1. Introduction

Cryptocurrency has changed our view of money and online payments. With the emergence of Bitcoin in 2009, created by a mysterious designer called Satoshi Nakamoto, digital money gained popularity over time. There are more than a thousand various cryptocurrencies like Ethereum, Ripple, and Binance Coin, each offering something unique to the marketplace.

In India, cryptocurrency is highly in demand, with investors trading and investing in digital assets in their millions. The government and policymakers, however, have been struggling to devise separate rules for its use. The lack of regulation has introduced vagueness, ambiguity, and financial risks to investors.

This paper examines the current status of cryptocurrency in India, regulation challenges, regulation of cryptocurrency around the globe, and prospects of cryptocurrency regulation in India.

2. Legal Standing of Cryptocurrency in India

India’s approach to cryptocurrency has been one of inconsistency, with repeated policy flip-flops and litigation characterizing its position today. The Reserve Bank of India (RBI) and government have been at loggerheads over crypto over time.

2.1 The RBI Ban (2018) and its Consequences

In April 2018, a circular was released by the RBI that banned banks from offering services related to cryptocurrency. The move effectively shut cryptocurrency trading in India, as investors and trading platforms were no longer able to use banking services. The RBI explained its move in terms of financial security, money laundering risk, and abuse of cryptocurrency for illicit use.

2.2 The Supreme Court Ruling (2020)

In March 2020, India's Supreme Court overruled the RBI ban in Internet and Mobile Association of India v. Reserve Bank of India. The Supreme Court ruled that the action of the RBI was unconstitutional, in that it did not provide enough evidence of cryptocurrency harming the Indian economy. The ruling brought cryptocurrency trading in India to life again, causing a new wave of investments and the introduction of different crypto exchanges.

2.3 The Current Regulatory Setting (2023–2025)

Despite the Supreme Court's ruling, cryptocurrency is in a gray area in India in terms of law. There is no specific law that regulates or even speaks of cryptocurrency. The government has, however, taken a few steps to watch over and control crypto transactions:

• Crypto Taxation: The government introduced a 30% tax on digital asset profits in the Budget of 2022 and a 1% TDS on high-value transactions. The move legalized cryptocurrency trading in a way, albeit excessive tax has scared many investors away.
  
  
• Lack of Regulatory Framework: The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was also expected to provide more clarity regarding cryptocurrency laws, but it is yet to be approved.
  
  
• Introduction of Digital Rupee: The RBI launched its own Central Bank Digital Currency (CBDC), i.e., Digital Rupee, in place of private cryptocurrencies. However, it is not a reaction to questions over the status of private cryptocurrencies like Bitcoin and Ethereum in a legal manner. The government's cautious approach keeps investors in cryptocurrency and companies in a dilemma.
  Questions about the legal status of private digital money such as Bitcoin and Ethereum. The government's conservative stance keeps investors in cryptocurrency and businessmen in a state of uncertainty.

3. Challenges in Regulating Cryptocurrency

While cryptocurrency is bringing in innovation and financial inclusion, it also brings in a new set of challenges that hamper regulation in India.

3.1 Lack of Clarity in Law

One of the key challenges is that there is no particular law in India that deals with cryptocurrency. Investors, exchanges, and even government institutions are in a dilemma over their rights and duties. The absence of clear-cut legal definitions makes it hard to determine whether cryptocurrency is to be considered an asset, a currency, or a commodity.

3.2 Risk of fraud, scams, and money laundering

The decentralized nature of cryptocurrencies subjects them to:

• Ponzi schemes and spurious projects that promise high returns
• Money laundering and illicit financial transactions due to a lack of regulation
• A lack of consumer protection mechanisms, subsequently making investors more exposed to fraud.

3.3 Impact on the Banking System

The RBI is concerned that the large-scale adoption of private cryptocurrencies would decrease the use of traditional banking by the public. If digital assets become more

attractive to the public compared to the Indian Rupee, it would impair the control of the central bank over monetary policy, making it more difficult to control inflation and financial stability.

3.4 High Taxation and Regulatory Burden

The government’s tax of 30% on profits and 1% TDS on trading is discouraging cryptocurrency trading. Indian traders are switching to overseas exchanges to avoid such heavy taxes, causing a loss of potential revenue to the country.

4. Global Crypto Regulatory Outlook

Different countries have taken different approaches to cryptocurrency regulation, ranging from complete legalization to prohibition.

• United States: The US government regulates cryptocurrency through institutions like SEC and IRS. Some of the cryptocurrency is viewed to be a security, whereas others are viewed to be commodities. The US also introduced taxes and legal exchanges to stay compliant.
  
  
• European Union (EU): The EU has put in place the Markets in Crypto-Assets (MiCA) regime that enunciates clear rules for digital assets in a way that is pro-innovation.
  
  
• China: China has been stern in its response, prohibiting cryptocurrency trading and mining in its entirety to manage financial stability and capital flight concerns.
  
  
• El Salvador: In a different vein, a national currency was legalized in the form of Bitcoin in El Salvador, a first for a government to legalize it.
  India can take a page or two from such models around the world to craft a balanced approach that protects investors without stifling technological innovation.

5. Future of Crypto Regulation in India

Given the increasing adoption of cryptocurrency, India needs a systemic approach to regulation. Some of the probable developments are:

5.1 Introduction of a Law on Cryptocurrency

The government can pass a distinct Crypto Regulation Bill that clearly articulates cryptocurrency's place in Indian law. The bill should

• Establish a licensing system for cryptocurrency exchanges • Set a system of taxing cryptocurrencies
• Set guidelines for money laundering (ML) compliance

5.2 The Role of the Digital Rupee (CBDC)

The RBI’s Digital Rupee would be a government-backed alternative to private cryptocurrencies. However, if it is introduced in a restrictive way, decentralized alternatives like Bitcoin and Ethereum would still be utilized. The more sensible approach would be a hybrid system that would allow the coexistence of CBDC and private crypto.

5.3 A Balanced Regulatory Approach

A well-designed system of regulation should:

• Provide legal certainty of whether cryptocurrency is a commodity, a currency, or an asset
• Ensure compliance with financial security procedures such as requirements of AML and KYC.
• Promote innovation to allow Indian blockchains and cryptocurrency start-ups to compete without having to move overseas. 6. Conclusion India's approach to cryptocurrency is in a transitional period, without a cut-and-dry system of laws in place. The Supreme Court has protected trading in cryptocurrency by overruling the ban ordered by the RBI, but the government has been cautious in its approach. The imposing of heavy taxes and a failure to provide a transparent system of rules have been making investors and companies struggle. For India to reap the benefits of the cryptocurrency revolution, it needs a strong system of laws that balances financial security and technical progress. By embracing global best practices, having open rules in place, and offering protection to investors, India can be a leader in the digital asset economy.

6. Conclusion

India’s approach to cryptocurrency is ambivalent, without a clear-cut legal framework. The Supreme Court has protected trading in cryptocurrency by overruling the ban that was put in place by the RBI, but the government has been cautious in action. The high taxes combined with a failure to provide a transparent regulatory system created entry barriers to investors and companies.

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