The New Age of Crypto: India’s 2024 Regulatory Framework Unveiled 

Policy Update
Dipannita Saha

Background of Cryptocurrency Regulations

India’s cryptocurrency regulation has undergone significant evolution over the past few years, characterized by a series of critical developments. In 2018, the Reserve Bank of India (RBI) adopted a stringent stance on cryptocurrencies, prohibiting banks and other regulated entities from facilitating crypto transactions. This decision was primarily driven by concerns regarding tax evasion, potential loss of seigniorage income, and the associated risks to fiscal stability posed by decentralized cryptocurrency activities. However, in 2020, the Supreme Court of India overturned the RBI’s ban, which subsequently led to a substantial increase in cryptocurrency trading within the country. In response to this burgeoning market, the government introduced a tax on cryptocurrency transactions in 2022 to mitigate speculative trading.

In 2021, the Indian government proposed the Cryptocurrency and Regulation of Official Digital Currency Bill, aiming to establish a clearer regulatory framework for digital assets. However, the bill did not progress through Parliament, leaving the legal status of cryptocurrencies in a state of ambiguity. Subsequently, in March 2023, the Finance Ministry extended the Prevention of Money Laundering Act (PMLA) to encompass Virtual Digital Assets (VDAs), thereby requiring cryptocurrency businesses to adhere to anti-money laundering regulations and comply with Know Your Customer (KYC) norms.

By 2024, the Securities and Exchange Board of India (SEBI) proposed a multi-regulator framework for overseeing cryptocurrency activities, indicating a shift towards a more structured regulatory approach. This proposal reflects SEBI’s recognition of the complexities inherent in the cryptocurrency market, while the RBI continues to express caution regarding the potential economic risks associated with digital currencies. This evolving regulatory landscape underscores the ongoing discourse surrounding the future of cryptocurrency regulation in India, as stakeholders seek to balance innovation with the need for robust oversight.

The regulatory measures introduced by SEBI and the RBI have profound implications for both the economy and the cryptocurrency sector. These regulations are designed to stabilize the financial system, mitigate risks, and protect investors, potentially enhancing economic stability and fostering investor confidence. However, striking the right balance is crucial, as overly stringent regulations could hinder technological innovation. The impact of these regulations extends to market dynamics and India’s position in the global crypto market, influencing how digital assets are integrated into traditional financial systems.

Functioning of 2024 Cryptocurrency Regulations in India:

As of 2024, India’s approach to regulating cryptocurrencies is a bit of a balancing act. The rules are a blend of old laws, new proposals, and policies that are constantly evolving. The aim is to manage the surge in popularity of digital assets while keeping investors safe, maintaining financial stability, and making sure everything lines up with global standards. In short, India is working to create a clear and secure environment for cryptocurrencies amidst a rapidly changing landscape.

