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This inconsistency prompts a significant inquiry: can India feasibly tax and oversee cryptocurrency activities without implementing a thorough regulatory framework for the industry?
Taxed but Not Recognized
Legal professionals assert that taxing and officially recognizing cryptocurrencies are distinct policy decisions.
“The taxation of VDAs indicates that the government acknowledges that cryptocurrency transactions yield taxable income, thus falling under its jurisdiction,” commented Sana Raees Khan, the founder of SRK Legal.
Yet, she emphasized that tax obligations do not equate to legal recognition or support. Khan pointed out that the existing tax framework is merely a means to capture revenue from ongoing economic activities, and should be seen as fiscal acknowledgment rather than regulatory endorsement.
This distinction clarifies India’s current strategy. The government has opted to include crypto transactions under tax and AML regulations while the central bank continues its caution against deeper financial integration of these assets.
Aditya Bharadwaj, a team leader at the Centre for Law, Policy and Governance at NFPRC Foundation, mentioned that policymakers generally regard cryptocurrencies as “speculative tools” that offer minimal value to the actual economy.
Instead of instituting an outright prohibition that might drive activities underground, authorities have chosen to maintain oversight over transactions through taxation and AML compliance, all while discouraging broad adoption.
The Shortcomings of an AML-Only Approach
Currently, India’s regulatory framework primarily focuses on financial crime prevention.
Registration with the FIU requires crypto service providers to conduct due diligence on customers, monitor transactions, and report suspicious activities. Experts emphasize that these responsibilities do not constitute comprehensive market regulation.
“While FIU registration supports financial integrity, institutional confidence also hinges on clarity regarding licensing, consumer protection, custody protocols, operational risks, and regulatory supervision,” stated Edul Patel, CEO and founder of Mudrex.
Sana Raees Khan further explained that while FIU registration includes crypto entities within the AML framework, it does not actually regulate cryptocurrencies as investment instruments or offer protections for investors.
Experts note that the lack of a comprehensive legal framework has resulted in significant gaps.
According to Khan, investors are missing critical safeguards commonly found in regulated financial markets, such as standardized disclosure, compensation mechanisms, uniform custody regulations, and formal dispute resolution systems.
Dr. Kanishk Agrawal, CTO at Judge Group India, stated that the existing framework that separates taxation from legal acknowledgment creates instability for both businesses and investors.
Although the government imposes tax on crypto transactions and mandates AML compliance, there is still no overarching law defining the legal status of digital assets or outlining the rights and responsibilities of market participants.
Can This Status Quo Persist?
For now, many experts feel that the current arrangement may be sustainable.
Bharadwaj pointed out that cryptocurrencies, such as Bitcoin, have limited utility beyond speculation, which could allow for a “regulated but unrecognized” framework if the goal is to prevent misuse while fostering blockchain innovation.
Nilesh Choudhary, CEO and founder of Aikyam Capital Group, indicated that India intentionally distinguishes between oversight and acknowledgment.
He noted that there are 54 VDA service providers registered with the FIU, and approximately 39.3 million KYC-verified crypto users possess assets valued at around ₹20,437 crore.
With this scale, Choudhary stressed that ensuring visibility and consumer protections is critical before entertaining the idea of formal recognition.
Nonetheless, some believe that maintaining this approach indefinitely may prove challenging.
“The longer we delay establishing a comprehensive legal framework, the more ambiguous the legal landscape will become,” Khan warned, citing unresolved issues surrounding consumer protection, dispute resolution, inheritance rights, insolvency processes, and cross-border transactions.
Participants in the industry argue that the uncertainty around regulations is hindering investment and development in the market.
Patel noted that while exchanges comply with taxation, reporting, and AML standards, they operate without a dedicated regulatory framework that delineates digital assets or market behavior standards. This situation, he said, introduces confusion for investors and complicates long-term institutional involvement.
Sathvik Vishwanath, co-founder and CEO of Unocoin, remarked that many investors who pay taxes on crypto transactions understandably expect a well-defined legal framework governing their rights and obligations. However, uncertainty continues regarding future regulatory actions and dispute resolution processes.
