Author : Syed Tauheed From Vidyavardhaka Law College 5th year B.A LL.B
To the point
The most disruptive type of financial innovation is cryptocurrencies, in particular, Bitcoin, Ethereum, and others, which rely on blockchain as a financial technology. Cryptocurrencies do not have sovereign support as opposed to fiat currencies that are issued by the Reserve Bank of India (RBI) using the Reserve Bank of India Act, 1934. They have been embraced by more people to engage in speculative trading, remittances, and even illicit activities leading to immediate discussions on whether they should be legal and regulated. The Indian regulatory environment has swing between efforts at total prohibition to tentative acceptance which is an indication of the conflict between lex lata (the law as it is) and lex ferenda (the law as it should be).
Use of legal Jargon
The cryptocurrencies include Bitcoin and Ethereum, which are decentralized digital assets and run on blockchain technology. In India, they are in a regulatory black hole as they are not considered legal tender by the Reserve Bank of India Act, 1934, nor are they expressly banned by any central legislation. Uncertainty is brought about by the lack of a codified mechanism to legislate. Illegal financial flows (IFFs), anti-money laundering (AML) requirements, and know-your-customer (KYC) compliance are the key words in the regulatory discussion.
The Proof
Cryptocurrencies have been constantly raised by the Reserve Bank of India (RBI). RBI in 2018 released a circular wherein banks were prohibited to trade in cryptocurrencies. Nevertheless, in Internet and Mobile Association of India v. The Supreme Court, RBI (2020), declared this ban unconstitutional and disproportional, arguing that it was against Article 19(1)(g) (freedom to practice trade). At the moment, the cryptocurrencies are taxed under the Income Tax Act, 1961, with gains taxed at 30 per cent (Flat tax) under the Finance Act, 2022, and the TDS is 1 per cent under Section 194S. Nonetheless, there is no wholesome law- there is no drafted Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 implemented. Rather, India is trying the Digital Rupee (CBDC) which is indicative of a conservative attitude of the state: control innovation, but contain volatility.
Abstract
This paper will discuss the legal landscape of cryptocurrency in India, which is undergoing change, the regulatory vacuum, the role of the judiciary, and taxation. It examines issues of money laundering, investor protection, and cybercrime risks and looks at opportunities of financial inclusion, technological innovation, and use of blockchain. The article ends with a call on the need to have a balanced approach in the law that encourages innovation without interfering with the national security and financial stability.
Case Laws
- Mobile Internet and Association of India v. Internet. RBI (2020) The RBI circular banning the use of banks to transact cryptocurrency transactions was ruled invalid by the Supreme Court. The Court deemed the action of RBI as being disproportionate because there were no direct facts that indicated the damage of cryptocurrencies to the banking system.
- Nishith Desai Associates v. Union of India (Discussion in Writ Petitions). Albeit not a historic ruling, a number of petitions point out to the need to have a definite statutory framework because the ambiguity contravenes the constitutional rights to trade.
- Gurcharan Singh v. Union of India (Delhi HC, 2021) The Delhi High Court wanted the Government to give clarity on whether cryptocurrency trade is regulated by the law, which is an indication of a judiciary acknowledgment of uncertainty in the regulations.
Challenges
- Regulatory Vacuum
The lack of a full-fledged law regulating cryptocurrencies is one of the most burning problems that are going on in India. Contrary to other countries, including the United States (SEC regulations) or the European Union (MiCA framework), India has not had a cohesive statute defining, categorizing and regulating cryptocurrencies. The uncertainties in the law form a grey zone, where investors, exchanges and regulators act without rules. This enhances litigation risks, compliance challenges and discourages foreign investment into the industry.
- Investor Risks
Cryptocurrencies are volatile in nature and their value may differ by a significant margin in a matter of hours. This instability makes small investors vulnerable to financial pressures, which result in instant losses. Lack of regulatory protection like mandatory disclosures, educating the investors, or insurance provisions place the innocent traders at the mercy of the market. The examples of the pump and dump schemes and collapses of an exchange can demonstrate how investor confidence is undermined when proper control is not ensured.
