Crypto currency in India: Regulation, Risk, and the Road Ahead

Author- Riddhima Mohanani [Manipal University]

To the Point
Crypto currency in today’s world is very much in news and popular. Basicallly, Crypto currency is a digital form of money that uses encryption and block chain technology to enable secure, decentralized transactions without the need for a central authority. Crypto currency is a new era in digital finance, but in India, it still operates under legal ambiguity. While it was not explicitly banned, neither Bitcoin nor Ethereum is recognized as legal tender, nor is there any special statute or regulatory body laid down to govern their usage. The Reserve Bank of India (RBI), in the interest of financial stability and consumer safety, prohibited banks from enabling transactions involving crypto currency in 2018. The Supreme Court took an opposite view in 2020 which was not imagined at all while delivering the IAMAI v. RBI verdict by holding that trading fell under the right guaranteed to citizens under Article 19(1) (g).
Since then, the government seems to have moved from opposition to partial acceptance, especially regarding taxation. The Finance Act, 2022, levied a 30 per cent tax on income from VDA transactions and a 1 per cent TDS on crypto-to-crypto exchanges and other crypto transactions, implicitly acknowledging crypto as a taxable financial asset. This move gave partial recognition to crypto’s but also attracted criticism for taxing without appropriately regulating or protecting investors.
Besides the regime, some crucial regulatory gaps exist. There is no framework to address crypto-related frauds, money laundering risks, exchange security, or consumer grievances. In the absence of proper KYC enforcement and data protection laws, Indian investors are vulnerable to phishing, rug pulls, and price manipulation in both centralized and decentralized exchanges.

Abstract
Crypto currency has emerged as a transformative innovation in the global financial ecosystem, offering decentralized alternatives to traditional banking systems. In India, still the legal status of crypto currencies remains uncertain and unstable. While the Supreme Court lifted the RBI’s 2018 ban, the absence of a dedicated regulatory framework continues to create confusion. The government’s imposition of a 30% tax on Virtual Digital Assets (VDAs) and 1% TDS on transactions signals partial recognition, but not legal validation. This article explores the regulatory evolution of crypto currency in India, evaluates associated risks like scams and money laundering, and examines the policy vacuum affecting investors and the fine tech sector. It further analyzes key legal developments, such as the IAMAI judgment and the implications of the Finance Act, 2022. With the rise of block chain technology and global coordination efforts through G20, India stands at a crossroads—where balancing innovation with financial security is not just urgent, but inevitable.

Use of Legal Jagron
To analyze the legal landscape of crypto-currency in India, it is essential to understand certain key legal terms and doctrines that frequently arise in judicial and legislative discussions surrounding virtual digital assets.
Virtual Digital Asset (VDA):
A predominant legal term introduced by the Finance Act, 2022, to include crypto currencies, NFTs, and other block chain-related digital assets. This forms the very basis of crypto taxation in India.
Fiat Currency:
A currency that is issued and backed by a government, e.g., INR, unlike crypto currencies, which are decentralized and are not accorded the status of legal tender in India.
Legal Tender:
Legal Tender basically means any currency that is  accepted for debts or payment and it is must to accept it. As per Indian law, it has been interpreted by the Reserve Bank of India that, crypto currencies are not accorded such status.
Money Laundering:
The process of concealing illegal funds are known as money laundering.
Doctrine of Proportionality:
A concept implemented by the Supreme Court when it dealt with the IAMAI v. RBI case, to verify if the RBI’s restrictions over crypto were a reasonable exercise of power when compared to the rights that were being curtailed.
Statutory Interpretation:
Courts and policymakers are frequently involved in interpreting evolving terms such as “currency,” “security” or “digital asset” that describe a legal status under existing statutes that do not have any express references to crypto.


