Context

• India has emerged as a global leader in grassroots cryptocurrency adoption, topping Chainalysis’s Geography of Crypto report for two consecutive years (2023 and 2024).
• With Indian retail investors having poured over $6.6 billion into crypto assets and projections indicating the potential creation of over 800,000 jobs by 2030, the country is clearly embracing the Web3 revolution.
• In addition, India boasts one of the fastest-growing developer ecosystems in the blockchain space.
• However, this rapid adoption starkly contrasts with the country’s ambiguous and restrictive policy environment, raising pressing questions about the future of virtual digital assets (VDAs) in India.

The Regulatory Paradox

• Growth Amidst Ambiguity
  • Despite the vibrancy of the crypto market, India’s approach to crypto regulation has been inconsistent and reactionary.
  • The Supreme Court's observation in May 2025, ‘Banning may be shutting your eyes to ground reality’, captures the tension between the flourishing digital asset space and the lack of coherent policy to govern it.
  • Since 2013, the Reserve Bank of India (RBI) has raised concerns about crypto, citing their unauthorised nature and potential threat to financial stability.
  • These concerns culminated in the RBI’s 2018 directive barring financial institutions from engaging with VDA entities, a move the Supreme Court later overturned in 2020.
  • Instead of a comprehensive regulatory framework, the Indian government opted for a fiscal deterrence approach.
  • Two significant tax policies introduced in 2022 imposed a 1% Tax Deducted at Source (TDS) on VDA transactions above ₹10,000 and a 30% capital gains tax without allowing loss offsetting.
  • While these measures were intended to enhance transparency and curb speculative trading, they inadvertently pushed users toward offshore, non-compliant platforms, severely limiting their effectiveness.
• Offshore Exodus and Revenue Losses
  • Between July 2022 and December 2023, Indian users transacted over ₹1.03 trillion worth of VDAs on foreign platforms, with only a meagre 9% of assets held on domestic exchanges.
  • This offshore trading surge led to a ₹2,488 crore loss in uncollected taxes.
  • The trend worsened between December 2023 and October 2024, as offshore trades reached ₹2.63 trillion.
  • Cumulatively, the estimated uncollected TDS from such platforms exceeds ₹60 billion.
  • Measures such as URL blocking to curb access had minimal impact, as users bypassed restrictions via VPNs, mirror sites, or by switching to other non-compliant exchanges.
  • These developments reflect the limitations of half-measures and underscore the urgency for full-spectrum legislation.

The Critical Role of VASPs

• Globally, standard-setting bodies like the International Monetary Fund, Financial Stability Board, and the Financial Action Task Force (FATF) advocate for comprehensive, risk-based, and internationally harmonised VDA regulation.
• Such frameworks depend on compliant domestic intermediaries, Virtual Asset Service Providers (VASPs), to serve as the enforcement arms of regulation.
• VASPs help ensure transparency, compliance, and regulatory oversight, making them indispensable in managing both the benefits and risks of the digital asset ecosystem.
• Indian VASPs have demonstrated a willingness to align with global norms.
• Their collaboration with the Financial Intelligence Unit-India has strengthened anti-money laundering and counter-terrorism financing systems, earning praise from FATF.
• The 2024 cyberattack that wiped out $230 million further galvanised the Indian VASP sector, prompting it to bolster cybersecurity, create insurance reserves, and initiate industry-wide safety standards.
• These actions illustrate the capacity of domestic platforms to act responsibly when empowered and regulated appropriately.

The Way Forward: Toward a Balanced and Future-Ready Framework

• The current scenario, taxing without regulating, is unsustainable and counterproductive.
• Without a comprehensive framework, India not only risks losing substantial tax revenue but also its ability to oversee a growing and strategically important sector.
• The potential of VDAs to contribute to national economic growth, job creation, and innovation cannot be fully realised under a policy vacuum.
• A forward-looking, balanced regulatory approach must be rooted in transparency, investor protection, and global interoperability.
• Instead of curbing innovation through prohibitive taxation or blanket bans, Indian regulators should recognise the constructive role played by VASPs and create a conducive environment for them to operate under oversight.
• Such a framework should aim to integrate crypto into the broader financial ecosystem without compromising on security or monetary control.

Conclusion

• India has demonstrated remarkable adoption and innovation in the digital asset space, yet its regulatory stance remains fragmented and reactive.
• To harness the full potential of the VDA economy while safeguarding its financial integrity, India must develop a pragmatic and comprehensive legal framework.
• Empowering compliant domestic platforms, harmonising with global standards, and focusing on risk-based regulations will enable the country to transition from a reluctant participant to a responsible global leader in the digital asset revolution.