Has Taxation Driven Activities Offshore?
The taxation regime itself is a source of contention. Industry leaders contend that elevated tax rates have not diminished interest in digital assets.
Patel referenced a KoinX report indicating that nearly 73% of Indian crypto trading volumes in 2025 occurred on offshore platforms. He asserted that excessive taxation might redirect trading activities without entirely eliminating them.
Supporting Patel’s claim, Vishwanath noted that the implementation of the 1% TDS has driven many high-frequency traders to offshore exchanges, reducing liquidity on compliant domestic platforms without significantly impacting overall trading activities.
Stablecoins: A Growing Concern
While Bitcoin and other cryptocurrencies often capture public attention, experts assert that the RBI is increasingly concerned about stablecoins.
Bharadwaj described stablecoins as a more significant challenge because they are designed to act as currency.
Unlike Bitcoin, which is too volatile for everyday transactions, stablecoins aim to maintain consistent value, often pegged to a fiat currency like the US dollar.
“A private, borderless, dollar-pegged currency is precisely what a central bank cannot allow to thrive within its economy,” he explained.
The issue extends beyond consumer safeguards.
Bharadwaj warned that stablecoins could enable users to transfer value internationally outside of India’s regulated foreign exchange framework, potentially evading current reporting and capital controls.
Anuj Gaur, director at IBBM Pvt Ltd, added that stablecoins tied to the dollar may facilitate cross-border transfers outside the conventional banking system, thereby impacting monetary policy and increasing reliance on foreign currency-linked assets.
Gautam Rege, a co-founder of Josh Software, indicated that central banks everywhere are more apprehensive about stablecoins than traditional cryptocurrencies, considering stablecoins are structured to serve as money rather than speculative tools.
While they might not replace payment infrastructures like UPI, they could emerge as significant contenders in sectors such as remittances, international transfers, and programmable financial services.
Ultimately, experts suggest that the RBI’s worries are intricately linked to monetary sovereignty.
“The prevalent use of dollar-linked stablecoins could displace activity outside domestic payment systems and complicate monetary policy,” Choudhary explained.
India’s Global Standing
Compared to other major markets globally, India’s approach appears distinct.
Manhar Garegrat, India head at Liminal Custody, noted that most developed nations have transcended AML-focused regulations and are developing comprehensive frameworks that govern the entire lifecycle of digital assets, including issuance, custody, trading, and consumer protections.
For example, the European Union’s Markets in Crypto-Assets (MiCA) framework outlines extensive rules for issuers, service providers, governance criteria, and consumer safeguards.
Singapore employs a licensing approach that emphasizes financial integrity and operational stability, while the United Kingdom is incorporating digital assets into its larger financial regulatory architecture.
Garegrat added that India stands out by imposing taxes while simultaneously withholding acknowledgment as a regulated financial asset class.
However, India is not the only country to separate regulation from recognition; several jurisdictions oversee crypto service providers without classifying cryptocurrencies as legal tender or traditional financial instruments. Nevertheless, most have established clearer licensing and supervisory structures compared to India’s current setup.
What’s Next?
Dinkar Sharma, a company secretary and partner at Jotwani Associates, asserted that any upcoming cryptocurrency legislation must strike a balance between legal clarity and the promotion of innovation while ensuring robust investor protections.
He emphasized the need for a detailed framework that categorizes various types of digital assets, identifies the correct regulatory bodies, and sets licensing standards for exchanges, custodians, brokers, and wallet providers.
“It should also encompass consumer protection, disclosure of information, governance standards, cybersecurity, risk management protocols, fraud prevention, market manipulation rules, regulations governing stablecoins, token offerings, decentralized finance, cross-border transactions, treatment of customer assets in insolvency, taxation rules, and enforcement mechanisms,” Sharma mentioned.
Industry stakeholders indicated that they would welcome stricter regulations if accompanied by legal clarity.
“The key shouldn’t just be about increasing or decreasing regulations but about implementing smarter regulations that align with the risks at hand,” Patel stated.
As of now, experts suggest that India’s approach remains a careful balancing act.
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