Author: Satyam Dubey
Collage: Symbiosis law school (SLS), Nagpur
1. TO THE POINT
The current definition of property, money and financial transaction have been revolutionized with the advent of the cryptocurrencies and Virtual Digital Assets (VDAs). While cryptocurrencies like Bitcoin and Ethereum are not legally accepted in India, cryptocurrency transactions are not totally banned by the law. Rather, India has taken a ‘wait and see’ attitude, with a mix of taxation, anti-money laundering (AML) measures and financial-sector oversight.
The legal framework governing VDAs has been evolving largely in the light of the Income-tax Act, 1961, Prevention of Money Laundering Act, 2002 (PMLA), directions of financial authorities and judicial rulings. The Finance Act, 2022 established a dedicated tax framework for VDAs, which includes a tax deduction mechanism of 1 per cent of certain transfers of VDAs and a tax rate of 30 per cent on income generated from transfers of VDAs.
The Organization of the taxation system has then been reorganized in the Income-tax Act, 2025, with the policy line of approach towards the taxation of VDA retained. But the main legal challenge is the lack of a general law that regulates cryptocurrencies and VDA markets, in particular. This means balancing the innovation and technological developments with consumer protection, financial stability, prevention of money laundering and national economic interests, which is a challenge for India.
2. USE OF LEGAL JARGON
Understanding the legal landscape of cryptocurrencies in India is crucial and the following are some key concepts to be aware of:
Virtual Digital Asset (VDA): A definition of VDA has been added by the Income-tax Act, 1961, Section 2(47A). It broadly includes any representation of value, regardless of whether it is created digitally, which can be transferred, stored or traded electronically, except as specifically excluded by the law.
Cryptocurrency: Cryptocurrency is a way of expressing value that is typically digitally represented and is usually based on cryptographic techniques and distributed ledger technology. It is often not backed directly by a central bank; unlike sovereign currency.
Blockchain: Blockchain is an open technology for the record that data is recorded in a distributed way across the network. Its technological design makes traditional regulation through “central intermediaries” challenging.
Anti-Money Laundering (AML): AML regulation aims to prevent the conversion or movement of the proceeds from illegal activities. Customer due diligence and record-keeping and reporting requirements may therefore apply to VDA service providers if they are within the PMLA framework of relevance.
Know Your Customer (KYC): KYC is a requirement that regulated entities are to verify the identity of their customers and hold suitable records. The VDA sector has a specific interest in KYC as pseudonymous transactions can pose risks of identity covering.
Tax Deducted at Source (TDS): Indian Taxation System withholding requirement for specified transfers of the VDAs (the Tax Deducted at Source). The earlier regime had introduced the concept of TDS obligations with Section 194S of the Income-tax Act, 1961 for transfers made by qualified VDA.
3. THE PROOF
India’s regulatory framework can be explained in three main aspects: Taxation, Anti-Money laundering, financial regulation.
A. Tax Treatment of Virtual Digital Assets
Provisions as specific as VDAs were introduced in the Finance Act, 2022. Sec 115BBH has provided for the taxation of a VDA transfer at a special rate of 30%, based on availability of statutory conditions. The Income Tax Department remains adamant that VDA income will continue to be taxable at 30% in accordance with Section 115BBH.
The number of losses that could be adjusted for VDA transfers was also limited by the regime. This is a reflection of the government’s intention to acknowledge and tax VDA deals, but not cryptocurrencies as traditional currency. A taxation system was also established with a withholding system. The earlier Income-tax Act, Section 194S was in respect of deduction of tax at source in the case of transfer of VDAs.
The Income-tax Department’s recent guidance clarifies that transactions after 1 April 2026 will be subject to the provisions of the new Act (Income-tax Act, 2025), and those before or on 31 March 2026 will remain covered by the old Act (Income-tax Act, 1921). This is important because it is establishing that taxation does not necessarily indicate that cryptocurrency is money, or legal tender.
