CRYPTOCURRENCY AND BLOCKCHAIN REGULATION IN INDIA:LEGAL UNCERTAINTY, EMERGING CHALLENGES AND THE CASE FOR REGULATORY REFORM

Abstract

Cryptocurrency regulation in India has developed in an unusual way. Digital assets are widely traded and taxed, yet India still does not have a single statute that clearly sets out their legal status or the responsibilities of market participants. The result is a regulatory landscape shaped by judicial intervention, tax legislation, administrative measures and rules originally designed for conventional financial activity.

This paper examines that landscape through the Reserve Bank of India’s approach to virtual currencies, the Supreme Court’s decision in Internet and Mobile Association of India v. Reserve Bank of India, the taxation of virtual digital assets, and subsequent policy developments. It also considers regulatory approaches in the European Union, the United States and Singapore. The comparison suggests that the central question for India is no longer whether digital assets can simply be prohibited or ignored, but how different forms of blockchain-based activity should be classified and supervised.

The discussion then turns to decentralised finance, non-fungible tokens and decentralised autonomous organisations, each of which exposes limitations in legal rules built around identifiable intermediaries, conventional ownership and formally constituted organisations. The paper argues for a principles-based and technology-neutral framework that combines regulatory clarity with proportionate investor protection, anti-money-laundering safeguards and room for responsible innovation.

Keywords: Cryptocurrency; Blockchain; Virtual Digital Assets; RBI; DeFi; NFTs; DAOs; Digital Asset Regulation; India.

I. Introduction

Blockchain-based assets have forced legal systems to reconsider assumptions that once appeared relatively settled. Financial transactions traditionally take place through institutions that can be licensed, supervised and, where necessary, held accountable. Public blockchain networks complicate that model because transactions may occur directly between participants through distributed infrastructure rather than through a single intermediary. Bitcoin’s original design illustrates this possibility: value can be transferred on a peer-to-peer network without relying on a conventional payment institution.

For India, the regulatory problem is particularly significant because adoption has continued despite uncertainty over the precise legal character of crypto-assets. A digital token may perform different economic functions in different settings. It may be held as an investment, used to access a service, represent an underlying asset, facilitate a payment, or provide governance rights. Treating every token as though it were legally identical therefore risks producing rules that are either too broad or too weak.

India’s response has so far emerged through several separate legal developments rather than one comprehensive enactment. The RBI attempted to isolate virtual-currency activity from regulated banking in 2018; the Supreme Court subsequently invalidated that measure; Parliament later created a specific taxation regime for virtual digital assets; and other regulatory requirements have gradually been applied to parts of the ecosystem. This piecemeal development has allowed the market to continue operating, but it has not answered several basic questions concerning classification, supervision, consumer remedies and institutional responsibility.

This paper examines that regulatory trajectory and asks what a more coherent Indian framework could look like. It first considers the RBI restriction, the Supreme Court’s proportionality analysis and the VDA tax regime. It then compares selected international approaches before examining the particular problems created by DeFi, NFTs and DAOs. The final section proposes reforms intended to distinguish legitimate technological innovation from risks that justify regulatory intervention.

II. India’s Regulatory Journey

The early Indian debate over cryptocurrency was dominated by risk. Concerns about volatility, money laundering, cybercrime, consumer losses and the potential use of privately issued digital assets outside the regulated financial system led authorities to adopt a cautious position.

On 6 April 2018, the RBI directed entities regulated by it not to provide services to persons or businesses dealing in virtual currencies. The measure did not make possession of cryptocurrency a criminal offence. Its practical effect was nevertheless substantial: exchanges and other crypto businesses depended on banking relationships to receive and transfer fiat currency, and the circular made those relationships extremely difficult to maintain.

The RBI’s concerns were not trivial. An asset class capable of rapid cross-border transfer, pseudonymous participation and extreme price movements raises genuine questions of financial integrity and consumer protection.  The legal difficulty, however, was whether excluding an entire category of otherwise lawful businesses from banking services was proportionate to risks that could potentially have been addressed through narrower controls.

