed RBI-regulated entities not to “deal in” or offer services facilitating dealings in virtual currencies, effectively cutting off crypto businesses from the formal banking channel.
This “banking exclusion” model was to become the main regulatory tool until it was challenged before the Supreme Court. In Internet & Mobile Ass’n of India v Reserve Bank of India (2020) , the Court held that while RBI had regulatory competence over matters affecting the financial system, the impugned measure did not pass the test of proportionality in the extant legal context especially since cryptocurrency trading itself was not prohibited by Parliamentary law thereby setting aside the circular. Scholarly and policy commentary around this phase included a recurring problem which is that India is oscillating between risk aversion and innovation without being able to decide if crypto should be made subject to payments risk, securities like investment product, or technology platform requiring calibrated regulation; legal scholarship argued that crypto asset systems are better approached as regulable platform technologies and not an all or nothing prohibition question. Parallel academic discussion also highlighted the pitfalls of the “regulatory vacuum” around the issues of custody, exchange obligations, and private law characterization of customer assets where no tailored regulation is able to mitigate consumer harm and the shortcomings of governance processes.
A big turn took place with respect to fiscal policy through the Union Budget/Finance Bill 2022, wherein in lieu of ban on crypto, it was taxed by Parliament by way of a unique taxation regime on “virtual digital assets,” including the now well-known 30% rate structure (by way of SS 115BBH) and transaction level reporting/collection by way of TDS (by way of SS 194S). This had created a unique Indian posture taxation without full legal recognition and has in essence given recognition of a crypto market in India and left behind the major regulatory issues Finally, India’s sovereign alternative has been well advanced via CBDC policy: according to modern policy analysis, the CBDC push in the Budget and simultaneous taxation of VDA is the state’s way of nudging a regulated path for the digital rupee without at the same time leaving private crypto on a path of careful oversight but with a deterrence tilt.
Current Legal Position and Regulatory Vacuum
India’s current legal regime implies that cryptocurrencies are to be treated as tradable digital currencies but not legal tender. The Reserve Bank of India (RBI) has made it clear on multiple occasions that cryptocurrencies such as Bitcoin and Ethereum are not authorized as money or official currency in India and thus cannot be used as a medium of payment in the formal economy. This lack of currency status means that crypto falls outside the traditional monetary regulatory ambit and is one of the main reasons for continued legal ambiguity. Unlike regulated financial instruments, there is no specific cryptocurrency statue introduced through parliament; there have been several draft bills such as the Cryptocurrency and Regulation of Official Digital Currency Bill which have been discussed but none have been passed into law thus leaving a legislative gap in the classification, licensing, custody, and market conduct.
Despite such a vacuum, India has introduced the Virtual Digital Asset (VDA) framework through the Income-tax Act, 1961 to tax the gains of crypto, which subjects the profits to a flat 30 percent tax, and 1 percent tax-deducted-at-source, often without regard to the cost set-off, often times exposing the crypto activity to a heavy fiscal burden, but providing no clear investor protection regime. In addition, the government has included entities dealing in VDAs under the Prevention of Money Laundering Act (PMLA) as reporting entities, as a signal that it is focusing on AML, but falling short of creating a unified financial regulatory regime.
The regulatory vacuum exists also for institutional authority. Multiple regulators such as the RBI, Securities and Exchange Board of India (SEBI) and the Ministry of Finance have claimed overlapping interests in terms of monetary stability, securities regulation and economic policy, however none of them has exclusive statutory mandate over cryptocurrencies. This fragmentation causes uncertainty for investors and blockchain startups, who have to grapple with compliance without any clear statutory guidelines, which discourages innovation and market growth while investor protection mechanisms are rudimentary.
Ban vs Regulate vs Tax – A Critical Analysis
(A) The Case for a Ban
The most compelling case against the sale of private cryptocurrencies is based on financial stability and systemic risk concerns. The Reserve Bank of India (RBI) has repeatedly warned that unregulated crypto-assets pose a potential threat to monetary sovereignty and macroeconomic stability. Globally, the Bank for International Settlement (BIS) has noted that crypto markets are highly volatile and speculative and are prone to collapse due to incidents such as failure of exchanges and liquidity crises which exposes retail investors to huge losses. Further, the Financial Action Task Force (FATF) has highlighted potential significant risks of money laundering and terrorist financing through virtual asset service providers if regulatory safeguards are weak. A ban, therefore, is often justified as a preventive tool, in order to shield the financial system and protect unsophisticated investors from fraud and scams.