  • Role of Regulatory Bodies: The regulatory landscape involves multiple authorities, including the RBI, the Securities and Exchange Board of India (SEBI), and the Ministry of Finance. Each body plays a distinct role in overseeing different aspects of the cryptocurrency market:
  • Reserve Bank of India (RBI): The RBI has taken measures to address risks posed by cryptocurrencies, including issuing warnings to investors about speculative nature and lack of transparency, emphasizing potential threats to monetary policy and foreign exchange regulations. The RBI has highlighted the need for international collaboration in regulating crypto assets and the importance of launching a CBDC to provide a safer alternative. The guidelines underscore the RBI’s commitment to safeguarding India’s monetary and financial system while fostering innovation in the digital currency space.
  • Securities and Exchange Board of India (SEBI): SEBI’s guidelines for cryptocurrency regulation in India establish a clear framework for managing digital assets. They classify assets into categories like utility and security tokens, requiring specific regulations for each. The guidelines mandate detailed disclosures from issuers and exchanges to enhance transparency and prevent fraud. Additionally, exchanges and service providers must obtain licenses, implement strong cybersecurity measures, and comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. To protect investors, SEBI has introduced grievance redressal mechanisms and investor education initiatives, ensuring awareness of potential risks. Overall, these guidelines aim to foster a stable and trustworthy crypto ecosystem while balancing innovation with consumer protection.
  • The Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA): IRDAI and PFRDA are tasked with overseeing insurance and pension-related virtual assets within the cryptocurrency sector. IRDAI ensures insurance products linked to cryptocurrencies comply with regulations and protect policyholders from risks. PFRDA regulates pension funds investing in virtual assets, ensuring alignment with safety and security standards. Both authorities aim to safeguard consumer interests while promoting innovation, contributing to a comprehensive regulatory framework for cryptocurrencies in India. SEBI recommends grievances be resolved under the Consumer Protection Act, emphasizing the need for consumer safeguards across all regulatory bodies involved.
  • Taxation Framework: The Indian government has implemented a taxation regime for cryptocurrencies, which includes a 30% tax on gains from the transfer of VDAs, along with a 1% Tax Deducted at Source (TDS) for transactions exceeding ₹50,000 or ₹10,000 in specific cases. This taxation framework acknowledges the existence of cryptocurrencies while creating uncertainty regarding their long-term legal status. The introduction of these taxes aims to regulate the market and ensure compliance with fiscal obligations.
  • Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations: In March 2023, the Indian Ministry of Finance extended the Prevention of Money Laundering Act (PMLA) to include VDAs, imposing stringent KYC requirements on crypto businesses. This regulatory move mandates that all cryptocurrency businesses obtain a license from the Financial Intelligence Unit of India (FIU-IND) and comply with AML policies. The implementation of the Travel Rule, a global standard set by the Financial Action Task Force (FATF), is part of this initiative, enhancing the country’s efforts to combat money laundering and terrorism financing.
  • Legal Status of Cryptocurrencies: Cryptocurrencies are not recognized as legal tender in India; however, they are legal to trade and hold. The Reserve Bank of India (RBI) initially imposed a banking ban on cryptocurrency transactions in 2018, which was lifted by the Supreme Court in March 2020. This ruling allowed banks to offer services to cryptocurrency exchanges, thereby facilitating the growth of the market. Despite this, the lack of specific licensing for cryptocurrency operators has resulted in regulatory ambiguity.
  • Proposed Legislation: The Cryptocurrency Bill: The Cryptocurrency and Regulation of Official Digital Currency Bill, introduced in 2021, remains a focal point in the discourse surrounding cryptocurrency regulation in India. Although the bill has not yet passed, it proposes the establishment of a regulatory framework for cryptocurrencies, aiming to balance innovation with necessary oversight. The latest discussions suggest that the bill may shift focus from an outright ban on private cryptocurrencies to a more regulatory approach, emphasizing investor protection and the establishment of clear guidelines for cryptocurrency exchanges.

These guidelines aim to provide a structured environment for digital assets, enhancing market integrity, protecting investors, and maintaining financial stability.

Performance of 2024 Cryptocurrency Regulations in India:

  • Monitoring and Evaluation: The effectiveness of the updated regulations will be assessed through key performance indicators, such as market growth, investor protection metrics, and tax revenue. These indicators will provide insights into how well the regulations support the growth and stability of the cryptocurrency market in India.
  • Balanced Approach: Overall, the 2024 regulations represent a proactive step towards creating a balanced approach that encourages innovation while safeguarding investor interests and maintaining financial stability.
  • Investor Protection: The Consumer Protection Act of 2019 has been leveraged to address investor grievances and enhance protection. This ensures accountability and helps keep investors informed about the potential risks involved in cryptocurrency investments.
  • Significant Shift in Approach: The 2024 regulations mark a major transformation in India’s management of digital assets. This change reflects a growing acknowledgment of the need for a structured regulatory framework to address the complexities and risks associated with cryptocurrencies.
  • Classification of Digital Assets: The updated framework introduces a clear classification system for digital assets. This includes distinct categories such as utility tokens and security tokens. Each category has tailored regulations to address its unique characteristics and associated risks.
  • Taxation Framework: A 30% tax on cryptocurrency income has been introduced to formalize the market and generate revenue. Additionally, a 1% tax deduction at source applies to transactions above ₹50,000, which helps in discouraging tax evasion and ensuring compliance.
  • Monitoring and Evaluation: The effectiveness of the updated regulations will be assessed through key performance indicators, such as market growth, investor protection metrics, and tax revenue. These indicators will provide insights into how well the regulations support the growth and stability of the cryptocurrency market in India.

Impact of 2024 Cryptocurrency Regulations in India: 

The regulatory landscape for cryptocurrencies in India has evolved significantly in 2024, reflecting a complex interplay of policy development, taxation, and compliance requirements. This analysis examines the impact of these regulations, backed by recent literature and policy reviews, to assess their effectiveness in achieving desired outcomes.

