Regulating India’s virtual digital assets revolution Premium

India must take decisive action to create the comprehensive legislation that the crypto industry requires while mitigating associated risks

India continues to lead in grassroots crypto adoption, for the second consecutive year in the ‘Geography of Crypto’ report by Chainalysis (2024). A National Association of Software and Service Companies (NASSCOM) report finds that Indian retail investors poured $6.6 billion into crypto assets and predicts the industry could create over eight lakh jobs by 2030. India also boasts one of the largest and fastest-growing web3 developer cohorts.

This vibrancy may seem surprising, given the rocky journey of crypto, known as ‘Virtual Digital Assets’ (VDA), in India, within the domestic regulatory and policy landscape. In May 2025, the Supreme Court of India questioned the absence of comprehensive and clear crypto regulation in India, with a remark, “Banning may be shutting your eyes to ground reality”. This observation highlights the dissonance between VDA reality and VDA policy which has created significant challenges for regulators and market players.

India, as a country of strict capital controls and tightly regulated payment systems, has found it difficult to reconcile these frameworks with the decentralised nature of VDAs. The Reserve Bank of India (RBI), as the domestic regulator of monetary policy, began expressing concerns about the potential threats of crypto as early as 2013, highlighting the risks associated with their lack of authorisation from any central bank or monetary authority. Despite this warning, the market saw unassailed growth in India, leading the RBI to issue a second circular in 2018, barring financial institutions from dealing with VDA-related entities. This restriction proved short-lived, with the Court overturning the circular in 2020.

The government then turned to prohibitive taxation policies as a stop-gap measure while appropriate regulations were formulated. In 2022, India implemented two key tax policies for VDAs under the Income Tax Act: a 1% tax deducted at source (TDS) on VDA transactions exceeding ₹10,000 under Section 194S and a 30% capital gains tax under Section 115BBH which disallows loss offsetting. Although these measures were designed to enhance transparency and curb speculation, their effectiveness has been limited.

Estimates by various industry reports and think tanks show that between July 2022 and December 2023, Indians traded over ₹1.03 trillion worth of VDAs on non-compliant platforms, with only 9% of the estimated ₹1.12 trillion in VDAs held on domestic exchanges. Offshore trading resulted in a loss of ₹2,488 crore in uncollected VDA tax revenue for India. Between December 2023 and October 2024, Indians traded over ₹2.63 trillion on offshore platforms. The cumulative uncollected TDS from offshore exchanges since July 2022 is estimated to exceed ₹60 billion, with the nine blocked exchanges accounting for over 60% of this trading volume. Efforts to block access to non-compliant platforms, such as URL blocking, had limited success. Trade volumes on blocked exchanges rebounded after temporary declines, and web traffic to these platforms rose by 57%. Users continued to bypass restrictions using virtual private networks (VPN), mirror platforms or servers, and by migrating to other non-compliant exchanges.

Guidelines by global standard-setting bodies, such as the International Monetary Fund, Financial Stability Board, and the Financial Action Task Force, converge in favour of comprehensive and risk-based regulation that is harmonised with international standards (a process that is underway). However, these frameworks and regulations rely on domestic, compliant intermediaries or Virtual Asset Service Providers (VASP) that act as the bridge and eyes for regulators. These intermediaries facilitate the alignment of the VDA industry with existing laws and enforcement of policies, and enhance visibility over the ecosystem, while providing crucial inputs concerning on-the-ground issues.

In contrast, India’s existing policy regime, which inadvertently pushes VDA users to offshore, non-compliant platforms, erodes the country’s ability to mitigate the risks presented by VDAs, as well as tax revenues that may have otherwise been collected.