Introduction
Cryptocurrency, also known as ‘crypto assets’ or ‘Crypto,’ has attained new heights in the world of digital currencies in the years following the COVID-19 pandemic. It is a type of virtual money that has made both the process and the outcome less complex and private due to the negligible interference from central banks or governments, thus making it decentralized and unregulated for the time being. This gives the freedom to make cryptocurrencies not just governments but also to private companies. Cryptocurrencies are currently being used for online transactions due to the various benefits they offer over traditional transactions. Such digital transactions are done using cryptography without the need for verification from banks, governments, or any financial institution.[2]
In a nutshell, the process of a Crypto transaction is shown below (Taking Bitcoin as a reference).
Step 1 – Cryptos like Bitcoins are made using a process called Mining. Mining consists of specialised interconnected computers networks and software around the world, which make new cryptos that are sent by an entity digitally based on the specific cryptos owned and desired to share.[3] This then takes the form of a transaction.
Step 2 – This transaction is grouped within a block consisting of several such transactions. This grouping is necessary for making it easier to verify the transactions and then encrypting them in the blockchain.[4]
Step 3 – This block is then validated by network nodes using cryptographic techniques. This technique requires a cryptographic number to be generated that is equal to or less than a number set by the Company’s network’s difficulty algorithm. The first miner to find the solution to this problem is rewarded with predetermined bitcoins, and the process starts anew.
Step 4 – This transaction is then dated and added to a blockchain by miners. Blockchain is the tamper-proof permanent ledger on which every transaction is encrypted after verification and are accessible to all on the network.[5]
Step 5 – The transaction comes to an end, and the amount is received by the receiver.[6]
Regulation of Digital Currencies in India
Cryptocurrencies began to slide in India following the Supreme Court’s decision to remove the ban on cryptocurrencies in 2020. Following the re-entry of one of the largest US-based cryptocurrency exchanges – Coinbase[7], after its failed attempt in 2022 citing regulatory uncertainties in UPI payments for Crypto Transactions, is indicative of the dynamic and diverse changes expected to happen in the Indian realm of Digital Currency, and a shift towards a more structured regulatory framework in the future seems imminent.
The legal framework of cryptocurrency in India has been a rollercoaster ride for the last decade –
2013-2017 – The RBI repeatedly issued warnings against investing in cryptocurrencies, citing financial and security risks.
2018 – RBI imposed a banking ban on crypto transactions, preventing financial institutions from dealing with crypto exchanges.
2020 - The Supreme Court removed the ban reviving the Crypto industry and giving landmark judgement in the case of Internet & Mobile Association of India vs Reserve Bank of India.[8]
2021-2022 – The Indian Government introduced Sec 2(47A) under the Income Tax Act, 1961[9] defining Virtual Digital Assets (VDA’s) and imposed a 30% tax u/s 113BBH[10] and 1% TDS u/s 194S of the Finance Act, 2022[11]. The rationale behind such a step may be to keep track of crypto activities in the country or, presumably to prevent small-scale institutions from entering in crypto exchange.
2023 - To prevent illicit activities and frauds happening in the crypto exchange, a notification dated 07-03-2023 was brought u/s 2(1) (sa) of the Prevention of Money Laundering Act (PMLA), 2002[12] Which lists down the crypto activities covered under this PMLA compliance. These transactions were brought under Anti–Money Laundering and Know Your Customer compliances mandating the reporting of crypto currency business to the Financial Intelligence Unit (FIU-IND).
Key Challenges in Crypto Currency Exchanges
Currently, there is no administrative body regulating cryptocurrency in India. Since major players in this field are entering for dominance, proper laws citing their smooth functioning are necessary. While the RBI remains skeptical, the Security and Exchange Board of India, having international exposure and expertise in currency and trading, can be tasked with managing VDA’s. Moreover, imposing such heavy taxations on such transactions seems to be illogical and unnecessary in the long run as it will hesitation and doubts in the local companies willing to enter in Crypto exchange. A properly drafted Cryptocurrency Regulation Bill[13] is suggested for proper regulation of the crypto assets, exchanges, taxation policies, and TDS revision purposes in the crypto exchange market. Such a bill would also help provide legal recourse to the investors experiencing instances of crypto frauds and scams, currently available only to stock market investors.
Conclusion
As India moves towards a $5 trillion economy, allowing a smooth flow in the crypto market is not just a need of the decade but a necessity of the century. With crypto being a growing market and all developed countries establishing their bases in the market, India can’t stay away for long if it doesn’t want to lag. Coinbase's re-entry into India and ongoing regulatory discussions indicate a move toward a more structured and transparent approach to cryptocurrency regulation. However, significant legal and policy challenges persist. The Indian government must strike a balance between fostering innovation and ensuring robust regulation to protect investors and maintain financial stability. The next few years will determine whether the government imposes further bans or embraces the changing dynamics of digital assets. Until then, investors and legal experts must stay vigilant and informed about the changing regulatory landscape.
Reference
[1] Ravi Shanker Bhatt is a 4th semester student in the Department of Law, Assam University.
[2] Kaspersky, (What is Cryptocurrency and how does it work? ), Kaspersky, (No publication date), < https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency > accessed 13th March, 2025
[3] Coinbase, (What is mining?), Coinbase, (No publication date), < https://www.coinbase.com/learn/crypto-basics/what-is-mining > accessed 13th March, 2025
[4] Birdee, How do cryptocurrencies work?, Birdee Blog, (No publication Date), <https://blog.birdee.co/en/how-do-cryptocurrencies-work> accessed 15th March, 2025
[5] Coursera Staff, (How Does Cryptocurrency Work? A Beginner's Guide), Coursera, (29 Jan, 2025), <https://www.coursera.org/articles/how-does-cryptocurrency-work> accessed 12th March, 2025
[6] Ibid
[7] Tech Desk, ( Coinbase returns to India: Crypto exchange confirms securing FIU regulatory nod ), The Indian Express, (12 March, 2025), < https://indianexpress.com/article/technology/tech-news-technology/coinbase-crypto-exchange-india-return-fiu-registration-9880736/ > accessed 14th March, 2025
[8] Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274
[9] Sec 2(47A) of Income Tax Act, 1961
[10] Sec. 113BBH of Finance Act, 2022
[11] Sec. 194S of Finance Act, 2022
[12] Sec 2(1) (sa) of the Prevention of Money Laundering Act (PMLA), 2002
[13] Alyssa Abrams, (Cryptocurrency in India: Legality, AML Regulations, and Taxation (2024)), The Sumsuber, ( 22 Aug, 2024), < https://sumsub.com/blog/cryptocurrency-in-india/ > accessed 14th March, 2025