Blockchain Technology: Prospects and Challenges

[2nd June 2025] The Hindu Op-ed: Regulating India’s virtual digital assets revolution 

PYQ Relevance:

[UPSC 2021] What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society also?

Linkage: India’s leadership in grassroots crypto adoption and the significant investment by retail investors, indicating its presence and potential impact on Indian society. Understanding this impact is a foundational aspect of the broader discussion on regulating VDAs.

 

Mentor’s Comment:  The Supreme Court’s recent observation questioning the absence of comprehensive crypto regulation highlights the urgent need for India to replace punitive taxation with structured oversight. Between December 2023 and October 2024, Indian investors traded over ₹2.63 trillion worth of crypto on offshore platforms, causing the country to miss out on substantial tax revenues and governance control. The article emphasizes this contradiction—a rapidly growing industry at the grassroots level and a fragmented, reactionary policy at the top.

Today’s editorial will talk about the comprehensive crypto regulation. This content would help in GS Paper II ( Governance) and GS Paper III (Science & Technology).

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Let’s learn!

Why in the News?

India has kept its top position in grassroots crypto adoption for the second year in a row, according to the 2024 Chainalysis Geography of Crypto report. But this achievement comes at a time when clear regulations are missingand government policies on crypto remain confusing and inconsistent.

What drives India’s lead in grassroots crypto adoption?

  • High Retail Investor Participation: Indian retail investors have shown strong enthusiasm, investing $6.6 billion into crypto assets (NASSCOM report). Eg: A large number of small-ticket retail trades contribute to India topping Chainalysis’ 2024 grassroots crypto adoption index.
  • Growing Web3 Developer Ecosystem: India hosts one of the fastest-growing Web3 developer communities, driving innovation and ecosystem engagement. Eg: Startups and developers building decentralized apps (dApps) and blockchain solutions across Tier-2 and Tier-3 cities.
  • Youthful Demographic and Digital Penetration: A young, tech-savvy population, high smartphone usage, and digital literacy foster wide crypto experimentation. Eg: College students and freelancers using stablecoins and crypto wallets for micro-transactions and cross-border payments.
  • Lack of Traditional Investment Access and Inflation Hedge: Limited access to formal investment channels and search for inflation-resistant assets prompt people to explore crypto. Eg: Young earners in semi-urban areas using crypto as an alternative to gold or fixed deposits for wealth storage.

Why did the Supreme Court flag regulatory gaps in 2025?

  • Absence of a Comprehensive Legal Framework: The Court noted the lack of clear and cohesive legislation for Virtual Digital Assets (VDAs), which hampers effective regulation and enforcement. Eg: In May 2025, the Supreme Court remarked, “Banning may be shutting your eyes to ground reality,” highlighting the disconnect between policy and practice.
  • Overreliance on Prohibitive Taxation Instead of Regulation: India imposed heavy taxes (30% capital gains, 1% TDS) as a stop-gap, without establishing regulatory clarity or investor safeguards. Eg: Despite taxation, crypto users shifted to offshore platforms, leading to over ₹60 billion in uncollected TDSand loss of oversight.
  • Risk of Pushing Activity Underground: The absence of regulation combined with enforcement gaps drove users towards non-compliant and unregulated exchanges, increasing systemic risk. Eg: The Court observed that without enabling regulation, users bypassed restrictions via VPNs and mirror sites, undermining regulatory intent.

Who ensures compliance in India’s crypto ecosystem?

  • Reserve Bank of India (RBI): As the monetary authority, RBI oversees the impact of crypto on financial stability, capital controls, and payment systems. Eg: RBI issued circulars in 2013 and 2018 warning financial institutions against dealing with crypto-related entities.
  • Financial Intelligence Unit-India (FIU-IND): FIU-IND monitors suspicious transactions, enforces anti-money laundering (AML) and counter-terror financing (CFT) norms. Eg: Indian Virtual Asset Service Providers (VASPs) collaborated with FIU-IND to strengthen AML/CFT compliance, gaining positive feedback from FATF.
  • Virtual Asset Service Providers (VASPs): VASPs act as domestic intermediaries ensuring KYC norms, reporting standards, and overall ecosystem transparency. Eg: After the 2024 crypto hack ($230 million loss), Indian VASPs enhanced cybersecurity, created insurance funds, and implemented industry-wide security guidelines.

Where are most Indian crypto assets traded?

  • Offshore, Non-Compliant Platforms: A significant portion of Indian crypto trading happens on offshore exchanges that do not comply with Indian regulations. Eg: Between July 2022 and December 2023, Indians traded over ₹1.03 trillion worth of VDAs on such platforms.
  • Limited Domestic Exchange Usage: Only about 9% of India’s estimated ₹1.12 trillion worth of crypto assets are held or traded on domestic exchanges. Eg: This limited use reflects investor preference for platforms with broader asset choices or less stringent controls.

How have Indian Virtual Asset Service Providers (VASPs) improved security and compliance?

  • Strengthened Anti-Money Laundering (AML): Indian VASPs have collaborated closely with the Financial Intelligence Unit-India (FIU-IND) to enhance monitoring and reporting standards. Eg: This cooperation earned positive feedback from the Financial Action Task Force (FATF) for improved compliance.
  • Enhanced Cybersecurity Measures: After the 2024 crypto hack that resulted in a $230 million loss, many Indian exchanges implemented stronger security protocols and real-time risk monitoring. Eg: Exchanges set up dedicated insurance funds to protect users against future thefts.
  • Industry-Wide Standardization and Collaboration: Indian VASPs united to create and enforce common cybersecurity guidelines and best practices across the ecosystem. Eg: This collective effort has improved overall trust and resilience of India’s crypto platforms.

Way forward: 

  • Formulate a Comprehensive, Risk-Based Regulatory Framework: India must develop clear, future-ready legislation that classifies, governs, and monitors Virtual Digital Assets (VDAs) in alignment with global standards (like FATF, IMF). Eg: A dedicated VDA Regulatory Authority or inclusion under SEBI/RBI oversight can ensure investor protection, AML enforcement, and innovation support.
  • Strengthen Domestic VASP Ecosystem Through Incentives and Integration: Encourage onshore compliance by lowering tax burdens, supporting innovation sandboxes, and integrating VASPs into India’s formal financial ecosystem. Eg: Offering tax rebates or compliance credits to VASPs adopting stringent KYC/CFT and cybersecurity norms can enhance trust and reduce offshore migration.

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