Regulating the Revolution of Virtual Digital Assets in India
‘Indians traded over ₹1.03 trillion worth of VDAs on non-compliant platforms’
| Photo Credit: Getty Images
For the second consecutive year, India has emerged as a leader in grassroots crypto adoption, as highlighted in the ‘Geography of Crypto’ report by Chainalysis (2024). A report from the National Association of Software and Service Companies (NASSCOM) reveals that Indian retail investors have invested $6.6 billion in crypto assets, predicting the sector could generate over eight lakh jobs by 2030. Additionally, India has one of the largest and fastest-growing web3 developer communities.
This dynamic growth is noteworthy, especially considering the tumultuous history of cryptocurrency, termed ‘Virtual Digital Assets’ (VDA), in India amidst an uncertain regulatory and policy environment. In May 2025, the Supreme Court of India criticized the lack of comprehensive crypto regulations, stating, “Banning may be shutting your eyes to ground reality.” This statement underscores the gap between the practicalities of VDA usage and the corresponding policies, creating substantial challenges for both regulators and market participants.
Addressing the Regulatory Gaps in India’s VDA Landscape
In a country known for strict capital controls and regulated payment systems, India faces difficulties in aligning these frameworks with the decentralized nature of VDAs. The Reserve Bank of India (RBI), the country’s monetary policy regulator, raised alarms about the risks associated with cryptocurrencies as early as 2013, pointing out that these assets lack central bank authorization. In response to the market’s unchecked growth, the RBI issued a circular in 2018 that prohibited financial institutions from engaging with VDA-related companies. However, this measure was quickly overturned by the Court in 2020.
The government subsequently implemented stringent tax policies as a temporary solution while regulatory frameworks were crafted. In 2022, two significant tax measures were introduced for VDAs under the Income Tax Act: a 1% tax deducted at source (TDS) on VDA transactions over ₹10,000 under Section 194S, and a 30% capital gains tax under Section 115BBH, which disallows loss offsetting. While these measures aimed to promote transparency and reduce speculation, their impact has been limited.
Industry reports estimate that between July 2022 and December 2023, over ₹1.03 trillion worth of VDAs were traded on non-compliant platforms, with a mere 9% of the estimated ₹1.12 trillion held on domestic exchanges. Offshore trading resulted in an uncollected VDA tax revenue loss of ₹2,488 crore for India. From December 2023 to October 2024, this figure rose to over ₹2.63 trillion traded on offshore platforms. The cumulative uncollected TDS from these exchanges since July 2022 is projected to surpass ₹60 billion, with nine blocked exchanges contributing to over 60% of this trading volume. Measures attempted to restrict access to non-compliant platforms, such as URL blocking, yielded limited success, as trade volumes on these exchanges rebounded after temporary dips, and web traffic increased by 57%. Users circumvented restrictions using virtual private networks (VPNs), mirror platforms, and migrating to other non-compliant exchanges.
The Role of Virtual Asset Service Providers (VASPs)
Global standard-setting bodies, including the International Monetary Fund, Financial Stability Board, and the Financial Action Task Force, advocate for comprehensive, risk-based regulation aligned with international standards—a process that is currently underway. These frameworks depend on domestic, compliant Virtual Asset Service Providers (VASPs) that serve as intermediaries, enhancing regulatory oversight. These entities facilitate the integration of VDA operations with existing laws and policy enforcement, while also providing valuable feedback on real-world challenges.
In contrast, India’s current policy environment inadvertently pushes VDA users toward offshore, non-compliant platforms, weakening the nation’s ability to manage VDA-related risks and collect potential tax revenue.
Meanwhile, Indian VASP platforms are advancing and demonstrate a commitment to regulation and ethical conduct. For instance, their collaboration with the Financial Intelligence Unit-India has significantly improved anti-money laundering and counter-terror financing measures, receiving commendation from the Financial Action Task Force (FATF). Following a significant hack in 2024 that resulted in a loss of $230 million, Indian exchanges stepped up their efforts, enhancing cybersecurity, establishing dedicated insurance funds for future incidents, and cooperating to develop industry-wide cybersecurity protocols.
The Urgent Need for a Framework
These developments highlight the essential role of VASPs in promoting a safer digital asset ecosystem. Coupled with their contributions to national value creation and economic development, these platforms present a constructive avenue for fund flows under the supervision of Indian regulators. To break free from the current policy impasse—where taxation is imposed without effective regulation—a balanced, pragmatic, and future-proof regulatory framework is critical. India must act decisively to enact comprehensive legislation needed by the crypto industry while effectively addressing associated risks.
Urvi Pathak is a lawyer specializing in competition law and technology
Published – June 02, 2025 12:52 am IST
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