India Hesitant to Regulate Crypto Over Legitimacy Concerns

India is adopting a cautious stance on cryptocurrencies, choosing to avoid comprehensive regulation amid fears that doing so would grant digital assets legitimacy and expose the financial system to systemic risks.

Limited Oversight, Heavy Taxation

A government document reviewed by Reuters highlighted the Reserve Bank of India’s (RBI) concerns, which underline the difficulty of mitigating crypto-related risks solely through regulation. Instead of creating a regulatory framework, authorities have leaned on punitive taxation and compliance measures to restrict activity. 

Since 2022, profits from digital assets have been taxed at 30%, while a 1% tax deducted at source (TDS) has further dampened market participation. Trading volumes on domestic exchanges have declined sharply as a result.

Despite these measures, international platforms are allowed to operate if they register with the Financial Intelligence Unit (FIU) and comply with anti-money laundering checks. For instance, Bybit recently resumed services in India after settling a penalty of 9.27 crore rupees ($1.06 million) for past violations.

Skepticism From the Central Bank

The RBI has consistently voiced reservations, stressing that cryptocurrencies pose “alarming” risks and could destabilize the financial system. The central bank’s position has contributed to a freeze in transactions between the formal financial sector and crypto entities. Yet, despite restrictions, Indian investors have collectively allocated around $4.5 billion to cryptocurrencies, according to government estimates.

The document noted that while the scale of investment is not significant enough to trigger systemic threats, the absence of formal regulations has effectively contained risks so far. It added that existing tax laws and compliance rules serve as deterrents to speculation and fraud.

Judicial and Regulatory Pressure

Calls for clarity have grown louder. India’s Supreme Court has urged the government to address the sector more decisively, observing that high taxation and TDS rules “amount to implicit recognition” of crypto. Meanwhile, the Central Board of Direct Taxes (CBDT) has questioned whether current rules adequately address derivatives and cross-border transactions, while also assessing the overall burden on investors.

Industry leaders have also pressed for a roadmap. CoinDCX CEO Sumit Gupta has argued for the formation of a parliamentary committee and a Web3 working group to establish a long-term strategy and align India with global innovation trends.

Global Commitments and Policy Shifts

India’s approach has fluctuated in recent years. A 2021 proposal to ban private cryptocurrencies was never pursued, while in 2023, during its G20 presidency, New Delhi advocated for a coordinated global regulatory framework. The government’s 2024 plan to issue a discussion paper was deferred, with officials opting to wait for U.S. regulatory clarity. 

Washington has since advanced with the GENIUS Act, which lays out federal rules for stablecoins and digital asset investments.

India has nonetheless committed to adopting the OECD’s Crypto-Asset Reporting Framework (CARF) by April 2027, which will introduce automatic cross-border reporting of crypto transactions to bolster transparency.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice