Despite having over 100 million cryptocurrency users, India still lacks comprehensive laws governing virtual digital assets (VDA). Existing regulations address tax and anti-money laundering (AML) obligations but do not fully cover consumer protection or broader market conduct.
Issues under discussion include the lack of unified investor protection rules, unregulated trading practices, and concerns that India's 30% tax rate combined with a 1% withholding tax may push users towards offshore platforms.
Stakeholders are discussing a risk-based VDA framework, licensing requirements for exchanges and custodians, standards for business conduct, regulations specific to real-world assets (RWA), and improved data and reporting systems.
Proposed safeguards include clearer custody norms, defined bankruptcy procedures, stronger disclosure standards, reserve transparency, and stricter oversight of leverage and liquidity risks.
India has over 100 million cryptocurrency users, many of whom are young and tech-savvy. However, the country still lacks clear and comprehensive regulations for virtual digital assets (VDA).
A formal review of VDA policy is currently underway. This may shift the existing system, which primarily focuses on high taxes and basic AML rules, towards a stronger framework prioritizing investor protection.
This article outlines the current VDA regulations in India as of November 24, 2025, explains what the VDA review entails, highlights key issues under review, summarizes the regulatory frameworks being considered, and discusses the potential benefits of the review.
In India, the term "VDA" is defined in the Income Tax Act through amendments introduced in 2022. It includes cryptocurrencies, non-fungible tokens (NFTs), and any other digital assets that the government may designate. VDAs are not legal tender, but individuals can buy, sell, and hold them.
India imposes strict taxes on VDAs, including a uniform tax rate of 30% on transfer profits and a 1% withholding tax on transactions exceeding certain thresholds. Losses from VDAs cannot be offset against other income.
Since March 2023, companies providing VDA services must register with the Indian Financial Intelligence Unit (FIU-IND). They are also required to comply with AML and Know Your Customer (KYC) rules under the Anti-Money Laundering Act.
All VDA service providers in India, including domestic and offshore platforms serving Indian users, must register with FIU-IND as reporting entities.
However, there is still no comprehensive law governing VDAs. This gap has created confusion and led to capital and talent outflows. India's current approach relies on high taxes and AML requirements but has yet to provide comprehensive regulation or strong consumer protection.
Did you know? Regulation is one of the fastest-changing areas in global finance. Unlike traditional financial laws, which often take years to change, cryptocurrency regulations can evolve within months.
In 2023, India's G20 presidency and recommendations from institutions like the Financial Stability Board encouraged the country to adopt international standards for cryptocurrency regulation.
In May 2025, the Supreme Court highlighted the regulatory gap and called for clearer laws. Subsequently, the Central Board of Direct Taxes sought feedback from stakeholders on the need for dedicated VDA legislation.
The review will cover several key areas:
Balancing innovation with investor protection
Creating appropriate regulations for different types of VDAs, including payment tokens, stablecoins, and tokenized assets
Aligning with global standards while protecting the Indian monetary system and preventing money laundering
Clarifying the roles of regulators and providing greater legal certainty for businesses and users.
The ongoing review of India's VDA framework focuses on addressing several core challenges and areas of ambiguity. The goal is to establish a clearer and stronger regulatory system. Here are the key issues being considered:
Investor protection: There is no unified legal protection for cryptocurrency investors. Major risks include unclear rules on how exchanges hold customer funds, a lack of defined procedures in the event of exchange failures, mis-selling of products, and insufficient disclosure standards.
Market integrity and systemic risk: Regulators are concerned about practices such as wash trading, hidden leverage, and the use of offshore platforms. Unregulated stablecoins and decentralized trading could also pose risks to India's financial system.
Money laundering: Although VDA service providers are bound by AML laws, enforcing these requirements on foreign platforms remains challenging. Decentralized finance (DeFi) is also not covered by current regulations.
Taxation: The 30% tax rate and 1% withholding tax (TDS), combined with the inability to offset losses, have pushed many users towards unregulated offshore platforms and slowed local innovation.
Tokenized real-world assets (RWAs): India currently lacks a regulatory framework for RWAs. If the adoption rate of tokenized real-world assets increases, this gap may become significant.
Did you know? Not all countries tax cryptocurrency transactions. Places like Portugal and Singapore do not tax capital gains but may tax when cryptocurrencies are converted into goods or services.
The review is expected to consider several regulatory models. Here are some concepts that may be discussed:
VDA laws with risk-based regulation: Dedicated VDA laws could classify assets based on risk and function, such as payment tokens, utility tokens, security-like tokens, and asset-referenced tokens. Regulation may depend on the activities involved.
Licensing norms for VDA service providers: Exchanges, custodians, wallet providers, and brokers may need to obtain licenses or register. They would also need to meet standards for governance, capital, cybersecurity, auditing, and asset segregation.
Business conduct rules: Standardized risk disclosures, ongoing product-level reporting, and clear advertising norms may be introduced. Regulations could address custody practices, conflicts of interest, segregation of customer assets, and bankruptcy procedures. Advertising rules may align with the guidelines of the Advertising Standards Council of India.
Regulation of user funds: Rules may require strict segregation of user funds, regular on-chain and off-chain reconciliations, and increased transparency of reserves. A statutory mechanism may be created to protect user assets held by VDA platforms.
Regulation of RWAs: A separate regulatory approach may be adopted to address tokenized RWA platforms and VDAs involving high-risk payment functions. These rules may include central bank involvement, capital support requirements, cross-border flow controls, and sandbox testing.
Data and reporting: Regulators may require regular or real-time reporting of trading volumes and order book data. Institutions like the Reserve Bank of India, the Securities and Exchange Board of India, and FIU-IND need to closely coordinate to ensure effective oversight of crypto activities.
A well-designed regulatory framework for India's VDA can bring significant benefits. It can enhance protections for users and the financial system while supporting responsible growth of the industry.
Did you know? Following the global adoption of Financial Action Task Force rules, cryptocurrency exchanges must adhere to strict KYC, reporting, and monitoring standards similar to those of banks. This has led to major compliance upgrades, including the use of on-chain analysis tools to track suspicious transactions on the blockchain.
A well-designed regulatory framework for VDAs can provide several key advantages:
Clearer protections for users without stifling innovation: Clearly defining the responsibilities and obligations of service providers will empower users with stronger rights and clearer remedies. For example, users will know in advance what will happen if an exchange fails.
Higher market integrity and stronger resilience of the financial system: Regulation can improve oversight of leverage, liquidity mismatches, margin practices, and reserve requirements. Effective rules for tokenized assets can also reduce the risk of issues spilling over into traditional finance.
Reduced money laundering risks: Licensing requirements combined with information sharing among global regulators can make it more difficult for unregulated offshore platforms to operate. This strengthens AML, counter-terrorism financing, and investor protection measures.
A comprehensive regulatory framework can encourage businesses and developers to build and hire talent within India rather than moving operations abroad.
Related: Bitcoin (BTC) Sharpe ratio approaches zero, a rare signal of risk-return dynamics
Original article: How India's VDA Review May Strengthen Protections Across the Crypto Ecosystem
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