Cryptocurrency Regulation in India: Towards a Coherent and Enforceable Legal Framework

INTRODUCTION 

In March 2020, the Supreme Court of India struck down the Reserve Bank of India’s blanket prohibition on cryptocurrency transactions.1 The Court held the prohibition disproportionate and constitutionally unsustainable. Two years later, the Finance Act, 2022 imposed a thirty percent flat tax on income from virtual digital assets.2 This is one of the highest tax rates imposed by any major economy on such assets. Yet no legislation was enacted defining what a virtual digital asset legally is, who may deal in it, or under what conditions. This paradox captures the fundamental incoherence at the heart of India’s approach: the State taxes what it has not chosen to regulate. 

India is home to one of the world’s largest cryptocurrency user bases.3 An estimated fifteen to twenty million active participants transacted in digital assets as of 2023. Yet there is no dedicated legislation governing the issuance, trading, custody, or consumer protection dimensions of cryptocurrency activity. The result is a regulatory vacuum. Exchanges operate, consumers transact, and disputes arise without a coherent legal framework to resolve them. 

This article argues that India’s current approach is structurally inadequate. Fragmentary taxation without substantive regulation cannot substitute for a dedicated legislative framework. Such a framework is both necessary and overdue. The article proceeds as follows. Section II sets out the existing legal framework. Section III analyses the leading judicial decisions. Section IV offers a critical evaluation of the present position. Section V examines comparative regulatory models. Section VI proposes a framework for reform. 

THE EXISTING LEGAL FRAMEWORK 

The Reserve Bank of India’s Regulatory Interventions 

The Reserve Bank of India first addressed cryptocurrency through a circular in April 2018.4 That circular directed all entities regulated by it to cease providing services in relation to virtual currencies. This measure effectively prohibited banks, payment processors, and financial institutions from facilitating cryptocurrency transactions. The stated rationale was consumer protection and financial stability. The circular identified no specific evidence of harm.5

Following the Supreme Court’s intervention in 2020, the RBI issued fresh advisories cautioning against cryptocurrency investment.6 The Bank cited financial stability concerns but refrained from imposing an outright ban. The central bank has since focused on developing the Digital Rupee — India’s central bank digital currency (CBDC). It was launched in pilot form in December 2022.7 

The Finance Act, 2022 and the Taxation Regime 

The Finance Act, 2022 introduced Sections 115BBH and 194S into the Income Tax Act, 1961.8 Together, these provisions created a dedicated tax regime for virtual digital assets (VDAs). Section 115BBH imposes a flat thirty percent tax on income from the transfer of VDAs.9 No set-off of losses against other income is permitted. Losses may not be carried forward to subsequent years. Section 194S mandates a one percent tax deducted at source on all VDA transfers exceeding a specified threshold.10 

The Finance Act, 2022 defines a ‘virtual digital asset’ broadly.11 The definition encompasses any information, code, number, or token generated through cryptographic means. The Digital Rupee is explicitly excluded. Notably, this definition operates only for purposes of the Income Tax Act. It does not constitute a comprehensive legal definition. No rights, obligations, or regulatory framework flows from it. 

Prevention of Money Laundering Act Amendments 

In March 2023, the Ministry of Finance notified an amendment to the Prevention of Money Laundering Act, 2002.12 The amendment brought VDA service providers — including exchanges, custodians, and settlement service providers — within its ambit. This made VDA entities ‘reporting entities’ obligated to conduct customer due diligence, maintain records, and report suspicious transactions. The amendment represents the first formal compliance obligation imposed on cryptocurrency businesses in India. It operates, however, in isolation from any licensing or authorisation framework. 

Absence of Dedicated Legislation 

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was listed for introduction in the Winter Session of Parliament but was never tabled.13 No subsequent bill has been introduced. India therefore has no statute governing the legal status of cryptocurrency. There is no framework for the rights of token holders, the obligations of exchanges, dispute resolution, or consumer protection. 

