Crypto Confusion to Clarity: How India is Taming the Digital Asset Beast

Cryptocurrency, once considered a speculative anomaly, has rapidly gained prominence as a transformative force in India’s financial ecosystem. With the global digital economy increasingly embracing decentralized technologies, cryptocurrencies have forced policymakers, regulators, and financial institutions to confront a paradigm shift. India, home to one of the world’s largest bases of cryptocurrency users and blockchain innovators, is navigating this complex landscape by attempting to balance innovation, regulation, and financial stability. The journey of cryptocurrency regulation in India reflects a confluence of judicial interventions, government policies, and industry advocacy, revealing the challenges and opportunities of integrating digital assets into a traditional economy.

India’s relationship with cryptocurrency began cautiously. In 2013, the Reserve Bank of India (RBI) issued its first advisory warning against the use of virtual currencies, highlighting concerns over money laundering, terrorism financing, and consumer protection. Despite this caution, the sector remained largely unregulated, allowing cryptocurrency exchanges and blockchain startups to thrive in a legal grey area. This period of unbridled growth attracted significant investment and innovation, but it also underscored the risks posed by the absence of regulatory oversight.

By 2018, the RBI escalated its response, issuing a directive prohibiting banks and financial institutions from facilitating cryptocurrency transactions. This effectively restricted the operations of exchanges and pushed many crypto businesses to the brink. However, this regulatory crackdown was short-lived. In a landmark decision in Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court struck down the RBI’s directive, ruling it unconstitutional. The Court held that the ban violated the fundamental right to trade under Article 19(1)(g) of the Indian Constitution. This judgment revitalized the cryptocurrency ecosystem, encouraging a renewed influx of investment and user participation while emphasizing the need for a comprehensive legislative framework.

In the absence of definitive legislation, Indian courts have played a pivotal role in shaping the regulatory narrative around cryptocurrencies. A series of judicial pronouncements has provided much-needed clarity and underscored the sector's legal permissibility:

The Gujarat High Court’s decision in Amarnihal Singh Wadhwa v. State of Gujarat, while granting anticipatory bail, noted that the Supreme Court in Internet and Mobile Association of India v. RBI (supra) invalidated the RBI’s circular prohibiting cryptocurrency transactions on grounds of proportionality. It observed that cryptocurrency transactions are not statutorily prohibited in India, and investments in digital assets are voluntary, reflecting the principle of individual choice.

In Akash Ghadiyali v. Union Territory of Dadra & Nagar Haveli, the Court highlighted that losses in cryptocurrency markets are inherent risks borne by investors, as digital assets are subject to global market fluctuations. It also noted that participants enter such investments after being apprised of the associated risks, thus negating allegations of fraud​. Further, the Court underscored that cryptocurrency investments are not penalized in India.

Similarly, in Gopal Singh Tomar v. State of Maharashtra, the Nagpur Bench of the Bombay High Court reiterated that providing guidance to investors about cryptocurrencies without evidence of fraudulent intent does not constitute an offense. The Court acknowledged the regulatory void surrounding cryptocurrencies and granted anticipatory bail on these grounds.

Further, the Orissa High Court in Nirod Kumar Das v. State of Odisha, emphasized that investments in cryptocurrencies, while speculative, do not inherently constitute offenses under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, or the Odisha Protection of Interest of Depositors (OPID) Act. The Court underscored the absence of a statutory framework explicitly banning cryptocurrency investments and ruled that voluntary participation negates claims of inducement​.

In the case of Manoj Kumar Pattnaik v. State of Odisha and Sandeep Kumar Choudhury v. State of Odisha the Court addressed allegations involving multi-level marketing schemes linked to cryptocurrency investments. The Court clarified that trading in cryptocurrencies, does not inherently constitute an illegal act in India. The judgments highlighted that investments in digital assets occur through individual volition, and the lack of statutory prohibition reinforces their legal status.

