The divergence raises a broader question: can India continue taxing and monitoring crypto activity without creating a comprehensive regulatory framework for the sector?
Taxed, monitored, but not recognised
Legal experts argue that taxation and recognition are two separate policy choices.
“Taxing VDAs demonstrates that the government has acknowledged that transactions in crypto create taxable income and therefore fall under the government’s authority,” said Sana Raees Khan, founder of SRK Legal.
However, she added that taxation does not amount to legal recognition or endorsement. According to Khan, the tax framework merely captures revenue from an existing economic activity and should be viewed as fiscal recognition rather than regulatory recognition.
That distinction helps explain India’s current approach. The government has chosen to bring crypto transactions within the tax net and AML framework, while the central bank continues to warn against broader financial integration of such assets.
Aditya Bharadwaj, team lead at the Centre for Law, Policy and Governance, NFPRC Foundation, said policymakers largely view cryptocurrencies as “speculative instruments” that contribute little to the real economy.
Rather than imposing a complete ban, which could drive activity underground, authorities have opted to retain visibility over transactions through taxation and AML compliance while discouraging wider adoption.
The limits of an AML-only framework
India’s regulatory architecture currently centres on financial crime compliance.
FIU registration requires crypto service providers to conduct customer due diligence, monitor transactions and report suspicious activity. Experts stress that these obligations do not amount to full market regulation.
“FIU registration addresses financial integrity, but institutional confidence also depends on clarity around licensing, consumer protection, custody standards, operational risk and regulatory oversight,” said Edul Patel, founder and chief executive officer of Mudrex.
Sana Raees Khan further said that FIU registration places crypto entities within the AML framework but does not regulate cryptocurrencies as investment assets or provide investor protections.
The absence of a broader legal framework has left major gaps, experts say.
Investors lack many of the safeguards available in regulated financial markets, including standardised disclosure requirements, compensation mechanisms, uniform custody rules and formal grievance redressal systems, according to Khan.
Dr Kanishk Agrawal, chief technology officer at Judge Group India, said the current framework separates taxation and compliance from legal recognition, creating uncertainty for businesses and investors alike.
While the government taxes crypto transactions and requires AML compliance, there remains no overarching legislation defining the legal status of digital assets or the rights and obligations of market participants, he added.
Can the status quo last?
For now, several experts believe the arrangement can continue.
Bharadwaj argued that cryptocurrencies such as Bitcoin have limited economic utility beyond speculation, which makes a “regulated but not recognised” framework sustainable if the government’s objective remains preventing misuse while allowing blockchain innovation to develop.
Nilesh Choudhary, founder and chief executive officer of Aikyam Capital Group, said India has deliberately separated oversight from recognition.
He said that the country already has 54 FIU-registered VDA service providers and nearly 39.3 million KYC-verified crypto users holding assets worth around ₹20,437 crore.
Given that scale, Choudhary said visibility and consumer safeguards are becoming increasingly important before any discussion on formal recognition.
Yet others argue that maintaining the current approach indefinitely could become difficult.
“The longer that there is no comprehensive legal framework, the more ambiguous areas of the law become,” Khan said, pointing to unresolved questions around consumer protection, dispute resolution, inheritance, insolvency proceedings and cross-border transactions.
Industry participants also contend that regulatory uncertainty is affecting investment and market development.
Patel said exchanges currently comply with taxation, reporting and AML requirements but operate without a dedicated regulatory framework defining digital assets or market conduct standards. This, he said, creates uncertainty for investors and complicates long-term institutional participation.
Sathvik Vishwanath, co-founder and chief executive officer of Unocoin, said many investors who pay taxes on crypto transactions naturally expect a clear legal framework governing their rights and obligations. Instead, uncertainty remains over future regulatory treatment and dispute resolution mechanisms.
Has taxation pushed activity offshore?
The tax regime itself remains a contentious issue. Industry executives argue that high taxation has not reduced demand for digital assets.
