Author: Tanisha Thakur, a student at Symbiosis Law School, Nagpur
To the Point
There is a recent rise in cryptocurrencies such as Bitcoin, Ethereum and Tether which has forced legal systems to start reconsidering traditional frameworks of currency, securities and financial regulation. Whereas there are some nations like EI Salvador have legal recognized Bitcoin as legal tender, while others which includes India as well, have oscillated between caution and regulation. In India, cryptocurrencies are not illegal, but they are also not recognized as legal tender. The exponential rise of cryptocurrency in the past decade has compelled lawmakers worldwide to reconsider their financial and legal frameworks. India’s approach has been cautions yet evolving neither fully embracing nor outright banning crypto assets. This article is going to elaborate about the evaluation of the legal issues surround the cryptocurrencies with a focus on compliance, enforcement and the need for a comprehensive regulatory framework that promotes innovation while mitigating the future risks.
Despite the rapid adoption of crypto assets, key legal concerns remain unsolved:
- Legal Status: Cryptocurrencies do not fit into the existing definitions under Indian Statutes such as the Coinage Act,2011 or the Reserve Bank of India Act, 1934.
- Regulatory Oversight: The RBI, SEBI and Finance Ministry have all made attempts to regulate the sectors which are present thereby creating over lapse and confusions in the system.
- Taxation: The Finance Act, 2022 imposed a flat 30% tax on income from the transfer of “Virtual Digital Assets” (VDAs) and 1% TDS on transaction.
- Money Laundering and Terrorism Financing: The Prevention of Money Laundering Act (PMLA), 2002 was amended in 2023 to cover crypto transactions, bring exchanges under the compliance umbrella.
Abstract
Cryptocurrency has emerged as a disruptive force in global finance, offering decentralization and anonymity. However, it’s very important features also raise complex legal challenges. This article explores and analyses the legal issues surrounding cryptocurrency in India and globally, focusing on regulatory ambiguity, criminal liability, taxation, and consumer protection. Case Laws and authoritative e references are provided for the legal clarity and guidance. Cryptocurrencies challenge the traditional understanding of money, regulation and fiscal systems. In India, their uncertain legal status, coupled with the evolving taxation and regulatory measures, creates a volatile environment for the investors and institutions alike. This article will ensure to explore the intersecting legal, financial and technological dimensions of the cryptocurrencies, identifies gaps in the current laws and the presents recent judicial and the legislative responses to regulate this digital frontier. The absence of the codified legislation in the India which has led to judicial interpretations and the patchwork regulations that ultimately lacks uniformity. This article will further highlight the critical legal challenges posed by the crypto transactions and assesses the urgent need for the legislative clarity.
Use of legal Jargon
Virtual Digital Assets (VDAs) – as defined under Section 2(47A) of the Income Tax Act, 1961 (post Finance Act 2022).
Fiat Currency – Currency that is declared legal tender by a government, unlike cryptocurrency which lacks sovereign backing.
Know Your Customer (KYC) norms – A regulatory requirement under the PMLA to prevent money laundering.
Decentralized Finance (DeFi) – Financial systems without intermediaries, typically facilitated via blockchain.
Initial Coin Offering (ICO) – A means of fundraising using tokens, similar to securities, but largely unregulated.
The Proof
The Finance Act, 2022: Defines and taxes VDAs under Income Tax Act.
Reserve Bank of India (RBI) Circular (2018): Prohibited banking services to crypto businesses, later set aside in the Internet and Mobile Association of India v. Reserve Bank of India (2020).
PMLA Notification (March 2003): Brought crypto under anti-money laundering scrutiny.
G20 and FATF Recommendations:
India, as part of the global efforts, is pushing for the uniform global standards for crypto regulations.
Drafts Digital India Act, 2003 seeks to replace the outdated IT Act and regulate emerging technologies which include blockchain, AI, and crypto. As Per this Act which defines digital assets and introduce data and the platform accountability.
Reserve Bank of India Annual Reports and Financial Stability Reports (FSR) which repeatedly warns against the systematic risk of cryptocurrencies, volatile and usage in illegal activity. In December 2022 FSR which there are states that crypto assets pose risks to monetary policy and financial stability.
Standing Committee on Finance Report in November 2021 stated that cryptocurrencies cannot be stopped but must be regulated.
Inter-Ministerial Committee (IMC) Report, 2019 chaired by Subhash Garg proposed banning private cryptocurrencies and launching a central bank digital currency.
From a constitutional perspective, the right to trade under Article 19(1)(g) and the right to privacy under Article 21 should be respected in regulating crypto. Global harmonization is also essential. Since cryptocurrency transcends borders, India must align with FATF, G20, and OECD standards. A strong but adaptive law, built on principles of proportionality, consumer protection, and data security, is the way forward.
Case Laws
- Internet and Mobile Association of India v. RBI (2020) 10 SCC 274
The Supreme Court struck down the RBI’s 2018 circular that banned banks from dealing with the crypto businesses. It was held that the circular was totally unconstitutional and it amounted to violation of Article 19(1)(g) of the Constitution of India and that is freedom to carry on the trade.
- Nischal Shetty v. Union of India (Ongoing, Delhi High Court)
Seeks clear regulatory guidelines for cryptocurrency exchanges and investors.
- State of Maharashtra v. Ajay Rajesh Kori (2021)
The accused used Bitcoin wallets for laundering proceeds of crime. Court Permitted confiscation of crypto wallets under PMLA.
Conclusion
India is progressing towards a regulatory framework that balances innovation with oversight. The Digital India Bill (proposed), and the Crypto Policy under drafting, are expected to codify legal recognition, obligations of exchanges, and consumer safeguards. Until then, the crypto space remains legally grey, requiring cautious navigation by users and platforms.
Enactment of a comprehensive cryptocurrency legislation. Robust consumer protection and cybersecurity frameworks. There are different types of international cooperation on the regulatory models which help crime prevention. The Cryptocurrency regulation varies and sometimes they are totally different widely across jurisdictions- such as from outright bans to the full acceptance as the legal tender in the legal system. India’s middle-ground stance has left investors navigating a grey zone of legality.
In conclusion, India stands at a critical juncture in the legal journey of cryptocurrency. While the government has taken preliminary steps by taxing crypto assets and bringing them under anti-money laundering laws, the absence of comprehensive legislation leaves both users and regulators vulnerable. A clear, well-defined, and forward-looking law is imperative—one that addresses classification, investor safety, exchange obligations, taxation, and international cooperation. Only a harmonized and technology-neutral regulatory regime can ensure that India leverages the potential of crypto while mitigating its risks.
FAQs
Q1. Is cryptocurrency legal in India?
Yes, owning and trading cryptocurrencies is legal, but they are not recognized as legal tender.
Q2. Are crypto exchanges legal in India?
Yes, but they must comply with KYC, AML, and TDS norms, especially after the March 2023 PMLA notification.
Q3. Is crypto income taxable?
Yes. Crypto income is taxable according to the provisions.
Q4. Can the government ban cryptocurrencies?
Legally, the government can regulate or restrict them via legislation, but a blanket ban may face constitutional challenges post the 2020 Supreme Court judgment.
Q5. Are there consumer protections in crypto trading?
Currently, there are minimal protections. Consumers must rely on platform policies, pending specific legislation.