The Crypto Conundrum, India’s Journey from Tax-led Ambiguity to Multi-Stakeholder Regulation in a Rapidly Globalising Digital Asset Landscape
India’s relationship with cryptocurrencies has been, to put it mildly, a study in ambivalence. For years, the regulatory posture oscillated between outright hostility and grudging tolerance, between warnings of existential risk and quiet acceptance of the technology’s persistence. The Reserve Bank of India’s 2018 circular, prohibiting regulated entities from dealing in virtual digital assets, was the high-water mark of this hostility—a sweeping ban that the Supreme Court struck down in 2020 as disproportionate. In the absence of a dedicated crypto legislation, the government fell back on indirect levers: a punitive tax regime and, more recently, the application of anti-money laundering rules.
The accompanying analysis by Smita Jha and Ananya Giri Upadhyay traces this evolution with precision and clarity. It shows how India’s approach has moved from a tax-led model—imposing a flat 30 per cent tax on income from VDA transfers, a 1 per cent tax deducted at source, and gift tax provisions—to a surveillance-led model, bringing VDA service providers under the Prevention of Money Laundering Act in 2023. This shift aligned India with global standards on anti-money laundering and combating terrorist financing, and signalled a decisive move away from the purely punitive approach that had characterised the earlier phase.
Yet the analysis also makes clear that India’s crypto framework remains a work in progress. The government has still not introduced a comprehensive, standalone crypto law. The regulatory architecture is fragmented, with the RBI maintaining its cautious stance, Sebi so far excluding VDAs from its ambit, and the courts playing a meaningful role in shaping the legal treatment of crypto assets. Recent reports indicate that the Ministry of Finance is engaging with Sebi and the RBI to establish a more structured framework, under which Sebi may emerge as the primary regulator for crypto exchanges while the RBI retains oversight of cross-border transactions, capital flows, and investment.
This multi-stakeholder approach, the authors argue, could provide much-needed clarity while creating a more predictable environment for innovation and investment. But its effectiveness will depend on the ability to combine regulatory clarity with proportionate, risk-based oversight. The balance between fostering innovation and protecting consumers, between integrating with global standards and preserving macroeconomic stability, is delicate and easily disturbed.
The Tax-Led Phase: Punitiveness Without Clarity
The government’s initial response to the crypto phenomenon was to tax it into submission. The 30 per cent flat tax on income from VDA transfers, applicable without allowing deductions for expenses or set-off of losses, was among the highest in the world. The 1 per cent tax deducted at source added another layer of compliance burden. The inclusion of VDAs under gift tax provisions created additional complexity.
The predictable result was a measurable migration of trading volumes to offshore platforms. Indian investors, facing a punitive tax regime at home, shifted their activities to jurisdictions with more favourable treatment. The government collected some revenue from those who remained compliant, but it also lost the ability to monitor and regulate a significant portion of the market. The tax-led approach was, in effect, a form of regulatory abandonment—a decision to let the market migrate rather than to bring it within a structured framework.
The authors do not explicitly criticise this approach, but their narrative makes clear its limitations. Taxation without regulation is not a policy; it is a revenue-raising measure that leaves the underlying risks—consumer protection, market integrity, financial stability—unaddressed. The migration of trading volumes to offshore platforms did not eliminate these risks; it merely moved them beyond the reach of Indian regulators.
The Surveillance-Led Phase: Bringing the Market Back In
The 2023 decision to bring VDA service providers under the Prevention of Money Laundering Act marked a decisive shift. For the first time, crypto exchanges and custodial wallet providers were subjected to a comprehensive regulatory framework. They were required to register with the Financial Intelligence Unit, implement robust internal governance and Know-Your-Customer checks, retain records for five years, and report suspicious transactions. Even offshore platforms servicing Indian users were required to comply.
This move had several important effects. First, it aligned India with global standards. The Financial Action Task Force had long called for the application of anti-money laundering rules to the crypto sector. India’s action brought it into compliance with these international obligations and signalled its commitment to combating terrorist financing and other illicit activities.
Second, it brought the market back onshore. Offshore platforms that wished to continue servicing Indian users were now required to register and comply. The FIU’s subsequent action against over 30 non-compliant platforms demonstrated that this was not merely a paper requirement but an enforceable obligation.
Third, it shifted the regulatory focus from punitiveness to surveillance. The goal was no longer to tax crypto out of existence but to bring it within a framework of traceability and enforcement. This was a mature recognition that crypto was not going away, and that the appropriate response was not prohibition but managed integration.
The Institutional Architecture: RBI, Sebi, and the Courts
India’s crypto regulatory landscape is not governed by a single authority but by a plurality of institutions, each with its own mandate, perspective, and tools.
The Reserve Bank of India has maintained a consistently guarded stance since at least 2013. Its concerns are multiple: cybersecurity risks, lack of grievance redress mechanisms for decentralised issuances, high price volatility, lack of asset backing, and the risk of disintermediation in payment systems. The RBI has consistently advocated for the central bank digital currency, the e-rupee, as a sovereign digital alternative that preserves monetary control while leveraging technological efficiencies. Governor Sanjay Malhotra’s November 2025 statement reaffirmed this cautious stance, emphasising that any final policy decision on cryptocurrency must rest with the government.
