NEED FOR A COMPREHENSIVE LEGAL FRAMEWORK
Author: Shantanu Trivedi
College: University of Allahabad
I. Abstract
Cryptocurrency has moved from being a niche technological curiosity to a mainstream financial phenomenon, with millions of Indian investors now holding digital assets worth several billion rupees. Yet India continues to govern this sector through a patchwork of tax provisions, anti-money laundering amendments, and informal central bank guidance, rather than through a dedicated, comprehensive statute. This article examines the present legal architecture governing cryptocurrency in India, tracing its evolution from the Reserve Bank of India’s 2018 banking ban, through the ban’s invalidation by the Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India (2020), to the taxation regime introduced by the Finance Act, 2022, and the anti-money laundering obligations imposed in March 2023. It argues that the absence of a unified legal framework creates regulatory uncertainty, exposes investors to unquantified risk, and leaves enforcement agencies without clearly defined jurisdiction.
II. To the Point
India currently does not have a single, comprehensive statute dedicated to regulating cryptocurrency as a distinct subject matter. Instead, the sector is governed indirectly through a combination of tax laws, anti-money laundering provisions, foreign exchange regulations, and non-binding advisories issued by the Reserve Bank of India (RBI). As a result, cryptocurrencies operate in a legal grey area; they are neither prohibited nor recognized as legal tender in the country. This position was reinforced after the Supreme Court, in ‘Internet and Mobile Association of India v. Reserve Bank of India’(2020), struck down the RBI’s 2018 circular that had directed banks to cease providing services to cryptocurrency businesses, holding the restriction to be disproportionate.
The regulatory landscape evolved further with the enactment of the Finance Act, 2022, which introduced a taxation framework for “Virtual Digital Assets” (VDAs). Under this regime, income arising from the transfer of VDAs is taxed at a flat rate of 30%, with no set-off or carry-forward of losses permitted. However, the imposition of tax does not amount to legal recognition or regulation of cryptocurrencies as financial assets. Similarly, a notification issued in March 2023 brought cryptocurrency exchanges and other virtual asset service providers within the ambit of the Prevention of Money Laundering Act, 2002 (PMLA), requiring them to comply with Know Your Customer (KYC), record-keeping, and reporting obligations.
Meanwhile, the proposed “Cryptocurrency and Regulation of Official Digital Currency Bill”, first announced in 2021, has yet to be introduced in Parliament. Consequently, several critical aspects of the cryptocurrency market, including investor protection, licensing and supervision of exchanges, custody and safeguarding of digital assets, grievance redressal mechanisms, consumer rights, and safeguards against fraud and market manipulation, remain largely unregulated. This fragmented approach has created significant legal uncertainty for investors, businesses, and regulators alike. The resulting regulatory vacuum underscores the urgent need for India to enact a comprehensive, purpose-built legal framework that provides clarity, accountability, and effective oversight while fostering innovation in the digital asset sector.
III. Use of Legal Jargon
A discussion of cryptocurrency regulation necessarily involves certain specialised legal and financial terms. These are explained below in simple language for ease of understanding.
● Virtual Digital Asset (VDA): A term introduced by Section 2(47A) of the Income Tax Act, 1961, covering cryptocurrencies, non-fungible tokens (NFTs), and similar digital assets for the limited purpose of taxation.
● Legal Tender: Currency that a debtor can legally use to discharge a debt, and which a creditor is bound to accept. Cryptocurrency has no legal tender status in India.
● FEMA (Foreign Exchange Management Act, 1999): The law governing cross-border foreign exchange transactions in India. Its applicability to crypto transactions remains unsettled.
● PMLA (Prevention of Money Laundering Act, 2002): The primary anti-money laundering statute in India, which now covers crypto exchanges as “reporting entities.”
● Reporting Entity: Under PMLA, an entity obligated to maintain records, verify client identity (KYC), and report suspicious transactions to the Financial Intelligence Unit-India (FIU-IND).
● AML/CFT: Anti-Money Laundering and Combating the Financing of Terrorism — the set of legal obligations designed to prevent illicit use of the financial system.
