SYLLABUS

GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: The Parliamentary Standing Committee on Finance, in its report on The Securities Markets Code, 2025, has urged the Government to examine the need for a statutory and regulatory framework for Virtual Digital Assets (VDAs).

Key Highlights of the Committee Report

• Need for a Comprehensive Regulatory Framework: The Committee observed that the rapid growth of the VDA ecosystem has created regulatory gaps and recommended a dedicated statutory framework.
• Interim Regulatory Mechanism: Pending enactment of a comprehensive law, the Committee proposed establishing an interim Self-Regulatory Organisation (SRO) under the oversight of a designated regulator, such as the RBI or SEBI.
• Strengthening Investor Protection: The framework should prescribe governance standards, fit-and-proper criteria, disclosure norms, customer asset protection, grievance redressal and a code of conduct for VDA service providers.
• Mitigating Financial & Security Risks: The Committee emphasised strengthening safeguards against money laundering, terror financing, tax evasion, cyber fraud and illicit cross-border financial flows associated with virtual digital assets.
• Bridging the Existing Regulatory Gap: While VDA transactions are taxed under the Income-tax Act and VDA service providers are covered under the Prevention of Money Laundering Act (PMLA), India still lacks a dedicated law governing cryptocurrencies and other virtual digital assets.

Understanding Virtual Digital Assets (VDAs)

• Meaning: Section 2(47A) of the Income-tax Act, 1961 defines a Virtual Digital Asset (VDA) as any information, code, number or token generated through cryptographic means or otherwise, providing a digital representation of value that can be transferred, stored or traded electronically, subject to specified exclusions.
• Examples: Cryptocurrencies (such as Bitcoin and Ether), Non-Fungible Tokens (NFTs), and other blockchain-based digital assets notified by the Central Government.
• Current Regulatory Position in India:
  • Income from the transfer of VDAs is taxed at 30% under Section 115BBH of the Income-tax Act.
  • A 1% Tax Deducted at Source (TDS) applies on specified VDA transactions under Section 194S.
  • VDA service providers are classified as 'reporting entities' under the Prevention of Money Laundering Act (PMLA), 2002, requiring compliance with KYC, record-keeping and reporting obligations.
  • India presently has no comprehensive legislation governing the issuance, trading, custody and consumer protection aspects of VDAs.

Why Does India Need a Regulatory Framework for VDAs?

• Protect Investors: Establish disclosure norms, segregation of customer assets, grievance redressal mechanisms and safeguards against fraud, cybercrime and market manipulation.
• Provide Regulatory Certainty: Clearly define the legal status of VDAs, regulatory responsibilities and compliance obligations, thereby strengthening investor confidence and ensuring the orderly development of digital asset markets.
• Strengthen Financial Integrity: Enhance safeguards against money laundering, terror financing, tax evasion and other illicit financial activities involving virtual digital assets.
• Safeguard Financial Stability: Address systemic risks arising from stablecoins, excessive speculation and the increasing linkages between crypto markets and the formal financial system.
• Promote Responsible Innovation and Global Alignment: Encourage blockchain innovation while aligning India's regulatory framework with evolving international standards, including the recommendations of the Financial Action Task Force (FATF).

Challenges in Regulating VDAs

• Borderless and Decentralised Ecosystem: Cross-border transactions and decentralised platforms make jurisdiction, taxation and enforcement particularly challenging.
• Regulatory Classification: Determining whether different VDAs should be treated as currencies, securities, commodities or a distinct asset class remains a major policy challenge.
• Regulatory Coordination: Clearly demarcating the roles of RBI, SEBI, FIU-IND and other agencies is complex, as different VDAs exhibit characteristics of multiple financial instruments.
• Global Coordination Deficit: Divergent regulatory approaches across jurisdictions enable regulatory arbitrage and complicate cross-border supervision and enforcement.
• Balancing Innovation with Regulation: Designing a framework that protects investors and financial stability without stifling technological innovation remains a key policy challenge.

Way Ahead

• Enact a Dedicated VDA Law: Establish clear legal definitions, regulatory responsibilities and compliance requirements for different categories of virtual digital assets.
• Adopt a Risk-Based Regulatory Framework: Clearly assign the roles of RBI, SEBI, FIU-IND and other competent authorities based on the nature and risks associated with different VDAs.
• Strengthen Investor Protection: Mandate robust disclosure standards, segregation of customer assets, periodic audits and effective grievance redressal mechanisms.
• Enhance International Cooperation: Align domestic regulations with global best practices and strengthen cooperation on anti-money laundering, taxation and cross-border enforcement.