That issue reached the Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India. The petitioners challenged the circular, including on the basis that it interfered with the freedom to carry on trade or business under Article 19(1)(g) of the Constitution. The Court accepted that the RBI had broad regulatory authority over entities within the financial system, but regulatory power did not make every restriction proportionate.

The circular was set aside. The Court’s reasoning was especially important because it did not declare cryptocurrency to be legal tender or confer a special legal status upon it. Instead, the judgment focused on the relationship between the identified harm and the severity of the regulatory response.  The RBI had not demonstrated sufficient damage to regulated entities to justify the measure in the form adopted.  The decision therefore became important not merely for the crypto industry but for the broader proposition that novel financial risks do not remove the requirement of proportionality.

The next major development came through taxation. The Finance Act, 2022 created a specific framework for income arising from virtual digital assets.¹⁰ Section 115BBH imposes a 30 per cent rate on income from transfer of VDAs, subject to the statutory rules governing deductions and losses, while section 194S introduced tax deduction at source for qualifying transfers.¹¹ The legislation also restricts the set-off of losses in the manner specified by section 115BBH.

Taxation, however, should not be confused with comprehensive regulation. A tax provision determines fiscal consequences; it does not by itself establish whether an asset is a security, payment instrument or some other regulated product, nor does it create a complete licensing and consumer-protection regime. India consequently arrived at an unusual position in which the law expressly recognised VDA transactions for tax purposes while many questions about the market’s regulatory architecture remained open.

The practical effects of the tax structure have also been debated. Industry research has argued that the tax rate and TDS mechanism affected domestic trading activity and may have encouraged some users to migrate towards offshore platforms.  Whether tax policy should be relaxed is ultimately a policy question, but a regime that drives activity outside domestic supervision may undermine some of the regulatory objectives it is intended to support.

India therefore faces a problem of regulatory fragmentation. Tax authorities, the RBI, financial-market regulators and enforcement agencies may each have legitimate interests in particular activities, but a digital asset can cut across traditional regulatory categories. The central challenge is to allocate responsibility according to the function and risk of the activity rather than merely the technology used to conduct it.

III. Legislative Direction and Comparative Approaches

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 appeared in parliamentary business but was not enacted.¹⁴ Public discussion surrounding the proposal was complicated by its reference to “private cryptocurrencies,” an expression whose practical scope was uncertain.¹⁵ A workable statute would need greater precision. Stablecoins, investment tokens, utility tokens, NFTs and decentralised governance tokens do not necessarily create the same risks and should not automatically receive identical legal treatment.

At the same time, India has proceeded with a central bank digital currency. The RBI’s Digital Rupee is fundamentally different from decentralised crypto-assets because it represents sovereign money issued by the central bank.¹⁶ Its existence therefore does not resolve the regulatory questions associated with privately created blockchain assets. CBDCs and crypto-assets may use related technological ideas, but their legal foundations and risk structures are different.

International experience provides several useful contrasts. The European Union’s Markets in Crypto-Assets Regulation (MiCA) represents an attempt to build a dedicated and comparatively harmonised framework for crypto-assets and service providers. Its significance for India lies less in copying individual provisions than in the regulatory architecture: classification, authorisation, disclosure and conduct obligations are addressed within a framework designed specifically for digital assets.

The United States has historically presented a different model, with several agencies and bodies of law potentially applying depending on the characteristics of the asset or activity. Securities analysis, including principles associated with SEC v. W.J. Howey Co., has played an important role in disputes over whether particular arrangements fall within securities law.¹⁸ The American experience demonstrates both the value of applying established legal principles to new technology and the uncertainty that can arise when jurisdiction is divided across regulatory regimes.

Singapore offers another useful comparison. Under the Payment Services Act and related supervision, the Monetary Authority of Singapore has used licensing and risk-based requirements to regulate relevant digital-payment-token services. The model does not treat innovation and oversight as mutually exclusive. Instead, market access can coexist with AML/CFT, operational and consumer-risk controls.

