Crypto-assets, stablecoins and tokenisation: the regulatory frontier

Detail

1. What crypto is and why the RBI distrusts it

• Cryptocurrency is a digital asset issued by private parties, not by a government.
• Cryptography (secret mathematical codes) keeps it secure.
• Every transaction is recorded on a blockchain, a shared digital record that is very hard to change once written. The mechanics are covered in payment-systems-digital-finance.

• Bitcoin (2009) was the first cryptocurrency.

• Not legal tender in India. 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.

• Very volatile. Prices can rise or fall sharply within days.
• RBI's view: no intrinsic value.
• A share pays dividends and a bond pays interest. These are cash flows, and they give the asset a basic value.
• Crypto pays nothing. Its price depends only on what the next buyer will pay.

• So the RBI says crypto is closer to speculation than to investment.

• In the tax law, crypto is a "Virtual Digital Asset" (VDA). The Income-tax Act uses this broad term, 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 [3].

2. India's policy timeline

Year	Event	What it did
2013, 2017	RBI caution notices	Warned the public about the risks of virtual currencies
April 2018	RBI circular	Barred regulated entities (banks, NBFCs, payment firms) from dealing with or giving services to crypto businesses. This cut exchanges off from banking
March 2020	Internet and Mobile Association of India (IAMAI) v. RBI, Supreme Court	Struck down the circular as disproportionate: the RBI had not shown real harm to its regulated entities that justified such a harsh step. Crypto trading through banks resumed
2021	Cryptocurrency and Regulation of Official Digital Currency Bill	Listed for Parliament but never taken up
Budget 2022-23	VDA tax regime	30% tax (s.115BBH), 1% TDS (s.194S), NFTs included
March 2023	PMLA extension	VDA service providers (VDA SPs) brought under the Prevention of Money Laundering Act, 2002 (PMLA) and told to register with FIU-IND
December 2023 onwards	Offshore exchanges blocked	Non-compliant foreign exchanges' websites were blocked
2023	G20 New Delhi Leaders' Declaration	Endorsed the IMF-FSB synthesis paper on crypto-assets
Pending	Government discussion paper on crypto	Still awaited (verify current)

3. How VDAs are taxed (Budget 2022-23)

• Section 115BBH: flat 30% tax on income from transferring a VDA [2].
• 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, and it cannot be carried forward.

• Worked example (tax):

• 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.

• Section 194S: 1% TDS on payments for transferring a VDA to a resident [3]. 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 [3].
• Threshold: there is no TDS if the payment in a year stays within ₹50,000 for "specified persons" (individuals or HUFs whose business turnover is below ₹1 crore, or professional receipts below ₹50 lakh). For all other payers the limit is ₹10,000 [3].
• Worked example (TDS): you sell a token for ₹2,00,000, so ₹2,000 is deducted as TDS.
• Why TDS matters: each trade leaves a record with the tax department, so crypto trades can be traced.

4. Anti-money-laundering net: PMLA and FIU-IND

• FIU-IND (Financial Intelligence Unit-India) is the central agency, under the Finance Ministry, that receives and analyses reports of suspicious financial transactions.
• VDA SPs operating in India must register with FIU-IND as Reporting Entities and follow their duties under PMLA [4]. These duties include KYC, keeping records and reporting suspicious transactions.
• Key legal point: these duties depend on the activity, not on having an office in India. A foreign exchange that serves Indian users must also comply [4].
• Enforcement under Section 13 of PMLA:
• Show-cause notices were issued to nine offshore VDA SPs (December 2023), and their websites were blocked [4].
• Later rounds of notices went to 25 offshore VDA SPs and to 15 VDA SPs for non-compliance [4].
• FIU-IND fined Bybit Fintech Ltd ₹9.27 crore (2025) [4].

5. Global coordination: the G20 and the IMF-FSB paper

• Synthesis paper, 7 September 2023. The IMF and the FSB (Financial Stability Board) wrote it at the request of India's G20 Presidency [6].
• It combines the crypto recommendations of the IMF, the FSB and the standard-setting bodies (SSBs), such as the Basel Committee [6].

• It covers risks to the economy and the financial system from crypto, stablecoins and DeFi [6].

• Key messages [6]:

• Crypto-assets should not be given official currency or legal tender status.
• Comprehensive regulation is preferred over a blanket ban.

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

• Follow-up: a G20 Crypto-asset Policy Implementation Roadmap status report (22 October 2024) found that nearly all FSB member jurisdictions either have crypto and stablecoin rules in place or plan to make them [7].

• The FATF "travel rule" requires exchanges to pass on sender and receiver details with every transfer, just as banks do for wire transfers.

6. Stablecoins

• Stablecoin: a crypto-asset built to keep a stable value by pegging (fixing) it to a reference asset, usually the US dollar (1 coin = US$1).

Type	How the peg is held	Example	Weak point
Fiat-backed	Reserves of cash and US Treasury bills	USDT, USDC	Are the reserves real, safe and easy to sell?
Crypto-collateralised	Over-collateralised with other crypto	—	The collateral itself is volatile
Algorithmic	Code expands or shrinks the supply	TerraUSD, which collapsed in May 2022	No real assets back it, so trust can vanish

• Over-collateralisation example: to create $100 of stablecoin, a user locks $150 of Ether (150%). If Ether falls by 30%, the collateral is worth $105. The system then sells it before it falls below $100.
• Risk 1: runs.
• Holders doubt the reserves → many redeem at once → the issuer sells reserves in a hurry → prices fall and the peg breaks.

• The RBI's Financial Stability Report notes that stablecoins have seen collapses and redemption pressures [5].

• Risk 2: dollarisation and loss of monetary sovereignty.