B. Prevention of Money Laundering Act, 2002
The second is the PMLA framework. The virtual digital assets anti-money-laundering requirements may apply to VDA service providers engaged in certain activities. The goal is to make cryptocurrencies more difficult to use as a means of laundering and hiding illegal funds or money.
Customer Identification, maintaining records of transactions, reporting of suspicious transactions to competent authority are some aspects of compliance. It is a significant step towards recognizing cryptocurrency as an activity with financial and regulatory implications, rather than just a technological phenomenon, by incorporating VDA-related activities into India’s AML framework.
C. U.S. monetary policy
The Reserve Bank of India (RBI) has voiced its concerns on cryptocurrencies, mainly in terms of monetary stability, consumer protection, financial integrity and potential use of cryptocurrencies by bad actors. The judgment in the Supreme Court’s Internet and Mobile Association of India v. Reserve Bank of India, however, had a significant impact on the legal position. The RBI’s circular for 2018 had mandated regulated entities to refrain from transacting in virtual currencies and offering services that could facilitate transactions in virtual currencies.
The Supreme Court looked at the lawfulness of this restriction. The Court finally struck down the argument of proportionality in the RBI circular. It’s a big decision because it showed, in my opinion, that although there is a regulatory concern, that concern has to meet constitutional standards when it impinges substantially on lawful economic activity
4.CASE LAWS
1.Internet and Mobile Association of India and the Reserve Bank of India
Citation: (2020) 10 SCC 274
Facts: In 2018, the Reserve Bank of India issued a circular prohibiting the dealings in virtual currency by the entities regulated by it or to provide any services which assist the dealings in virtual currency. The circular was contested by the industry and cryptocurrency exchanges before the Supreme Cour
Question: Was the decision of the RBI to impose complete ban on regulated entities to transact with cryptocurrency-basedbusinesses lawful?
Judgment: The Supreme Court set aside the RBI circular. The Court accepted the RBI’s authority over financial institutions, but stated that the limitation imposed by the circular was excessive when compared to the damage that was shown as a case before the Court. The judgement continues to be the top Indian constitutional decision regarding the regulation of cryptocurrencies.
2. Internet and Mobile Association of India – Constitutional Significance
The case is special because it sets precedent that cryptocurrency regulation is subject to constitutional review. Restrictions by public authorities must be rationally linked to the object they seek to achieve and must meet the requirement for proportionality, even if an economic activity is considered to have a potential risk. Therefore, any future comprehensive cryptocurrency legislation should take into account the public interest, economic freedom, consumer protection, and financial stability.
5.ABSTRACT
India is facing a huge regulatory challenge due to the rapid growth of cryptocurrency and Virtual Digital Assets. VDAs are not financial assets like stocks and bonds, but rather decentralised technological systems that do not require the traditional financial intermediaries. This complicates the task for regulators with regards to taxation, consumer protection, money laundering, market manipulation and financial stability. India has taken a piecemeal but developing regulatory strategy. The taxation system acknowledges the income generated from transfers made through the VDA and applies a special taxation system to them. Incorporation of specified VDA service providers under anti-money laundering framework. Meanwhile, the Reserve Bank of India remains very apprehensive about the monetary and financial impact of private cryptocurrencies. The Supreme Court’s ruling in the case of Internet and Mobile Association of India v Reserve Bank of India shows that the regulation of cryptocurrencies does not take a vow of poverty, but is bound by constitutional laws, specifically proportionality. The current system thus offers a compromise—whereas cryptocurrency is not defined as sovereign money, the use of VDAs is still bound by legal and financial requirements. The key regulatory lacuna is the lack of a single regulatory framework covering licensing, consumer protection, market integrity, custody of digital assets, dispute resolution, cross-border transactions etc. A more technology neutral and risk-based approach should be taken in a future Indian regulatory structure, however, with robust AML and investor protection measures.
6. KEY LEGAL CHALLENGES
Regulatory Uncertainty
For now, India has no single law on crypto but rather several. This can lead to investment uncertainty for investors, exchanges and businesses trying to figure out the exact legal nature of specific digital assets and activities.
