The rapid expansion of the global Virtual Digital Assets (VDAs) market presents India with an opportunity to define its regulatory approach. Striking the right balance between fostering innovation in this fast-growing sector and implementing effective risk management measures is essential. By drawing on the regulatory experiences of other nations, India can develop a framework that ensures both stability and growth. During its G20 Presidency, India emerged as a leading advocate for standardizing regulatory frameworks for VDAs globally, championing international collaboration to address the inherently cross-border nature of VDAs and the imperative to mitigate the macro-financial implications associated with them.
Around the world, regulatory progress in the VDA sector has been swift and decisive. The European Union’s Markets in Crypto-Assets (MiCA) Regulation came into effect in 2024, marking a milestone in structured oversight of the sector in the EU. Dubai’s International Financial Centre (DIFC) introduced the world’s first Digital Assets Law, solidifying its position as a leading financial hub in the Middle East. Meanwhile, global markets witnessed significant developments, from the approval of Bitcoin Exchange-Traded Funds (ETFs) in the U.S. to the advancement of the G20 Roadmap on VDAs and the adoption of FATF Standards by Virtual Asset Service Providers (VASPs). The re-election of Donald Trump further amplified momentum, as a wave of pro-crypto sentiment saw Bitcoin surge past the $100k mark. The Trump administration has made significant moves toward crypto adoption, including an executive order establishing a crypto working group tasked with proposing new digital asset regulations and exploring the creation of a national crypto stockpile. Additionally, the administration has appointed venture capitalist David Sacks as the White House AI and Crypto Czar and introduced a specialized crypto task force under the U.S. Securities and Exchange Commission.
Despite the rapid advancements in major economies, India’s regulatory landscape for VDAs remains a work in progress. The announcement of a Discussion Paper in 2024 was a significant milestone. While there has been a delay in its release, the Department of Economic Affairs (DEA) Secretary’s recognition of the need to reassess India’s stance in response to global developments highlights a strategic and adaptive approach. This thoughtful reassessment ensures India’s regulatory framework aligns with international best practices while fostering innovation and stability in the VDA sector.
Regulating VDAs: The Way Forward
The VDA & Web3 ecosystem in India presents immense potential. The ‘India’s Web3 Landscape 2024’ report by Hashed Emergent highlights India’s emergence as a global Web3 leader, accounting for 11.8% of the global VDA developer base and ranking as the second-largest developer market worldwide. Indian founders contribute to 5.4% of global Web3 startups. The developer ecosystem has witnessed remarkable growth, with a 28% increase in 2024 alone. Projections indicate that India is on track to surpass the United States as the largest global developer community by 2028. This growth underscores the importance of creating a conducive regulatory environment that nurtures innovation while ensuring responsible adoption.
Hence, the focus is no longer on WHETHER to regulate VDAs but on WHEN and HOW to regulate them effectively. The key question now is what aspects regulators must consider while shaping a framework that fosters growth while ensuring guard rails.
India’s Web3 sector holds immense potential, and while its current trajectory is promising, balanced regulations will determine how effectively the country can capitalize on it. Strategic policy measures can drive innovation, enhance the Ease of Doing Business and Ease of Living, and unlock the sector’s full value. To achieve this, the government must take a targeted approach by empowering entrepreneurs, developers, and the tech workforce. Establishing specialized centres of excellence, investing in skill development, and fostering regulatory sandboxes will be crucial in promoting responsible innovation and long-term growth.
On the operational front, C-KYC access should be extended to FIU-IND registered compliant exchanges to ensure seamless compliance. Additionally, several banks continue to deny banking services and Merchant Category Codes for VDA-related transactions. Addressing these operational inefficiencies is essential to benefit businesses, customers, and the government alike.
Taxation remains a significant challenge for the sector. The Finance Bill 2025 has proposed amendments to the definition of VDAs and introduces mandatory reporting requirements for crypto-asset transactions, aligning India with global efforts to enhance transparency and ensure tax compliance. However, no tax reliefs have been provided in this budget, leaving the existing high tax burden on the sector unchanged. India needs to develop a user-friendly tax regime for the VDA sector and re-examine the prescriptions made in the Union Budget of February 2022. The high rate of TDS, disallowing offset/carry forward of losses, and a flat 30% tax on gains have forced Indian VDA users to shift their trading and businesses to offshore exchanges (and other informal channels), resulting in lack of oversight on these transactions, loss of revenue to the Govt and increased ML/TF risks. With greater government oversight via PMLA provisions, as well as the tax provisions on compliant domestic trading platforms, it is an opportune time to offer a gradual and graded relief to the VDA and Web3 sector by at least allowing for set-off or carry forward of losses arising from transfer of VDAs as per the prevailing income-tax laws, and following this up by reducing the rate of TDS on VDA transactions to, say 0.01%, and refining the provisions for tax on profits to bring it on par with other capital assets.
India has a unique opportunity to shape the future of VDA regulation, especially following its G20 Presidency. While an all-encompassing legislative framework may not be feasible immediately, the government’s announcement of a discussion paper marks a critical first step. The next step is to release the paper and initiate a broad-based consultative process with all concerned stakeholders. Such an engagement, together with the feedback received, can lay the groundwork for a well-structured regulatory framework for VDAs in India.
With global momentum shifting toward crypto asset regulation, India has a unique opportunity to position itself at the forefront of this space. By developing a comprehensive regulatory framework, India can not only ensure the responsible use of VDAs but also establish itself as a global