The Proof
The legal debate around crypto currency in India began to heat up by the Reserve Bank of India’s message issued to all regulated financial institutions. In 2018, the RBI’s message ordered banks and every other financial institution to not engage in, or providing services to, individuals or businesses dealing with any form of crypto currency. By taking away banking services required to conduct legitimate trading and sales activity with crypto currencies, the RBI directly intervened with the functioning of Indian crypto exchanges without banning crypto assets themselves.
Consequently, the RBI ban was struck down by the Supreme Court in its judgment in Internet and Mobile Association of India v. RBI (2020). The Court held that the RBI’s prohibition on entities acting as banks for the use of crypto currencies and VDAs was a disproportionate restriction and unreasonable limitation of the right to carry on any profession or business under Article 19(1) (g) of the Constitution Supremacy. 
The popularity of crypto currency usage continues to surge and increase, with or without the gaps in regulations. Therefore, the Finance Act, 2022 brought clarity to the extent of taxation of Virtual Digital Assets (VDAs). This is a significant development in the government formally recognizing crypto currencies in the tax ledger, but it is still too early to assess where the taxation regime will land in the future.
Despite these developments, India does not have a specific regulatory legislation or specific governing body to deal with the crypto market. Regulatory bodies such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have issued warnings about the crypto market especially concerning its volatility, lack of consumer protection, using them in criminal activity, money laundering, and potential terror financing. However, without legislation, these issues remain solely conceptual.
There is an urgent need for regulation in India as it has witnessed several large-scale crypto scams, such as the GainBitcoin Ponzi scheme, where investors had lost crores of rupees in fraudulent ventures promising unrealistic returns.
As part of the G20 presidency in 2023, India recognized the global nature of crypto and urged the international community to work together to mitigate cross-border risks posed by digital assets. India supported the Financial Stability Board’s (FSB) recommendations regarding regulations for crypto markets, and acted as a participant in the process of shaping a framework for a unified approach to regulations. This step was indicative of India’s pivot toward responsible engagement in the crypto space, rather than an outright prohibition.
With the anticipation of the forthcoming Digital India Act which addresses replaces the existing Information Technology Act, 2000, there is an expectation that individuals can anticipate some provisions for new technologies such as the frameworks for block-chain, artificial intelligence, and crypto-currencies. If the Digital India Act is effectively implemented, it will become India’s first comprehensive legal framework for regulating digital assets, addressing the current legal void and providing clarity and accountability for users and innovators alike.

Case Laws
Internet and Mobile Association of India v. Reserve Bank of India, (2020)
In this landmark ruling, the Supreme Court struck down the RBI’s 2018 circular prohibiting banks from interacting with crypto-currency related entities in India. The Court found the RBI’s action disproportionate and in violation of Article 19(1) (g) of the Constitution, which guarantees the right to carry on any lawful trade or business. The ruling stressed that the lack of positive evidence of harm can never justify a blanket prohibition on fundamental rights.
Karmanya Singh Sareen v. Union of India, (2017)
While this case is not about crypto-currencies directly, it is important in the wider context of digital privacy and data protection. The Supreme Court verdict that arised  from WhatsApp’s data-sharing terms, and highlighted the importance of informational privacy. In the context of crypto-currencies, where handling KYC and transactional data is sensitive and privacy focused, this case supports the argument for a straightforward data protection framework governing crypto exchanges.
Tata Consultancy Services v. State of Andhra Pradesh
This case was also not related to crypto currency but it recognized software as “goods” under sales tax laws, opening the door to reinterpreting intangible digital assets like crypto-currencies under Indian law.

Conclusion
The crypto-currency journey in India underscores a fine line between enabling financial evolution, and protecting financial stability. From a period of regulatory hostility, we proceed to a phase of cautious acceptance marked by a taxation regime, but action remains patchy and moves reactively rather than proactively. The Supreme Court decision in IAMAI v. RBI facilitates the freedom to trade, the Finance Act, 2022 brought fiscal recognition our virtual digital assets but until the arrival of comprehensive regulatory framework, users will remain vulnerable, exposed to legal uncertainty, scams, they would be looted and minimal consumer right protections.
The policy landscape within India stands at crossroads now. With block-chain technology rapidly progressing, decentralized finance (DeFi) emerging globally, and India’s role as a G20 country, we need a regulatory regime that is protective, and inclusive while remaining future-proof. In light of the proposed Digital India Act, a legal framework that imposes technological standards is insufficient; accountability, transparency and robust protections for investors must be enshrined within our digital asset ecosystem.
In summary, crypto-currencies possess transformative potential for innovation and inclusion, as well as economic prosperity, however the legal future of crypto-currency in India relies on a timely transition from uncertainty to certainty. A balanced crypto law that is properly drafted does not only remain a hopeful aspiration, it remains an absolute imperative to protect our financial sovereignty, while adapting to our digital economy.

FAQs
Is crypto-currency legal in India?
Crypto-currency is not illegal but remains unregulated. There is no specific legislation that legalizes or bans it.
Is income from crypto taxable?
Yes, under the Finance Act 2022, a 30% tax applies on gains from VDAs, with 1% TDS on transactions.
Can the RBI ban crypto again?
The Supreme Court gave a verdict that a blanket ban violates the right to trade. However, RBI can still regulate through indirect controls.
What are the risks of investing in crypto?
High volatility, scams, legal uncertainty, and lack of consumer protection.
What is the government planning for crypto regulation?
India is working on the Digital India Act and participating in global discussions under G20 to create a harmonized crypto policy.

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