4.1 The Post-IAMAI Period: March 2020 to Present
The Supreme Court's judgment in IAMAI v. RBI on March 4, 2020 created a new regulatory landscape for cryptocurrency in India. While the banking prohibition was lifted, the judgment coincided with the COVID-19 pandemic and subsequent regulatory developments that continued to shape the industry.
Immediate Impact of the Judgment
The IAMAI judgment had several immediate effects:
- Banking Services Restored: Banks could no longer refuse services to cryptocurrency businesses based on the struck-down Circular
- Exchanges Resumed: Major exchanges that had suspended INR trading resumed operations
- Trading Volumes Surged: Pent-up demand led to significant increases in trading activity
- New Market Entrants: International exchanges began exploring Indian market entry
Timeline of Post-IAMAI Developments
Despite the IAMAI victory, the regulatory environment remains uncertain. No comprehensive cryptocurrency legislation has been enacted, and the government has sent mixed signals about its long-term policy. Practitioners must navigate this uncertainty carefully.
4.2 RBI's Post-Judgment Stance
Following the IAMAI judgment, RBI has not issued any new comprehensive cryptocurrency circular. However, the central bank has maintained its cautionary stance through public communications and has continued to express concerns about virtual currencies.
RBI's May 2021 Clarification
In May 2021, RBI issued a clarification after reports that banks were continuing to deny services to crypto customers:
"It has come to our attention that certain banks/regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular dated April 06, 2018. Such references to the said circular by banks/regulated entities are not in order as the circular was set aside by the Hon'ble Supreme Court on March 04, 2020."
The clarification also noted that banks should carry out customer due diligence in line with KYC/AML requirements, but cannot blanketly refuse services citing the struck-down Circular.
Continued RBI Concerns
Despite the clarification, RBI has continued to express strong reservations about cryptocurrencies:
- Financial Stability: RBI Governor has repeatedly warned about financial stability risks
- Monetary Policy: Concerns about impact on rupee and monetary policy transmission
- Consumer Protection: Warnings about speculative nature and potential for losses
- CBDC Preference: RBI has advocated for Central Bank Digital Currency (Digital Rupee) as alternative
"Private cryptocurrencies are a big threat to our financial and macroeconomic stability... They can also be used for money laundering and terror financing." RBI Governor Shaktikanta Das, December 2021
Banking Sector Response
Banks have adopted varying approaches post-IAMAI:
| Bank Category | Typical Approach |
|---|---|
| Private Sector Banks | Generally providing services with enhanced due diligence |
| Public Sector Banks | More cautious; some continue informal restrictions |
| Payment Banks | Mixed approach; some actively support crypto platforms |
| NBFCs | Generally more willing to engage with crypto sector |
Clients may still face informal banking restrictions. If a bank refuses services, advise: (1) request written reasons; (2) cite RBI's May 2021 clarification; (3) file complaint with Banking Ombudsman; (4) consider writ petition if banking access is essential to business.
4.3 Taxation Framework for Virtual Digital Assets
The Finance Act, 2022 introduced a comprehensive taxation framework for Virtual Digital Assets (VDAs), marking the first explicit statutory recognition of cryptocurrencies in Indian law. While not a regulatory framework, the taxation provisions have significant implications for the industry.
Definition of Virtual Digital Asset
The definition explicitly includes:
- Cryptocurrencies: Bitcoin, Ethereum, and other crypto tokens
- NFTs: Non-fungible tokens are specifically mentioned
- Any Other Token: Central Government may notify additional tokens
Section 115BBH: 30% Tax on VDA Income
Income from transfer of VDAs is taxed at a flat 30% rate:
| Provision | Detail |
|---|---|
| Tax Rate | 30% flat rate (plus surcharge and cess) |
| Deductions Allowed | Only cost of acquisition - no other deduction |
| Loss Set-off | Not allowed against any other income |
| Loss Carry Forward | Not permitted |
| Basic Exemption | Not available - tax payable from first rupee of profit |
The 30% flat tax with no set-off provisions is significantly harsher than taxation of other speculative activities. Stock market profits are taxed at 10-15% (long-term) or 15% (short-term) with set-off and carry-forward available. This differential treatment may be vulnerable to Article 14 challenge, though no case has yet tested this.
Section 194S: 1% TDS on VDA Transfers
A 1% Tax Deducted at Source (TDS) applies to VDA transfers:
- Rate: 1% of consideration
- Deductor: Person responsible for paying (typically exchange or buyer in P2P)
- Threshold: Rs. 50,000 in a year (Rs. 10,000 for specified persons)
- Effective Date: July 1, 2022
Section 115BBH: Gifts of VDAs
Gifts of VDAs are taxable in the hands of the recipient:
- Taxability: Fair market value taxable as income from other sources
- Exemptions: Limited exemptions for gifts from relatives or on occasions like marriage
- Valuation: FMV determined as on date of transfer
Key tax planning points: (1) Maintain detailed records of acquisition cost with supporting evidence; (2) Consider timing of transfers across financial years; (3) Be aware that staking rewards and airdrops may be taxable; (4) International transfers may have FEMA implications; (5) Mining income treatment unclear - conservative approach is to treat as business income.
Compliance Obligations
Cryptocurrency users and businesses have significant compliance obligations:
- Record Keeping: Maintain records of all transactions, acquisition costs, and sale proceeds
- TDS Compliance: Exchanges must deduct and remit 1% TDS; file TDS returns
- ITR Disclosure: VDA holdings and transfers must be disclosed in income tax returns
- Advance Tax: Pay advance tax on estimated VDA profits
- Foreign Assets: Offshore exchange holdings may require Schedule FA disclosure
4.4 Proposed Legislative Framework
The Indian government has repeatedly announced intentions to introduce comprehensive cryptocurrency legislation, but as of the date of this course, no such legislation has been enacted. Understanding the proposed frameworks is essential for anticipating future regulatory developments.