● FATF (Financial Action Task Force): An inter-governmental body that sets global AML/CFT standards; India’s crypto-related PMLA amendment was influenced by FATF recommendations.
● TDS (Tax Deducted at Source): Under Section 194S of the Income Tax Act, 1961, a 1% tax is deducted at source on the transfer of VDAs above a specified threshold.
● CBDC (Central Bank Digital Currency): India’s own official digital currency, the Digital Rupee (e₹), issued by the RBI — distinct from private cryptocurrencies such as Bitcoin or Ethereum.
● Doctrine of Proportionality: A constitutional principle requiring that any restriction on a fundamental right must be a reasonable and necessary measure to achieve its stated objective, and not excessive in relation to the harm sought to be prevented.
IV. The Proof
The claim that India lacks a comprehensive cryptocurrency law, and instead relies on fragments of other statutes, can be demonstrated through the following legal and regulatory developments.
First, in April 2018, the Reserve Bank of India issued a circular under its powers over banking regulation, directing all entities regulated by it to stop providing banking services to any person or business dealing in virtual currencies. This was, in effect, an indirect ban achieved by cutting off banking access to crypto exchanges rather than a direct prohibition on cryptocurrency itself.
Second, this circular was challenged and struck down by the Supreme Court of India in 2020 (discussed in detail under Case Laws below), on the ground that it violated the fundamental right to carry on trade or business under Article 19(1)(g) of the Constitution, and failed the test of proportionality. Despite this judgment, the RBI has continued to express informal caution about cryptocurrency through public statements, without issuing fresh binding regulation.
Third, the Finance Act, 2022 inserted Section 2(47A), Section 115BBH, and Section 194S into the Income Tax Act, 1961. Section 2(47A) defines “Virtual Digital Asset” broadly to include cryptocurrencies and NFTs. Section 115BBH taxes income from the transfer of a VDA at a flat rate of 30%, without allowing deduction of any expenditure (other than the cost of acquisition) and without permitting the set-off of losses from one VDA against gains from another, or against any other head of income. Section 194S mandates that a 1% TDS be deducted on payments made for the transfer of a VDA above a prescribed threshold. This regime treats crypto as a taxable asset class but stops short of defining its legal status, permissible use, or regulatory oversight.
Fourth, in March 2023, the Central Government issued a notification under the Prevention of Money Laundering Act, 2002, bringing crypto exchanges, custodian wallet providers, and participants in financial services related to the issue or sale of a virtual digital asset within the definition of “reporting entity.” This requires such entities to carry out customer due diligence, maintain transaction records, and report suspicious activity to the Financial Intelligence Unit-India, in line with India’s commitments as a member of the Financial Action Task Force.
Fifth, the applicability of the Foreign Exchange Management Act, 1999 to cross-border crypto transactions remains ambiguous, since crypto is neither classified as currency nor as a security under existing law, creating uncertainty for exchanges and investors dealing with foreign platforms.
Finally, the Cryptocurrency and Regulation of Official Digital Currency Bill, first listed for introduction in the winter session of Parliament in 2021, has still not been tabled. Public reports suggest that the Government has chosen to await a globally coordinated approach, particularly following the International Monetary Fund–Financial Stability Board Synthesis Paper on crypto-asset policy, released in 2023 during India’s G20 presidency. This ongoing legislative delay is itself proof of the absence of a comprehensive framework, more than six years after the technology and its associated risks were first flagged by Indian regulators.
V. Case Laws
Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274
This is the leading and, to date, the only Supreme Court judgment directly addressing cryptocurrency regulation in India. The Supreme Court held that trading in cryptocurrency, though unregulated, was not illegal, and that the petitioners’ right to carry on this business was protected under Article 19(1)(g) of the Constitution. Applying the doctrine of proportionality, the Court found that the RBI had failed to demonstrate any actual or quantifiable financial loss suffered by entities it regulated on account of crypto trading. Since no empirical harm was shown, the blanket banking ban was held to be a disproportionate restriction and was accordingly quashed. This judgment remains significant for two reasons: it confirmed that cryptocurrency trading is presently lawful in India in the absence of a specific prohibiting statute, and it placed the burden on regulators to justify restrictive measures with cogent evidence rather than general apprehension.