  • Market Stability and Investor Confidence: The introduction of clear tax regulations and AML/KYC requirements is expected to enhance investor confidence by providing a safer trading environment. However, the high tax rate may deter some investors, potentially stifling market growth. The lack of a comprehensive regulatory framework continues to create uncertainty, affecting long-term investment decisions.
  • Compliance Challenges for Businesses: The requirement for crypto businesses to comply with extensive KYC and AML regulations increases operational costs and complexity. Smaller firms may struggle to meet these requirements, leading to market consolidation where only larger players can thrive. This could reduce competition and innovation within the sector.
  • Enhanced Market Integrity: SEBI’s regulations, including the classification of digital assets and stringent disclosure requirements, have significantly improved market transparency. This has helped in reducing fraudulent activities and increasing investor confidence. Reports from the Press Information Bureau indicate a decline in market manipulation cases since the implementation of these guidelines (PIB, 2024).
  • Stabilized Economic Environment:  By controlling the impact of cryptocurrencies on monetary policy and financial stability, the RBI has supported a more stable economic environment. The International Monetary Fund’s report underscores that these measures have contributed to macroeconomic stability in India.
  • Systemic Risk Management: The RBI’s restrictions on banks and financial institutions from engaging in cryptocurrency transactions have effectively mitigated systemic risks. This approach has been instrumental in preserving financial stability and preventing potential disruptions to the monetary system.
  • Global Competitiveness: India’s regulatory alignment with international standards has enhanced its competitiveness in the global cryptocurrency market. The Financial Times has noted that India’s approach serves as a model for other emerging markets, potentially attracting international investments.

To sum it up, the 2024 cryptocurrency rules set by SEBI and RBI have done a great job of making the market more trustworthy, protecting investors, handling risks, and keeping the economy steady. They’ve also helped India stay competitive in the global crypto scene.

Emerging Issues of Cryptocurrency Regulations:

  • High Taxation Rates: The 30% tax on cryptocurrency transactions and the 1% TDS may deter retail investors and hinder market growth. The government should consider revising these rates to make them more competitive and encourage investment while ensuring compliance.
  • Regulatory Ambiguity: The absence of a comprehensive regulatory framework creates uncertainty for businesses and investors, affecting long-term planning. Regulators must expedite the finalization of the Cryptocurrency and Regulation of Official Digital Currency Bill to provide clarity and stability.
  • Compliance Burdens: Stricter AML/KYC requirements increase operational costs for crypto businesses, particularly for smaller firms. Industry associations should collaborate with the government to develop a tiered compliance framework that eases burdens on smaller entities while maintaining security standards.
  • Integration with Traditional Financial Systems: The integration of cryptocurrencies into traditional financial systems remains challenging due to concerns about volatility and systemic risk. Financial institutions should explore partnerships with crypto firms to develop hybrid products that mitigate risks while promoting innovation.
  • Global Regulatory Disparities: Differences in regulatory approaches across countries create confusion and complicate international operations for crypto businesses. International regulatory bodies should work towards harmonizing regulations to facilitate smoother cross-border transactions.

To address these new challenges, it’s important for everyone involved—the government, regulators, businesses, and consumer groups—to join forces. By working together and sharing ideas, India can create effective rules that both support innovation and protect consumers, all while keeping the market stable.

Way Forward

To enhance the effectiveness of the 2024 cryptocurrency regulation in India requires a multifaceted approach that addresses emerging challenges while maintaining a balance between fostering innovation and ensuring consumer protection. Policymakers must revisit the current tax structure, considering revisions to make rates more competitive and encourage investment, while ensuring compliance with necessary regulations. The finalization of the Cryptocurrency and Regulation of Official Digital Currency Bill should be expedited to provide the much-needed clarity and stability that businesses and investors seek.

Additionally, regulators should work closely with industry associations to develop tiered compliance frameworks that ease the burden on smaller entities without compromising on security standards. This collaborative effort will help create an environment conducive to the growth of crypto businesses, particularly startups and SMEs, which are crucial for driving innovation.

Furthermore, engaging with global regulatory bodies to harmonize cross-border regulations will facilitate smoother international operations and enable Indian crypto firms to expand their reach. As the pace of technological advancement in the crypto space continues to accelerate, regulators must adopt a proactive approach, involving tech experts in the regulatory process to stay ahead of innovations and address potential gaps in oversight. By implementing these measures and addressing emerging issues, India can position itself as a leader in the crypto space, contributing to the broader vision of a New India that embraces technological innovation and financial inclusion as drivers of economic progress and social development.

Selected References and Important Links

About the Contributor: Dipannita Saha is an intern at IMPRI. She is  a MA(Economics) student from the Center for Economic Studies and Planning, Jawaharlal Nehru University.

Acknowledgement- The author would like to thank Anamitra Sinha and Geetam Acharya for reviewing their article.

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