Author: Janhavi Pradhane, Shahaji Law College
Introduction
Cryptocurrency has emerged as a revolutionary financial innovation, offering a decentralized and digital alternative to traditional monetary systems. With the rise of Bitcoin, Ethereum, and other virtual assets, global economies are adapting to the potential and challenges posed by digital currencies. In India, however, the legal status of cryptocurrency has been a topic of intense debate, with regulatory authorities expressing concerns over financial stability, security, and potential misuse. Despite these apprehensions, the growing interest of investors and technological advancements have propelled the discussion toward a structured legal framework. The Indian government and judiciary have played a significant role in shaping the cryptocurrency landscape, leading to policy changes, taxation measures, and judicial pronouncements that impact traders, investors, and businesses. This article provides a detailed analysis of the legal framework governing cryptocurrency in India, examines key case laws, highlights regulatory challenges, and explores the way forward for digital assets in the country.
Legal Framework Governing Cryptocurrency in India
The Reserve Bank of India (RBI) and its Stance on Cryptocurrency.The Reserve Bank of India (RBI), as the central monetary authority, has maintained a cautious stance toward cryptocurrency due to concerns about financial stability, consumer protection, and the potential use of digital assets for illicit activities. The RBI first addressed cryptocurrency risks through a series of advisories and circulars. In its 2013 and 2017 press releases, the central bank warned users, traders, and holders of virtual currencies about potential security threats, fraud risks, and lack of consumer protection. However, the most significant regulatory action came in April 2018, when the RBI issued a circular prohibiting banks and financial institutions from providing services related to cryptocurrency. This directive effectively cut off banking support for cryptocurrency exchanges, making it difficult for Indian users to trade digital assets. The restriction led to a decline in cryptocurrency activity and forced several exchanges to shut down or relocate operations.
The Supreme Court of India, in the landmark case of Internet and Mobile Association of India v. RBI (2020), overturned the RBI’s ban, ruling that the circular was unconstitutional. The court held that the RBI had not provided sufficient justification for such a blanket restriction and emphasized that the fundamental right to practice any profession or carry out any trade under Article 19(1)(g) of the Indian Constitution was being violated. The judgment was a significant victory for the cryptocurrency industry in India, allowing exchanges to resume operations and reigniting investor interest. However, despite the court’s intervention, regulatory uncertainty persisted, as the government continued to explore potential legislative measures to regulate or ban private cryptocurrencies.
The Cryptocurrency and Regulation of Official Digital Currency Bill
Over the years, the Indian government has proposed multiple versions of legislation aimed at regulating digital currencies. One of the most notable legislative attempts was the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The bill sought to prohibit all private cryptocurrencies while simultaneously laying the foundation for an official digital currency to be issued by the RBI. The bill’s objective was to mitigate risks associated with digital assets, such as money laundering and terror financing, while promoting a centralized and regulated form of digital currency. However, the bill faced significant criticism from industry experts and stakeholders, who argued that an outright ban would stifle innovation, drive cryptocurrency businesses underground, and hinder India’s participation in the global blockchain economy. Due to these concerns and the rapid evolution of the digital asset market, the bill was never introduced in Parliament, leaving a regulatory void that continues to exist today.
Taxation of Cryptocurrency Under the Finance Act, 2022
Although India has not explicitly recognized cryptocurrency as legal tender, the Finance Act, 2022 marked a turning point by introducing taxation provisions for digital assets. This move indicated the government’s inclination toward regulation rather than an outright ban. Under Section 115BBH, any income derived from the transfer of virtual digital assets, including cryptocurrencies and NFTs, is taxed at a flat rate of 30%. This rate is significantly higher than that imposed on many other asset classes, reflecting the government’s intent to discourage speculative trading. Furthermore, under Section 194S, a 1% Tax Deducted at Source (TDS) is levied on transactions exceeding specific limits, ensuring that all cryptocurrency transactions are reported to tax authorities. Additionally, the Finance Act restricts the set-off of cryptocurrency losses against other income, meaning that traders cannot offset their losses from digital asset trading with gains from other financial activities. These stringent tax measures have impacted retail investors and small traders, making cryptocurrency investments less attractive compared to traditional asset classes.
Judicial Pronouncements and Important Case Laws
The Indian judiciary has played a crucial role in shaping the regulatory environment for cryptocurrency.
The Internet and Mobile Association of India v. RBI (2020) case is one of the most significant legal battles, wherein the Supreme Court struck down the RBI’s 2018 ban. The ruling reinforced the fundamental right to trade and highlighted the need for proportionate regulatory measures instead of arbitrary restrictions.
Another important case is Nishith Desai Associates v. Union of India (2021), which challenged the lack of a clear regulatory framework and called for legislative clarity to protect investors and businesses involved in cryptocurrency transactions.