The Securities and Exchange Board of India has so far excluded VDAs from its regulatory ambit. This may change under the emerging framework, with Sebi potentially assuming primary responsibility for regulating crypto exchanges. Sebi’s expertise in market regulation, investor protection, and intermediary oversight would be valuable in this domain, but its mandate would need to be explicitly extended by legislative or executive action.
The courts have played a meaningful role in shaping the legal treatment of crypto assets. The Supreme Court’s 2020 judgment striking down the RBI’s ban was the most dramatic intervention, but recent high court rulings have also been significant. By characterising VDAs as “property” held in trust by platforms for investors, these rulings have imposed fiduciary duties on intermediaries and strengthened investor protection. The courts have, in effect, filled some of the gaps left by legislative inaction.
The Global Context: From G20 Leadership to International Coordination
India’s crypto policy is not being formulated in isolation. Its 2023 G20 Presidency provided an opportunity to advocate for a coordinated global response to cryptocurrencies. The outcome was G20 leaders’ endorsement of a road map created by the International Monetary Fund, which recommended a robust regulatory framework encompassing registration, prudential norms, global coordination, and capacity-building—rather than an outright ban, particularly for emerging economies.
This global context is important for several reasons. First, it provides a benchmark against which India’s approach can be evaluated. The IMF road map and the standards developed by the Financial Action Task Force offer guidance on what a well-designed regulatory framework should include.
Second, it creates pressure for convergence. As more jurisdictions move toward regulation rather than prohibition, the costs of remaining outside the mainstream increase. India’s decision to bring VDA service providers under PMLA was partly a response to this pressure.
Third, it offers opportunities for learning. The European Union’s Markets in Crypto-Assets Regulation (MiCA) and the United States’ proposed GENIUS Act provide models that India can study and adapt. The Basel Committee on Banking Supervision’s work on prudential standards for banks’ crypto-asset exposures offers guidance on managing systemic risk.
The Path Ahead: From Fragmentation to Coherence
The authors conclude that India’s crypto framework remains a “work in progress.” This is an accurate assessment. The government has still not introduced a comprehensive, standalone crypto law. The regulatory architecture remains fragmented, with different institutions exercising different powers and pursuing different objectives.
Recent reports that the Ministry of Finance is engaging with Sebi and the RBI to establish a more structured framework are encouraging. A multi-stakeholder approach, leveraging institutional expertise and regulatory capacity, could provide much-needed clarity on the permissibility and supervision of various VDA services. It could create a more predictable environment for innovation and investment. It could move India from a reactive, piecemeal approach to a proactive, coherent strategy.
But the authors also sound a note of caution. The effectiveness of India’s crypto framework will ultimately depend on its ability to combine regulatory clarity with proportionate, risk-based oversight. Overregulation could stifle innovation and drive activity offshore. Underregulation could expose consumers and the financial system to unacceptable risks. Getting the balance right is the central challenge.
Conclusion: The Balance to Be Struck
India’s journey on crypto regulation has been long and uneven. It has moved from hostility to grudging tolerance, from tax-led punitiveness to surveillance-led integration, from unilateral action to global coordination. It has learned from its mistakes—the Supreme Court’s striking down of the RBI ban was a costly lesson in the limits of executive action. It has built on its successes—the application of PMLA to VDA service providers was a significant achievement.
The path ahead is clearer than it was, but it is not yet fully mapped. The emerging multi-stakeholder approach, with Sebi and the RBI sharing responsibility under government oversight, offers a promising way forward. But the details matter: the scope of Sebi’s mandate, the nature of RBI’s oversight, the mechanisms for coordination and conflict resolution, the balance between central and state regulation. These are not technical details; they are constitutive choices that will shape the crypto ecosystem for years to come.
The authors’ final words—”proportionate, risk-based oversight”—capture the essence of the challenge. Oversight that is disproportionate will stifle innovation without enhancing protection. Oversight that is insufficiently risk-based will miss the most dangerous threats while burdening the most legitimate activities. India has the opportunity to get this balance right. It has the institutional capacity, the global connections, and the regulatory experience. What it needs now is the political will to move from fragmentation to coherence, from reaction to strategy, from uncertainty to clarity.
Q&A Section
Q1: How has India’s regulatory approach to cryptocurrencies evolved from the 2018 RBI circular to the present, and what were the key milestones in this evolution?
A1: India’s approach has evolved through three phases. First, prohibition (2018-2020) : The RBI circular prohibited regulated entities from dealing in virtual digital assets, effectively cutting off the banking system from crypto exchanges. The Supreme Court struck down this ban in 2020 as disproportionate. Second, tax-led regulation (2022-2023) : In the absence of a dedicated crypto law, the government imposed a flat 30 per cent tax on VDA income (without allowing deductions or loss set-off), a 1 per cent tax deducted at source, and gift tax provisions. This led to measurable migration of trading volumes to offshore platforms. Third, surveillance-led regulation (2023-present) : VDA service providers were brought under the Prevention of Money Laundering Act, requiring registration with the Financial Intelligence Unit, Know-Your-Customer checks, record-keeping, and suspicious transaction reporting. Offshore platforms servicing Indian users were required to comply, and the FIU has taken action against over 30 non-compliant platforms. This shift aligned India with global anti-money laundering standards and signalled a move from punitiveness to traceability and enforcement.
