Cryptocurrency and the Indian Legal Framework

Cryptocurrency has emerged as one of the most debated innovations in the global financial system. Operating on decentralized blockchain technology, cryptocurrencies such as Bitcoin, Ethereum, and Ripple allow peer-to-peer transactions without the involvement of banks or central authorities. Advocates argue that cryptocurrencies promote financial inclusion, reduce transaction costs, and represent the future of digital economies. However, their volatility, anonymity, and potential misuse for money laundering and terrorism financing have raised regulatory concerns worldwide. India, too, has grappled with the question of how to regulate this emerging asset class, resulting in an evolving and often uncertain legal framework.

Initially, Indian regulators took a skeptical approach. In 2013 and 2017, the Reserve Bank of India (RBI) issued warnings cautioning investors against the risks of cryptocurrencies. In 2018, the RBI went further, issuing a circular prohibiting banks and financial institutions from providing services related to virtual currencies. This effectively crippled cryptocurrency exchanges in India. However, in Internet and Mobile Association of India v. Reserve Bank of India (2020), the Supreme Court struck down the circular, holding it disproportionate and violative of the fundamental right to trade under Article 19(1)(g). The judgment revived the Indian crypto industry but also highlighted the urgent need for a clear regulatory framework.

Since then, India has moved cautiously, avoiding outright legalization or criminalization. The government has proposed several draft legislations, including the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, which aimed to prohibit private cryptocurrencies while creating a framework for a state-backed digital currency. However, this bill was never tabled. Instead, in recent years, the focus has shifted towards regulation rather than prohibition. The Union Budget 2022 introduced a 30% tax on income from virtual digital assets and a 1% tax deducted at source (TDS) on transactions above a threshold, signaling that cryptocurrency is recognized as a taxable asset even if not formally legalized.

India is also exploring the introduction of a Central Bank Digital Currency (CBDC), known as the “Digital Rupee,” backed by the RBI. The pilot project was launched in 2022, reflecting the government’s view that while decentralized private cryptocurrencies pose risks, blockchain-based digital currencies can be harnessed in a controlled and sovereign manner. This dual approach reflects India’s cautious stance: discouraging speculation in private cryptocurrencies while promoting an official digital alternative.

The Indian legal framework, however, remains incomplete. There is no dedicated statute governing cryptocurrencies, leaving regulatory oversight fragmented between the RBI, the Securities and Exchange Board of India (SEBI), and the Ministry of Finance. Issues such as classification of cryptocurrencies—whether as currency, commodity, or security—remain unresolved. This creates legal uncertainty for investors, businesses, and enforcement agencies. Concerns over money laundering and financing of illicit activities have prompted demands for stronger regulation, particularly compliance with the Prevention of Money Laundering Act, 2002 and Know Your Customer (KYC) norms. At the same time, overregulation or prohibition could push the crypto market underground, making it even harder to monitor.

The global experience provides useful lessons. Countries such as the United States and European Union have moved toward regulatory oversight, focusing on anti-money laundering, taxation, and consumer protection, while allowing innovation to flourish. Others, like China, have imposed strict bans on cryptocurrency trading and mining. India’s challenge is to strike a balance that preserves financial stability and protects investors without stifling technological innovation. With its large population of young, tech-savvy investors and growing fintech sector, India stands at a crucial juncture where the right regulatory approach could harness the potential of blockchain technology while curbing its risks.

In conclusion, cryptocurrency and the Indian legal framework reflect an ongoing evolution. From outright prohibition by the RBI to judicial intervention and partial recognition through taxation, India has taken incremental steps toward regulation. Yet, the absence of a comprehensive law creates uncertainty and risk. The road ahead requires clarity on classification, strong consumer protection, alignment with anti-money laundering norms, and promotion of the Digital Rupee as a stable alternative. Ultimately, India’s approach must balance innovation with caution, ensuring that the promise of cryptocurrency and blockchain technology is realized without compromising financial security and the rule of law.