Critically evaluate how effective India's PMLA and tax-based approach to Virtual Digital Assets has been in protecting investors and preventing illicit finance.

India does not have a dedicated law for Virtual Digital Assets (VDAs). It regulates them indirectly, by taxing them and by bringing their service providers under the Prevention of Money Laundering Act, 2002 (PMLA). The October 2026 Binance hack tested this approach: about $6.3 billion was lost and only about $3 billion was frozen [1]. The approach has done better at tracing money than at protecting investors.

Preventing illicit finance

Strengths

• AML net: since March 2023, VDA service providers have been PMLA reporting entities under FIU-IND. They must do KYC checks and report suspicious transactions [4].
• Reach over offshore exchanges: FIU-IND fined Binance ₹18.82 crore under Section 13 of the PMLA in 2024 [4]. This shows foreign platforms can be forced to comply.
• Audit trail: the 1% TDS under Section 194S is deducted on each VDA transfer, so the tax department gets a record of every trade [2].

Gaps

• Recovery depends on private firms: in the Binance hack, the funds were frozen by Tether and Circle, not by any regulator [1].
• The RBI warns that dollar stablecoins could make money laundering easier and weaken India's monetary sovereignty [6].

Protecting investors

Strengths

• A flat 30% tax under Section 115BBH, with only the cost of acquisition deductible, discourages speculative trading [3].
• Registration with FIU-IND gives users a basic way to tell which platforms are compliant [4].

Gaps

• No custody rules: PMLA registration checks who trades, not how safely exchanges hold assets. There are no rules on keeping client assets separate or on compensation. Binance users had to rely on the exchange and private issuers to get funds back [1].
• Losses are not shared: VDA losses cannot be set off against other income [5]. A hacked investor bears the whole loss, while the state taxes every gain.
• Pushes traders offshore: high transaction taxes on compliant Indian platforms may drive traders to foreign exchanges that India cannot directly supervise.
• No legal status: VDAs are not legal tender, and no law sets out users' rights when an exchange fails.

India's tax-and-PMLA model has largely succeeded in making crypto traceable, but it leaves investors exposed to the risk of the platform failing. India needs a calibrated VDA law that:

• defines the legal status of VDAs;
• requires exchanges to keep client assets separate, as SEBI requires for securities;
• mandates cyber-security audits;
• makes offshore exchanges accountable to Indian users.

At the same time, India should keep stablecoins out of everyday payments, as the RBI advises [6]. Together, these steps would protect investors and support SDG 16.4 on curbing illicit financial flows.