India's relationship with cryptocurrencies is complex, marked by both enthusiasm and caution. While the nation leads the world in crypto adoption, the government and Reserve Bank of India (RBI) have expressed concerns about potential risks to financial stability. This has resulted in a somewhat ambivalent regulatory landscape, with the government seemingly hesitant to fully embrace crypto as a mainstream financial instrument. However, a more nuanced perspective is needed: India should recognize and leverage cryptocurrencies and blockchain technology not just as assets, but as vital components of its digital infrastructure.
India's crypto market has seen remarkable expansion, driven by rapid technological advancements and a growing user base. Chainalysis reports that India leads the world in grassroots crypto adoption, demonstrating the technology's widespread appeal and integration into the financial lives of many Indians. This adoption is fueled by increasing familiarity with DeFi platforms and digital financial services. Minister Jayant Chaudhary has even disclosed his own crypto investments, signaling growing mainstream interest. This surge in adoption underscores the need for a clear and comprehensive regulatory framework that can protect investors and foster innovation.
Currently, India imposes a flat 30% tax on income from the transfer of virtual digital assets (VDAs) such as cryptocurrencies and NFTs. Additionally, a 1% Tax Deducted at Source (TDS) is levied on transactions exceeding ₹50,000 (approximately $600 USD). While these measures generate revenue for the government, they have also been criticized for their strictness and potential to stifle trading activity. According to a survey by the Indian exchange Mudrex, 93% of respondents support cryptocurrency regulation in the country. The survey also indicated that 90% of respondents would invest more if government policy became clearer and taxes more balanced.
The RBI has voiced concerns that regulating cryptocurrencies could legitimize the sector and increase systemic financial risks. The central bank worries about the potential for increased speculation and the difficulty of controlling peer-to-peer (P2P) transfers and operations on decentralized exchanges. While an outright ban could address some risks, it would be difficult to enforce in practice. The RBI is also concerned that the widespread use of stablecoins could weaken India's digital payment systems, including UPI. Instead of permanent regulations, authorities plan to maintain partial oversight.
However, the benefits of viewing crypto as digital infrastructure are numerous. Blockchain technology, the foundation of most cryptocurrencies, offers solutions for enhancing trust, security, and transparency across various sectors. For example, blockchain can be used to create immutable land registries, reduce corruption, and streamline supply chains. States like Maharashtra and Andhra Pradesh have already begun using blockchain for land record digitization.
Moreover, a clear regulatory framework can foster innovation and institutional participation in crypto markets. It can also help to mitigate risks by establishing compliance standards and protecting investors from fraud and scams. By embracing crypto as digital infrastructure, India can position itself as a leader in the global digital economy. Pi42, India's first INR-settled crypto perpetual futures exchange, is an example of a company building infrastructure for India's crypto future. By focusing on INR-settled perpetual futures, solving taxation pain points, and investing in technology, Pi42 aims to give Indian traders the tools they need within the country's regulatory framework.
To fully realize the potential of cryptocurrencies and blockchain, India needs to shift its perspective and develop a comprehensive regulatory framework that balances innovation with risk management. This framework should provide clarity on taxation, promote investor protection, and encourage the development of blockchain-based solutions for various sectors. By viewing crypto as digital infrastructure, India can unlock its transformative potential and build a more efficient, transparent, and inclusive digital economy.
