India’s Crypto Conundrum

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."