Additionally, the case of RBI v. Unocoin (2019) shed light on the challenges faced by cryptocurrency exchanges operating in a regulatory gray area. Unocoin, one of India’s leading crypto exchanges, faced law enforcement scrutiny despite no explicit legal ban on cryptocurrency trading at the time. The case underscored the need for well-defined policies to prevent arbitrary enforcement actions against legitimate businesses.
Regulatory Challenges and Concerns
One of the biggest challenges in India’s cryptocurrency landscape is the absence of a comprehensive legal framework. Unlike countries that have established clear regulations, India’s approach remains fragmented, leading to uncertainty among investors, exchanges, and businesses. The risk of money laundering and fraud is another significant concern, as the decentralized and pseudonymous nature of cryptocurrencies makes them susceptible to misuse. The Financial Action Task Force (FATF) has called for stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) measures to combat illicit activities involving digital assets. Additionally, consumer protection issues arise due to the volatile nature of cryptocurrencies and the prevalence of scams and fraudulent schemes. Many investors, particularly those new to digital assets, have suffered financial losses due to misleading investment schemes and hacking incidents. Furthermore, environmental concerns associated with cryptocurrency mining remain a topic of debate. Given India’s energy constraints and commitment to sustainable development, the high energy consumption of proof-of-work mining raises questions about the environmental impact of large-scale crypto adoption.
Future Prospects and the Way Forward
To address these challenges, India must introduce a comprehensive regulatory framework that strikes a balance between innovation and risk mitigation. Instead of an outright ban, policymakers should focus on establishing a legal structure that ensures transparency, security, and investor protection. The adoption of a Central Bank Digital Currency (CBDC), such as the RBI’s Digital Rupee, represents a significant step toward modernizing India’s financial ecosystem. A government-backed digital currency can coexist with private cryptocurrencies, offering a regulated alternative while fostering technological advancements in blockchain and fintech. Additionally, India must collaborate with global regulatory bodies to develop standardized regulations for cross-border cryptocurrency transactions. Given the global nature of digital assets, international cooperation is essential to address challenges related to taxation, fraud prevention, and regulatory compliance. Lastly, public awareness and investor education play a crucial role in ensuring safe and informed participation in cryptocurrency markets. Regulatory agencies must launch awareness campaigns to educate investors about legal obligations, risks, and best practices in digital asset trading.
Conclusion
Cryptocurrency in India exists in a regulatory gray area, with shifting policies and evolving judicial interpretations shaping its trajectory. While the government has recognized digital assets through taxation measures, the absence of clear legislation continues to create uncertainty. The way forward lies in adopting a balanced regulatory approach that fosters innovation while mitigating risks. By establishing a well-defined legal framework, embracing CBDCs, and promoting investor education, India can position itself as a global leader in the digital asset ecosystem while ensuring financial stability and security.
FAQS
1. Is cryptocurrency legal in India?
Cryptocurrency is neither explicitly legal nor illegal in India. While the Reserve Bank of India (RBI) had previously banned banks from dealing with crypto-related transactions in 2018, the Supreme Court overturned this ban in 2020. However, there is no clear legislation regulating cryptocurrency, leaving its legal status uncertain.
2. Does India have any law governing cryptocurrency?
As of now, India does not have a dedicated law governing cryptocurrency. The government has proposed the Cryptocurrency and Regulation of Official Digital Currency Bill, but it has not been enacted. However, taxation provisions under the Finance Act, 2022 impose a 30% tax on crypto income and a 1% TDS on transactions above a certain threshold.
3. Is cryptocurrency considered legal tender in India?
No, cryptocurrency is not recognized as legal tender in India. The Indian government only recognizes the Indian Rupee (INR) as legal tender, and digital assets like Bitcoin, Ethereum, and others are not accepted as official currency for transactions.
4. Do I need to pay tax on cryptocurrency in India?
Yes, cryptocurrency transactions are subject to taxation in India. Under Section 115BBH of the Income Tax Act, any gains from the sale of cryptocurrencies are taxed at a flat rate of 30%, and losses from crypto transactions cannot be offset against other income. Additionally, Section 194S imposes a 1% TDS on crypto transactions exceeding specific limits.
5. Can I use cryptocurrency for online purchases in India?
While some merchants and online platforms accept cryptocurrency as payment, it is not officially recognized as a medium of exchange by the government. Transactions involving cryptocurrency carry legal and regulatory risks due to the lack of clear guidelines.
6. What did the Supreme Court rule on cryptocurrency in India?
In Internet and Mobile Association of India v. RBI (2020), the Supreme Court struck down the RBI’s 2018 circular banning banks from facilitating crypto transactions. The court ruled that the ban was unconstitutional as it lacked sufficient justification and violated the fundamental right to trade under Article 19(1)(g) of the Indian Constitution.