- Taxation Confusion
In India, virtual digital asset (VDAs) and transaction gains have been subject to a flat 30 percent tax and 1 percent tax deduction under Section 194S of the Income Tax Act. Although this gives a legal recognition to the crypto assets, the tax system is believed to be punitive and not facilitative. TDS mechanism makes it economically ineffective to trade by small and medium investors because the liquidity is reduced. Also, the cryptocurrency industry has not yet clarified whether crypto transactions are capital gains, business income, or speculative income, which has caused controversy and deterred the mainstream adoption.
Prospects
- Financial Inclusion
The possible inclusion of a greater number of people in the financial sector is one of the most powerful arguments that cryptocurrencies may make. The extent of Indian population that is not banked or underbanked is also a significant share with fewer facilities of access to formal credit and savings. The financial services without intermediaries like banks can be affordable, borderless and real time using the cryptocurrencies and blockchain-based payment system. As an example, microloans, remittances, and peer-to-peer transactions, which can direct individuals directly at each other, can be facilitated by smart contracts, which lowers transaction costs and closes the divide between urban and rural economies.
- Global Integration
Being a part of the G20, India can also impact the international discussion of the cryptocurrency regulation. Some of the jurisdictions such as the EU through its Markets in Crypto-Assets (MiCA) Regulation and the U.S. with its SEC-driven regulation are moving towards comprehensive legal frameworks. India can become a regulatory leader in the Global South in case the country embraces a balanced strategy, both in terms of innovation and protection. This would be an invitation to foreign investment, support fintech startups, and enable Indian businesses to be a part of the global digital economy.
- The Digital Currency of the Central Bank (CBDC).
The launch of Digital Rupee or Central Bank Digital Currency (CBDC), the Indian Central Bank, is one of the steps to modernize the financial sector. The CBDC is not supported by the individual crypt currency similar to the case of the private crypt currency, the currency is not supported by the reserve bank of India, hence the sovereign guarantee and stability. The two-tier system where the CBDC coexists with privately issued cryptocurrencies will offer the best of both worlds, namely the innovation and decentralization of the privately issued cryptocurrencies and the stability and reliability of state-backed currency. This kind of hybrid ecosystem will minimize the use of physical cash, enhance payment efficiency and limit the transactions in the black market.
Conclusion : India’s approach to cryptocurrency regulation is caught between prohibition and acceptance. While risks of fraud, volatility, and money laundering are genuine, outright bans are impractical. Instead, a calibrated legal framework, modeled on global best practices, should be adopted. Legislation must balance innovation, consumer protection, and state control. As cryptocurrencies become mainstream, India must embrace regulation that fosters growth while safeguarding economic stability.
FAQs
Q1. Is cryptocurrency legal in India?
Yes, cryptocurrency is not illegal in India. The Supreme Court in Internet and Mobile Association of India v. RBI (2020) lifted the RBI’s 2018 ban on banking services for crypto businesses. However, India does not yet have a comprehensive legal framework regulating cryptocurrencies.
Q2. What is the current stance of the Indian government on cryptocurrency?
The government maintains a cautious approach. While it has not banned private cryptocurrencies, it discourages their use as legal tender. It has, however, introduced taxation rules (30% tax on income from virtual digital assets and 1% TDS on transactions).
Q3. What are the major challenges in regulating cryptocurrency in India?
Key challenges include lack of a uniform global framework, risk of money laundering and terror financing, investor protection, market volatility, tax evasion, and balancing innovation with regulation.
Q4. What role does the Reserve Bank of India (RBI) play in cryptocurrency regulation?
The RBI has repeatedly warned against risks associated with crypto. It is developing the Central Bank Digital Currency (CBDC), or “Digital Rupee,” which may coexist with private cryptocurrencies under a regulated framework.
Q5. How are cryptocurrency transactions taxed in India?
Profits from trading or investing in crypto are taxed at a flat rate of 30%. Additionally, a 1% TDS is applicable on every transfer of crypto assets above certain thresholds, regardless of profit or loss.
