Summary
- India leads world for second year running in crypto adoption, despite the government’s crackdown on the sector.
- India has little legislation governing the sector but has imposed high tax rates in an effort to deter use.
- Different ruling bodies have differing attitudes towards crypto and its development in the country, with crypto supporters hoping for a change in stance.
- For more stories like this, take a look at the Crypto in Action series.
What is driving high adoption rates?
India topped the Chainalysis global cryptocurrency adoption ranking for a second year, ranking high on the use of centralized exchanges and decentralized finance assets between June 2023 and July 2024.
The survey revealed a good spread of adoption throughout different crypto assets, suggesting that those new to the sector are using services that aren’t banned.
How do Indians use crypto?
A survey conducted in June 2023, revealed that approximately 20% of the population owns cryptocurrency. Bitcoin and Ethereum are the most popular coins and take up is highest in the top half of the country. The three primary reasons given for interest in the sector were curiosity, the hope for long-term returns and the desire to diversify portfolios.
More recently, in April 2024, it emerged that a section of wealthy Indians were using their annual remittance quotas to buy spot-Bitcoin exchange-traded funds (ETFs). Citizens are permitted to remit up to $250,000 each financial year. One platform, Vested Finance, had recorded more than $5.3 million in Bitcoin ETF trading volumes, 67% of which were buy orders.
Is crypto legal in India?
The country has no regulation relating to virtual digital assets (VDAs), and they are not prohibited. That said, the government does not consider cryptocurrencies to be legal tender.
The authorities have imposed high taxation rates on the sector, which some have argued constitutes a first step towards recognizing cryptocurrencies and widens the debate of their legality in India.
What is the government’s attitude towards crypto?
Overall, the government has taken a harsh line on crypto since 2018. Taxation rates of 30% and 1% have been imposed on capital gains from cryptocurrencies and TDS, respectively, on virtual digital assets (VDAs).
In 2018, the Reserve Bank of India (RBI, central bank), prohibited lenders and other financial intermediaries from dealing with crypto exchanges and their users. The RBI said that cryptocurrencies could lead to tax evasion and that P2P activities would rely on voluntary compliance. Overall, it deemed this a risk to fiscal stability. This was challenged in the courts and in 2020 the Supreme Court reversed the decision.
Subsequently, the government has not regulated the exchange of cryptocurrencies but instead raised the spectre of terrorist financing. As a result, in March 2023 the RBI called on financial institutions to comply with strict money-laundering and foreign exchange rules.
In 2021, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was introduced into the lower house (Lok Sabha). The intent was to create a favorable framework for the central bank, the RBI, to create a digital currency, but was pulled before being debated. It has not been reintroduced, despite speculation.
In the face of growing crypto activity, the authorities introduced tax on crypto transactions during the 2022 budget, and followed this with a request that all exchanges register locally before facilitating domestic transactions.
The authorities have previously said that given the global nature of cryptocurrencies, there should be a global framework to regulate these assets. It reiterated this position during its G20 presidency in 2023 And fears appear reflected in the action that has been taken against offshore crypto exchanges.
How have government fears about crypto manifested themselves?
Offshore crypto exchanges have, arguably, borne the brunt of government action. In December 2023, the Financial Intelligence Unit (FIU) issued show-cause notices to nine such exchanges over a failure to comply with local regulations. On the back of this, in January 2024, apps related to cryptocurrency exchanges, like Binance, were removed for download in India.
By mid-year, several exchanges faced fines, which in the case of Binance ran to 188.2 million rupees (approximately $2.25m), for failing to adhere to India’s laws against money laundering when providing services to Indian clients.
Several of the exchanges, including Binance and KuCoin, reregistered with the FIU, and after paying the fines and proving that they were in line with AML and KYC legislation, were allowed to resume operations in August 2024.
Are there changes afoot?
There are differences in opinion on how the sector should be regulated, with the Securities and Exchange Board of India (SEBI) keen – like the crypto community – to have a multi-agency approach, with different departments overseeing the areas that are most relevant to their work, rather than having one overarching regulator.
SEBI has reportedly said that it could monitor cryptocurrencies in their securities form and Initial Coin Offerings (ICO), along with issuing licenses for equity market-related products.
The publication of a consultation paper on cryptocurrency legislation issued by the Department of Economic Affairs (DEA) had been expected in September 2024, but this has not been forthcoming. When it is released, the paper is expected to seek feedback from stakeholders about the future of digital currencies in India.
Although the authorities have taken a harsh line on crypto development, they have encouraged the use of blockchain and the RBI has developed a central bank digital currency (CBDC), the digital rupee, which became available for use in 2023. It is not subject to the same taxation as cryptocurrency transactions, and according to the bank, secured 5 million users by July 2024.
This is, however, a relatively low number, likely reflecting the popularity of India’s very popular Unified Payments Interface (UPI), a real-time payment system that was introduced in 2016 to facilitate instant mobile payments.
The authorities have restricted crypto exchanges’ access to UPI. This makes it very difficult to on-ramp and off-ramp using the payment network. The sector has lobbied for access, but as yet, no progress has been made.
Timeline of events
2021 – the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced into the Lok Sabha (lower house) but pulled in the final days of the parliament.
February 2022 – The Advertising Standards Council of India announced guidance (which came into effect in April that year) related to crypto and NFT advertising.
2022 – the union (federal) budget presented a tax regime for VDAs, including cryptocurrencies.
May 2023 – the FIU asked the Ministry of Electronics and Information Technology to block online access to cryptocurrency exchanges.
December 2023 – the FIU issued show-cause notices to nine offshore cryptocurrency exchanges.
June 2024 – Binance was fined 188.2 million rupees.
The same month, Finance Minister Nirmala Sitharaman kept crypto tax regulations unchanged during the budget. The industry had called for a reduction in the tax deducted at source rate from 1% to 0.01%, and a progressive tax on gains rather than the flat 30% rate.
August 2024 – Binance secured its re-entry into the Indian market.
Outlook for India’s crypto adoption
Its notable that crypto adoption remains high – and seemingly growing – despite the government’s tough line. Plus, it is hoped that now large, international exchanges like Binance are operating, adoption will continue to rise.
There are, however, a lot of unanswered questions, which depending on the answers, would either dampen enthusiasm for the sector or see it grow exponentially. In this respect, two key documents – the delayed discussion paper and the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 – are eagerly awaited in the hope that they will provide clarification and open up debate about crypto.
One area that is unclear is how much of a challenge India’s UPI system poses to crypto adoption. UPI is widely popular for payments, including – as the system has become available internationally – to the Indian diaspora. This is important in terms of remittance payments, which is often a key reason for crypto adoption. This suggests that in India, the primary reason to get involved with the crypto sector will be for investment purposes, rather than P2P payments.