III. CASE LAW ANALYSIS 

Internet and Mobile Association of India v. Reserve Bank of India 

The foundational judicial pronouncement on cryptocurrency in India is Internet and Mobile Association of India v. Reserve Bank of India.14 A three-judge bench of the Supreme Court set aside the RBI’s 2018 circular on the ground that it failed the test of proportionality. The Court applied a four-part proportionality framework.15 It held that the RBI had not demonstrated harm of sufficient nature or magnitude. Such harm was required to justify the complete exclusion of a legitimate economic activity. 

The judgment is significant for two reasons beyond the immediate outcome. First, it implicitly recognised cryptocurrency trading as a legitimate economic activity.16 Such activity is protected under Article 19(1)(g) of the Constitution of India, subject to reasonable restrictions. Second, it placed the burden squarely on the regulator to justify any restrictive measure with evidence. This establishes a constitutional constraint on arbitrary prohibition. 

Subsequent Judicial Developments 

Indian courts have not yet ruled definitively on the property rights dimensions of cryptocurrency. The question of whether a token constitutes ‘property’ — for contract enforcement, insolvency, or succession — remains open.17 In the absence of legislative definition, civil courts have applied general contract law principles. Disputes from cryptocurrency transactions have been treated as contracts for the sale of goods or money contracts. The characterisation depends on the facts of each case. This ad hoc approach produces inconsistent outcomes and cannot substitute for a statutory framework. 

CRITICAL EVALUATION 

The Taxation-Without-Regulation Anomaly 

The most structurally significant defect in India’s current position is the imposition of taxation without a corresponding legal framework. A thirty percent tax rate presupposes that cryptocurrency is a legitimate asset generating taxable income.18 Yet the same State that taxes cryptocurrency has not confirmed its legal status as property. It has not established the rights of holders against exchanges. No consumer redress mechanism exists. The State has assumed the fiscal incidents of a regulatory regime while declining to create one. 

When an exchange becomes insolvent, Indian users have no statutory priority as creditors.19 There is no regulatory body to approach. No established mechanism exists for the recovery of assets. This was demonstrated by the global collapse of FTX in 2022. They are left to pursue remedies under general contract or tort law against entities whose legal character and obligations have never been defined. 

The Chilling Effect of the Tax Structure 

The thirty percent flat rate under Section 115BBH has demonstrably reduced trading volumes on Indian exchanges.20 The one percent TDS under Section 194S compounds this effect. The prohibition on loss set-off further discourages participation. The disallowance of losses is particularly anomalous. A trader who gains on one transaction and loses on another is taxed on the gross gain. No relief is provided for the net loss. This treatment is inconsistent with the approach to other speculative instruments. Futures and options permit loss set-off within the same head of income under the Income Tax Act, 1961.21 It is submitted that the disallowance of intra-year loss set-off has no principled basis.22 It operates as a punitive rather than a revenue measure. 

PMLA Coverage Without Licensing Creates Asymmetric Compliance 

The 2023 PMLA amendment imposes anti-money laundering and countering the financing of terrorism (AML/CFT) obligations on VDA service providers.23 No licensing regime was established simultaneously. An exchange that complies fully with PMLA reporting obligations remains legally unrecognised in every other dimension. It cannot hold client assets under any framework defining the nature of that custody. It cannot be wound up under a framework protecting creditors.24 No authority can supervise it short of criminal prosecution. This asymmetry is the reverse of sound regulatory design. Sound design conditions obligations on authorisation. Rights and responsibilities are created simultaneously. 

COMPARATIVE PERSPECTIVES 

The European Union: The MiCA Framework 

The European Union’s Markets in Crypto-Assets Regulation (MiCA) entered into full effect in December 2024.25 It represents the most comprehensive attempt by any major jurisdiction to regulate digital assets through a unified framework. MiCA establishes a licensing regime for crypto-asset service providers.26 It creates three categories of regulated tokens: asset-referenced tokens, e-money tokens, and utility tokens. Capital and conduct requirements apply to each category. Consumer protection standards include rights of complaint and redress. The MiCA framework demonstrates that comprehensive cryptocurrency regulation is achievable without prohibiting the activity. By distinguishing between categories of digital asset, MiCA tailors regulatory requirements to specific risks. All tokens are not treated identically. 

