Crypto Regulation Bill in India: Is the Legal Vacuum Closing?

Written by Nishi Rajput

Table of Contents

• Introduction
• Background: India’s Journey with Cryptocurrency Regulation
  • 1. RBI’s 2018 Ban
  • 2. Supreme Court Intervention (2020)
  • 3. Draft Bills and Policy Papers
• Key Features of the Proposed Crypto Regulation Bill
  • 1. Definition of Digital Assets
  • 2. Prohibition vs. Regulation
  • 3. Regulatory Oversight
  • 4. Consumer Protection & AML
  • 5. Taxation Framework
• Regulatory Developments: Beyond the Bill
  • 1. Reserve Bank of India (RBI)
  • 2. SEBI and Financial Market Regulators
  • 3. Financial Intelligence Unit (FIU)
• Challenges in Drafting Effective Crypto Legislation
• Opportunities for India
• Is the Legal Vacuum Closing?
• Conclusion

Introduction

The rise of cryptocurrencies has presented unprecedented challenges for regulators around the world. In India, the debate over how to regulate digital currencies like Bitcoin, Ethereum, and stablecoins has oscillated between skepticism and cautious optimism. For years, the Indian crypto ecosystem has operated in a regulatory grey zone, with investors, exchanges, and developers grappling with legal ambiguity. The long-anticipated Crypto Regulation Bill, yet to be formally enacted, is viewed as a potential watershed moment for digital assets in the country.

The central question remains: Is the legal vacuum finally closing? This article delves into the evolution of crypto regulation in India, the key features of the proposed legislation, regulatory developments by institutions like the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI), and what lies ahead for crypto stakeholders.

Background: India’s Journey with Cryptocurrency Regulation

1. RBI’s 2018 Ban

In April 2018, the Reserve Bank of India issued a circular prohibiting banks and financial institutions from dealing in or providing services to crypto businesses. This move effectively choked banking access for crypto exchanges, stifling the ecosystem.

2. Supreme Court Intervention (2020)

In March 2020, the Supreme Court in Internet and Mobile Association of India v. RBI struck down the 2018 RBI circular, citing disproportionality and lack of adequate reasoning. This judgment revived crypto trading and re-energized investor interest.

3. Draft Bills and Policy Papers

Several drafts and reports have emerged since then, including:

• 2019 Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill: Proposed a blanket ban on all private cryptocurrencies.
• Standing Committee on Finance Report (2021): Recognized cryptocurrencies as an emerging asset class and called for balanced regulation.
• Budget Announcements 2022: Introduced a 30% tax on crypto income and 1% TDS on transfers, indirectly acknowledging crypto trading.

However, the absence of a comprehensive crypto law continues to pose regulatory and legal uncertainties.

Key Features of the Proposed Crypto Regulation Bill

While the final version of the bill has not been made public, based on parliamentary debates, government responses, and official statements, the expected features include:

1. Definition of Digital Assets

The bill aims to define:

• Virtual Digital Assets (VDAs)
• Utility Tokens vs. Security Tokens
• CBDC (Central Bank Digital Currency) as legal tender

2. Prohibition vs. Regulation

Earlier drafts proposed an outright ban on private cryptocurrencies. However, recent developments suggest a shift towards regulation rather than prohibition.

3. Regulatory Oversight

The bill may designate SEBI, RBI, or a new regulator to:

• License and monitor crypto exchanges
• Set compliance standards
• Oversee token issuance and fundraising (e.g., ICOs)

4. Consumer Protection & AML

Provisions may include:

• Know Your Customer (KYC) norms
• Anti-Money Laundering (AML) compliance
• Safeguards against fraud, price manipulation, and illicit financing

5. Taxation Framework

The bill is likely to formalize the existing tax regime:

• 30% flat tax on crypto income (as per Income Tax Act)
• 1% TDS on all transfers above a threshold
• Clarity on treatment of losses and GST applicability

Regulatory Developments: Beyond the Bill

1. Reserve Bank of India (RBI)

• The RBI remains cautious, consistently highlighting risks such as financial instability, capital flight, and consumer protection.
• In December 2022, it launched the Digital Rupee (CBDC) as a regulated alternative to private cryptocurrencies.

2. SEBI and Financial Market Regulators

• SEBI may play a lead role in regulating crypto-assets as securities, particularly tokens used for fundraising.
• Calls for coordination among SEBI, RBI, CBDT, ED, and MeitY underscore the multi-dimensional nature of crypto regulation.

3. Financial Intelligence Unit (FIU)

• In December 2023, India mandated that crypto exchanges register with the FIU and follow AML reporting norms.
• Several international exchanges like Binance and KuCoin were pulled up for non-compliance, indicating tighter enforcement.

Challenges in Drafting Effective Crypto Legislation

1. Classification Ambiguity
   • Is cryptocurrency a currency, commodity, or security? The answer affects the applicable regulatory framework.
2. Balancing Innovation and Risk
   • Overregulation may stifle innovation and drive activity underground, while under-regulation could expose consumers to scams and volatility.
3. Interagency Coordination
   • India lacks a unified digital asset policy. Harmonizing mandates among multiple regulators remains complex.
4. Cross-Border Concerns
   • Crypto assets are inherently global. Domestic regulation must align with international standards like those of the FATF to prevent arbitrage and illicit use.
5. Technology Complexity
   • Lawmakers must grapple with evolving concepts like DeFi, NFTs, DAOs, and staking, which go beyond basic tokens.

Opportunities for India

1. Becoming a Global Crypto Hub
   • With a tech-savvy population and vibrant startup ecosystem, India can leverage crypto innovation for financial inclusion, remittances, and Web3 development.
2. Harnessing Blockchain for Governance
   • Government initiatives like IndiaChain and DigiLocker show openness to blockchain adoption in public services.
3. Job Creation and Investments
   • The Indian crypto industry already supports thousands of jobs and has attracted billions in venture capital.
4. Pioneering Regulatory Sandboxes
   • India’s approach could evolve into a flexible regulatory sandbox, balancing experimentation with oversight.

Is the Legal Vacuum Closing?

The short answer is: partially, but not completely.

While the DPDPA, taxation rules, AML guidelines, and CBDC pilot have addressed some aspects of digital assets, the absence of a dedicated Crypto Regulation Bill means the space is still governed by fragmented norms.

However, the policy posture is gradually shifting:

• From ban to regulation
• From denial to engagement
• From ambiguity to phased compliance

The introduction of the bill in Parliament, possibly after stakeholder consultations and alignment with global standards, would mark the final closure of the legal vacuum.

Conclusion

India stands at a critical crossroads in shaping its crypto policy. A well-drafted Crypto Regulation Bill can foster responsible innovation, protect investors, and position India as a leader in the digital asset economy. Conversely, delay or overregulation may push talent and capital abroad.

With over 150 million crypto users, India can no longer afford legal uncertainty. As the government weighs its options, the coming months will determine whether India embraces the crypto future with clarity, consistency, and conviction—finally putting an end to its long-standing legal limbo.