An investigation by a national daily has laid bare that India has a thriving crypto underworld. Cryptocurrency exchanges have been used by cyber-fraud networks to move hundreds of crores through Indian mule accounts, over-the-counter traders, and anonymous digital wallets. Crime proceeds have travelled from small towns in India to Dubai, Cambodia and China and law enforcement agencies have even tracked stolen money to blacklisted offshore platforms and wallets linked to terror groups. All of this has become possible because the cryptocurrency market sits in a legal vacuum in India. In 2018, the Reserve Bank of India barred banks from serving cryptocurrency exchanges and traders, claiming that such virtual currencies could lead to money laundering, tax evasion, and fraud due to the untraceable nature and the difficulty in evaluating the taxability of the transaction. But the Supreme Court struck down this circular in 2020; this led to the reopening of the market. Without legislation, though, there is no clear definition of what a crypto asset is under Indian law. There is no distinction between tokens meant for payments, tokens that resemble securities, and tokens that function like commodities. This absence of basic classification makes supervision impossible. Exchanges exist in a grey space where they are taxed, monitored selectively, and expected to follow anti-money laundering norms, but have no formal legal identity.
This vacuum is dangerous because India has one of the world’s largest crypto user bases. Yet when an exchange is hacked or it melts down, there is no specialised ombudsman, no licensing authority to hold platforms accountable, and no basic right to compensation. This is doubly unfair because users have to pay high taxes on crypto assets and, yet, have no guaranteed recourse if things go wrong. The government’s belief that non-recognition keeps the sector small is outdated. Non-recognition simply ensures that it grows in ways that are hard to supervise but easy to exploit. The European Union’s MiCA framework, Japan’s exchange-licensing rules, and Singapore’s risk-based licensing approach show that legislation can restrain a sector without promoting it. A legal framework in India would not need to approve cryptocurrency as money or encourage speculative trading; it would only need to define the asset clearly, set licensing requirements for anyone serving Indian users, impose strict rules on custody and consumer protection, enforce anti-money laundering standards, and rationalise taxation so that activity stays on the record rather than leaking offshore. This is the only way to contain systemic risks.