India's Cryptocurrency Regulatory Vacuum Creates Perfect Storm
India's cryptocurrency industry is navigating treacherous waters as the absence of comprehensive legislation combined with heavy taxation has created what experts describe as a regulatory nightmare. Despite the government collecting taxes and allowing banking services for crypto transactions, the lack of a governing framework has pushed major exchanges to relocate overseas and caused daily trading volumes to plummet by a staggering 97%.
The Supreme Court Intervention and Policy Whiplash
The situation reached such critical levels that the Supreme Court of India had to intervene, describing Bitcoin trading in India as "like dealing with a refined way of hawala business" due to the complete absence of regulations. This observation came during an ongoing case in May 2025, where the apex court explicitly asked the government to formulate a "clear cut" policy on virtual currency.
The judiciary has previously played a crucial role in reviving the industry when it overturned the Reserve Bank of India's 2018 ban on banks servicing crypto exchanges in March 2020. The court ruled the ban unconstitutional and "disproportionate," stating that while the RBI could regulate, it couldn't destroy an entire industry without proper evidence.
This judicial intervention proved transformative, triggering exponential growth in India's crypto ecosystem. From just 6 million investors in March 2020, the number skyrocketed to 119 million within five years, with market projections estimating the sector could reach $15 billion by 2035.
The Double Taxation Blow and Its Devastating Impact
The industry's optimism was short-lived as Finance Minister Nirmala Sitharaman delivered what market participants term a "double whammy" in Budget 2022. The government imposed a flat 30% tax on all income from Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs, alongside a 1% Tax Deducted at Source (TDS) on every crypto transaction.
This taxation framework has proven particularly punishing because the 1% TDS applies even on loss-making trades, creating what industry experts call an unsustainable burden for a developing sector. The Bharat Web3 Association, representing 47 crypto exchanges and wallet companies, has been vocal about the devastating consequences.
According to their representation to the Finance Ministry, between April 2022 and July 2023, daily crypto exchange volumes crashed by 97% following the TDS implementation. More alarmingly, trading worth approximately Rs 35,000 crore shifted to offshore platforms, representing nearly 90% of India's total crypto trade volume.
Government Stance and International Dimensions
Despite the industry's pleas for clarity, government officials have expressed reluctance toward creating separate legislation for cryptocurrencies. A senior official explicitly stated, "We are not keen on regulating the sector by means of a legislative framework," fearing that regulations would confer legal legitimacy and attract more investment, potentially fueling systemic risks in the financial sector.
Minister of State for Finance Pankaj Chaudhary emphasized in Parliament that any comprehensive regulatory framework would require "significant international collaboration" on risk evaluation and common standards. This international perspective highlights the global nature of the cryptocurrency challenge.
Meanwhile, the government continues to apply existing regulations to the sector. In 2023, cryptocurrencies were brought under the Prevention of Money Laundering Act, requiring exchanges, wallet providers, and DeFi platforms to register with the Financial Intelligence Unit (FIU-IND), conduct KYC verification, maintain detailed records, and report suspicious activities.
Enforcement Actions and Industry Exodus
The regulatory ambiguity hasn't prevented the government from penalizing crypto exchanges for non-compliance with anti-money laundering laws. Between 2024 and 2025, the FIU-IND imposed substantial fines totaling over Rs 28 crore on three major exchanges - Binance (Rs 18.82 crore), ByBit (Rs 9.27 crore), and KuCoin (Rs 34.5 lakh). Additionally, compliance notices were issued to 25 foreign-based exchanges from countries including the US, China, Cambodia, and Singapore.
This fragmented approach has created what industry leaders describe as an uneven playing field. As Abhay Agarwal, founder and CEO of crypto exchange GetBit, explained, "The absence of a clear framework creates more friction than freedom." Compliant Indian platforms face banking access uncertainties while offshore entities serve Indian users without similar accountability.
The human and financial costs are substantial. Investments worth approximately $280 million have been jeopardized across at least two major hacks impacting leading crypto exchanges in the last two years. The government has explicitly warned investors that "crypto products and NFTs are unregulated and can be highly risky" with no regulatory recourse for losses.
The Path Forward: Uncertainty or Innovation?
Despite the challenges, India remains a significant player in the global crypto landscape. Chainalysis data reveals India received an estimated $268.9 billion in crypto assets between 2022 and 2023, spiking to $338 billion in the first half of 2025 - the highest in the Asia Pacific region.
Industry representatives continue advocating for clarity. The Bharat Web3 Association has drafted a VDA Regulatory Authority Bill as a potential starting point for policy certainty. As Dilip Chenoy, Chairperson of Bharat Web3, emphasized, "clear and consistent policies" are essential for the sector to thrive.
Manhar Garegrat of Liminal Custody warned that "indefinite ambiguity can push innovation into regulatory grey zones" and set Indian startups back by years. With multiple ministries reportedly working on separate frameworks, the hope for cohesive regulation persists, even as the immediate future remains clouded by uncertainty.