These jurisdictions differ considerably, so no model can simply be transplanted into Indian law. Their broader lesson is that regulatory certainty does not require treating every crypto-asset as conventional money or prohibiting the technology. India can instead identify the economic function of an activity, determine the risks associated with it and assign obligations proportionate to those risks.

IV. Emerging Legal Challenges: DeFi, NFTs and DAOs

The next stage of blockchain regulation is more difficult than regulating centralised cryptocurrency exchanges because many emerging applications challenge the very idea of an identifiable intermediary.

Decentralised finance allows financial functions such as lending, borrowing, exchange and investment to be performed through blockchain-based protocols and smart contracts. Conventional financial regulation often assumes that there is an institution capable of performing customer due diligence, maintaining records, managing operational risk and responding to supervisory directions. A genuinely decentralised protocol may not fit comfortably within that assumption.

The important regulatory question is therefore not simply whether DeFi should be “regulated.” It is where legally meaningful control exists. Developers, governance participants, interface operators, custodians and persons exercising material control over a protocol may occupy very different positions. Rules that ignore these distinctions may impose liability on actors who cannot realistically perform the required obligation, while leaving genuinely influential actors outside the framework.

NFTs raise a different set of problems. An NFT is a blockchain token capable of identifying a unique tokenised item or record, but ownership of the token does not automatically answer questions concerning copyright or other intellectual-property rights in the associated work.²¹ Indian copyright law does not contain an NFT-specific ownership regime.²² Market participants may therefore confuse ownership of a token with ownership of the underlying intellectual property unless contractual terms clearly explain what rights are transferred.

NFT regulation should consequently focus on the substance of the transaction. Some tokens may function principally as collectibles; others may be connected to investment arrangements, memberships, gaming assets or intellectual property. Consumer disclosures, fraud prevention, taxation and contractual clarity may be more useful than attempting to create a single legal rule for every NFT.

DAOs create yet another challenge. Governance may be conducted through smart contracts and token-holder voting rather than a conventional board and management structure. Some jurisdictions have begun experimenting with statutory recognition of DAO structures. Wyoming, for example, introduced legislation permitting qualifying DAOs to operate through an LLC framework. India’s Companies Act does not presently create an equivalent category for decentralised code-governed organisations.²⁴

Without a recognised legal wrapper, difficult questions arise about who contracts on behalf of a DAO, who bears liability, where the organisation is located for legal purposes and how tax or dispute-resolution rules apply. India need not recognise every decentralised arrangement as a separate legal person. It should, however, consider whether organisations meeting defined governance, disclosure and accountability requirements should be permitted to adopt a recognised legal form.

V. Policy Recommendations

India’s regulatory objective should be neither unconditional acceptance of crypto-assets nor regulation by deterrence. The more durable approach is to regulate identifiable risks while allowing technological models to evolve.

First, Parliament should establish a statutory framework that classifies digital assets according to their principal functions and creates clear regulatory responsibilities. Payment-like assets, investment products, stablecoins and utility-oriented tokens may require different treatment. Definitions should be sufficiently precise to provide certainty but flexible enough to accommodate technological change.

Second, entities that hold customer assets or operate centralised trading services should face meaningful consumer-protection obligations. These should include appropriate disclosures, safeguarding or segregation of client assets, cybersecurity controls, conflict-of-interest rules and accessible grievance mechanisms.

Third, the VDA tax framework should be periodically reviewed alongside regulatory objectives. Tax policy should raise legitimate revenue without unnecessarily encouraging activity to move to jurisdictions where Indian authorities have less visibility.

Fourth, regulatory sandboxes should be used more actively for blockchain-based financial products. The RBI has already developed a regulatory sandbox framework.²⁶ Controlled testing can help regulators understand new business models before deciding whether existing rules are sufficient or new obligations are required.

