Introduction
A growing population of crypto enthusiasts in India, which has surpassed 100 million, finds itself in a precarious regulatory landscape due to the absence of a thorough legal framework for virtual digital assets (VDAs). Although existing regulations provide for taxation and mandate compliance with Anti-Money Laundering (AML) standards, they fall short in critical areas such as consumer protection and market conduct oversight.
Current Regulatory Landscape
In India, the legal definition of a VDA was brought into existence through amendments to the Income Tax Act in 2022, which encompassed not just cryptocurrencies but also non-fungible tokens (NFTs) and other digital assets specified by the government. Although these assets are not classified as legal tender, individuals retain the right to trade and possess them. The nation imposes a flat tax of 30% on profits derived from VDAs along with a 1% TDS on transactions that exceed specific thresholds, while losses from these assets cannot be set against other income.
Since March 2023, companies engaged in providing VDA services are mandated to register with the Financial Intelligence Unit-India (FIU-IND) and adhere to AML and Know Your Customer (KYC) regulations outlined in the Prevention of Money Laundering Act. This regulation applies to both domestic and foreign platforms catering to Indian customers. Despite these stipulations, a comprehensive controlling law remains absent, creating an environment of uncertainty that has prompted a significant exodus of both capital and talent from the country.
VDA Review Insights
India’s G20 presidency in 2023 and insights drawn from organizations like the Financial Stability Board have played a crucial role in spurring the country toward the integration of international standards in crypto regulation. Following a 2025 Supreme Court appeal noting the glaring regulatory void, the Central Board of Direct Taxes initiated consultations to assess the necessity for a dedicated VDA law.
The review is set to investigate essential aspects such as:
- Balancing innovation with effective investor protections
- Establishing suitable oversight approaches for varied VDAs, including trading tokens and stablecoins
- Ensuring alignment with global regulations while safeguarding India’s financial ecosystems against illicit activities
- Clearly defining the roles of relevant regulatory bodies to provide greater legal clarity for businesses and users alike.
Key Issues Under Consideration
The ongoing regulatory assessment seeks to address fundamental uncertainties that have persisted in the VDA framework. Major considerations include:
- Investor Protection: The lack of a cohesive legal structure protecting crypto investors raises concerns regarding exchange fund management, failure protocols, misrepresentation, and inadequate disclosure.
- Market Integrity and Risks: Regulatory attention is directed toward phenomena like wash trading, hidden leverage, and offshore platform operations, which pose systemic risks to the financial system.
- Money Laundering Concerns: Despite AML regulations covering VDA service providers, enforcing these on international platforms is problematic, particularly regarding decentralized finance (DeFi) sectors that escape current regulations.
- Taxation: Heavy taxation where losses cannot be offset against profits is driving many users towards unregulated international platforms, effectively stifling local innovation.
- Tokenized Real-World Assets (RWAs): With no current regulatory basis for RWAs, this could become critical as tokenization continues to gain traction.
Potential Regulatory Frameworks
Discussions surrounding the review may lead to various proposed regulatory models, including:
- Risk-Based VDA Law: A tailored VDA law categorizing assets based on their risk profile into different classifications such as payment tokens and utility tokens.
- Licensing for VDA Services: Formal licensing requirements for exchanges, custodians, and brokers to ensure compliance with governance, cybersecurity, and financial transparency standards.
- Conduct-of-Business Standards: Introduction of uniform risk disclosures, continuous reporting, and clear advertising guidelines pertinent to VDAs.
- User Fund Regulations: Clear rules for the segregation of user funds and regular account reconciliations can enhance transparency regarding reserves.
- RWAs Regulation: Specific regulations addressing tokenized RWAs could lead to greater involvement from central banks and enhanced capital requirements.
- Data and Reporting Requirements: Establishing periodic reporting mandates for transaction data among regulatory authorities like the Reserve Bank of India and the Securities and Exchange Board of India will foster better oversight.
A well-crafted regulatory framework has the potential to significantly benefit the VDA industry in India. By bolstering user protections and enhancing system resilience, it can also promote a conducive environment for entrepreneurship and talent retention within the domestic market.
