Strengthening India's Crypto Ecosystem: The Potential Impact of VDA Review

India, home to over 100 million crypto users, is currently lacking a robust legal framework for virtual digital assets (VDAs). While existing laws address taxation and anti-money laundering (AML), they fall short in consumer protection and broader market conduct. As the government reviews its VDA regulations, discussions are centered on enhancing investor safety and addressing key market challenges.

Key Takeaways

India has over 100 million crypto users but lacks comprehensive VDA legislation, resulting in insufficient consumer protection and regulation of market conduct.
Concerns have been raised about the lack of unified investor protection laws and the high tax environment pushing users toward unregulated offshore platforms.
Stakeholders are exploring a risk-based regulatory framework, including licensing for exchanges and custodians, and clearer rules around custody and disclosure standards.
Proposed measures may enhance user protection through improved practices around asset management, transparency, and regulatory oversight.

India is witnessing a remarkable growth in its crypto user base, exceeding 100 million, yet it still does not have a clear and comprehensive regulatory framework for virtual digital assets (VDAs). Although regulations regarding taxation and anti-money laundering (AML) exist, they do not adequately protect consumers or regulate the overall market behavior.

The ongoing discussions aim to address important issues, including a lack of unified investor protection guidelines, the prevalence of unregulated trading methods, and the concern that India’s taxation structure—a 30% profit tax combined with a 1% tax deducted at source (TDS)—is incentivizing users to move to offshore platforms.

With this in mind, stakeholders are considering a risk-based framework for VDAs, which would include licensing requirements for exchanges and custodians, standards for business conduct, specific regulations for real-world assets (RWAs), and improved data reporting systems.

Recommendations for enhanced safeguards focus on establishing clearer custody standards, defining processes for insolvency, strengthening disclosure requirements, ensuring reserve transparency, and expanding oversight of leverage and liquidity risk.

How India’s VDA review may strengthen protections across the crypto ecosystem

Current VDA Regulations in India

As defined in the Income Tax Act, amended in 2022, "VDA" encompasses cryptocurrencies, non-fungible tokens (NFTs), and any other digital assets the government may designate in the future. Though VDAs are not recognized as legal tender, individuals can buy, sell, and hold them.

India enforces stringent taxes on VDAs: a flat 30% tax on profits from VDA transfers and a 1% TDS on transactions exceeding certain thresholds. Importantly, losses on VDAs cannot be used to offset other income.

Since March 2023, all companies offering VDA services have been required to register with the Financial Intelligence Unit-India (FIU-IND) and comply with AML and Know Your Customer (KYC) regulations under the Prevention of Money Laundering Act.

All VDA service providers, including both domestic and offshore entities that cater to Indian users, must register with FIU-IND as reporting entities. Despite these steps, there is still no comprehensive VDA law in place, leading to confusion and a potential capital exodus. Current regulations, while high in tax and AML requirements, do not fully cover the necessary protections or regulations for consumers.

Did you know? Regulation in the financial sector is evolving rapidly. Unlike traditional finance laws that may take years to change, cryptocurrency regulations can shift significantly within months.

What the VDA Review Entails

As part of its G20 presidency in 2023, India was encouraged to adopt international standards for crypto regulation. The Supreme Court highlighted regulatory gaps in May 2025, advocating for clearer laws; the Central Board of Direct Taxes subsequently sought feedback on the need for dedicated VDA legislation.

The review will focus on multiple pivotal areas:

Balancing innovation with investor protection
Establishing appropriate oversight for various types of VDAs, including trading tokens, stablecoins, and tokenized assets
Aligning with global standards while safeguarding India’s monetary system and combating money laundering
Clarifying regulatory roles to provide businesses and users with greater legal certainty

Key Challenges Under the VDA Review

The ongoing review of India's VDA framework aims to address several fundamental challenges and uncertainties to create a clearer and more robust regulatory environment. Key issues under consideration include:

Investor Protection: There is no cohesive law ensuring the safety of crypto investors. Risks include unclear guidelines regarding how exchanges manage customer funds, inadequate procedures in the event of an exchange failure, product mis-selling, and insufficient disclosure practices.
Market Integrity: Regulators are wary of practices such as wash trading, hidden leverage, and reliance on offshore platforms, as unregulated stablecoins and decentralized trading may destabilize India's financial system.
Money Laundering: Although VDA service providers are subject to AML laws, enforcing these rules on foreign platforms remains a challenge. Decentralized finance (DeFi) also falls outside the current regulatory scope.
Taxation Issues: The existing tax rate of 30% and the 1% TDS, combined with the inability to offset losses, have pushed many users towards unregulated offshore platforms and stunted local innovation.
Tokenized Real-World Assets: India currently lacks a regulatory framework for RWAs, which could become increasingly significant as the tokenization of real-world assets gains traction.

Did you know? Not every country imposes taxes on crypto transactions. Countries like Portugal and Singapore do not tax capital gains on cryptocurrencies, although they may levy taxes when crypto is converted into goods or services.

Proposed Regulatory Frameworks

The review will likely assess various regulatory models, including:

Risk-Based VDA Law: A specialized VDA law may categorize assets by risk and function, such as payment tokens and utility tokens, with regulatory oversight dependant on the nature of the activity.
Licensing Norms: Service providers such as exchanges, custodians, and wallet providers may need to attain licenses, adhering to standards regarding governance, capital, cybersecurity, auditing, and asset segregation.
Conduct-of-Business Rules: Potential regulations may standardize risk disclosures, ongoing product evaluations, and clear advertising for VDAs. This could also involve guidelines on custody, conflicts of interest, and insolvency processes.
User Fund Regulations: There might be requirements for strict separation of user funds and regular reconciliation, combined with transparency mandates regarding reserves. A mechanism could be established to protect user assets held by VDA platforms.
RWA Regulation: A specific approach could focus on tokenized RWA platforms and VDAs with high-risk payment features, incorporating central bank oversight, capital requirements, cross-border flow controls, and sandbox testing.
Data and Reporting Obligations: Regulators might demand periodic or real-time reporting of transaction volumes and order-book data, necessitating close coordination among key agencies like the Reserve Bank of India, Securities and Exchange Board of India, and FIU-IND for effective crypto oversight.

A well-structured regulatory environment for VDAs in India has the potential to offer substantial benefits, bolstering user protections while fostering responsible sector growth.

Did you know? Following the adoption of Financial Action Task Force regulations globally, crypto exchanges now adhere to strict KYC, reporting, and oversight standards—similar to those required of banks—leading to significant compliance upgrades, including enhanced analytics for tracking suspicious blockchain transactions.

Benefits of a Thoughtful VDA Review

A carefully considered regulatory framework for VDAs can lead to notable advantages, such as:

Enhanced Safeguards for Users: Clearly delineating responsibilities and obligations of service providers can empower users with stronger rights and remedies, ensuring they understand the process if an exchange encounters failure.
Increased Market Integrity: Regulation can bolster oversight of leverage, liquidity discrepancies, margin practices, and reserve requirements. Effective rules for tokenized assets may also mitigate the risks of financial challenges spilling over into traditional markets.
Mitigated Money-Laundering Risks: Licensing requirements, complemented by global regulatory information sharing, could hinder the operations of unregulated offshore platforms, thereby strengthening measures against money laundering, terrorist financing, and bolstering investor protections.

Implementing a comprehensive regulatory framework can inspire businesses and developers to remain and grow within India, rather than relocating their operations abroad.