Author: Devyani Vig, New Law College (BVDU), Pune
To The Point
Cryptocurrency refers to a form of digital or virtual money that is widely regarded as more secure than conventional currency due to its use of advanced encryption techniques. At the core of this technology lies cryptography, a process that transforms readable information into complex, coded formats that are extremely difficult to decipher without authorization. Cryptocurrencies fall under the broader categories of digital currencies, virtual currencies, and alternative currencies. The inception of cryptocurrency dates back to 2008 with the creation of Bitcoin, which became operational in 2009. Since then, the digital currency ecosystem has grown exponentially, leading to the emergence of numerous other cryptocurrencies such as Ethereum, Litecoin, Ripple, Zcash, and Das. India, home to one of the world’s largest populations of internet users, has witnessed a sharp rise in cryptocurrency adoption, particularly among young investors and technology enthusiasts. This growth has been further fueled by the government’s broader push toward digitization and a cashless economy. However, this rapid expansion has not been met with a parallel evolution in regulatory oversight. Cryptocurrencies in India currently operate in a legal grey area, neither expressly prohibited nor explicitly permitted under existing financial laws. The absence of a clear legislative or regulatory framework poses significant legal, economic, and security risks. The usage of cryptocurrencies is still susceptible to abuse in areas like fraud, tax evasion, and money laundering if they are not formally recognised or supervised by a regulatory agency like the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India (RBI). Moreover, the lack of investor protection mechanisms raises concerns about consumer rights, dispute resolution, and financial stability. This article aims to critically analyse the existing legal vacuum surrounding cryptocurrency in India.
Abstract
Cryptocurrencies like Bitcoin and Ethereum have gained significant popularity in recent years, especially in India, where digital adoption is on the rise. These virtual currencies offer a fast, decentralized, and secure way of making transactions without relying on banks or traditional financial institutions. However, while their use is growing, India still doesn’t have any specific law or clear guidelines to regulate them. This lack of regulation has created a legal vacuum, making it difficult for users, investors, and even law enforcement agencies to understand what’s allowed and what isn’t. The article takes a closer look at how cryptocurrencies work and why they’ve become so popular. It also discusses how India’s central bank and government have responded so far from cautious warnings to proposing bills that never passed. It highlights key court cases, especially the Supreme Court’s ruling that lifted the RBI’s ban on crypto in 2020. To understand how India can move forward, the article also looks at how other countries are handling crypto regulation. In the end, this article argues that instead of banning or ignoring cryptocurrencies, India needs a proper law that clearly defines, regulates, and monitors them. Such a law should focus on protecting investors, preventing illegal use, and at the same time, encouraging innovation in the financial technology space.
Legal Jargon
Virtual Digital Asset (VDA): As per Section 2(47A) of the Income Tax Act (introduced via Finance Act, 2022), a Virtual Digital Asset refers to any digital representation of value, including cryptocurrencies and non-fungible tokens (NFTs), which are not recognized as legal tender but can be traded, transferred, or stored electronically.
Regulatory Vacuum: A term used when a sector or subject matter, such as cryptocurrency, operates without a clear or dedicated legal or institutional framework. It implies a lack of enforceable guidelines or statutory oversight, often resulting in confusion or risk.
Article 19(1)(g): This constitutional provision safeguards the freedom to pursue any career, trade, or enterprise, including the practice of any profession.
