Syllabus:

GS3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: The ‘Geography of Crypto’ report by Chainalysis (2024) highlights that India continues to lead in grassroots crypto adoption for the second consecutive year.

India’s Position in Global Crypto Adoption

• India also has one of the largest and fastest-growing Web3 developer communities in the world.

• A NASSCOM report highlights:

• Indian retail investors invested $6.6 billion into crypto assets.
• The crypto industry is projected to create over eight lakh jobs by 2030.

Regulatory Challenges in India's VDA Ecosystem

• The rapid growth of the crypto ecosystem contrasts sharply with an uncertain and evolving policy environment in India.

• In India, crypto is officially referred to as Virtual Digital Assets (VDAs).

• This highlights the disconnect between the growth of VDAs and regulatory clarity, posing challenges for both policymakers and market participants.

• India has strict capital controls and heavily regulated payment systems, which are difficult to reconcile with the decentralized nature of crypto.

• The Reserve Bank of India (RBI):

• First raised concerns in 2013, citing the absence of authorization from any central authority.
• In 2018, issued a circular prohibiting financial institutions from dealing with VDA-related entities.
• The Supreme Court overturned this circular in 2020. 

• In May 2025, the Supreme Court highlighted the lack of comprehensive crypto regulation, noting that banning crypto ignores the market’s reality, undermines the connect between policy and the vibrant crypto ecosystem.

Prohibitive Taxation Measures and Their Impact

• The Income Tax Bill, 2025 introduces a clear legal framework classifying Virtual Digital Assets (VDAs) including cryptocurrencies and Non-Fungible Tokens (NFTs) as property and capital assets for the first time. 

• The bill enforces a 30% Capital Gains tax on VDA transfers, applies a 1% TDS on transactions, and requires mandatory reporting to promote transparency and curb financial abuse.

• However, their effectiveness was limited due to the continued rise in offshore trading.

Role of Virtual Asset Service Providers (VASPs)

• International organizations like the IMF, Financial Stability Board, and FATF advocate for:

• Comprehensive, risk-based, and globally harmonized regulations.

• Such frameworks rely on domestic compliant intermediaries or VASPs, who:

• Implement policy,
• Enhance regulatory visibility,
• Provide insights into real-time industry challenges.