Regulating the Unregulated: India’s Legal Conundrum with Cryptocurrencies

Till date, a central legal question remains at large: What is cryptocurrency and what is its legal character? Is it goods, a security, or a currency?

Introduction

For years, the Indian approach to cryptocurrency could be summed up in one word: uncertain. While the government and regulatory bodies have not imposed an outright ban, they have maintained a stance of cautious scepticism, navigating a complex path that balances burgeoning innovation with systemic risks. This creates a peculiar environment where crypto is not illegal, yet it is not fully regulated either, leaving investors, businesses and the legal system in a state of limbo.

Early RBI warnings and regulatory anxiety

Reserve Bank of India (RBI) was among the earliest institutions to express concern about cryptocurrency dealings in the country. In December 2013, it issued a cautionary press release warning users that virtual currencies like Bitcoin, Litecoin, and Ripple posed financial, legal and security risks.¹ RBI clarified that these digital coins were not authorised by any monetary authority in India and that users transacted at their own peril.

Despite of the warning, the market grew. Cryptocurrency exchange platforms like Binance, Zebpay and WazirX emerged, Indian investors began trading millions in digital assets and advertisements promoting crypto investments became common. Alarmed by this pace, RBI in April 2018 issued a circular directing all regulated entities including banks and payment service providers not to deal with or provide any services related to virtual currencies.² This effectively cut off crypto exchanges from the banking system.

The Supreme Court’s intervention: freedom to trade in virtual assets

The regulatory chokehold was challenged in the Supreme Court by the Internet and Mobile Association of India (IAMAI). The petitioners argued that the RBI circular was arbitrary, disproportionate, and violated the constitutional right to carry on trade under Article 19(1)(g) of the Constitution.

In Internet and Mobile Assn. of India v. RBI³, the Supreme Court held that while RBI had the authority to regulate virtual currencies, a complete exclusion from the banking system was disproportionate, especially when no law prohibited cryptocurrency trading itself. The circular was, therefore, struck down.

This judgment was not an endorsement of cryptocurrencies. Rather, it was an affirmation of constitutional proportionality. The Court held that regulation must be reasonable, evidence-based and minimally invasive. This decision reopened banking channels for exchanges and restored investor confidence. It also clarified a crucial legal point: Holding or trading cryptocurrency in India is not illegal.

Classification dilemma: What exactly is cryptocurrency?

Till date, a central legal question remains at large: What is cryptocurrency and what is its legal character? Is it goods, a security, or a currency?

Each classification carries different implications:

1. As goods, it attracts GST and general contract laws.

2. As a security, it falls under SEBI’s jurisdiction.

3. As a currency, it comes within RBI’s domain.

The lack of clarity causes fragmented compliance and litigation risks. Courts and regulators must eventually evolve a sui generis classification for virtual digital assets to ensure consistency.

Legal status: not illegal, yet not legal tender

However, being “not illegal” is far from being “legal tender”. The Government of India has consistently clarified that cryptocurrencies are not recognised as currency. No one is bound to accept them as payment. They function instead as digital assets, similar to gold or shares. Thus, crypto may be owned, traded and held, but not used as money in the legal sense. In the absence of a dedicated cryptocurrency law, regulation occurs indirectly through multiple statutes and notifications.

The Union Budget 2022 was a turning point, introducing a new tax regime for Virtual Digital Assets (VDAs). It imposed a flat 30 per cent tax on gains from VDA transfers, along with a 1 per cent Tax Deducted at Source (TDS) on transactions above a certain threshold.⁴ This established crypto as a recognised asset class for tax purposes, though not as legal tender.

In 2023, the Union Government brought Virtual Asset Service Providers (VASPs), including exchanges and wallet providers, under the purview of the Prevention of Money Laundering Act, 2002 (PMLA)⁵. This mandated stringent Know Your Customer (KYC) norms and reporting obligations, bringing India’s framework closer to global standards.

Absence of a comprehensive statute

India still lacks a specific law dealing with cryptocurrencies. The proposed “Banning of Cryptocurrency and regulation of Official Digital Currency Bill, 2019” which sought to criminalise private crypto holdings was never tabled. Later drafts hinted at a softer stance, promoting blockchain technology but discouraging private tokens.

In 2025, reports suggest that the Government of India is holding back comprehensive regulation due to concerns about systemic risks, financial instability and monetary sovereignty. Policymakers have emphasised the need for global consensus through forums like the G20 and Financial Action Task Force (FATF) before finalising a domestic law.

In contrast, RBI is actively pursuing its Central Bank Digital Currency (CBDC), known as the e-Rupee, a sovereign digital alternative that embodies blockchain benefits while preserving State control.

Key issues and challenges

Despite regulatory progress, several issues continue to plague the Indian crypto landscape:⁶

1. Legal ambiguity and fragmented regulation: The biggest challenge remains the lack of a clear, comprehensive law. The current regulatory structure is fragmented, with different bodies (Ministry of Finance, RBI, Financial Intelligence Unit) overseeing various aspects like tax, monetary stability and compliance. This creates uncertainty for businesses and investors alike.⁷ On 19 May 2025, while hearing a bail petition, the Supreme Court questioned the Central Government’s prolonged inaction on cryptocurrency regulation. The court remarked that the absence of a clear legal framework has created a “fertile ground” for misuse, with unregulated trading being a “more polished form of Hawala,” or illegal money transfers.⁸ The potential over-regulation could push tech talent and startups to more crypto-friendly jurisdictions, causing India to lose its competitive edge in a rapidly growing global industry.

2. Taxation hurdles: While a tax regime provides clarity, its current form presents significant challenges. The flat 30 per cent tax on gains, coupled with no allowance for set-off of losses, makes trading highly expensive and potentially unviable. This stifles frequent trading and may drive investors towards unregulated channels.

3. Investor protection and consumer recourse: With no clear legal framework, investor protection remains limited. In case of scams, hacks, or exchange failures, there is no formal dispute resolution mechanism or established recourse available to customers. Offshore exchanges, which many Indian investors use, further complicate jurisdictional issues, making legal remedies difficult and costly to pursue.⁹

Constitutional and jurisprudential dimensions

The Supreme Court’s 2020 ruling in Internet and Mobile Assn. of India¹⁰ set an important precedent in administrative law. It reaffirmed that even economic regulations must pass the test of proportionality, balancing public interest against individual freedom. This doctrine, drawn from Modern Dental College v. State of M.P.¹¹ and K.S. Puttaswamy v. Union of India¹², requires that any restriction must have a legitimate purpose, be necessary and be the least restrictive measure available.

Applied to cryptocurrency, the principle implies that outright bans would likely fail judicial scrutiny unless supported by strong empirical justification.

Implications for the legal system

For lawyers and judges, cryptocurrency introduces novel questions: How does one prove ownership of an asset that exists only on a blockchain? What constitutes delivery, transfer or breach in a smart contract? Can crypto wallets be attached or seized under Section 85, Nagarik Suraksha Sanhita?

These questions will soon reach Indian courts. The answers will shape not only the crypto industry but also the future jurisprudence of digital property.

Conclusion

India’s approach to cryptocurrency mirrors its broader philosophy towards technology—cautious, incremental and constitutionally grounded. There is no law banning crypto; yet, it is not legal tender. It is taxed, monitored and occasionally prosecuted, but not fully regulated. This coexistence amid uncertainty defines India’s crypto story.

The coming years must transform this uncertainty into clarity, through legislation that protects consumers, ensures transparency, and nurtures innovation without compromising the financial system. As India stands at the crossroads of digital transformation, the law must not merely react to technology; it must lead it.