India’s approach to cryptocurrency regulation reflects a profound policy paradox. While the government has embraced blockchain innovation and imposed a 30 percent tax on virtual digital asset gains, it has yet to enact a comprehensive statutory framework governing cryptocurrencies. The Supreme Court’s 2020 ruling in Internet and Mobile Association of India v. RBI effectively decriminalized crypto trading, yet the Reserve Bank of India continues to express concern over financial stability and monetary sovereignty. As adoption surges and enforcement obligations expand under anti-money laundering law, India faces a pressing question: how should decentralized digital assets be regulated within a traditional financial architecture?
India’s Regulatory Paradox
India stands at a crossroads in its engagement with cryptocurrency. Retail participation ranks among the highest globally, yet policymakers have not enacted a unified legislative regime that clearly defines the legal character of digital assets.
The legal landscape shifted materially in 2020 when the Supreme Court of India, in Internet and Mobile Association of India v. Reserve Bank of India, struck down a circular issued by the Reserve Bank of India that had restricted banking services to cryptocurrency exchanges. The ruling did not confer formal legal recognition on cryptocurrencies but clarified that trading them was not unlawful.
Subsequently, Parliament amended the Income Tax Act, 1961 to introduce Section 115BBH, imposing a flat 30 percent tax on gains from virtual digital assets. Simultaneously, crypto intermediaries were designated “reporting entities” under the Prevention of Money Laundering Act, 2002, requiring registration with the Financial Intelligence Unit-India.
Thus, crypto in India occupies a curious space: taxed but not fully regulated, permitted yet politically contested.
Why Regulation Is Necessary
The original vision of cryptocurrency, articulated in the Bitcoin white paper by Satoshi Nakamoto, was to eliminate reliance on centralized intermediaries. Blockchain architecture promised peer-to-peer value transfer secured by cryptography rather than institutional trust.
However, decentralization and pseudonymity have introduced systemic risks. Without regulatory oversight, cryptocurrencies can facilitate illicit financial flows, expose investors to fraud and amplify speculative volatility.
Three risk categories dominate policy debates: money laundering and fraud, cybersecurity vulnerabilities and market manipulation.
Money Laundering and Illicit Finance
Cryptocurrencies’ borderless architecture enables rapid cross-jurisdictional transfers. Wallet addresses, while traceable on public blockchains, do not inherently reveal identity. This pseudonymity can obscure beneficial ownership and complicate enforcement.
One early and widely cited example was the Silk Road marketplace, a dark web platform that facilitated anonymous transactions in Bitcoin and became associated with narcotics trafficking and other illegal activities before being dismantled by U.S. authorities.
India’s policymakers fear similar misuse within domestic markets. The inclusion of crypto intermediaries under anti-money laundering legislation reflects recognition that anonymity without oversight can erode financial integrity.
Cybersecurity and Investor Protection
Beyond criminal misuse, the crypto ecosystem remains vulnerable to hacks and security breaches. Exchanges globally have suffered digital intrusions resulting in substantial asset losses. In decentralized finance environments, coding vulnerabilities can expose users to sudden capital erosion.
Traditional financial regulation provides consumer safeguards, disclosure obligations and capital adequacy requirements. In contrast, crypto markets operate with fragmented standards, leaving retail investors exposed to asymmetric information and operational risk.
Given India’s high retail adoption rates, investor protection concerns carry significant socio-economic implications.
Market Manipulation and Volatility
Cryptocurrency markets frequently exhibit extreme price volatility. Thin liquidity in certain tokens, coupled with concentrated holdings among large participants, creates conditions ripe for price manipulation.
Pump-and-dump schemes and coordinated social media campaigns have periodically distorted valuations. Without clear disclosure norms and surveillance mechanisms, enforcement remains reactive rather than preventive.
Regulatory clarity could reduce systemic risk by establishing reporting standards and accountability frameworks for exchanges and token issuers.
The Sovereignty Question
The RBI has repeatedly expressed apprehension that decentralized cryptocurrencies could undermine monetary sovereignty and capital controls. Unlike sovereign currency, crypto assets are not issued by a central authority and may function as parallel mediums of exchange.
This concern partly explains the RBI’s exploration of a central bank digital currency (CBDC), designed to harness blockchain’s efficiency while preserving institutional control over monetary policy.
The sovereignty debate underscores a core tension: how to encourage technological innovation without compromising macroeconomic stability.
Fitting Innovation Into Traditional Legal Structures
Cryptocurrencies challenge conventional regulatory categories. They are neither fully currencies, nor securities, nor commodities — yet they share characteristics of all three.
Attempting to fit them into pre-existing statutory “round holes” risks conceptual mismatch. A coherent framework may require bespoke legislation addressing classification, taxation, licensing and enforcement in an integrated manner.
India’s incremental approach — taxation without full recognition, compliance without comprehensive codification — reflects both caution and ambivalence.
Toward a Coherent Policy Architecture
As crypto adoption deepens, regulatory uncertainty itself becomes a market risk. Investors and entrepreneurs require clarity to allocate capital efficiently. At the same time, policymakers must guard against systemic vulnerabilities.
A forward-looking framework could harmonize anti-money laundering compliance, investor protection safeguards and prudential oversight, while preserving room for blockchain innovation.
India’s crypto debate is not merely technological. It is constitutional, fiscal and geopolitical. Whether the nation opts for calibrated regulation or sweeping prohibition will signal its broader stance on digital finance in the decades ahead.
In attempting to fit this “square peg” into traditional legal structures, India must decide whether adaptation or resistance better serves its economic sovereignty and innovation ambitions.
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