What are the legal frameworks existing for regulating the virtual digital asset market in India?

By Roshan Aslam

Virtual digital assets (VDA), more commonly referred to as cryptocurrencies, are currently on the receiving end of demands of regulatory frameworks in India. While VDAs lack complete regulatory directives, a 2020 Supreme Court judgement, followed by India’s dynamic role at the 2023 G20 Summit has cast a regulatory framework for these assets.

Prior attempts of establishing legal frameworks

In the past, few ineffective attempts have been made to regulate VDAs. One of these attempts was made by the Reserve Bank of India (RBI), which has been historically against the usage of cryptocurrencies. In 2018, the RBI mandated entities under its jurisdiction abstain from dealing with crypto by highlighting the associated risks and threats. Some of its concerns were later attested, and a landmark Supreme Court judgement in 2020 completely altered the regulations imposed by the RBI on cryptocurrencies in India – effectively lifting the indirect ban on them. This sent out a call validating the legality of VDAs in India, but simultaneously, put the spotlight on other issues. This resulted in the establishment of regulatory assessments like initiating taxation, bringing VDA service providers inside ‘reporting entities’, compulsory customer assessment and obligatory registration with the Financial Intelligence section under the jurisdiction of the Prevention of Money Laundering Act, 2002 (PMLA) and its rules, including anti-money laundering (AML) methods.

India’s stance on regulating VDAs

India has since experienced an extensive switch in its approach to establishing legal frameworks of VDAs – before and after the G20 Summit in 2023 that was organised in New Delhi. The country advocated for a cooperative worldwide regulatory apparatus for cryptocurrencies and the necessity for reducing macro-financial intimations. India also recommended the ‘Financial Stability Board Synthesis Paper’ for the International Monetary Fund which lays out an international collaborative legal framework for the regulations of VDAs.

The existing regulations and requirements

The 2021 Cryptocurrency Bill is presently waiting for approval before the Parliament of India. As per reports, it will establish a rapid legal framework for the formal VDAs, which will be provided by the RBI. The bill will also ban any private VDAs which were not issued by the state. However, there has been a lack of clarity over what constitutes a private VDA. Before the 2021 bill, a committee by the Indian government had put forward another bill, the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’ – which was never realized.

In 2021, the Ministry of Corporate Affairs came up with an amendment to the Companies Act 2013 and required entities to reveal their profits and loss (P&L), along with the size of their VDAs in their financial statements. The intimation of taxation on VDAs includes a 30% tax on the earnings using these assets and a 1% TDS on any transaction in case of a Passover of VDAs.

The Indian authorities, particularly the Advertising Standards Council of India, issued a guideline about advertisements of cryptocurrencies in 2022. It has established the appropriate practice for the advertisement of digital assets, like differentiating the types of disclaimers, appropriate information that can be used on advertisements and other details that are allowed to be commissioned.

Other legal frameworks that might apply to cryptocurrencies are the Foreign Exchange Management Act, as well as the Income Tax Act.

This is important for all stakeholders to keep in mind that VDAs in India remain majorly unregulated. The RBI has retained its position intact so far – trading in cryptocurrencies takes place at the trader’s peril. However, there are no doubts that cryptocurrency holds immense potential for the future, as have been maintained in the report of the United Nations Conference on Trade and Development, which revealed that India holds the 7th spot among all countries in terms of adaptation in digital currencies. The report has also mentioned that a massive 7.3% of Indians owned digital assets in 2021, a number that has only grown since then.

(The author is Mr. Roshan Aslam, Co-founder & CEO of GoSats, and the views expressed in this article are his own)