Patel cited a KoinX report showing that nearly 73 per cent of Indian crypto trading volumes in 2025 occurred on offshore platforms. He argued that excessive taxation can influence where trading takes place rather than eliminating it altogether.
Adding to Patel’s point, Vishwanath said the introduction of the 1 per cent TDS led many high-frequency traders to migrate to offshore exchanges, which has reduced liquidity on compliant domestic platforms while doing little to curb overall trading activity.
Stablecoins emerge as the bigger concern
While public attention often focuses on Bitcoin and other cryptocurrencies, experts say the RBI’s deeper concern increasingly centres on stablecoins.
Bharadwaj described stablecoins as a bigger challenge because they are designed to function as money.
Unlike Bitcoin, whose volatility limits its use in everyday transactions, stablecoins seek to maintain a stable value, typically by being pegged to a fiat currency such as the US dollar.
“A private, borderless, dollar-denominated form of money is exactly what a central bank cannot tolerate proliferating inside its economy,” he said.
The concern extends beyond consumer protection.
According to Bharadwaj, stablecoins could allow users to move value across borders outside India’s formal foreign exchange system, potentially bypassing existing reporting and capital control mechanisms.
Anuj Gaur, director at IBBM Pvt Ltd, said dollar-backed stablecoins could facilitate cross-border transfers outside the traditional banking system, which could potentially affect monetary policy transmission and increasing dependence on foreign currency-linked assets.
Gautam Rege, co-founder of Josh Software, said that central banks globally are more concerned about stablecoins than conventional cryptocurrencies because stablecoins are designed to function as money rather than speculative assets.
While they are unlikely to replace payment infrastructure such as UPI, they could become significant competitors in areas such as remittances, cross-border transfers and programmable financial transactions.
The RBI’s concern, experts say, is ultimately tied to monetary sovereignty.
“Stablecoins raise a further issue — the widespread use of dollar-linked tokens could shift activity outside domestic payment rails and complicate monetary policy transmission,” Choudhary said.
How India compares globally
Compared with major global markets, India’s approach remains unusual.
Manhar Garegrat, India head at Liminal Custody, said most mature jurisdictions have moved beyond AML-focused oversight and are building comprehensive frameworks governing the entire lifecycle of digital assets, including issuance, custody, trading and consumer protection.
The European Union’s Markets in Crypto-Assets (MiCA) framework, for instance, establishes a detailed rulebook covering issuers, service providers, governance requirements and consumer safeguards.
Singapore relies on a licensing regime emphasising financial integrity and operational resilience, while the United Kingdom is integrating digital assets into its broader financial regulatory architecture.
Garegrat said India remains relatively unusual in simultaneously imposing taxation while withholding recognition as a regulated financial asset class.
That does not mean India is alone in separating regulation from recognition. Several jurisdictions regulate crypto service providers without treating cryptocurrencies as legal tender or traditional financial assets. However, most have paired that approach with clearer licensing and supervisory frameworks than India currently has.
What comes next?
Dinkar Sharma, company secretary and partner at Jotwani Associates, said any future crypto legislation would need to balance legal certainty with innovation while ensuring adequate investor protection.
According to him, a comprehensive framework should clearly classify different categories of digital assets, identify the appropriate regulatory authorities, and establish licensing standards for exchanges, custodians, brokers and wallet providers.
“It should also address consumer protection, disclosure and governance norms, cybersecurity and risk management requirements, safeguards against fraud and market manipulation, as well as rules governing stablecoins, token issuances, decentralised finance, cross-border transactions, insolvency treatment of customer assets, taxation and enforcement,” Sharma said.
Industry participants say they would support stricter oversight if it comes with legal certainty.
“The objective should not simply be more regulation or less regulation, but smarter regulation that is proportionate to the risks involved,” Patel said.
As of now, experts say India’s approach remains a balancing act.
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