Singapore: The Payment Services Act Model 

Singapore’s Payment Services Act, 2019, as amended in 2021, requires a licence from the Monetary Authority of Singapore.27 The requirement applies to entities providing digital payment token services, including exchange and transfer services. Licence conditions include capital requirements, safeguarding obligations for customer assets, and AML/CFT compliance.28 Singapore’s approach is notable for its technology-neutrality. Its graduated licensing structure calibrates requirements to the scale and risk profile of the applicant.

The United States: Jurisdictional Fragmentation as a Cautionary Model 

The United States presents a cautionary counterexample. The absence of federal crypto-specific legislation has produced a contested jurisdictional landscape.29 The Securities and Exchange Commission and the Commodity Futures Trading Commission dispute authority over different categories of digital asset. High-profile enforcement actions have proceeded by characterising specific tokens as securities under the Howey test.30 The results have been inconsistent, generating significant legal uncertainty for market participants. India should treat the United States model not as a template but as a warning against regulatory fragmentation. 

CONCLUSION 

This article has demonstrated that India’s current approach to cryptocurrency is both legally incoherent and practically harmful. It is characterised by aggressive taxation, isolated compliance obligations, and the persistent absence of dedicated legislation. It fails investors, it fails consumers, and it fails the State’s own interest in a stable and well-functioning financial market. 

The analysis in the preceding sections supports three specific legislative proposals. First, Parliament should enact a Virtual Digital Assets Act. The Act should establish the legal status of cryptocurrency as property. It should create a licensing regime for exchanges and custodians, and set minimum standards for consumer protection and dispute resolution. Second, the Act should adopt a risk-based classification of digital assets. Following the MiCA model, regulatory requirements should be calibrated to the nature and risk of each category. Third, the Income Tax Act provisions introduced by the Finance Act, 2022 should be revised. Intra-year loss set-off for VDA transactions should be permitted. The TDS rate should be aligned with comparable speculative instruments. 

India is not short of regulatory capacity. What is absent is legislative will. The longer Parliament delays, the wider the gap between market reality and legal framework. The greater that gap, the greater the harm to those who transact within it. It is submitted that a coherent, principled regulatory framework is not merely desirable. It is constitutionally demanded. The Supreme Court has already recognised cryptocurrency trading as a legitimate economic activity. 

