Cryptocurrency

Also called: Crypto-assets, Virtual digital assets, VDA · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

Cryptocurrency is a digital asset issued by private parties, not by a government or central bank. It is kept secure by cryptography (secret mathematical codes), and every transaction is recorded on a blockchain (a shared digital record that is very hard to change once written). Bitcoin (2009) was the first cryptocurrency.

It matters for two reasons. In India, crypto is not legal tender, and the RBI sees it as a risk to financial stability and to its control over money. Even so, the government taxes it heavily and regulates it as a Virtual Digital Asset (VDA), without formally recognising it.

Explanation

How it works

• Private issue. A private network or firm creates crypto. The RBI or government does not. No authority stands behind its value.
• Cryptography protects ownership. Only the holder of the secret key can move the coins.
• Blockchain record. Every transfer is written into a shared record that many computers keep. Once a transaction is added, changing it is very hard.
• No middleman needed. Money can move across borders without a bank. This is why crypto is praised for cheap remittances. It is also why it worries regulators.
• Not legal tender. Legal tender is money that the law says must be accepted to settle a debt, like the rupee. No one in India is forced to accept crypto.

Why the RBI says it has "no intrinsic value"

• Assets usually get value from cash flows.
• A share pays dividends. A bond pays interest.

• These regular payments give the asset a basic value.

• Crypto pays nothing.

• Its price depends only on what the next buyer will pay.

• So the RBI treats it as closer to speculation (betting on price moves) than to investment.

• Very volatile. The price can rise or fall sharply within days.

• More buyers rushing in → price jumps → more people buy in the hope of quick gains.
• Trust falls → holders sell together → price crashes.

Types of crypto-assets

• Plain cryptocurrencies (e.g. Bitcoin). Their price floats freely.
• Stablecoins. These are crypto-assets that try to keep a stable value by pegging (fixing) themselves to a reference asset, usually the US dollar (1 coin = US$1).
• Fiat-backed stablecoins hold reserves of cash and US Treasury bills. Examples: USDT, USDC. Weak point: are the reserves real, safe and easy to sell?
• Crypto-collateralised stablecoins are over-collateralised, which means they lock up more crypto than the value of the coins issued. Weak point: the collateral itself is volatile.
• Algorithmic stablecoins use code to expand or shrink supply, with no real assets behind them. Example: TerraUSD, which collapsed in May 2022.

• Worked example (over-collateralisation): to create $100 of stablecoin, a user locks $150 of Ether (150%). If Ether falls by 30%, the collateral is worth $105. The system sells it before its value drops below $100.

• NFTs (Non-Fungible Tokens). An NFT is a unique token that certifies ownership of one specific item. Fungible means interchangeable, like one ₹100 note for another. No two NFTs are the same.

• DeFi (decentralised finance). Lending and trading run by smart contracts (self-running code that carries out a deal automatically). DeFi has no KYC and no one to complain to, and it faces the risk of hacks.

The main risks

• Money laundering and terror financing. Transfers are hard to trace.
• Tax evasion.
• Weak consumer protection. Investors have no clear place to complain when things go wrong.
• Capital flight. Money can leave the country without passing through banks, which gets around capital controls.
• Loss of monetary sovereignty (the RBI's control over India's money).
• People move savings from rupees into dollar stablecoins.
• Rupee deposits with banks shrink.
• Changes in the repo rate (the rate at which the RBI lends to banks) then reach fewer people.

In India

Policy timeline

Year	Event
2013, 2017	RBI caution notices warned the public about virtual currencies
April 2018	RBI circular barred regulated entities (banks, NBFCs, payment firms) from serving crypto businesses. This cut exchanges off from banking
March 2020	IAMAI v. RBI: the Supreme Court struck the circular down as disproportionate because the RBI had not shown real harm to justify such a harsh step. Crypto trading through banks resumed
2021	Cryptocurrency and Regulation of Official Digital Currency Bill was listed for Parliament but never taken up
Budget 2022-23	VDA tax regime: 30% tax, 1% TDS, NFTs included
March 2023	VDA service providers brought under PMLA, 2002 and told to register with FIU-IND
December 2023 onwards	Websites of non-compliant offshore exchanges were blocked
Pending	Government discussion paper on crypto (verify current)

What counts as a VDA in the tax law

• The Income-tax Act uses the term "Virtual Digital Asset", not "cryptocurrency".
• VDAs include crypto-assets, NFTs and other digital assets.
• VDAs exclude Indian currency, CBDC (the RBI's digital rupee), foreign currency and digital assets the government notifies as exempt [2].

Tax: Section 115BBH (Budget 2022-23)

• Income from transferring a VDA is taxed at a flat 30% [1].
• The only deduction allowed is the cost of acquisition (the price you paid).
• Losses cannot be set off. A loss on one VDA cannot reduce the gain on another VDA or on any other income. It also cannot be carried forward.
• Worked example:
• You gain ₹1,00,000 selling Bitcoin and lose ₹60,000 on another token in the same year.
• Normal logic says the net gain is ₹40,000. Under s.115BBH, you are taxed on the full ₹1,00,000.
• Tax = 30% × ₹1,00,000 = ₹30,000 (plus surcharge and cess). The ₹60,000 loss is ignored.