• People move savings from rupees into dollar stablecoins → rupee deposits with banks shrink → repo rate changes (the rate at which the RBI lends to banks) reach fewer people.

• The RBI's FSR (December 2025) says stablecoins add new layers of risk to the global financial system. It also notes that demand is strongest in economies with weaker institutions and little access to dollar assets [5].

• Risk 3: capital flight. Money can leave the country without passing through the banking system, which gets around capital controls.

• Global rules (scaffold):
• US GENIUS Act (July 2025) legitimised payment stablecoins.

• EU MiCA (Markets in Crypto-Assets Regulation), applicable from 2024, is a single rulebook for crypto across the EU.

• RBI stance: countries should prefer CBDCs over private stablecoins. This protects trust in money and financial stability [5]. Some argue for a regulated rupee stablecoin (verify current).

7. CBDC: the RBI's alternative

• CBDC (Central Bank Digital Currency) is legal tender in digital form, issued by the central bank itself. India's version is the e-rupee (e₹).
• Pilots [8]:
• Wholesale e₹-W: November 2022. It is used by banks and institutions, starting with settlement of trades in government securities on the secondary market.

• Retail e₹-R: December 2022. It is used by the public.

• Why the RBI prefers it: a CBDC is a liability of the central bank itself, so it carries no credit risk. It keeps payments in rupees and under the RBI.

8. DeFi, NFTs and asset tokenisation

• Decentralised finance (DeFi): lending, borrowing and trading run by smart contracts on a blockchain. A smart contract is self-running code that carries out a deal automatically, with no bank or broker in between.
• Risks: no KYC, hacks, code bugs, and no one to complain to.

• The IMF-FSB paper places DeFi within the scope of regulation [6].

• Non-Fungible Token (NFT): a unique blockchain token that certifies ownership of one specific digital or physical item.

• Fungible means interchangeable, like one ₹100 note for another. NFTs are non-fungible, so no two are the same.

• In India, NFTs are taxed as VDAs [3].

• Asset tokenisation: showing ownership of real-world assets (bonds, property, invoices) as digital tokens.

• Fractional ownership: a ₹1 crore flat split into 1,00,000 tokens of ₹100 each lets small investors buy a share.
• Tokens can be traded and settled quickly.

• In April 2026 the IMF published a note on tokenised finance (IMF Notes No. 26/01), which shows official attention [9].

• Pilots:

• RBI's wholesale CBDC and tokenisation pilots [8].
• Regulatory sandboxes run by SEBI and IFSCA (the regulator for GIFT City). A sandbox lets firms test new products live under relaxed rules and close supervision.
• BIS Project Agorá, which tests tokenised deposits settled with wholesale central bank money (verify current).

9. The debate: ban or regulate?

• For crypto and tokenisation:
• Innovation.
• Cheaper and faster cross-border payments and remittances.
• Financial inclusion.

• Fractional access to assets.

• Against:

• Risks to financial stability.
• Weak consumer protection.
• Tax evasion.
• Money laundering and terror financing.

• Loss of monetary sovereignty.

• Policy options:

• Ban, as the RBI attempted in 2018 before the Supreme Court struck it down.

• Regulate, as the IMF-FSB paper and India's current tax-plus-PMLA approach do [6].

• Why a ban alone fails: crypto crosses borders. Users move to offshore platforms, so rules need global coordination through the FSB and FATF. India's "activity-based" PMLA rule shows how national law can reach offshore firms [4].

Prelims Hooks

• Crypto is not legal tender in India. The IMF-FSB paper (2023) also advises against giving crypto legal tender status [6].
• 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 VDA transfer income, with no set-off of losses and only the cost of acquisition deductible. s.194S = 1% TDS [2][3].
• The VDA definition includes crypto and NFTs but excludes CBDC (e₹) and Indian or foreign currency. Trap: "the digital rupee is a VDA" is false [3].
• VDA SPs report to FIU-IND under PMLA, 2002 (since March 2023). The duty is activity-based, so it applies to offshore exchanges too [4].
• The IMF-FSB Synthesis Paper (7 September 2023) was prepared at the request of India's G20 Presidency and endorsed in the New Delhi Leaders' Declaration [6].
• Algorithmic stablecoin example: TerraUSD, collapsed May 2022. Fiat-backed examples: USDT, USDC.
• e₹-W pilot: November 2022; e₹-R pilot: December 2022 [8].
• MiCA = the EU's crypto law. GENIUS Act (July 2025) = the US payment-stablecoin law.
• The FATF travel rule requires sender and receiver details to travel with every crypto transfer.

Mains Points

• Regulate, don't ban.
• The Supreme Court (2020) rejected a disproportionate ban.
• The IMF-FSB paper (2023) favours comprehensive regulation [6].
• India now uses tax (30% + 1% TDS) and PMLA/FIU-IND rules as tools to regulate crypto without formally recognising it [2][4].

• The missing piece is a clear law on crypto itself (the discussion paper is pending).

• Stablecoins threaten monetary sovereignty.

• Dollar stablecoins can cause dollarisation, capital flight and weaker transmission of RBI policy.
• The RBI's FSR (December 2025) calls them a new layer of risk [5].

• The RBI's answer is the CBDC. A regulated rupee stablecoin is being debated as an alternative.

• Tokenisation is the useful part of the technology.

• Tokenised bonds, deposits and invoices on a wholesale CBDC base can cut settlement time and cost.
• It can widen retail access to assets and support GIFT City (IFSCA sandboxes).

• It keeps the central bank as the anchor of trust [8][9].

• Global coordination is essential.

• Crypto is borderless, so national rules need FSB/FATF standards to work.
• India's G20 Presidency (2023) led the IMF-FSB synthesis paper, which gives India a role in shaping global crypto rules [6][7].