Cryptocurrency Regulations In India-All You Need To Know

Cryptocurrency regulations in India are complex yet crucial if you want to invest in cryptocurrencies.

Did you know that millions of Indians are diving into the world of cryptocurrency?

In fact, recent statistics show that Indians are actively buying and selling cryptocurrencies, and the projected growth rate for this market is a staggering 54.11% CAGR from 2024 to 2032!

The cryptocurrency market in India is valued at $2.6 billion in 2024. If it grows at a CAGR of 54.11%, by 2032, the market would be worth approximately $21.2 billion!”

Now, before you jump in and start investing, there are some crucial regulations you need to be aware of. Understanding these rules can make all the difference in your investment journey.

By the end of this video, you’ll know the tax implications of cryptocurrency investments, as well as important terms like PMLA, VASPs, VDAs, and FATF.

Cryptocurrency Regulations-Important Terms to understand

To understand the regulations, let’s start with some basic and important terms that are crucial in the cryptocurrency landscape.

First up, we have Cryptocurrencies or Virtual Digital Assets (VDAs). According to Section 2(47A) of the Income Tax Act, a cryptocurrency is defined as any information, code, number, or token that is generated through cryptographic means and is not considered Indian or foreign fiat currency.

In simpler terms, VDAs encompass all types of crypto assets, including cryptocurrencies, tokens, and even non-fungible tokens (NFTs). However, it’s important to note that gift cards or vouchers do not fall under this definition.

Next, let’s talk about Virtual Asset Service Providers, or VASPs.

VASPs are entities that facilitate the exchange, transfer, or safekeeping of virtual digital assets. This includes cryptocurrency exchanges, wallet providers, and platforms that allow users to trade or manage their crypto assets.

With the recent regulations, VASPs are now required to comply with the PMLA, ensuring they adhere to anti-money laundering and counter-terrorism financing measures .

Now, let’s move on to the Prevention of Money Laundering Act, or PMLA. The PMLA was enacted in India to combat money laundering and ensure that financial systems are not misused for illegal activities.

Now that we’ve covered the key terms, let’s dive into the regulations surrounding cryptocurrency taxation in India

Cryptocurrency Regulations-Crypto Taxation

In India, Virtual Digital Assets (VDAs), which include cryptocurrencies and NFTs, are subject to taxation. The income generated from VDAs can be classified in two ways: as Capital Gains when you buy and sell cryptocurrencies, or as Business Income when you actively trade in VDAs.

Regardless of the classification, any income gained from VDAs is subject to taxation.

This was clarified in the budget of 2022, which introduced specific tax rates for VDAs. Let’s break it down.

First is the 30% Tax on Gains:

The income or gain from the transfer of VDAs is taxed at 30%. For instance, let’s say you bought Bitcoin for Rs. 1,000. The next year, you got lucky and sold that Bitcoin for Rs. 10,000. Your gain would be Rs. 9,000. Therefore, the tax payable would be 30% of Rs. 9,000, which equals Rs. 2,700.

Also note that this tax is in addition to the income tax you are liable to pay in the year.

Second is the 1% TDS:

Additionally, a Tax Deducted at Source (TDS) of 1% is deducted for any sale transaction. So, for example, if you sell Bitcoins worth Rs. 10,000, you will actually receive Rs. 9,900 because 1% of the sale is deducted at source and given to the government.

The taxes, if you ask me, is a positive step in the adoption of cryptocurrencies, as it reflects the fact that the Government wants to bring it into the mainstream regulations.

Understanding these tax implications is crucial for anyone looking to invest in or trade cryptocurrencies in India.

Cryptocurrency Regulations-Crypto Exchanges and VASPs

Now that we’ve covered the taxation aspect, let’s move on to the regulations governing Virtual Asset Service Providers, or VASPs.

In 2023, the Indian government officially recognized cryptocurrency exchanges as VASPs under the Prevention of Money Laundering Act (PMLA).

This significant inclusion means that almost all cryptocurrency exchanges now operate under the same regulatory framework as traditional financial institutions, such as banks

Do let me know in the comments, if you think this is good from the Government to bring cryptocurrency exchanges under the ambit of the PMLA.

As we talked earlier, “The PMLA was enacted in 2002 and became effective in 2005. Its primary goal is to combat money laundering and ensure that India’s financial system adheres to global standards for Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT).

With VASPs or simply put the cryptocurrency exchanges put under the gambit of PMLA, it is imperative for these VASPs to comply with the PMLA rules.

This regulatory framework aims to enhance transparency and accountability in the cryptocurrency space, protecting both investors and the financial system.

If you want I can bring in another video on the compliance requirements of the VASPs, or you can read my article, the link to which I have given in the comments section.

Current State- Cryptocurrency Regulations

Currently, India is reviewing its stance on cryptocurrency regulations. We were supposed to receive a draft in September 2024, but that timeline has been delayed due to crypto-friendly policy announcements by U.S. President Donald Trump in January 2025.

