[Answered] “India’s virtual digital assets revolution faces a significant policy-reality gap, challenging regulators and market players. Analyze the key governance and regulatory challenges in effectively managing this nascent sector to ensure financial stability, protect consumers, and foster responsible innovation.

Introduction

India’s virtual digital assets (VDA) sector, particularly cryptocurrencies and blockchain-based platforms, is experiencing explosive grassroots adoption. As per the 2024 Chainalysis report, India tops the global crypto adoption index, with over $6.6 billion in investments and an ecosystem poised to generate over 8 lakh jobs by 2030. However, this vibrant ecosystem operates in a regulatory vacuum, where policy has not kept pace with innovation, raising significant governance challenges.

Governance and Regulatory Challenges

1. Lack of Comprehensive Legal Framework: The Supreme Court’s 2025 observation that “banning may be shutting your eyes to ground reality” underscores the vacuum in India’s crypto governance. While taxation policies exist, there is no overarching legal framework that defines or regulates VDAs, creating uncertainty for investors, startups, and regulators alike.
2. Monetary Sovereignty vs. Decentralization: The Reserve Bank of India (RBI) has consistently flagged crypto as a threat to monetary stability and capital controls. The decentralized, borderless nature of VDAs conflicts with India’s tightly regulated monetary architecture, posing risks of capital flight, currency substitution, and evasion of financial regulations.
3. Ineffectiveness of Current Taxation Regime: India’s 1% TDS on transactions and a flat 30% capital gains tax were introduced to bring transparency and curb speculation. However, punitive taxation, in the absence of regulatory clarity, has driven users offshore. Between 2022 and 2024, over ₹3.6 trillion in VDA trade was routed through non-compliant offshore platforms, leading to ₹6,000 crore in uncollected TDS alone.
4. Cybersecurity and Consumer Protection Risks: The 2024 $230 million hack of an Indian exchange exposed systemic vulnerabilities. While Indian VASPs responded by enhancing cyber defences and setting up insurance funds, the absence of enforceable cybersecurity standards or investor redressal mechanisms continues to expose consumers to theft, scams, and market volatility.
5. Regulatory Arbitrage and Evasion: URL blocking of foreign exchanges has proven ineffective, with users easily bypassing restrictions using VPNs and mirror sites. This undermines domestic compliance efforts and weakens India’s financial surveillance capacity.

Role of VASPs and International Best Practices

1. Virtual Asset Service Providers (VASPs) are essential intermediaries for regulatory compliance. Indian VASPs, in collaboration with the Financial Intelligence Unit (FIU), have taken strides in implementing Anti-Money Laundering (AML) and Counter-Terror Financing (CTF) norms, gaining recognition from the FATF.
2. Internationally, jurisdictions like the European Union (MiCA framework) and Japan have adopted comprehensive, risk-based crypto regulations to integrate innovation with safeguards — a model India can adapt.

Way Forward: Towards Responsible Regulation

1. Enact a Comprehensive VDA Legislation: India must formulate clear legal definitions for VDAs, delineate regulatory responsibilities (RBI, SEBI, FIU), and establish licensing and registration norms for VASPs.
2. Develop a Risk-Based Regulatory Framework: Inspired by global bodies like the Financial Stability Board and FATF, India should adopt a tiered, risk-sensitive model that balances innovation with systemic risk oversight.
3. Streamline Taxation with Regulation: Align tax rates with regulatory incentives to disincentivize offshore trading while promoting transparency and domestic exchange growth.
4. Enhance Consumer and Cyber Protection: Mandate disclosure norms, cybersecurity audits, grievance redressal mechanisms, and compensation frameworks for VDA platforms.
5. Institutional Capacity Building: Equip financial regulators with blockchain surveillance tools, forensic capabilities, and global cooperation mechanisms to counter illicit activities.

Conclusion

India’s VDA revolution presents an opportunity to lead in the global digital economy. However, without agile and inclusive regulation, it risks becoming a source of instability and consumer harm. Bridging the policy-reality gap through a future-ready, balanced framework is essential to ensure financial integrity, public trust, and technological sovereignty.