Regulating India’s Virtual Digital Asset (VDA) Revolution: Bridging Policy with Reality

India is undergoing a silent financial revolution — the rapid adoption and integration of Virtual Digital Assets (VDAs). India’s VDA market is currently navigating a maze of partial regulations, prohibitive tax regimes, and judicial interventions — underscoring a significant dissonance between innovation and oversight. With the Economic Survey 2022–23 acknowledging blockchain’s transformative potential, the urgency to bridge this regulatory gap is now more critical than ever.

What are Virtual Digital Assets (VDAs) and Their Status in India?

1. The Finance Act, 2022 introduced the term “Virtual Digital Assets” under Section 2(47A) of the Income Tax Act, 1961, a VDA is defined as: “any information or code or number or token generated through cryptographic means providing a digital representation of value.” This includes cryptocurrencies, non-fungible tokens (NFTs), and tokenized real-world assets.

2. These can be used for investment, value exchange, or functioning as a unit of account. For example, Bitcoin and Ethereum are cryptocurrencies, while NFTs like digital art pieces are VDAs that represent ownership and uniqueness.

3. According to Statista, India’s digital asset user base is expected to reach 107.3 million by 2025, reflecting a rapidly expanding market. Moreover, Economic Survey 2022-23 acknowledged blockchain as a disruptive technology capable of transforming finance, governance, and trade.

4. In Internet and Mobile Association of India v. RBI (2020), the Supreme Court underscored that a complete ban on VDAs infringes on Article 19(1)(g), allowing businesses and startups to resume VDA-related operations in India.

5. The Inter-Ministerial Committee (IMC) in 2019 had suggested banning private cryptocurrencies while enabling a regulated digital currency. However, this draft bill never materialized into law.

What are the Types of Virtual Digital Assets?

1. Cryptocurrencies: These are decentralized digital currencies used for peer-to-peer transactions like Bitcoin and Ethereum.
2. Stablecoins: Crypto assets pegged to fiat currencies, designed to reduce volatility (e.g., USDT, USDC).
3. Non-Fungible Tokens (NFTs): Unique digital collectibles used in art, gaming, and media.
4. Utility Tokens: Provide access to specific platforms or services (e.g., BAT, Filecoin).
5. Security Tokens: Represent traditional securities like shares in tokenized form. E.g. Paxos Gold, tokenized RE.
6. Asset-backed Tokens: Represent claims on physical assets like gold or real estate.
7. Central Bank Digital Currencies (CBDCs): Digital version of sovereign currency, currently piloted in India.

What are the Legal and Regulatory Framework in India?

1. Income Tax Act, 1961: Under Section 115BBH there is 30% tax on VDA income without loss set-off and Section 194S offers 1% TDS on transactions exceeding ₹10,000.
2. Prevention of Money Laundering Act (PMLA), 2002: VDAs brought under AML/CFT framework in 2023. Covers exchange, safekeeping, administration, and VDA-related services.
3. Information Technology Act, 2000: VASPs must maintain KYC and transaction records for five years.
4. Companies Act, 2013: Mandates disclosure of VDA holdings and profits/losses in financial statements.
5. Advertising Standards Council of India (ASCI): Mandatory disclaimers for VDA ads highlighting risk and regulatory void.
6. Judicial Oversight: The Supreme Court has emphasized that regulation, not prohibition, is the right approach (2020, 2025 observations).

How Other Nations Regulate VDAs?

1. European Union (EU): The Markets in Crypto-Assets (MiCA) regulation, effective 2024, ensures consumer protection, stablecoin governance, and market integrity across member states. It mandates licensing for service providers and reserves for asset-backed tokens.

2. Japan: Japan’s Financial Services Agency requires exchanges to register, maintain capital reserves, segregate user funds, and comply with stringent AML/CFT norms. Japan’s proactive stance enabled quick recovery post the Coincheck hack (2018).

3. Singapore: Under the Payment Services Act, 2019, digital token service providers must obtain licenses, adhere to AML/CFT guidelines, and meet consumer protection norms, making Singapore a global crypto hub.

4. UAE (Dubai): Dubai’s Virtual Asset Regulatory Authority (VARA) governs all VDA activities within its jurisdiction, promoting innovation under clear legal oversight.

What is the Significance of VDAs for India?

1. Financial Inclusion and Remittances: VDAs enable low-cost, real-time financial access for unbanked populations. They reduce remittance fees, crucial for India, which received $111 billion in 2022. This promotes inclusion in tier-2 and tier-3 cities. Example: Faster, cheaper remittances for rural families
2. Job Creation and Economic Growth: The VDA sector is projected to create over 800,000 jobs by 2030 (NASSCOM). It fuels digital entrepreneurship, especially in fintech and blockchain development. This spurs income generation and regional economic uplift. Example: 8 lakh crypto jobs by 2030
3. Startup and Innovation Ecosystem: India hosts the world’s third-largest Web3 developer base, attracting significant VC funding. Regulatory clarity could further boost blockchain, DeFi, and NFT startups. It supports experimentation via innovation sandboxes. Example: Polygon raised global Web3 investment
4. Tax Revenue and Fiscal Gains: With clear regulations, VDAs can plug tax leakages and generate over ₹60,000 crore annually. Offshore trading currently evades taxation (~₹2,488 crore lost). TDS and capital gains provide structured revenue. Example: ₹60,000 crore potential VDA tax
5. Asset Tokenization and Investment Access: VDAs allow fractional ownership in high-value assets like real estate and art. This expands investment access to retail investors and enhances market liquidity. Tokenized assets improve capital market depth. Example: Fractional real estate ownership enabled
6. Cross-border Trade and MSME Support: Blockchain reduces forex costs and paperwork for MSMEs in global trade. Smart contracts offer transparent, trustless settlements and reduce transaction friction. Enhances competitiveness of Indian exports. Example: Blockchain cuts MSME forex costs
7. Governance and Public Service Transparency: Blockchain ensures immutable records, reducing corruption in welfare schemes, land titles, and supply chains. Pilot projects in Telangana and Andhra Pradesh show success in public recordkeeping. Example: Land titles via blockchain verified
8. CBDC Integration and Monetary Sovereignty: VDAs can complement India’s e-Rupee rollout, improving transaction traceability and efficiency. Blockchain-based rails enhance digital policy tools and reduce currency leakage. Strengthens RBI’s control over digital finance. Example: e-Rupee integrated with blockchain rails

