By Smita Jha & Ananya Giri Upadhya, Respectively Partner and Associate at Khaitan & Co
India’s regulatory approach for virtual digital assets (VDAs), including cryptocurrencies, has evolved through cautious judicial intervention and incremental, sector-specific regulation rather than a unified statutory framework. After warnings about financial volatility and security risks, the Reserve Bank of India (RBI) in 2018 prohibited regulated entities from dealing in VDAs, a move later struck down by the Supreme Court in 2020 as disproportionate. In the absence of a dedicated crypto legislation, the government has relied on indirect regulatory levers, principally taxation and anti-money laundering rules, leaving the crypto market in a state of regulatory ambiguity.
The imposition of a high flat tax of 30% on income from VDA transfers without allowing deductions for expenses or set-off losses along with a 1% tax deducted at source and gift tax provisions resulted in a measurable migration of trading volumes to offshore platforms. However, in 2023, VDA service providers, including crypto exchanges and custodial wallet providers, were brought under the purview of the Prevention of Money Laundering Act (PMLA), 2002. This meant even offshore platforms servicing Indian users to comply with stringent compliance requirements like registration with the Financial Intelligence Unit (FIU), robust internal governance compliances, Know-Your-Customer checks, five-year records retention, and suspicious transaction reporting.
Bringing VDA service providers within the ambit of the PMLA was instrumental in aligning India with global standards on anti-money laundering and combating terrorist financing and proliferation of weapons of mass destruction. This marked a decisive shift from a purely tax-led approach to one centred on surveillance, traceability, and enforcement. The timely revision of such instructions, with the latest update on January 8, along with FIU action against over 30 offshore platforms for non-compliance, signals a clear intent to enforce stricter regulatory oversight on crypto platforms.
The government and regulators are navigating a complex trilemma—fostering technological innovation, protecting consumers, and ensuring macroeconomic stability. Since 2013, the RBI has maintained a consistently guarded stance on cryptocurrencies, citing cybersecurity risks, lack of grievance redress mechanisms for decentralised issuances, high price volatility, lack of asset backing, and the risk of disintermediation in payment systems. Given these risks, the RBI has consistently advocated the adoption of the central bank digital currency (CBDC), the e-rupee, as a sovereign digital alternative that preserves monetary control while leveraging technological efficiencies.
As recently as November 2025, RBI Governor Sanjay Malhotra reiterated the central bank’s cautious stance on private cryptocurrencies, its strong support for CBDCs, and its view that any final policy decision on cryptocurrency must rest with the government.
While the Securities and Exchange Board of India (Sebi) has so far excluded VDAs from its regulatory ambit, the judiciary has played a meaningful role in shaping the legal treatment of crypto assets. Beyond the Supreme Court’s 2020 judgment setting aside the RBI’s ban on dealing in VDAs, recent high court rulings have characterised VDAs as “property” held in trust by platforms for investors, thereby imposing fiduciary duties on intermediaries and strengthening investor protection.
India is not formulating its crypto policy in isolation. With its 2023 G20 Presidency, India advocated a coordinated global response to cryptocurrencies, culminating in G20 leaders endorsing a road map created by the International Monetary Fund. The paper recommended a robust regulatory framework encompassing registration, prudential norms, global coordination, and capacity-building instead of an outright ban, particularly for emerging economies.
Globally, crypto policy has shifted decisively towards regulation and institutional integration rather than prohibitions. The Basel Committee on Banking Supervision’s decision to expedite its review of prudential standards for banks’ crypto-asset exposures reflects this trend. Stablecoins, owing to their relative price stability and currency backing, continue to dominate the global policy agenda, with several jurisdictions advancing regulatory frameworks such as the US’s GENIUS Act and the European Union’s Markets in Crypto-Assets (MiCA) Regulation.
The path ahead for India’s crypto regulation remains a work in progress. While the government has so far refrained from introducing a comprehensive, standalone crypto law, recent reports indicate that the ministry of finance is engaging with Sebi and the RBI to establish a more structured regulatory framework for cryptocurrencies. Under this framework, Sebi may emerge as the primary regulator for crypto exchanges, while matters pertaining to cross-border transactions, capital flows, and investment could fall within the RBI’s remit.
Such a multi-stakeholder approach—leveraging institutional expertise and regulatory capacity—could provide much-needed clarity on the permissibility and supervision of various VDA services, while creating a more predictable environment for innovation and investment.
The effectiveness of India’s crypto framework will ultimately depend on its ability to combine regulatory clarity with proportionate, risk-based oversight.