Chronology of Legislative Proposals
Expected Features of Future Legislation
Based on official statements and leaked drafts, future legislation may include:
Likely Provisions
- Definition of Cryptocurrency: Legal definition distinguishing different types of tokens
- Regulatory Authority: Designation of regulator (likely RBI for payments, SEBI for securities)
- Licensing Regime: Registration/licensing requirements for exchanges and service providers
- KYC/AML Requirements: Mandatory customer verification and anti-money laundering measures
- Consumer Protection: Disclosure requirements, risk warnings, and dispute resolution
- CBDC Framework: Legal basis for RBI's Digital Rupee
Uncertain Elements
- Ban vs. Regulation: Whether private cryptocurrencies will be banned or regulated
- Exceptions: Which cryptocurrencies/use cases might be exempted from restrictions
- Existing Holdings: Treatment of cryptocurrencies already held by Indians
- Mining: Whether cryptocurrency mining will be permitted
- DeFi: How decentralized finance protocols will be treated
Any future legislation must account for IAMAI v. RBI. While Parliament has broader powers than RBI, a blanket ban on cryptocurrency would still need to satisfy Article 19(1)(g) and 19(6). The proportionality analysis in IAMAI suggests that a total prohibition would face constitutional challenge unless demonstrated to be necessary and proportionate.
4.5 International Regulatory Approaches
India's cryptocurrency policy is being developed in the context of evolving international approaches. Understanding how other jurisdictions regulate cryptocurrencies provides useful comparative frameworks and may influence Indian policy.
Comparative Regulatory Models
| Jurisdiction | Approach | Key Features |
|---|---|---|
| United States | Multi-regulator | SEC (securities), CFTC (commodities), FinCEN (AML), state licenses |
| European Union | MiCA Regulation | Comprehensive framework for crypto-assets; licensing; stablecoin rules |
| United Kingdom | Regulatory | FCA registration for AML; securities rules apply to security tokens |
| Singapore | Regulatory | Payment Services Act licensing; securities regulation for tokens |
| Japan | Regulatory | Comprehensive framework; exchange licensing; user protection |
| China | Prohibition | Ban on trading and mining; developing CBDC |
| El Salvador | Legal Tender | Bitcoin adopted as legal tender alongside USD |
Emerging International Consensus
Several principles are emerging from international regulatory efforts:
- Same Activity, Same Risk, Same Regulation: Crypto performing functions similar to traditional finance should face similar regulation
- Technology Neutrality: Regulation should focus on activities, not specific technologies
- Risk-Based Approach: Regulatory intensity should correspond to risk level
- International Coordination: Cross-border nature requires coordinated approach
- Consumer Protection: Mandatory disclosures and investor protection measures
FATF Guidance
The Financial Action Task Force (FATF) has issued guidance on Virtual Asset Service Providers (VASPs):
- Travel Rule: VASPs must share originator/beneficiary information for transfers above threshold
- KYC Requirements: Customer due diligence obligations similar to traditional finance
- Transaction Monitoring: Suspicious activity monitoring and reporting
- Licensing/Registration: VASPs should be licensed or registered
When advising clients or challenging regulations, international approaches can be valuable: (1) Demonstrate less restrictive alternatives exist (key for proportionality); (2) Show workable regulatory models; (3) Argue for competitive neutrality; (4) Reference FATF compliance alternatives to bans.
4.6 Current Legal Status: A Practical Summary
Given the complex and evolving regulatory landscape, practitioners need a clear understanding of what is and is not permitted under current law. This section provides a practical summary of the current legal status of various cryptocurrency activities in India.
What is Clearly Legal
- Holding Cryptocurrency: No law prohibits holding/owning cryptocurrencies
- Buying/Selling: Trading cryptocurrencies is legal (subject to taxation)
- Operating Exchanges: Legal, though no specific regulatory framework exists
- Blockchain Development: Developing blockchain applications is legal
- NFT Creation/Trading: Legal and increasingly common
- Banking Services: Banks cannot refuse services solely based on crypto involvement
What is Unclear/Grey Area
- Mining: Not explicitly addressed; likely legal but tax treatment unclear
- Staking: Legal but tax treatment of rewards uncertain
- DeFi Participation: Novel structures may have unaddressed regulatory implications
- Token Launches (ICOs/IDOs): May trigger securities law; high legal risk
- Cross-Border Transfers: FEMA implications unclear
- Accepting Crypto as Payment: Legal but accounting/tax treatment complex
What is Prohibited/High Risk
- Securities Without Registration: Tokens meeting securities definition require SEBI compliance
- Deposit Taking: Accepting deposits from public requires RBI license
- Operating Without KYC: AML/KYC requirements apply; non-compliance is offense
- Money Laundering: PMLA applies to cryptocurrency transactions
- Tax Evasion: Failure to report/pay tax on crypto income is prosecutable
For clients operating in the cryptocurrency space: (1) Implement robust KYC/AML procedures; (2) Maintain complete transaction records; (3) Ensure tax compliance; (4) Avoid promotional claims that might trigger securities concerns; (5) Stay informed of regulatory developments; (6) Consider regulatory engagement and industry association membership.
Key Takeaways from Part 4
- IAMAI restored banking access but comprehensive regulation remains pending
- RBI maintains cautionary stance but cannot cite struck-down Circular
- 30% tax on VDA income with 1% TDS creates significant compliance obligations
- Legislation repeatedly deferred - regulatory uncertainty continues
- International approaches vary from prohibition to legal tender status
- Current status: Legal to hold/trade but with tax obligations and no regulatory framework
- Future regulation must satisfy proportionality per IAMAI