The Proof
Despite India’s position as one of the largest crypto markets in terms of user base and trading volume, there is a glaring absence of a structured legal framework to govern the use, trade, and taxation of cryptocurrencies. This legal vacuum has led to significant uncertainty for investors, exchanges, law enforcement agencies, and even regulators themselves. The Reserve Bank of India’s April 2018 circular, which restricted all RBI-regulated companies from interacting with or offering services to people or enterprises involved in cryptocurrencies, is example of regulatory overreach. This action, although significant in its implications, was not supported by any specific statute passed by Parliament. Consequently, it was challenged before the Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India (2020). The bench ruled that the RBI’s action was out of proportion and infringed under Article 19(1)(g) of the constitution, which guarantees the freedom of trade and profession. The Court also pointed out that the RBI had not offered enough factual evidence to support its prohibition. This judgment exposed the weakness of the current regulatory architecture and made clear that in the absence of legislative backing, such restrictions cannot withstand judicial scrutiny. Adding to the confusion is the government’s inconsistent policy direction. Although the Centre proposed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, intending to ban private cryptocurrencies while allowing for the development of a Central Bank Digital Currency (CBDC), the Bill was never introduced in Parliament. Since then, there has been no substantial legislative progress or official policy clarification, leaving cryptocurrency exchanges and users operating in a legal grey area. This ongoing indecision has made it difficult to determine the nature of cryptocurrencies whether they are assets, securities, commodities, or a new class of digital property altogether. This ambiguity has created fertile ground for fraudulent schemes and scams. Cases such as the GainBitcoin scam, led by Amit Bhardwaj, which reportedly defrauded investors of over ₹20,000 crore, and the Morris Coin case, highlight the real-world consequences of inadequate legal safeguards. Law enforcement agencies often struggle to prosecute such offenses effectively because they must rely on general provisions under the Indian Penal Code (IPC), the Prevention of Money Laundering Act (PMLA), or the Foreign Exchange Management Act (FEMA), none of which are specifically designed to deal with digital assets or blockchain-based offenses. As a result, courts and investigating officers are forced to interpret existing laws creatively to fit the digital context an approach that often leads to procedural delays and inconsistencies. Further complicating the situation is the taxation policy. The 2022 Union Budget introduced a 30% flat tax on income derived from the transfer of virtual digital assets, alongside a 1% TDS (Tax Deducted at Source) on all crypto transactions. However, these amendments, introduced through the Finance Act, came without any formal recognition or classification of cryptocurrencies under Indian law. Thus, while the government is taxing crypto gains, it has yet to define whether these assets qualify as currencies, commodities, or securities an inconsistency that poses significant challenges for compliance, enforcement, and investor trust. Lastly, there remains no single designated authority to regulate the crypto ecosystem. The Reserve Bank of India deals with monetary policy and CBDCs, and the Securities and Exchange Board of India (SEBI) governs securities markets, but neither institution has been officially assigned the role of overseeing cryptocurrencies. In the absence of a central regulator or a statutory body, enforcement becomes scattered, uncoordinated, and reactive rather than preventive. This regulatory vacuum not only undermines investor confidence but also leaves the system open to abuse, manipulation, and financial instability.
Case Laws
Internet and Mobile Association of India v. Reserve Bank of India:
A circular issued by the Reserve Bank of India in April 2018 that prohibited banks and financial institutions from providing services related to virtual currencies was raised in the recent case of Internet and Mobile Association of India v. Reserve Bank of India (2020) by several bitcoin exchanges and industry participants. The RBI justified its decision by citing risks to financial stability and investor protection. However, the petitioners argued that the circular had no statutory backing and violated their fundamental right to trade and business under Article 19(1)(g) of the Constitution. The Supreme Court, after considering the arguments, held that although the RBI had the authority to regulate the financial system, the ban it imposed was excessive and lacked evidence of actual harm caused by cryptocurrency trading. Since there was no specific law prohibiting the use of cryptocurrencies in India, the Court struck down the circular, restoring access to banking services for crypto-related businesses.
Harish BV v. Union of India & Ors.
A Public Interest Litigation (PIL) was filed before the Supreme Court in Harish BV v. Union of India & Ors. by Harish BV, a co-founder of a cryptocurrency startup based in Bengaluru, contesting the proposed provisions of the 2019 Banning of Cryptocurrency and Regulation of Official Digital Currency Bill. All cryptocurrency-related activities, including mining, holding, trading, and transacting, were intended to be illegal under the draft bill. Such a general prohibition, according to the petitioner, was capricious, illogical, and in violation of the fundamental rights protected by Article 14 (right to equality) and Article 19(1)(g) (freedom to practise any profession or carry on trade). The Supreme Court did not issue a definitive ruling in this matter, and the bill was never filed in Parliament, but the petition was crucial in bringing the economic and constitutional ramifications of a complete ban on cryptocurrencies to the attention of the public and judiciary. The case made clear that, given India’s changing crypto environment, regulation must be balanced with prohibition.
