Cryptocurrency & Blockchain Regulations

Cryptocurrency & Blockchain are significant topics gaining prominence worldwide and India is no exception. This article provides an overview of blockchain and cryptocurrency, their characteristics, the current legal status in India, the trajectory of regulation, and the challenges that lie ahead.

What Is Blockchain?

Imagine you and your friends keeping track of who owes money to whom on a shared online list. Instead of scribbling down every transaction in a notebook, everyone in the group can see and verify the entirety of every transaction. 

That is blockchain in a nutshell. Primarily, blockchain is the decentralized digital ledger that records transactions across multiple computers.

What Is Cryptocurrency?

Cryptocurrency is the digital version of money, and it exists solely on the internet. It is not like normal money. Cryptocurrency is not controlled by banks or the government. It uses blockchain in order to secure, make clear, and decentralize transactions.  Currently, Bitcoin (BTC), Ethereum (ETH), and Dogecoin (DOGE) are some of the most famous cryptocurrencies.

Characteristics Of Cryptocurrencies

Following are the key features of cryptocurrencies:

• Digital Nature: Cryptocurrencies have only existed in digital format. You cannot touch or hold it like cash. 

• Decentralized: There is no central authority controlling it; it's controlled by multiple computers all around the world.

• Secure Transactions: Cryptography is utilized to make transactions secure and immutable through advanced mathematics and coding.

• Global and Speedy: It can be transferred anywhere in the world in a matter of minutes. You could transfer cryptocurrency usually at a price cheaper than that of banks.

Legal Status Of Cryptocurrency In India

We are in 2025, still, cryptocurrencies are yet to be declared legal tender in India. This essentially means that cryptocurrencies can not be used in everyday transactions like the fiat currency. But trading and investment in them is not illegal.

In April 2018, the RBI issued a circular stating that banking services for banks in relation to cryptocurrencies were banned. This badly affected the crypto exchanges and businesses as well. Regulation for cryptocurrencies is seen in various facets by RBI, Ministry of Finance, and SEBI. Nevertheless, India happens to be one of the biggest markets for the adoption of cryptocurrency with no clear-cut regulatory regime.

Course Of Cryptocurrency Regulation In India

Cryptocurrency has been regulated in India through the following mechanism: 

First Ban Of RBI And Directions Of The Supreme Court

In 2013, the RBI came out with warnings against virtual currencies. It pointed out that there would be several risks of fraud and possible money laundering where virtual currencies were concerned. In April 2018, a circular from the RBI stated that banking services for banks in relation to cryptocurrencies were to be prohibited. This really put crypto exchanges and businesses down into a pit.

On the other hand, in the landmark judgment Internet And Mobile Association Of India vs. Reserve Bank Of India (2020), the Supreme Court held that the RBI rules regarding virtual currencies ought to protect the financial system. However, it condemned the ban imposed by the RBI on virtual currencies as disproportionate. The Court observed that the RBI should have considered less intrusive measures and alternatives before imposing the ban. 

Cryptocurrency And Regulation Of Official Digital Currency Bill, 2021

The Indian government brought forth the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in pursuance of the verdict from the Supreme Court. The Bill is proposing the following:

• Ban All Private Digital Currencies: The Bill proposed banning all private digital currency. It has strived to promote the creation of a Central Bank Digital Currency.

• Official Digital Currency: The RBI issued an Instrument called Digital Rupee which should be seen as some form of alternative to cryptography.

• Regulatory Board: A Digital Currency Board of India (DCBI) would regulate activities and compliance.

• Development of Blockchain: The Bill restricted the use of cryptography but acknowledged blockchain and encouraged research in the area.

As of 2025, this Bill has yet not been passed by the Parliament. 

Taxation And Compliance Measures

Cryptocurrencies have the following taxation measures:

Cryptocurrency Taxation

India has brought the following taxation policies into place to bring transparency and accountability to cryptocurrency transactions:

• Flat 30% Tax: All the trading, mining, and staking of cryptocurrencies have a 30% tax levied on the income.

• 1% Tax Deducted at Source (TDS): A 1% TDS is applied on the sale of any crypto, which in the current financial year exceeds ₹50,000 annually.

• No offset of losses: Losses of any investment in cryptocurrencies can't be offset against other taxable income.

Anti-Money Laundering (AML) & Know Your Customer (KYC) Rules

In March 2023, India expanded PMLA to include coverage of cryptocurrencies within its ambit, and now requires:

• Crypto exchanges will have to conduct KYC verification of users.

• Exchange has to submit all suspicious transactions to FIU-IND.

• Strict compliance with the AML measures so as to curb illegal financial activities.

Obstacles In Effective Cryptocurrency Regulation In India

India has made rapid strides, yet still faces the following challenges towards regulating cryptocurrencies effectively:

• Risk of Financial Crimes: Due to decentralized and pseudonymous characteristics, this decentralized currency offers scope for money laundering and illicit transactions.

• Cryptocurrency Price Fluctuations: Highly volatile price of cryptocurrencies causes the risk to small investors.

• Hacking and Schemes: A large number of hacking incidents and schemes have increased risks for investors.

• Lack of Clarity in Regulation: The lack of a well-defined legal framework creates uncertainty among businesses and investors.

• Innovation versus control: Too much control stifles innovation; blockchain-based businesses may be affected into leaving India.

Future Outlook: Regulation of Cryptocurrency in India

India's future cryptocurrency regulation likely involves a cautious approach, focusing on its own CBDC (Digital Rupee), international collaboration, and exploring blockchain technology's potential separately from cryptocurrencies.

India Central Bank Digital Currency Initiative

The RBI has been trying to take control of the scenario surrounding private cryptocurrencies by launching the Central Bank Digital Currency. Even though it is still in its pilot test, the Digital Rupee promises to be a safe and government-backed alternative to other cryptocurrencies.

International Cooperation For Crypto Regulation

India has been emphasizing the need for international cooperation on the regulation of cryptocurrency. SEBI has recommended a multiplicity of regulators, involving local as well as foreign financial authorities, to collaborate for a framework at the global level.

Blockchain Adoption

Though the Indian government is still hesitant about cryptocurrencies, it has not rejected blockchain technology. State governments of Telangana and Karnataka have started various blockchain-related projects that pertain to supply chain management, health services, and land records.

Conclusion

In India, the legal status of cryptocurrencies and blockchain are still ambiguous. The central government intends to maintain a balancing act between mitigating risks and fostering relations. They have presented a structured regulatory framework by focusing on taxation, AML/KYC compliance, and by exploring a Central Bank Digital Currency. The future will likely involve further refinement of regulations, increased international cooperation, and potentially wider adoption of blockchain technology across various sectors.

FAQs

A few FAQs on cryptocurrencies and blockchain are:

Q1. How has cryptocurrency been regulated in India?

Until now, India’s approach involves proposed legislation (yet to be passed, the current focus on AML/KYC compliance, and RBI warnings regarding crypto use.

Q2. How are cryptocurrencies taxed in India?

As per regulations in India, one has to pay a huge 30% tax on income from crypto trading, mining, and staking. A crypto trader also has to pay 1% TDS on sales exceeding ₹50,000 annually.

Q3. What are the AML and KYC requirements for cryptocurrency exchanges in India?

Crypto exchanges are required to conduct KYC verification of users and report suspicious transactions to FIU-IND, adhering to AML regulations to prevent financial crimes.