(B) The Case for Regulation
However, many scholars say that complete prohibition is far from practical in a borderless digital economy. Academic commentary in Indian legal scholarship relates that crypto-assets are more like speculative digital commodities or instruments of investment rather than currencies, and hence are better regulated by calibrated regulatory frameworks rather than prohibition. The International Monetary Fund (IMF) has also suggested that countries should implement comprehensive regulatory frameworks that are focused on licensing, disclosure, custody safeguards and consumer protection rather than prohibitions. Regulation would enable India to bring exchanges under a compliance framework that would protect investors by adopting KYC and reporting standards, and promote blockchain innovation and fintech growth along with managing risks.
(C) The Tax-Only Model
India’s present approach imposing 30% tax under SS115BBH and 1% TDS under SS194S is a manifestation of revenue recognition with no clarity in regulation. While this model creates fiscal revenue, according to scholars, taxation without a parallel investor protection framework leads to policy inconsistency and market uncertainty. This lack of classification whether crypto is a security, a commodity or sui generis asset continues to create ambiguity on regulatory jurisdictional.
Global Perspective & India’s Way Forward
Globally, crypto regulation has divided into four clear models each of which offers some lessons for India. In the United States, there is no single “crypto code,” but rather, regulators, particularly the SEC, have adopted an enforcement-driven strategy by suing market participants for failing to register and disclose and failing to register with the SEC in an effort to ensure compliance and market conduct, a strategy that has been called “regulation by enforcement” in much of the scholarship, which induces compliance pressure but also creates uncertainty about clear ex ante rules.
The European Union has taken the opposite direction by adopting a harmonized rulebook with the Markets in Crypto-Assets Regulation (MiCA) on issuance, disclosure, authorization and conduct of crypto asset service providers at EU level, with the aim of reducing fragmentation and increasing consumer safeguards.
China being the prohibition model: A joint notice led by the People’s Bank of China in 2021 made crypto-related business activities illegal financial activities, a hard-line policy choice against private crypto markets. El Salvador being the most liberal model: Recognizing Bitcoin as legal tender in the Bitcoin Law, it has been duly made officially usable for payment obligations within the jurisdiction of the country. Against such contrasting approaches, the “way forward” in India must be neither on one extreme to outright ban crypto-related activities pushing it offshore nor on the other extreme of legal recognition of financial tender, which would raise concerns over monetary and A more workable path is a MiCA-style Indian framework, where crypto-assets are defined by category (payment-token, utility-token, investment-token), licensing and capital/segregation norms are applied to exchanges and custodians, plain language risk disclosures are mandated, and FATF aligned AML compliance is integrated to ensure taxation works not in place of investor protection, but alongside it.
Conclusion
India’s cryptocurrency policy today reflects caution without coherence. A complete prohibition, though attractive from a risk-control perspective, is neither technologically feasible nor economically sustainable in a globalized and digital financial ecosystem. Experience from other jurisdictions shows that outright bans tend to push activity underground or offshore, reducing regulatory visibility rather than eliminating risk. At the same time, India’s current approach of imposing a heavy tax burden under Sections 115BBH and 194S of the Income-tax Act, 1961, without providing a comprehensive regulatory framework, creates inconsistency. Taxation acknowledges the existence of a crypto market, yet the absence of investor protection, licensing norms, and clear regulatory classification leaves participants operating in uncertainty.
A structured and proportionate regulatory framework therefore appears to be the most balanced path forward. Such a model would clearly define crypto-assets, allocate regulatory jurisdiction, impose compliance and disclosure obligations on exchanges, and integrate strong AML safeguards in line with global standards. Regulation does not imply endorsement; it implies control, transparency, and accountability.
India must move from policy hesitation to regulatory clarity if it wishes to remain a serious player in the global digital economy while safeguarding financial stability and consumer interests.