Q2: What are the limitations of a purely tax-led approach to crypto regulation, and how did the migration of trading volumes to offshore platforms illustrate these limitations?
A2: A tax-led approach has several limitations. First, it is reactive rather than proactive: it raises revenue from existing activity but does nothing to shape the market or address underlying risks. Second, it creates incentives for avoidance: when domestic taxation is punitive, activity migrates to jurisdictions with more favourable treatment. This is precisely what happened in India: the 30 per cent flat tax, 1 per cent TDS, and absence of loss set-off made onshore trading unattractive, driving volumes to offshore platforms. Third, it leaves regulatory gaps unaddressed: consumer protection, market integrity, financial stability, and anti-money laundering concerns are not resolved by taxation. The migration to offshore platforms did not eliminate these risks; it merely moved them beyond the reach of Indian regulators. Fourth, it forfeits regulatory influence: once activity migrates offshore, the ability to monitor, investigate, and enforce is severely constrained. The tax-led approach was, in effect, a form of regulatory abandonment. The shift to PMLA oversight recognised these limitations and sought to bring the market back within a regulatory framework.
Q3: What are the key provisions of bringing VDA service providers under the Prevention of Money Laundering Act, and why is this shift significant?
A3: The key provisions require VDA service providers (crypto exchanges and custodial wallet providers) to: register with the Financial Intelligence Unit; implement robust internal governance and compliance; conduct Know-Your-Customer checks on all users; retain records for five years; and report suspicious transactions to the FIU. Offshore platforms servicing Indian users are also required to comply.
This shift is significant for several reasons. First, it aligns India with global standards set by the Financial Action Task Force, demonstrating commitment to combating terrorist financing and other illicit activities. Second, it brings the market back onshore by imposing enforceable obligations on offshore platforms, with the FIU taking action against non-compliant entities. Third, it shifts the regulatory focus from punitiveness to surveillance—the goal is no longer to tax crypto out of existence but to bring it within a framework of traceability and enforcement. Fourth, it creates a foundation for more comprehensive regulation, establishing baseline requirements that can be built upon as the regulatory framework evolves. The authors describe this as a “decisive shift” from a tax-led to a surveillance-led model.
Q4: What roles do the RBI, Sebi, and the courts currently play in India’s crypto regulatory landscape, and how might these roles change under the emerging multi-stakeholder framework?
A4: Currently, the RBI maintains a consistently guarded stance, advocating for the central bank digital currency as a sovereign alternative and emphasising that any final policy decision must rest with the government. It has regulatory authority over payment systems and cross-border transactions. Sebi has so far excluded VDAs from its regulatory ambit but may emerge as the primary regulator for crypto exchanges under the emerging framework. The courts have played a meaningful role: the Supreme Court struck down the RBI’s 2018 ban as disproportionate in 2020, and recent high court rulings have characterised VDAs as “property” held in trust, imposing fiduciary duties on intermediaries.
Under the emerging multi-stakeholder framework reported to be under discussion, Sebi may assume primary responsibility for regulating crypto exchanges, leveraging its expertise in market regulation and investor protection. The RBI would retain oversight of cross-border transactions, capital flows, and investment, consistent with its mandate for financial stability and monetary control. This division of responsibility could provide much-needed clarity while creating a more predictable environment for innovation and investment. The courts would continue to adjudicate disputes and interpret the law, filling gaps left by legislation and regulation.
Q5: How does India’s G20 presidency and international coordination efforts shape its domestic crypto policy, and what can India learn from regulatory developments in other jurisdictions?
A5: India’s 2023 G20 presidency provided an opportunity to advocate for a coordinated global response to cryptocurrencies. The outcome was G20 leaders’ endorsement of an IMF road map recommending a robust regulatory framework—registration, prudential norms, global coordination, capacity-building—rather than an outright ban, particularly for emerging economies. This global context shapes domestic policy in several ways.
First, it provides a benchmark: the IMF road map and FATF standards offer guidance on what a well-designed framework should include. India’s decision to bring VDA service providers under PMLA was partly a response to these international obligations. Second, it creates pressure for convergence: as more jurisdictions move toward regulation, the costs of remaining outside the mainstream increase. Third, it offers learning opportunities: the EU’s Markets in Crypto-Assets Regulation (MiCA) provides a comprehensive model for regulating crypto-assets, issuers, and service providers. The US’s proposed GENIUS Act offers insights into stablecoin regulation. The Basel Committee’s work on prudential standards for banks’ crypto exposures provides guidance on managing systemic risk.
India can learn from these developments while adapting them to its own context. The challenge is to combine regulatory clarity with proportionate, risk-based oversight—learning from others while forging a path appropriate to India’s unique circumstances. The authors emphasise that the effectiveness of India’s framework will depend on getting this balance right.