Consumer and Investor Protection
There are high price fluctuations, technical risks, fraud and cyber-security risks in cryptocurrency markets. A detailed plan needs to define clear responsibilities of exchanges and custodial service providers.
Money laundering and terrorist financing.
Conventional financial investigations may be hindered due to the cross-border and pseudo-anonymous nature of cryptocurrency transactions. It is therefore important to have robust KYC and transaction monitoring systems in place
Cross-Border Enforcement
Unlike conventional transactions, cryptocurrency deals can take place across borders without geographical limitations. Indian regulators could then find themselves in a quandary in such a case.
Classification of Digital Assets
Not all tokens are always economic tokens. Some can be investment vehicles, some can be access to a platform, and others can be as payment tools. A uniform regulatory treatment can, therefore, have unexpected effects.
7. THE REGULATORY GAP
India’s current governance is most lacking of a dedicated law concerning only cryptocurrencies and VDAs.
Ideal elements for a future law should include:
1. licensing and registration of VDA exchanges
2. KYC and AML compliance – mandatory
3. consumer and investor protection
4. Standards in cyber-security and custody
5. Manipulation and fraudulent trading in the market
6. disclosure requirements
7. taxation and accounting treatment
8. cross-border transactions
9. dispute-resolution mechanisms
10. Regulatory co-ordination among RBI, SEBI, FIU-IND and other competent authorities.
It would be better to have a risk-based regulatory model than a ‘one size fits all’ ban. Compliance requirements may be more stringent on assets that pose a higher systemic, consumer or financial risk, and less stringent on lower-risk technological applications.
8.CONCLUSION
The advent of the cryptocurrency and Virtual Digital Assets (VDA) is among the most transformative advances of financial technology today. India’s policies have evolved from regulatory uncertainty to ones of taxation, AML, financial-sector supervision. However, taxation and AML regulation is not a perfect solution for the full-fledged regulatory framework for cryptocurrencies. The lack of robust legislation leaves issues of licensing, consumer protection, conduct in the market, custody, dispute resolution and cross-border enforcement unclear. The observation in the case of Internet and Mobile Association of India v. RBI is significant as it lays down a constitutional rule that any regulatory intervention by the government must be proportionate to the legitimate government purpose. The future regulation, therefore, should not ignore the risks cryptocurrencies involve and technological innovation should not be unnecessarily stifled. India needs an all-encompassing, risk-based and technology-neutral approach to Regulation that can safeguard financial stability and consumers, while fostering responsible innovation in the Blockchain space. This would offer enhanced legal clarity and help India join the fast-growing global digital-asset economy.
9. FAQ
Q1. Is cryptocurrency legal in India?
Cryptocurrency isn’t legal tender in India. But India has not given a blanket ban on specified activities around Virtual Digital Assets, it has imposed tax and regulatory requirements.
Q2. Virtual Digital Assets? What are they?
A VDA is an asset that is represented electronically and is within the definition of assets as per the Indian tax law. The definition includes certain digital representations of value which may be transferred, stored or traded electronically.
Q3. What is the rate of taxation for VDA income?
The transfer of VDAs is taxed at a special 30% rate as per the statutory provisions. The 30% applies in line with Section 115BBH of the earlier Income-tax Act, confirms Income Tax Department.
Q4. In effect, does tax make crypto legal tender?
Cryptocurrencies do not automatically become legal tender through taxation of income generated from an activity.
Q5. Which is the most crucial Supreme Court case related to cryptocurrency?
The major judgment that was cited was Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274 where the Supreme Court struck down the RBI’s restriction on banking transactions involving cryptocurrency-related activities on proportionality grounds.
Q6. What is the need for a robust legislation for cryptocurrencies in India?
An all-encompassing statute could offer further clarity on licensing, consumer protection, market integrity, taxation, AML compliance, custody, cyber-security and cross-border transactions.
