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2nd June 2025 (12 Topics)

India’s Crypto Conundrum

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Context

India has once again ranked first in grassroots crypto adoption globally, as per the Chainalysis 2024 report. Simultaneously, the Supreme Court (May 2025) raised concerns over the lack of a clear regulatory framework for Virtual Digital Assets (VDAs), exposing the gap between rapid market growth and regulatory preparedness.

Contradictions in India’s Crypto Growth: Legal Vacuum vs. Market Dynamism

  • Regulatory Landscape and Policy Mismatch
    • Supreme Court’s Intervention (May 2025): The Supreme Court criticized the lack of comprehensive crypto legislation, calling out the dissonance between ground-level adoption of VDAs and the legal vacuum, asserting that mere bans fail to address the complexity of the issue.
    • Capital Control Challenges: India's strict capital controls and centralized payment systems stand in contrast to the decentralized architecture of VDAs, making policy harmonization inherently difficult under the existing regulatory paradigms.
    • Early RBI Actions and Judicial Reversal: The RBI’s 2018 circular prohibiting banks from servicing crypto entities was struck down by the Supreme Court in 2020, highlighting the judicial pushback against blanket restrictions lacking statutory basis.
  • Fiscal Measures and Their Limited Effectiveness
    • Prohibitive Taxation Model (2022): India introduced a 30% capital gains tax (Section 115BBH) and 1% TDS (Section 194S) on VDA trades in 2022, aiming to increase transparency and deter speculative behavior in the absence of regulatory law.
    • Scale of Offshore Transactions: Between July 2022 and October 2024, Indian users traded over ?3.66 trillion on non-compliant exchanges, resulting in a TDS loss exceeding ?6,000 crore, with nine blocked exchanges accounting for over 60% of volume.
    • Circumvention of Government Controls: Despite URL blocks and access restrictions, web traffic to blocked exchanges increased by 57%, with users evading controls via VPNs, mirror websites, and alternate platforms, undermining enforcement efforts.
  • Role of VASPs and the Path Ahead
    • VASPs as Regulatory Anchors: Virtual Asset Service Providers (VASPs) act as key intermediaries aligned with FATF and FSB global standards, enabling visibility, compliance, and the enforcement of KYC/AML norms in the crypto ecosystem.
    • Compliance Success and Risk Mitigation: Indian VASPs collaborated with FIU-India to improve anti-money laundering and counter-terror financing controls, especially post the 2024 hack involving $230 million, by deploying insurance reserves and cybersecurity protocols.
    • Need for a Comprehensive Framework: The current regime of taxation without regulation is unsustainable. A future-ready, balanced legislative framework is essential to retain economic value, ensure consumer protection, and safeguard national financial sovereignty.

Practice Question:

"India’s current approach to Virtual Digital Assets (VDAs) centered on taxation without regulation risks undermining both economic potential and regulatory effectiveness. Critically examine the need for a comprehensive crypto regulatory framework in light of recent judicial observations and global standards."

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