Copyright infringement not intended

Source: The Hindu

Context

India leads in grassroots crypto adoption, with $6.6 billion invested by ordinary investors and 800,000 jobs predicted by 2030, but rules for virtual digital assets are vague and difficult to understand.

What is Crypto Adoption?

• Crypto adoption refers to the increasing acceptance and use of cryptocurrencies like Bitcoin, Ethereum, and others by individuals, businesses, and governments. 
• It involves using crypto for transactions, investments, remittances, and as an alternative to traditional banking. Factors driving adoption include financial inclusion, low transaction fees, faster cross-border payments, and decentralization. 
• As awareness grows, more retailers accept crypto, fintech companies integrate blockchain, and some countries explore central bank digital currencies (CBDCs). 
• However, challenges like regulatory uncertainty, volatility, and lack of education still hinder widespread use. Overall, crypto adoption signals a shift toward a more digital, decentralized financial ecosystem.

What are virtual digital assets? 

• They are digital representations of value that can be electronically stored, transferred, or traded. They include:
• Cryptocurrencies are digital or virtual currencies that are safeguarded using cryptographic procedures, making them very resistant to counterfeiting.
• NFTs (Non-Fungible Tokens) are unique digital assets that are recorded on a blockchain and can be traded for money, cryptocurrencies, or other NFTs.
• VDAs can be used for payments, investments, or to represent real-world objects like artwork, real estate, personal identities, and property rights.

What drives India's leadership in grassroots cryptocurrency adoption?

• High retail investor participation: Indian retail investors have demonstrated great excitement, investing $6.6 billion in cryptocurrency assets (NASSCOM report). For example, India ranks first in Chainalysis' 2024 grassroots crypto adoption rating due to a huge amount of small-ticket retail transactions.
• Growing Web3 Developer Ecosystem: India has one of the fastest-growing Web3 developer communities, which promotes innovation and ecosystem participation. For example, startups and developers are developing decentralized apps (dApps) and blockchain solutions in Tier 2 and Tier 3 cities.
• Youthful Demographics and Digital Penetration: A young, tech-savvy populace, extensive smartphone use, and digital literacy encourage widespread crypto exploration. For example, college students and freelancers use stablecoins and crypto wallets to conduct microtransactions and cross-border payments.
• People are exploring cryptocurrency due to a lack of traditional investing channels and a desire to invest in inflation-resistant assets. For example, young people in semi-urban areas use cryptocurrency instead of gold or fixed deposits to store their riches.

The Regulatory Paradox in India’s Crypto Ecosystem

1. Inconsistent Regulatory Approach

• India's stance on crypto regulation has been ambiguous and reactionary despite the sector’s rapid growth.
  
  
• The Supreme Court's observation in May 2025 — “Banning may be shutting your eyes to ground reality” — reflects the tension between a flourishing market and the absence of a coherent regulatory policy.
  
  
• Since 2013, the Reserve Bank of India (RBI) has repeatedly flagged concerns regarding the unauthorised status of crypto and its potential to destabilize the financial system.
  

2. Timeline of Regulatory Actions

• In 2018, the RBI issued a directive prohibiting financial institutions from engaging with Virtual Digital Asset (VDA) entities.
  
  
• This ban was overturned by the Supreme Court in 2020, highlighting a lack of legal foundation.
  
  
• In 2022, the Indian government introduced fiscal deterrents instead of a robust regulatory framework:
  
  
• 1% Tax Deducted at Source (TDS) on VDA transactions exceeding ₹10,000.
  
  
• 30% capital gains tax without provisions for loss offsetting.
  

3. Unintended Consequences of Taxation

• These tax measures aimed to increase transparency and discourage speculation.
  
  
• However, they led to an offshore exodus, pushing users toward foreign, non-compliant platforms.
  
  
• The effectiveness of these policies was significantly diminished as Indian users avoided domestic exchanges.
  

Offshore Exodus and Revenue Losses

1. Scale of Offshore Transactions

• Between July 2022 and December 2023, Indian users transacted ₹1.03 trillion on offshore platforms.
  
  
• Merely 9% of assets were retained on domestic exchanges during this period.
  
  
• The trend escalated between December 2023 and October 2024, with offshore trades reaching ₹2.63 trillion.
  

2. Tax Revenue Loss

• The estimated loss in uncollected taxes reached ₹2,488 crore during the first phase.
  
  
• Cumulatively, the uncollected TDS from such transactions exceeds ₹60 billion.
  

3. Ineffectiveness of Enforcement Measures

• Measures like URL blocking were largely ineffective.
  
  
• Users easily bypassed restrictions using VPNs, mirror sites, or migrated to other non-compliant platforms.

Core Challenges and Judicial Insight

• India’s capital controls and regulated payment systems are incompatible with the decentralized nature of VDAs.
  
  
• The Supreme Court's May 2025 remarks emphasized the disconnect between India’s restrictive policies and the reality of a vibrant crypto economy.
  
  
• These developments underline the urgent need for a full-spectrum, forward-looking legislation to manage the crypto ecosystem effectively.

Way Forward

• The existing scenario of taxation without regulation is unsustainable and destructive.
• Without a robust framework, India risks losing not only significant tax revenue, but also the ability to manage a growing and strategically crucial sector.
• VDAs' potential to contribute to national economic growth, job creation, and innovation cannot be fully realized in a policy vacuum.
• A forward-thinking, balanced regulatory strategy must be founded on openness, investor protection, and global interoperability.
• Instead of stifling innovation through prohibitive taxes or blanket prohibitions, Indian policymakers should appreciate the positive role performed by VASPs and offer a conducive climate for them to function under supervision.
• Such a framework should try to integrate cryptocurrency into the broader financial ecosystem while maintaining security and monetary management.

Practice Question Q. What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society also?