Virtual Digital Assets (VDAs) refer to digital tokens and cryptocurrencies such as Bitcoin, Ethereum, and various other blockchain-based tokens. These assets operate independently of any central bank or government authority. Their ownership is documented on a decentralized digital ledger known as a blockchain.
India boasts a vibrant community of young developers and technology enthusiasts who are captivated by the opportunities presented by VDAs. This interest has led to significant investments, with reports indicating that billions of dollars have been funneled into crypto assets. The sector is projected to generate over eight lakh jobs by 2030, showcasing its potential impact on the economy.
The primary challenge lies in the absence of a clear and comprehensive policy framework. Current financial and payment regulations cater to traditional banking systems and assets, which are not equipped to handle the decentralized and global characteristics of VDAs. Consequently, this creates difficulties for regulators and law enforcement agencies to effectively monitor, tax, or safeguard users.
Since 2013, the RBI, as India’s monetary authority, has issued warnings about the risks associated with VDAs. In 2018, it enforced a ban on banks engaging with VDA-related entities. However, this ban was overturned by the Supreme Court in 2020, which deemed it unjustified.
In 2022, the Indian government introduced two significant tax policies for VDAs:
These measures aim to enhance transparency and curb illegal activities. However, they have also prompted users to shift their trading activities to foreign platforms to evade these taxes.
A substantial number of Indian users gravitate towards offshore, non-compliant platforms due to their lower tax obligations and relaxed regulations. Currently, approximately 91% of Indian crypto trading occurs on these platforms, leading to significant tax revenue losses for the Indian government.
Estimates suggest that Indians engaged in trading trillions of rupees worth of VDAs on offshore platforms between 2022 and 2024. The government has faced an estimated tax loss exceeding ₹60 billion, with the majority of trading concentrated on nine major foreign exchanges.
The government has attempted to block access to these offshore platforms, but with limited success. Many users have found ways to circumvent these restrictions using VPNs, mirror sites, or non-compliant exchanges.
VASPs encompass entities that provide services related to VDAs, including crypto exchanges, wallet providers, payment processors, and platforms facilitating the buying, selling, storing, or transferring of digital assets.
Regulators utilize the term VASPs to encompass a broad spectrum of digital asset activities, extending beyond mere trading. This approach ensures that regulations safeguard all types of services within the crypto ecosystem.
Indian VASPs are proactively striving to align with global standards by collaborating with regulatory agencies to combat money laundering and terrorism financing. They have also enhanced cybersecurity measures following recent hacking incidents, fostering greater trust and safety within the VDA landscape.
A lack of clear regulations results in lost tax revenue and hampers investor protection against scams. A well-balanced policy framework will support innovation, create a secure environment for users, and ultimately bolster India’s economy.
India must establish a comprehensive, clear, and equitable policy framework that fosters innovation while safeguarding national interests. This will ensure the sustainable growth of the digital assets sector under appropriate supervision, contributing positively to India’s economic development.
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