TDS: Section 194S

• A 1% TDS applies to payments for transferring a VDA to a resident [2]. TDS (tax deducted at source) means the buyer or exchange cuts the tax before paying the seller.
• Payments to non-residents fall under s.195 instead [2].
• Threshold: no TDS applies if yearly payments stay within ₹50,000 for "specified persons". These are individuals or HUFs whose business turnover is below ₹1 crore, or whose professional receipts are below ₹50 lakh. For all other payers the limit is ₹10,000 [2].
• Worked example: you sell a token for ₹2,00,000, so ₹2,000 is deducted as TDS.
• Why it matters: every trade leaves a record with the tax department, so crypto trades can be traced.

Anti-money-laundering: PMLA and FIU-IND

• FIU-IND (Financial Intelligence Unit-India) is the central agency under the Finance Ministry. It receives and analyses reports of suspicious financial transactions.
• VDA service providers (VDA SPs) operating in India must register with FIU-IND as Reporting Entities. They must do KYC, keep records and report suspicious transactions [3].
• The duty is activity-based. It depends on serving Indian users, not on having an office in India, so foreign exchanges must also comply [3].
• Enforcement under Section 13 of PMLA:
• Show-cause notices went to nine offshore VDA SPs (December 2023), and their websites were blocked [3].
• Later rounds of notices went to 25 offshore VDA SPs and to 15 VDA SPs [3].
• FIU-IND fined Bybit Fintech Ltd ₹9.27 crore (2025) [3].

Global role: India's G20 Presidency (2023)

• The IMF and FSB (Financial Stability Board) wrote a Synthesis Paper (7 September 2023) at the request of India's G20 Presidency [5].
• The paper's key messages [5]:
• Crypto should not get legal tender status.
• Countries should prefer comprehensive regulation over a blanket ban.

• Countries should apply FATF anti-money-laundering standards.

• The G20 New Delhi Leaders' Declaration endorsed the paper.

The RBI's alternative: CBDC

• The e-rupee (e₹) is legal tender in digital form, issued by the RBI itself.
• Pilots began with e₹-W (wholesale) in November 2022 and e₹-R (retail) in December 2022 [6].
• The RBI's Financial Stability Report (December 2025) says stablecoins add new layers of risk. It argues that countries should prefer CBDCs over private stablecoins [4].

Don't confuse with

• CBDC / e-rupee (e₹): issued by the RBI, legal tender, and carries no credit risk. Cryptocurrency is privately issued and not legal tender. The e₹ is excluded from the VDA definition [2].
• Stablecoin: a type of crypto-asset pegged to a reference asset, usually the US dollar. Ordinary crypto like Bitcoin has no peg and its price floats freely.
• Shares and bonds: these pay dividends or interest, which gives them basic value. The RBI's objection is that crypto pays no cash flow at all.
• NFT: also a VDA, but each token is unique (non-fungible). Units of a cryptocurrency are fungible, so one Bitcoin can be swapped for another.

Prelims Hooks

• Crypto is not legal tender in India. The IMF-FSB Synthesis Paper (7 September 2023) also advises against giving crypto legal tender status [5].
• IAMAI v. RBI (March 2020): the Supreme Court struck down the RBI's April 2018 banking ban on crypto as disproportionate.
• s.115BBH = 30% tax on income from transferring a VDA. Losses cannot be set off, and only the cost of acquisition is deductible [1]. s.194S = 1% TDS [2].
• Trap: "The digital rupee is a VDA" is false. VDAs include crypto and NFTs but exclude CBDC and Indian or foreign currency [2].
• VDA service providers report to FIU-IND under PMLA, 2002 (since March 2023). The duty is activity-based, so it covers offshore exchanges too [3].
• TerraUSD (collapsed May 2022) was an algorithmic stablecoin. USDT and USDC are fiat-backed.

Mains Points

• Regulate, don't ban.
• The Supreme Court (2020) rejected a disproportionate ban.
• The IMF-FSB paper (2023) favours comprehensive regulation [5].
• India now uses tax (30% plus 1% TDS) and PMLA/FIU-IND rules to control crypto without formally recognising it [1][3].

• The missing piece is a clear law on crypto itself, since the government discussion paper is still pending.

• Crypto and stablecoins threaten monetary sovereignty.

• Dollar stablecoins can cause dollarisation (people switching from the rupee to the dollar), capital flight and weaker transmission of RBI policy.

• The RBI's FSR (December 2025) calls them a new layer of risk. It prefers the CBDC (e₹) as the safe digital option [4].

• A ban alone fails because crypto is borderless.

• Users simply move to offshore platforms.
• National rules need global standards from the FSB and FATF to work.
• India's activity-based PMLA rule shows how national law can reach offshore firms [3].
• India's G20 Presidency led the IMF-FSB paper, which gives India a voice in shaping global crypto rules [5].

Related concepts

• Stablecoin
• Decentralised finance
• Non-Fungible Token
• Asset tokenisation

Read more

• Crypto-assets, stablecoins and tokenisation: the regulatory frontier