India’s Cryptocurrency Conundrum: Can Updated VDA Regulations Safeguard Progress or Hinder Expansion?

India is currently reassessing its approach to virtual digital assets (VDAs), a move that could transform the nation’s cryptocurrency environment by bringing it closer to international norms and addressing persistent issues around consumer safety and market reliability. Despite the absence of a robust legal structure, India remains a vital market for crypto, boasting over 100 million users—many of whom are young and technologically adept. The Central Board of Direct Taxes is leading this review, prompted in part by the Supreme Court’s directive in May 2025 for more explicit regulations,

by implementing oversight based on risk and protections centered on investors.

At present, India’s VDA rules are piecemeal, concentrating mainly on steep taxation and basic anti-money laundering (AML) protocols. The imposition of a 30% tax on crypto earnings, along with a 1% tax deducted at source (TDS), has driven many participants to unregulated foreign exchanges, hindering domestic growth. While the Financial Intelligence Unit-India (FIU-IND) enforces AML and KYC standards for both local and international providers, there is no comprehensive legislation covering asset custody, bankruptcy, or market practices.

including unchecked stablecoins, decentralized exchanges, and unclear leverage mechanisms.

The ongoing review, shaped by India’s leadership of the G20 in 2023 and recommendations from global financial authorities, is focusing on several crucial aspects. Protecting investors is a primary concern, with suggestions for standardized rules on asset custody, insolvency, and mandatory transparency. Measures to ensure market integrity may involve licensing for exchanges, custodians, and wallet operators, as well as tighter controls on leverage and liquidity. There is also discussion of a dedicated regulatory approach for tokenized real-world assets (RWAs),

as a center for innovation in this rapidly developing sector.

The proposed reforms include a risk-based categorization for VDAs—such as payment, utility, and asset-backed tokens—each governed by specific regulatory measures. Licensing requirements could obligate service providers to adhere to standards for capital, cybersecurity, and governance, while conduct rules may enforce uniform risk disclosures and asset separation.

involving the central bank and using regulatory sandboxes to encourage innovation while managing systemic risks.

A comprehensive VDA regulatory system could offer substantial advantages. By clarifying legal responsibilities and improving transparency, it could help prevent financial crimes and attract both domestic and international investment. Enhanced data and reporting obligations, including real-time transaction tracking, would allow agencies like the Reserve Bank of India and the Securities and Exchange Board of India to collaborate more efficiently. Furthermore, reducing dependence on overseas platforms could nurture local expertise and creativity,

in line with international standards.

The effectiveness of this regulatory overhaul will depend on finding the right balance between strict oversight and adaptability. Some caution that excessive regulation could hinder progress, while insufficient enforcement may leave systemic vulnerabilities unaddressed. Nonetheless, many believe that a balanced strategy—one that incorporates global best practices while reflecting India’s unique market conditions—

emerge as a frontrunner in the evolving crypto landscape.