Authored By: Yeligeti Bhanupriya
Ams Law College for Women
Abstract
The rapid expansion of cryptocurrencies has been profound legal and regulatory challenges for jurisdictions, particularly for developing economies such as India. Despite widespread adoption of digital assets including Bitcoin, and other blockchain-based tokens, India continues to operate without a comprehensive statutory framework governing cryptocurrencies. This article critically examines the legal status of cryptocurrencies in India, focusing on the regulatory role of the Reserve Bank of India (RBI), judicial scrutiny by the Supreme Court, and recent policy measures such as the taxation of virtual digital assets under the Finance Act, 2022. The study analyses the constitutional, financial stability, and consumer protection dimensions of cryptocurrency regulation while highlighting the tension between innovation and risk mitigation. A comparative perspective with the United Kingdom ,to illustrate alternative regulatory approaches. The article concludes that India’s existing framework remains fragmented and uncertain, potentially impeding innovation while offering limited investor protection, and recommends the enactment of a dedicated cryptocurrency statute supported by a risk-based regulatory framework.
Introduction
Cryptocurrencies, enabled and distributed ledger technology, represent a fundamental transformation in nature of money, value transfer, and financial intermediation. Since the launch of Bitcoin in 2009, cryptocurrencies have evolved from technological experiments into a globally traded digital asset ecosystem. Their decentralised nature, and borderless functionality challenge conventional legal that are premised on centralised authority and territorial jurisdiction.
In India, cryptocurrency adoption has grown significantly over the past decade. Factors such as smartphone usage, increased internet penetration, and speculative investment opportunities have contributed to this expansion Governmental responses have oscillated between restrictive and accommodative approaches, ranging from banking prohibitions to taxation-based recognition.
The absence of legislative clarity has raised critical legal questions regarding the classification of cryptocurrencies. This article examines the evolving regulatory landscape governing cryptocurrencies in India, analyses judicial responses, and proposes recommendations for future-ready regulatory framework.
Literature Review and Legal Framework
literature on cryptocurrency regulation highlights concerns relating to financial stability, money laundering, terrorist financing, consumer protection, and regulatory arbitrage. Legal scholars argue that the decentralised nature of cryptocurrencies complicates enforcement under traditional financial laws while simultaneously offering efficiency and innovation benefits.
In India, regulatory oversight has primarily been exercised by the Reserve Bank of India, which derives its authority from the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. In April 2018, the RBI issued a circular prohibiting regulated entities from providing banking services to businesses dealing in virtual currencies.
The circular was challenged before the Supreme Court in Internet and Mobile Association of India v Reserve Bank of India, where the Court held that the RBI’s action was disproportionate and violated Article 19(1)(g) of the Constitution. The judgment marked a significant development in India’s cryptocurrency jurisprudence, reaffirming constitutional safeguards while recognising the RBI’s regulatory competence.
Analysis and Discussion
India’s regulatory approach to cryptocurrencies remains fragmented and reactive. The absence of statutory classification—whether cryptocurrencies constitute currency, securities, commodities, or payment instruments—has resulted in regulatory overlap and enforcement challenges. Multiple authorities, including the RBI, SEBI, and the Ministry of Finance, exercise partial jurisdiction without clear coordination.
From a constitutional standpoint, restrictions imposed on cryptocurrency businesses must satisfy the test of proportionality. The Supreme Court’s decision in IMAI v RBI underscores the judiciary’s role in preventing excessive executive interference with economic freedom. However, judicial intervention cannot substitute for comprehensive legislative action.
The introduction of a stringent taxation regime under the Finance Act, 2022, which imposes a 30 per cent tax on gains from virtual digital assets and a 1 per cent tax deducted at source, reflects a contradictory regulatory posture. While taxation implicitly recognises the existence of cryptocurrencies, it does not address consumer protection, fraud prevention, or market integrity. Excessive taxation coupled with legal uncertainty risks driving innovation.
Comparative Perspective
The United Kingdom adopts a comparatively balanced approach to cryptocurrency regulation. Cryptocurrencies are not recognised as legal tender but are regulated under existing financial laws. The Financial Conduct Authority oversees cryptocurrency businesses for anti-money laundering compliance, requiring registration and adherence to customer due diligence obligations. This risk-based model allows innovation while mitigating systemic risks.
India may draw valuable lessons from this approach by integrating cryptocurrencies into existing regulatory structures rather than pursuing outright prohibition or prolonged ambiguity.
Findings and Observations
1. India lacks a comprehensive statutory framework governing cryptocurrencies.
2. Regulatory measures remain fragmented and inconsistent.
3. Judicial intervention has protected constitutional rights but not ensured regulatory certainty.
4. Taxation measures recognise cryptocurrencies without establishing investor safeguards.
5. Comparative jurisdictions demonstrate that balanced regulation is achievable.
Conclusion and Recommendations
Cryptocurrency regulation in India stands at a critical crossroads. While regulatory oversight is essential to address financial stability and consumer protection concerns, prolonged uncertainty undermines innovation and investor confidence. India must move beyond ad hoc regulatory measures towards a coherent legal framework.
It is recommended that India enact a dedicated cryptocurrency statute that clearly defines virtual digital assets and allocates regulatory responsibilities. A risk-based regulatory approach aligned with international best practices should be adopted. Strengthening consumer protection mechanisms and enhancing regulatory coordination will enable India to harness the benefits of blockchain innovation while safeguarding its financial system.
Reference(S):
1. Internet and Mobile Association of India v Reserve Bank of India (2020) 10 SCC 274.
2. Reserve Bank of India, ‘Statement on Developmental and Regulatory Policies’ (RBI, 6 April 2018).
3. Finance Act 2022, s 115BBH.
4. Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (2008).
5. Financial Conduct Authority, ‘Guidance on Cryptoassets’ (UK FCA, 2019).