What are the Challenges and Risks Associated with VDA’s?

1. Market Volatility and Speculation: VDAs like Bitcoin and Terra-LUNA have shown extreme price swings, leading to heavy retail losses. This volatility makes them unreliable for savings or payments. Unbacked assets can trigger speculative bubbles. Example: Bitcoin dropped 60% in 2022
2. Cybersecurity Threats and Technological Risks: Smart contract bugs and protocol failures can lead to massive fund losses. Indian exchanges have faced severe cyberattacks, undermining investor confidence. Insurance and unified security norms remain weak. Example: $230 million wiped in 2024 hack
3. Money Laundering and Illicit Financing: Pseudonymous transactions allow illicit flows and terror funding, bypassing traditional financial checks. FATF has flagged India’s limited AML enforcement on crypto platforms. Lack of KYC norms fuels abuse. Example: FATF flagged India’s AML gaps
4. Tax Evasion and Regulatory Arbitrage: High TDS rates and unclear regulations drive users to offshore exchanges. This results in loss of tax revenue and legal oversight. An estimated ₹2,488 crore evaded in 2022–24. Example: ₹2,488 crore lost via offshore trade
5. Lack of Legal Clarity and Coordination: India lacks a central VDA law despite multiple regulatory discussions since 2019. Overlapping roles of RBI, SEBI, and MeitY cause ambiguity and weak enforcement. The proposed crypto bill remains pending. Example: Crypto Bill still not passed
6. Bank Disintermediation and Policy Impact: Wallet-to-wallet VDA transfers bypass traditional banks, reducing deposit bases. This can disrupt monetary policy transmission and credit creation. Risks to financial system stability are growing. Example: Wallets bypass banking infrastructure
7. Consumer Protection and Awareness Deficit: No statutory grievance redressal exists for VDA fraud victims. Users face risks from Ponzi schemes, misleading ads, and misinformation. ASCI has warned about deceptive VDA promotions. Example: No redressal for crypto fraud victims
8. Capital Flight and Financial Stability Risks: Offshore trading, driven by regulatory arbitrage, leads to capital outflows. Unregulated VDA flows can weaken the rupee and disrupt RBI’s capital controls. Data gaps limit real-time surveillance. Example: Offshore trading fuels capital flight

What can be the Way Forward?

1. Enact Comprehensive Legislation: India must move beyond fragmented taxation to a unified Digital Asset Regulation Bill. It should align with global frameworks like MiCA and FATF to ensure legal clarity. This will strengthen investor protection and market integrity. Example: MiCA law passed by European Union
2. Establish a Dedicated Regulator: Create a nodal body such as a “Digital Assets Regulatory Authority (DARA)” or assign responsibility to the Ministry of Finance. This would streamline coordination and eliminate inter-agency overlaps with RBI, SEBI, and MeitY.
   Example: VARA established in Dubai, 2022
3. Support Self-Regulatory Organisations (SROs): Encourage industry-led SROs to define ethical standards, resolve disputes, and ensure compliance. These bodies can act as the first layer of accountability and sectoral discipline. Example: AMFI regulates mutual fund conduct
4. Revamp the Crypto Tax Regime: Reduce TDS to 0.01% to prevent flight to offshore platforms. Align crypto taxation with STT/CTT norms and allow for loss offsetting to encourage legitimate domestic participation. Example: 1% TDS causes offshore migration
5. Launch Regulatory Sandboxes: Enable startups and innovators to test blockchain applications under regulatory supervision. This approach balances innovation and risk management, following models from Singapore and the RBI. Example: RBI launched fintech sandbox in 2021
6. Mandate Cybersecurity and Insurance Standards: Introduce compulsory audits, incident disclosures, and exchange insurance funds. Circuit breakers and CERT-IN compliance should be mandatory for all Indian VASPs. Example: CERT-IN norms enforced in April 2022
7. Promote Consumer Awareness Campaigns: Run mass education drives on VDA risks and safe practices, modelled after AMFI’s campaigns. Empower users with knowledge to counter fraud and misinformation. Example: AMFI’s “Mutual Funds Sahi Hai” ads
8. Foster Global Regulatory Collaboration: Engage actively with FATF, G20, IMF, and BIS to standardize policies and ensure legal cross-border VDA operations. This would also help India shape future global crypto norms. Example: G20 urged crypto policy harmonization

Conclusion:
India stands at a pivotal moment in its digital economic journey. A regulatory vacuum, however, breeds uncertainty, drives capital offshore, and limits innovation. A future-ready, innovation-friendly, and globally harmonized legal framework will ensure that India not only safeguards its economy but also leads the digital asset revolution. As digital assets evolve, so must the laws that govern them—for in this convergence lies the future of finance.