The present regulatory framework for Virtual Digital Assets (“VDA”) in India could be described as partial and risk-focused: while cryptocurrencies are not officially recognised as legal tender, their holding and exchange are not generally prohibited, meaning they operate under carefully managed regulatory measures even in the absence of comprehensive regulatory legislation.
Recent reports based on Reuters’ review of a government document reflecting the Reserve Bank of India’s (“RBI”) views on the subject claim that the Indian government is reluctant towards the establishment of a comprehensive regulatory framework for cryptocurrencies, citing RBI’s concerns over financial stability and the risk of rendering the sector systemic in the long run. This discourse provides us with a timely vantage to analyse the country’s approach towards its VDA ecosystem and the unique regulatory framework that exists.
The Existing Regulatory Framework
In India, digital assets are legally classified as “Virtual Digital Assets” under section 2(47A) of the Income Tax Act, inserted via the Finance Act of 2022. Modifications introduced through this Finance Act have established a distinct regime, including section 115BBH which mandates a 30% tax on income from the transfer of VDAs, disallows deductions except for the cost of acquisition, and prohibits the set-off of losses from VDAs against other incomes, along with 1% Tax Deduction at Source (“TDS”) on transactions above ₹10,000 under section 194S. The proposed Finance Bill 2025 also reportedly seeks to expand the VDA definition from April 1, 2026, to include any crypto-asset relying on cryptographically secured distributed ledger technology.
Parallelly, as per notification S.O. 1072(E) by India’s Ministry of Finance (Department of Revenue), issued on March 7, 2023, activities related to Virtual Digital Assets (“VDA”) now come under the regulatory scope of the Prevention of Money-Laundering Act, 2002 (“PMLA”), i.e., persons carrying on specified virtual digital asset services are designated “reporting entities” under the PMLA and are required to register with FIU‑IND and comply with KYC/AML obligations. This application of PMLA on VDA service providers is an operationally significant regulatory development. FIU-IND’s recent enforcement actions demonstrate the seriousness of this requirement which indicates that body has moved beyond regulatory warnings towards active supervision, warranting a compliance-first environment where regulatory adherence is essential for operational continuity.
Meanwhile, SEBI’s approach towards regulation of VDAs reflects careful boundary-setting rather than comprehensive regulation. SEBI has proposed a multi-regulatory framework where different authorities would oversee specific categories of VDAs based on their economic characteristics rather than their technological form. Since April 1, 2025, SEBI has also been monitoring crypto tokens that resemble securities with the intention of implementing a multi-agency regulatory model that includes RBI and the Ministry of Finance. However, despite establishing a Committee on Financial and Regulatory Technologies in 2020 and releasing a discussion paper on distributed ledger technology in securities markets, no security token has been tested in SEBI’s regulatory sandbox. Additionally, SEBI also prohibits mutual funds from investing in VDAs and restricts alternative investment funds from crypto exposure, creating regulatory arbitrage opportunities for unregulated investment vehicles.
Tokenisation and Real-World Assets: IFSCA’s Flexibility
While mainstream Indian regulators maintain cautious positions on digital assets, the International Financial Services Centres Authority (“IFSCA”) has emerged as a progressive voice in blockchain regulation. IFSCA’s consultation paper on tokenisation of real-world assets released in February 2025 and the subsequent TechFin and Ancillary Services Regulations of 2025, represents the most comprehensive regulatory framework for blockchain-based financial instruments in India. The framework allows for controlled experimentation with asset tokenisation under IFSCA’s regulatory sandbox. For example, Realdom India Private Limited recently received conditional approval by IFSCA to operate the Pinvest Exchange which is a global online marketplace for securitized real estate and infrastructure assets, demonstrating that regulatory innovation is possible within India’s cautious framework.
This sandbox approach allows market participants to test tokenisation models while providing regulators with practical experience in overseeing blockchain-based financial services. For professionals and individuals interested in tokenisation, the GIFT City route may provide the only current path for legitimate, regulated experimentation with blockchain-based securities in India.
Government’s Concerns Over Creation of a Comprehensive Framework
The government documents referred to earlier claim to reveal particular concern about stablecoins, especially those pegged to the US dollar, which officials fear could undermine India’s Unified Payments Interface (“UPI”) system. This is a sovereign monetary concern distinct from general cryptocurrency scepticism that reflects broader geopolitical concerns about dollar-denominated digital assets in emerging economies. The success of UPI as a public digital payment system creates strong incentives for authorities to resist private alternatives that could undermine government payment platforms. As a result, stablecoin-related businesses may face heightened scrutiny as regulators seek to protect India’s digital payment infrastructure.
