Virtual Digital Assets: Its Significance & Regulation

Context (TH): India’s Crypto Conundrum: India leads globally in grassroots adoption of Virtual Digital Assets. Yet, an ambiguous and restrictive regulatory approach contrasts sharply with this growth.

What are Virtual Digital Assets?

Virtual Digital Asset (VDA) is a digitally stored, transferable, or tradable representation of value, not necessarily backed by any government or central authority.
They leverage blockchain technology for security and transparency.

Cryptocurrencies are digital currencies secured through cryptographic methods, enabling secure & decentralised transactions. Used for making payments & acting as a store of value similar to digital gold. E.g. Bitcoin, Ethereum.
Non-Fungible Tokens (NFTs) are unique, non-interchangeable digital tokens that certify ownership of a specific asset or content. Used to represent digital ownership of items such as art, music, videos, or even virtual real estate, and are typically bought and sold using cryptocurrencies.
Other Digital Assets include tokenized forms of physical or intangible assets, such as real estate, commodities like gold, or digital representations of property rights and personal identities. These assets aim to increase liquidity, transparency, and security in ownership and transactions.

2013: RBI first raised concerns about cryptocurrencies due to their decentralised, unauthorised nature.
2018: RBI banned financial institutions from dealing with crypto-related entities.
2020: Supreme Court overturned the RBI ban, allowing crypto activities to resume.
2022: Government imposed 1% TDS on VDA transactions above ₹10,000 and a 30% capital gains tax, without allowing loss offsets.
2023: VDAs were brought under the Prevention of Money Laundering Act (PMLA).
2025: The Income Tax Bill, 2025, explicitly classified VDAs as property and capital assets, aligning with countries like the UK, US, and Australia.

United States: VDAs taxed as property and Securities and Exchange Commission (SEC) monitors crypto as securities.
UK & Australia: Classified as property, taxed under capital gains rules.
Global Consensus (IMF, FATF, FSB): Advocate for risk-based, internationally harmonized regulation relying on domestic, compliant intermediaries—Virtual Asset Service Providers (VASPs).

Economic Opportunity: Over $6.6 billion invested by Indian retail investors.
Employment: Potential to create 800,000+ jobs by 2030.
Developer Ecosystem: India has one of the fastest-growing blockchain developer communities globally.
Technological Leadership: India’s participation in Web3 innovation can position it as a global digital powerhouse.
Tax Revenue: Proper regulation could recover thousands of crores in lost revenue currently slipping offshore.

Regulatory Ambiguity: No clear law governing VDAs, pushing VDA users to offshore, non-compliant platforms, eroding the country’s ability to mitigate risks presented by VDAs, as well as tax revenues.
Over-Reliance on Taxation: Tax-heavy policies without protective or enabling regulation.
Capital Controls Clash: India’s tight monetary controls don’t align well with decentralised digital assets.
Ineffective Enforcement: URL blocking of foreign exchanges has been bypassed using VPNs, mirror sites, or by switching platforms.
Security Risks: The $230 million cyberattack in 2024 underscored vulnerabilities in the sector.

Comprehensive Legislation: Move beyond taxation; enact laws that clearly define rights, obligations, and safeguards for VDA stakeholders.
Enable VASPs: Encourage domestic platforms through licenses, regulatory sandboxes, and public-private collaboration.
Investor Protection: Establish transparent disclosure norms, grievance redress mechanisms, and insurance requirements.
Global Harmonisation: Align with international standards from bodies like FATF, IMF, and FSB to facilitate cross-border trade and avoid regulatory arbitrage.
Digital Infrastructure: Strengthen India’s technological backbone, cybersecurity, and blockchain frameworks.
Avoid Blanket Bans: Embrace innovation while regulating responsibly—bans push users to underground platforms, increasing risk and reducing oversight.