These judgments collectively emphasize the voluntary nature of cryptocurrency investments and highlight the absence of any statutory ban, making the case for legislative clarity. The evolution of cryptocurrency regulations in India reflects a dynamic interplay between judicial interventions and regulatory uncertainty. However, these judicial precedents also highlight the urgent need for a robust and comprehensive legislative framework to address the complexities of the crypto ecosystem.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was introduced with the aim of establishing a dual framework: enabling the issuance of a Central Bank Digital Currency (CBDC) by the Reserve Bank of India (RBI) and regulating or banning private cryptocurrencies. The bill proposed a clear distinction between government-backed digital currencies and private digital assets, citing concerns over financial stability, consumer protection, and the misuse of cryptocurrencies for illicit activities.

Scheduled for discussion during the Winter Session of 2021, the bill was not tabled in Parliament. Instead, the government decided to engage in further consultations with industry stakeholders and regulatory experts. This delay, while creating a sense of uncertainty, allowed for a more thoughtful consideration of the technological, economic, and legal implications of cryptocurrency regulation. Stakeholders emphasized the potential of cryptocurrencies to drive innovation, create jobs, and enhance financial inclusion. The government’s decision to tread cautiously reflects an acknowledgment of these possibilities while remaining committed to addressing associated risks.

In the absence of comprehensive legislation, India moved toward formalizing cryptocurrency transactions through taxation. The Finance Act of 2022 introduced key measures:

1. 30% Tax on Gains: Profits from cryptocurrency trading, mining, and sales are taxed at a flat 30%, making it one of the highest tax rates globally.

2. 1% Tax Deducted at Source (TDS): Introduced in July 2022, TDS ensures traceability of transactions.

3. Tax on Gifting: Gifts in cryptocurrency are subject to capital gains tax upon realization.

These measures signify the government’s implicit acknowledgment of cryptocurrencies as legitimate financial instruments. The Income Tax Appellate Tribunal further reinforced this by categorizing cryptocurrency profits as capital gains in Raunaq Prakash Jain v. Income Tax Officer.

While cryptocurrencies remain in regulatory limbo, the RBI has taken decisive steps toward launching its Central Bank Digital Currency (CBDC), the digital rupee (e₹). The digital rupee, currently in pilot stages, represents a government-backed digital asset that seeks to modernize India’s payment infrastructure. By leveraging blockchain technology, the CBDC aims to offer the advantages of cryptocurrencies—efficiency, security, and transparency—while maintaining State control over monetary policy.

The Financial Intelligence Unit (FIU), under the Ministry of Finance, has mandated stringent compliance norms for cryptocurrency exchanges. These include adherence to anti-money laundering (AML) guidelines, Know Your Customer (KYC) protocols, and reporting of suspicious transactions. These measures align with global standards set by organizations like the Financial Action Task Force (FATF) and enhance accountability within the sector.

As India steps into 2025, the regulatory landscape for cryptocurrencies is poised for significant transformation. A revised version of the Cryptocurrency Bill is expected to address the legal status of private cryptocurrencies, investor protection mechanisms, and emerging trends in decentralized finance (DeFi). Enhanced oversight is anticipated for areas like Initial Coin Offerings (ICOs) and decentralized applications, ensuring that innovation is balanced with financial stability. Furthermore, India’s approach will likely align with international standards set by bodies like the IMF and FATF, reflecting the global nature of cryptocurrency markets.

India’s cryptocurrency regulation journey is a testament to the challenges of integrating disruptive technologies into a traditional economy. Judicial interventions, tax reforms, and the RBI’s cautious exploration of the digital rupee underscore the growing recognition of cryptocurrencies as transformative financial instruments. However, the lack of a comprehensive legislative framework continues to leave critical gaps.

The next few years will be crucial as India seeks to position itself as a global leader in blockchain innovation while safeguarding its financial ecosystem. By adopting a balanced approach that fosters innovation and ensures accountability, India can set a benchmark for other emerging economies navigating the crypto revolution.

About the author: Ashish Deep Verma is the Founder and Managing Partner of Vidhiśāstras – Advocates & Solicitors.

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