Directorate of Enforcement v. Amit Bhardwaj & Ors.
In Directorate of Enforcement v. Amit Bhardwaj & Ors., the Enforcement Directorate (ED) initiated investigations against Amit Bhardwaj, the founder of GainBitcoin and several other crypto-based companies, for allegedly orchestrating one of India’s largest cryptocurrency scams. Bhardwaj was accused of running a multi-level marketing scheme that promised investors unrealistic returns in Bitcoin, reportedly defrauding over 8,000 people of more than ₹20,000 crore. The scheme lured investors with the promise of fixed monthly payouts, while the actual funds were misappropriated. The ED filed cases under the Prevention of Money Laundering Act (PMLA), 2002, and proceedings were also initiated under sections of the Indian Penal Code (IPC) for cheating, criminal conspiracy, and fraud. The case exposed significant loopholes in India’s regulatory and enforcement framework concerning digital assets and underscored the urgent need for a cryptocurrency-specific legal regime to prevent such large-scale financial frauds.
Conclusion
India stands at a crossroads in the digital financial revolution. Cryptocurrencies have, on the one hand, created fresh possibilities for financial inclusion, investment, and innovation. On the other, the lack of a clear legal and regulatory framework has resulted in confusion, inconsistent policy decisions, and a heightened risk of fraud and misuse. While the Supreme Court’s intervention in the IAMAI v. RBI case restored a degree of operational freedom to crypto businesses, it also highlighted the limitations of regulatory action without legislative backing. The government’s approach ranging from warnings and taxation to proposals for outright bans reflects an uncertain and reactive stance. Taxing cryptocurrency income while failing to legally define or classify it creates a contradictory legal environment, where citizens are expected to comply with unclear laws. Moreover, enforcement agencies continue to struggle with prosecuting crypto-related crimes using outdated legislation that does not account for the decentralized, borderless nature of digital assets. It is therefore imperative that India moves toward enacting comprehensive, forward-looking legislation tailored to the unique challenges of cryptocurrency. This legal framework should not only define and classify virtual digital assets but also establish safeguards against misuse, ensure investor protection, and assign clear regulatory responsibilities whether to RBI, SEBI, or a dedicated crypto authority.
FAQS
Is cryptocurrency legal in India?
While cryptocurrencies are not illegal, they are not recognized as legal tender either. The Supreme Court lifted the RBI ban in 2020, but no enabling legislation currently exists.
Can cryptocurrencies be considered “property” under Indian law?
Indian law does not clearly define cryptocurrencies as “property”, but in practice, courts and authorities may treat them as intangible digital assets. If they are held with the intention of investment or exchange, they could fall under the broader interpretation of “movable property” for legal purposes like taxation, seizure, or inheritance.
Can a person be held liable for receiving cryptocurrency as payment for illegal activities, even unknowingly?
Yes, under Indian criminal law a person can be held liable if they are found to have received proceeds from an illegal activity, even in the form of cryptocurrency.
Can I be prosecuted for trading in cryptocurrency in India?
As of now, there is no law criminalizing private cryptocurrency ownership or trading, but misuse (e.g., for fraud or money laundering) can be prosecuted under existing laws like IPC, FEMA, and PMLA.
What laws currently apply to cryptocurrencies in India?
There is no specific crypto law, but laws like:
Income Tax Act (for gains),
PMLA (for laundering crypto proceeds),
FEMA (for cross-border crypto trades),
IT Act (for cyber frauds)
may be invoked depending on the circumstances.
Sources
https://www.fticonsulting.com/insights/articles/central-bank-digital-currencies-india-future-money-failing-experiment
https://cleartax.in/s/bitcoins-taxes-india
https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency
https://lawfullegal.in/cryptocurrency-in-india
https://www.livelaw.in/
https://www.coinbase.com/en-in/learn/crypto-basics/what-is-cryptocurrency
https://www.globallegalinsights.com/practice-areas/blockchain-cryptocurrency-laws-and-regulations/india/
https://cleartax.in/s/bitcoins-taxes-india
https://www.business-standard.com/finance/personal-finance/bitcoin-scam-the-legality-of-cryptocurrencies-in-india-explained-124112100977_1.html