FOOTNOTES 

1. Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274 (India). 2. Finance Act, 2022, § 115BBH (India). 
2. 2023 Global Crypto Adoption Index, CHAINALYSIS (Sept. 12, 2023, 9:00 AM), https://www.chainalysis.com/blog/2023-global-crypto-adoption-index/.
3. Reserve Bank of India, Prohibition on Dealing in Virtual Currencies, RBI/2017-18/154 (Issued on Apr. 6, 2018) (India). 
4. Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274, ¶¶ 7.3–7.5 (India). 6. Reserve Bank of India, Caution to Investors on Virtual Currencies (Issued on Feb. 5, 2021) (India). 7. Reserve Bank of India, Launch of Digital Rupee — Retail Pilot (Issued on Dec. 1, 2022) (India). 8. Finance Act, 2022, §§ 115BBH, 194S (India). 
5. Finance Act, 2022, § 115BBH(2) (India). 
6. Finance Act, 2022, § 194S (India). 
7. Income Tax Act, 1961, § 2(47A) (as inserted by Finance Act, 2022) (India). 
8. Ministry of Finance, Notification No. S.O. 1072(E) (Notified on Mar. 7, 2023) (India). 13. Lok Sabha, Bulletin Part-II No. 4401 (Nov. 29, 2021) (India). 
9. Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274 (India). 15. Id. at ¶¶ 7.5–7.6. 
10. India Const. art. 19, cl. 1(g). 
11. See generally SHRIKANT G. HATHI & BELA HATHI, LAW OF CONTRACT AND SPECIFIC RELIEF 210–12 (2d ed. 2021). 
12. Finance Act, 2022, § 115BBH(1) (India); see also Income Tax Act, 1961, § 2(47A) (India). 19. Molly White, FTX Collapse and Contagion, WEB3 IS GOING GREAT (Nov. 11, 2022, 8:00 AM), https://web3isgoinggreat.com/?id=ftx-collapse. 
13. Crypto Trading Volumes on Indian Exchanges Fall 90% After Tax Rules, ECON. TIMES (May 3, 2022, 10:30 AM), https://economictimes.indiatimes.com. 
14. Income Tax Act, 1961, § 43(5) (India). 
15. Finance Act, 2022, § 115BBH(2) (India); see also Memorandum Explaining the Provisions in the Finance Bill, 2022, ¶ 4.3 (Ministry of Finance, Feb. 1, 2022). 
16. Ministry of Finance, Notification No. S.O. 1072(E) (Notified on Mar. 7, 2023) (India). 24. Prevention of Money Laundering Act, 2002, §§ 12, 12A (India). 
17. Regulation (EU) 2023/1114 of the European Parliament and of the Council on markets in crypto-assets, 2023 O.J. (L 150) 40 (EU). 
18. Id. arts. 3, 59–76. 
19. Payment Services Act 2019 (No. 2 of 2019), as amended by Payment Services (Amendment) Act 2021 (Sing.). 
20. Monetary Authority of Singapore, Guidelines on Licensing for Payment Service Providers, PS-G01, ¶¶ 3.1–3.4 (2019) (Sing.). 
21. Commodity Futures Trading Comm’n v. Binance Holdings Ltd., No. 23-cv-1887 (N.D. Ill. 2023). 30. SEC v. Ripple Labs Inc., No. 20-cv-10832 (S.D.N.Y. 2020). 

REFERENCES AND BIBLIOGRAPHY 

Cases 

Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274 (India). Commodity Futures Trading Comm’n v. Binance Holdings Ltd., No. 23-cv-1887 (N.D. Ill. 2023). SEC v. Ripple Labs Inc., No. 20-cv-10832 (S.D.N.Y. 2020). 

Constitution 

India Const. art. 19, cl. 1(g). 

Legislation 

Finance Act, 2022 (India).

Income Tax Act, 1961 (India). 

Prevention of Money Laundering Act, 2002 (India). 

Payment Services Act 2019 (No. 2 of 2019), as amended by Payment Services (Amendment) Act 2021 (Sing.). 

Regulation (EU) 2023/1114 of the European Parliament and of the Council on markets in crypto-assets, 2023 O.J. (L 150) 40 (EU). 

Circulars and Notifications 

Reserve Bank of India, Prohibition on Dealing in Virtual Currencies, RBI/2017-18/154 (Issued on Apr. 6, 2018) (India). 

Reserve Bank of India, Launch of Digital Rupee — Retail Pilot (Issued on Dec. 1, 2022) (India). Ministry of Finance, Notification No. S.O. 1072(E) (Notified on Mar. 7, 2023) (India). Monetary Authority of Singapore, Guidelines on Licensing for Payment Service Providers, PS-G01 (2019) (Sing.). 

Secondary Sources 

SHRIKANT G. HATHI & BELA HATHI, LAW OF CONTRACT AND SPECIFIC RELIEF 210–12 (2d ed. 2021). 

2023 Global Crypto Adoption Index, CHAINALYSIS (Sept. 12, 2023, 9:00 AM), https://www.chainalysis.com/blog/2023-global-crypto-adoption-index/. 

Crypto Trading Volumes on Indian Exchanges Fall 90% After Tax Rules, ECON. TIMES (May 3, 2022, 10:30 AM), https://economictimes.indiatimes.com. 

Molly White, FTX Collapse and Contagion, WEB3 IS GOING GREAT (Nov. 11, 2022, 8:00 AM), https://web3isgoinggreat.com/?id=ftx-collapse. 

Memorandum Explaining the Provisions in the Finance Bill, 2022 (Ministry of Finance, Feb. 1, 2022).