Fifth, cross-border coordination is essential. Digital assets can be transferred across jurisdictions far more easily than many conventional assets. Effective AML/CFT controls, tax enforcement and investigation of cyber-enabled offences therefore require cooperation with foreign regulators and international standard-setting bodies.

Finally, policymakers should distinguish the risks of speculative trading from the wider uses of distributed-ledger technology. Blockchain applications in record keeping, tokenisation, logistics and other sectors should not automatically inherit rules designed to address speculative financial products. Technology-neutral regulation should focus on the legal and economic consequences of an activity rather than its label.

VI. Conclusion

India has moved a considerable distance from the regulatory uncertainty that surrounded cryptocurrency during its early adoption, but the legal framework remains incomplete. The Supreme Court’s intervention clarified the limits of the RBI’s 2018 banking restriction, and Parliament has established an explicit tax regime for virtual digital assets. Those developments acknowledge the reality of the market without resolving all questions concerning classification, licensing, consumer protection and institutional responsibility.

The need for clarity will become more pressing as blockchain activity expands beyond centralised exchanges. DeFi challenges intermediary-based regulation; NFTs complicate assumptions about digital ownership; and DAOs test legal concepts of organisation, liability and governance. Attempting to address all of these technologies through a single undifferentiated category would likely create new uncertainty.

India would benefit from a framework built around functions, risks and accountable actors. Such an approach can impose stronger obligations where businesses custody assets, solicit investment or exercise meaningful control, while avoiding unnecessary restrictions on technological experimentation that does not create comparable risks. International models demonstrate that oversight and innovation can coexist, although India’s framework must ultimately reflect its own constitutional, financial and institutional setting.

The policy choice is therefore not between prohibition and an unregulated market. It is between continued fragmentation and a legal structure capable of identifying which activities require supervision, who should bear responsibility and what protections users should reasonably expect. Answering those questions clearly would provide a more stable foundation for India’s participation in the evolving digital-asset economy.

Footnotes / Authorities to Retain and Verify Before Submission

1. Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System” (2008).
2. Chainalysis, “The 2023 Global Crypto Adoption Index” (2023).
3. Nishith Desai Associates, “Virtual Currencies in India — A Legal Analysis” (2021).
4. Reserve Bank of India, Circular No. RBI/2017-18/154, DBR.No.BP.BC.104/08.13.102/2017-18 (6 April 2018).
5. RBI materials concerning risks associated with virtual currencies.
6. Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274.
7. Constitution of India, art. 19(1)(g).

8–9. Internet and Mobile Association of India v. RBI, relevant proportionality discussion.

10. Finance Act, 2022, inserting provisions relating to virtual digital assets.
11. Income-tax Act, 1961, ss. 115BBH and 194S, as applicable.
12. Income-tax Act, 1961, s. 115BBH.
13. Esya Centre, “Crypto Tax: A Comparative Assessment and Way Forward for India” (2022).
14. Lok Sabha materials concerning the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
15. PRS Legislative Research materials concerning the proposed 2021 Bill.
16. RBI, Concept Note on Central Bank Digital Currency (October 2022).
17. Regulation (EU) 2023/1114 on Markets in Crypto-Assets (MiCA).
18. SEC v. W.J. Howey Co., 328 U.S. 293 (1946), together with applicable U.S. securities-law materials.
19. Payment Services Act 2019 (Singapore) and applicable MAS materials.
20. Financial Stability Board, “The Financial Stability Risks of Decentralised Finance” (2023).
21. World Intellectual Property Organization materials on NFTs and intellectual property.
22. Copyright Act, 1957 (India).
23. Wyoming DAO Supplement, Wyo. Stat. Ann. § 17-31-101 et seq.
24. Companies Act, 2013 (India).
25. Finance Act, 2022 / Income-tax Act VDA provisions.
26. RBI, “Enabling Framework for Regulatory Sandbox” (2019), as subsequently updated where applicable.