Trump orders crypto working group to draft new regulations, explore national stockpile | Reuters

Now, let’s talk about the current gaps or loopholes in the existing regulations and what we can expect in the upcoming updates.

Key Compliance Requirements for VASPs

The VASP Notification has introduced several responsibilities for VASPs to enhance compliance with the PMLA. Here’s a summary of the key obligations:

Verification of Client Identity and Due Diligence:
1. VASPs must conduct Know-Your-Customer (KYC) checks on all users.
1. This includes verifying identity through valid documents and identifying beneficial owners when applicable.
1. KYC measures are required at the start of an account relationship and for transactions of INR 50,000 or more, or any international transaction.
Record-Keeping Requirements:
1. VASPs must maintain detailed records of customer identities, ultimate beneficial owners (for corporate entities), and transaction details.
1. This includes wallet addresses, IP addresses, transaction hashes, and other relevant information to ensure transparency and accountability.
Registration and Reporting Obligations:
1. VASPs must register with the Financial Intelligence Unit (FIU) and submit electronic KYC records to the Central KYC Records Registry within 10 days of a new user’s first transaction.
1. Any suspicious activity indicating money laundering or terrorist financing must be reported promptly to the FIU.
Internal Compliance Mechanisms:
1. VASPs are required to implement robust internal policies and procedures for due diligence.
1. Senior management must approve these measures to ensure accountability and minimize financial crime risks.
Designated Director and Principal Officer:
1. VASPs must appoint a Designated Director responsible for overseeing AML compliance and a Principal Officer who communicates with the FIU and submits reports on suspicious transactions.
Enhanced Reporting Obligations:
1. VASPs must file reports within seven working days if there are reasonable grounds to suspect that a transaction may involve proceeds of an offence or if the transaction appears complex or lacks economic rationale.
Specific Guidelines for VASPs:
1. Following international standards from the Financial Action Task Force (FATF), VASPs must comply with the ‘Travel Rule’, which requires accurate information about both the originator and beneficiary in all virtual asset transfers.
1. This rule promotes transparency and facilitates cross-border cooperation among regulatory authorities.

Current Gaps-Cryptocurrency Regulations

Despite the significant strides made in regulating Virtual Asset Service Providers (VASPs) under the Prevention of Money Laundering Act (PMLA), there are notable gaps in the current regulatory framework, particularly concerning decentralized platforms and non-custodial wallets.

There are two main types of exchanges: Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs).”

Centralized Exchanges are managed by a third party that acts as an intermediary between buyers and sellers. They charge transaction fees for successful trades. Examples include Binance, Coinbase, Kraken, and Bitfinex.
Decentralized Exchanges, on the other hand, have no third party facilitating trades. Instead, they enable peer-to-peer trading directly between users. Examples include PancakeSwap, Uniswap, and SushiSwap.

While centralized exchanges must comply with KYC and AML regulations, DEXs and other decentralized platforms remain largely unregulated. This gap poses significant risks.

Without regulatory oversight, these platforms can be exploited for money laundering or other illicit activities.

For instance, if a user trades Bitcoin on a DEX without any KYC checks, it becomes challenging for authorities to trace the transaction back to its source, increasing the risk of financial crime

Expected Updates in the Cryptocurrency Regulations

To address these gaps, it is anticipated that Indian regulators will need to update the existing framework to include decentralized platforms and non-custodial wallets. Here are some expected updates:”

Inclusion of Decentralized Platforms:
Regulators may begin to define and categorize decentralized platforms within the VASP framework. This would mean that operators of DEXs could be classified as VASPs if they facilitate transactions on behalf of others, thereby subjecting them to the same compliance requirements as centralized exchanges.
Clarification on Non-Custodial Wallets:
Current regulations lack clarity on non-custodial wallets, which allow users to maintain control over their private keys. Future regulations may specify that non-custodial wallet providers must comply with certain AML and KYC requirements if they engage in business activities that involve user assets.
Focus on Control and Influence:
Following FATF guidelines, Indian regulators might emphasize the need to monitor individuals or entities that exercise control over decentralized platforms. This means that even if a platform is decentralized, those who manage or influence its operations could be held accountable under the PMLA.
Risk-Based Approach:
Regulators are expected to adopt a risk-based approach to assess the potential risks associated with decentralized platforms and non-custodial wallets. This would involve evaluating the specific circumstances of each platform and determining appropriate regulatory measures based on their risk profile.

Conclusion

In conclusion, as the cryptocurrency landscape continues to evolve in India, understanding the regulations surrounding Virtual Digital Assets is more important than ever.

With significant growth projected in the market, it’s crucial for investors to stay informed about tax implications, the role of VASPs, and the current regulatory framework.

While there are notable gaps, such as the regulation of decentralized platforms and non-custodial wallets, upcoming updates promise to address these issues and enhance the overall integrity of the cryptocurrency ecosystem.

By staying educated and compliant, you can navigate this exciting market with confidence. Thank you for watching, and don’t forget to like, subscribe, and hit the notification bell for more insights on cryptocurrency regulations and investments!