Ahead of Budget 2026, there are reports that the government is mulling a comprehensive regulatory framework for crypto markets. The current regulatory ambiguity poses risks such as conflicts of interest, non-transparent token listings, inconsistent custody practices & weak oversight disclosures, explains V Shunmugam
How do Indians invest in crypto assets?
In Indian law and policy, crypto assets are referred to as Virtual Digital Assets (VDAs), which cover most blockchain-based tokens. For investors, this includes three buckets:
(i) Large-cap tokens such as Bitcoin and Ether,
(ii) Stablecoins that attempt to track a fiat currency or reference asset, and
(iii) A long tail of high-volatility small-cap tokens.
Most Indians use centralised crypto exchanges that offer INR onboarding, custody, and trading through mobile apps. A smaller but increasing number utilise self-custody wallets and token-to-token exchanges. India is consistently ranked among the top countries worldwide for crypto adoption.
Leading local exchanges report over 20 million registered users, with a large portion now from tier-2 and tier-3 cities.
Though the crypto ecosystem is commercially well-developed, it lacks comprehensive institutional regulation. The country hosts large-scale exchanges, wallet providers, liquidity providers, influencers, and compliance tech firms. However, unlike the EU, the UK, or Singapore, India does not have a formal market conduct framework for crypto trading venues.
In mature markets, exchanges are increasingly subject to licensing requirements that enforce custody protections, transparency standards, market surveillance, and conflict-of-interest management. India’s growth in this sector has outpaced its regulatory development architecture.
Current focus on transaction protocols
Regulation has mainly come through indirect methods. India charges a 30% tax on VDA gains and a 1% TDS on every transfer, establishing a clear transaction record. TDS collections increased from Rs 221 crore in FY23 to Rs 363 crore in FY24, and Rs 512 crore in FY25, totalling about Rs 1,100 crore over three years.
Last month, the Financial Intelligence Unit revised and unified its anti money laundering/ counter-terrorist financing guidelines, strengthening requirements for registration, governance, KYC, monitoring, and reporting.
Who are the key intermediaries?
The ecosystem now involves numerous intermediaries that influence investor results, including exchanges, custodians and wallets, brokers and aggregators, market makers, token issuers, affiliates and influencers, as well as on- and off-ramp service providers.
Increasing tax revenue, growing user numbers, and frequent enforcement actions indicate that crypto activity has achieved a significant retail level. Currently, the lack of market regulations poses clear risks such as non-transparent token listings, conflicts of interest, inconsistent custody practices, and weak oversight disclosures.
Objectives of crypto regulation
Global standard-setting bodies prioritise three goals in crypto regulation: safeguarding investors, promoting fair, efficient and transparent markets, and preventing systemic risks. The WazirX hack in July 2024, involving $235 million, exposed the dangers of custody mishaps.
Subsequent incidents, where platforms stated customer funds remained safe, emphasised the same point: retail investors’ main risk often stems from the intermediary, not just market fluctuations.
While tax and anti money laundering measures help identify investors and monitor money flows, they do not guarantee transparent price discovery or fair market practices.
As more first-time investors and Gen Z participate, risks such as wash trading, inflated volumes, and pump-and-dump schemes emerge as key concerns for investor protection. The rising use of stablecoins and leveraged products raises broader questions about financial stability and cross-border transactions, underscoring systemic issues.
How rest of the world does it
Regulations typically focus on their function instead of specific labels. EU’s MiCA framework grants licences to crypto-asset service providers and enforces disclosure and conduct standards. The UK has strict rules for crypto promotions and is developing a more comprehensive regulatory system.
Hong Kong and Singapore mandate licensing for trading platforms, requiring robust custody and governance standards. The global strategy: license trading venues, regulate trading activity, and safeguard clients’ assets.
Outcomes of a proper framework
A credible Indian framework would rest on clear outcomes. Trading plat-forms would follow uniform standards on listings, market surveillance, conflict management, disclosures, audits, and swift investor grievance redressal.
Certain protections would be non-negotiable: strict segregation of client assets, robust custody and cyber-security practices, transparent proof-of-reserves with matching liabilities, and time-bound incident disclosures.
(The writer is partner, MCQube)
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.