Enforcement Directorate Action against Crypto Exchanges (2022 onwards)
Following the Supreme Court judgment, in the absence of a dedicated crypto statute, enforcement agencies have relied on existing laws to act against alleged misuse. In 2022, the Enforcement Directorate invoked provisions of the Prevention of Money Laundering Act, 2002 and the Foreign Exchange Management Act, 1999 against a major domestic crypto exchange in connection with instant-loan-app fraud proceeds allegedly routed through cryptocurrency. Similar PMLA-based action has since been taken against other exchanges and individuals. These proceedings illustrate a recurring pattern: regulators and investigative agencies are compelled to stretch general-purpose statutes, designed for traditional financial instruments, to address crypto-specific misconduct, in the absence of tailored regulatory tools such as licensing conditions, exchange audits, or asset-freezing powers specific to digital assets.
Comparative Reference: Securities and Exchange Commission v. Ripple Labs Inc. (United States District Court, S.D.N.Y., 2023)
Although not an Indian decision, this case is instructive for comparative purposes. The U.S. Securities and Exchange Commission alleged that Ripple’s XRP token constituted an unregistered security. The court drew a distinction between institutional sales (treated as securities transactions) and programmatic sales on public exchanges (not treated as securities transactions), illustrating how classification of a crypto asset can determine which regulator and which law applies. India’s continuing failure to classify VDAs in a similar manner as currency, commodity, security, or a sui generis asset class is precisely the gap that a comprehensive Indian statute would need to close.
VI. Conclusion
The current Indian approach to cryptocurrency regulation can best be described as regulation by accident rather than regulation by design. Tax law captures revenue, anti-money laundering law captures compliance obligations, and constitutional adjudication has clarified the limits of executive overreach — yet no statute defines what a virtual digital asset legally is, who may deal in it, how investors are to be protected, how exchanges are to be licensed and audited, or how disputes and insolvencies involving crypto assets are to be resolved. This piecemeal approach leaves millions of Indian retail investors without dedicated grievance redressal mechanisms, leaves exchanges without clear compliance benchmarks beyond AML obligations, and leaves enforcement agencies dependent on statutes not designed for this purpose.
A comprehensive legal framework is needed, and should, at minimum, address five elements: first, a clear statutory definition and classification of virtual digital assets, distinguishing currency-like tokens, security-like tokens, and utility tokens; second, identification of a competent regulator or a coordinated multi-regulator mechanism involving the RBI and SEBI; third, a licensing and registration regime for exchanges and intermediaries, with minimum capital, custody, and disclosure standards; fourth, harmonisation of the taxation regime with the broader regulatory framework, so that taxation is not the only point of legal contact between the State and the crypto investor; and fifth, a dedicated investor grievance and dispute resolution mechanism.
Until such a law is enacted, cryptocurrency in India will remain what it has been since 2018: technically legal, heavily taxed, increasingly monitored for money laundering, but fundamentally unregulated.
VII. References
1. The Constitution of India, 1950, art. 19(1)(g).
2. Income Tax Act, 1961, ss. 2(47A), 115BBH, 194S (as inserted/amended by the Finance Act, 2022).
3. Prevention of Money Laundering Act, 2002, s. 2(1)(wa); Gazette Notification S.O. 1072(E), dated 7 March 2023, Ministry of Finance, Government of India.
4. Foreign Exchange Management Act, 1999.
5. Reserve Bank of India, Circular No. RBI/2017-18/154, DBR.No.BP.BC.104/08.13.102/2017-18, dated 6 April 2018 (“Prohibition on dealing in Virtual Currencies”).
6. Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274.
7. Securities and Exchange Commission v. Ripple Labs Inc., No. 20-cv-10832 (S.D.N.Y. 2023).
8. Securities and Exchange Board of India, Discussion Paper on Crypto Assets/Products (2022).
9. Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (draft, not introduced in Parliament).