Further, RBI’s Central Bank Digital Currency (“CBDC”) program continues to advance parallelly, with digital rupees worth over ₹1,016 crore in circulation across 17 banks as of March 2025, serving more than 60 lakh individuals. CBDC’s programmable features, demonstrated through initiatives like the Subhadra Yojana in Odisha, display government’s preference for controlled and purpose-driven digital currency applications. This too ends up creating competitive pressure on private cryptocurrencies by providing a regulated alternative that addresses some blockchain technology benefits within government-controlled parameters.
Navigating the Framework for Market Participants
For Cryptocurrency Exchanges and VDA Service Providers (“VASPs”), the regulatory environment requires a compliance-first approach with comprehensive AML/KYC procedures. PMLA requires comprehensive documentation of VDA transactions, including customer identification, transaction details, and beneficial ownership information, which means market participants would need to maintain these records for the required five-year period and have systems for regulatory reporting. The CERT-In cybersecurity directions also add additional record-keeping requirements, including incident reporting and log retention standards. These overlap with but do not replace PMLA requirements, creating multiple compliance obligations.
Cross-Border Compliance Considerations are also there since International VDA service providers would require to navigate both Indian regulatory requirements and their home jurisdiction regulations. FIU-IND registration is mandatory for any entity providing VDA services to Indian users, regardless of whether the entity is domestically or internationally located as the registration is activity-based rather than location-based. Foreign Exchange Management Act (“FEMA”) implications for cross-border crypto transactions also remain in a regulatory grey definition, requiring close analysis of FEMA implications alongside tax and AML requirements when structuring cross-border crypto arrangements.
For Investment Advisors and Fund Managers, the current regulations create significant constraints on regulated investment vehicles as SEBI-regulated mutual funds and alternative investment funds (“AIFs”) cannot invest in VDAs with insurance and pension funds facing similar restrictions. This creates opportunities for unregulated investment vehicles but increases compliance risks. The 30% tax rate and 1% TDS requirements could create tax planning challenges for family offices and high-net-worth clients requiring careful structuring as an absence of loss offset provisions also mean that crypto portfolio management would require different approaches compared to traditional securities.
Whereas companies focusing on blockchain technology rather than cryptocurrency face fewer regulatory obstacles. The government’s support for blockchain applications in supply chain management, healthcare, and finance creates opportunities for B2B technology providers. However, any token issuance or cryptocurrency-adjacent services would trigger VDA regulations. Hence, from a legal and regulatory perspective, maintaining clear separation between blockchain technology services and cryptocurrency-related activities could help minimize regulatory risk while preserving innovation opportunities.
Future Outlook and Strategic Recommendations
India’s regulatory approach towards VDAs reflects a stable, if restrictive, environment where compliant businesses can operate while speculative excess is discouraged through tax policy and compliance friction. The absence of comprehensive crypto legislation does not seem to reflect regulatory failure but rather a deliberate choice to manage sector development through taxation, compliance requirements, and selective innovation programs.
Reportedly, the government had initially planned to release a discussion paper outlining its crypto policy stance by September 2024, but this has been indefinitely deferred as authorities reassess their position in light of evolving global developments, particularly the United States’ increasingly pro-crypto regulatory stance following the passage of legislation like the GENIUS Act. The government’s decision to defer the crypto discussion paper until global regulatory clarity emerges, particularly from the United States, suggests that India’s final regulatory approach will depend significantly on international developments. US regulatory developments may influence India’s ultimate policy direction as well.
For market participants, the current environment rewards compliance-focused strategies over aggressive regulatory arbitrage. Businesses that invest in robust compliance systems and maintain cooperative relationships with regulators are best positioned for long-term success regardless of how the regulatory framework evolves. While tokenisation opportunities emerging through IFSCA’s framework can provide a blueprint for broader digital asset regulation in India.
Disclaimer: The information published in the above newsletter is collected from various sources in electronic medium and analyzed by the firm. The reader is advised to consult the attorney qualified in their jurisdiction, before acting on any information contained in this newsletter. India Juris excepts no liability what so ever in this regard.
