The Indian state taxes virtual digital assets, registers their intermediaries under PMLA, and blocks offshore platforms through Section 69A of the IT Act; the RBI continues to describe the asset class as speculative code without intrinsic value. The Department of Economic Affairs discussion paper has been through five public deferrals since 2023. Six arms of the state hold operational levers, none holds a licensing mandate. What does this architecture of coordinated recognition and refusal reveal about how the state manages an asset class it has chosen neither to legitimise nor to prohibit, and what would have to shift for the paper to move?
What the Indian state has built on Virtual Digital Assets (VDAs) over the last six years is not a regulatory gap. It is an architecture. The state has drawn three perimeters around the sector: fiscal, anti-money-laundering, and judicial; and has deliberately left the fourth perimeter, prudential and licensing, blank. The absence is a design choice. Reading it as administrative sluggishness misses the institutional logic at work.
The fiscal perimeter was drawn by the Finance Act 2022, which inserted Section 115BBH into the Income Tax Act imposing a 30 per cent flat tax on gains from VDA transfers and Section 194S imposing a 1 per cent Tax Deducted at Source on transaction value. The Central Board of Direct Taxes (CBDT) has deployed this architecture seriously: over 44,000 notices issued, approximately ₹888.82 crore of undisclosed VDA holdings identified, FY 2022-23 collection of ₹269.09 crore and FY 2023-24 collection of ₹437.43 crore, with cumulative direct tax and TDS collections across the first three years running into several hundred crore. The CBDT does not tax an asset class it considers non-existent; it taxes the trade in it, which requires implicit recognition of the underlying.
The AML perimeter was drawn by the March 2023 gazette notification under Section 2(1)(sa)(vi) of the Prevention of Money Laundering Act, 2002, which brought Virtual Digital Asset Service Providers (VDASPs) under the reporting-entity framework. The Financial Intelligence Unit-India (FIU-IND) holds 49 registered VDASPs as of early 2026, across domestic and offshore platforms. Binance and KuCoin paid penalties to re-enter; Coinbase re-registered in March 2025. The architecture treats the intermediary as a reporting entity under PMLA, while leaving the underlying asset class legally undefined.
The AML perimeter does not operate as an isolated registration regime. It coordinates with the Ministry of Electronics and Information Technology and the Enforcement Directorate to produce operational consequences that no single statute could deliver alone. The December 2023 enforcement event illustrates the architecture in motion. FIU-IND issued show-cause notices to nine offshore exchanges (Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, Bitfinex) for operating in India without registration. On FIU-IND's recommendation, MeitY invoked Section 69A of the Information Technology Act 2000 to block the exchanges' URLs and the apps they distributed through Indian app stores. The Enforcement Directorate ran parallel PMLA proceedings on specific entities where transaction trails were available. Binance and KuCoin paid penalties of approximately ₹18.82 crore and ₹35 lakh respectively and re-registered in 2024; the others remain blocked. The architecture's operational reach travels through the FIU-MeitY-ED axis: the AML notification creates the registration obligation, MeitY's blocking power makes non-registration commercially unsustainable, and the ED's enforcement provides the criminal-law dimension. A foreign exchange that reads only the PMLA notification has read one of three coordinated levers; the architecture is calibrated to require all three to be read together. The state regulates the activity without regulating the asset class, and the coordination is the regulation.
The judicial perimeter was drawn by the Supreme Court in *Internet and Mobile Association of India v. Reserve Bank of India* (March 2020), which struck down the RBI's 2018 banking circular on proportionality grounds. The Court did not endorse VDAs; it held that the RBI's prohibition on banks providing services to VDA intermediaries was disproportionate to the demonstrated risk. That ruling is the space inside which the entire domestic industry operates. In January 2025 the Delhi High Court expanded the space by seeking responses from RBI, the Securities and Exchange Board of India (SEBI), the Ministry of Finance, and the Ministry of Electronics and Information Technology (MeitY) on their VDA regulatory positions; the Court subsequently dismissed the petition in February 2026 on the ground that writ jurisdiction cannot compel Parliament or the executive to legislate or regulate in a particular manner, leaving the regulatory question to the legislature.
The fourth perimeter, prudential and licensing regulation, is where the institutional decision to not regulate sits. The Department of Economic Affairs (DEA) has been preparing a discussion paper on VDAs since 2023. It has moved through at least five public deferrals: December 2024 (Parliament told no timeline anticipated), May 2025 (final drafting), June 2025 (stablecoins focus with GENIUS Act cues), September 2025 (a government document reported by Reuters argued that regulating crypto would grant it "legitimacy" and could allow the sector to become "systemic"), and April 2026 (shelved). The September 2025 reasoning is the most candid piece of the record: the state's argument against comprehensive regulation is that regulation itself would normalise the asset class beyond what the RBI is prepared to accept. The incompleteness is not transitional. It is the architecture.
The DEA can prepare a discussion paper; it cannot publish it over an explicit RBI objection. This is not written into any statute or rule of business. It is institutional convention, built over six decades of financial-sector policy-making, in which the central bank's formal concurrence is treated as a necessary precondition for any paper touching monetary or currency-adjacent architecture. The RBI Financial Stability Report of December 2025 urged global prioritisation of Central Bank Digital Currencies (CBDCs) over privately-issued stablecoins. Deputy Governor T. Rabi Sankar's 12 December 2025 speech at the Mint BFSI Conclave described VDAs as speculative code and stablecoins as presenting significant concerns for monetary stability, fiscal policy, banking intermediation, and systemic resilience. These positions, reiterated in multiple fora through 2025 and early 2026, have not shifted. The DEA paper has therefore not moved.
The historical record shows that this kind of impasse resolves not through persuasion but through mandate reallocation. SEBI received full regulatory jurisdiction over securities derivatives through the SEBI Act amendments of 2000 after the UTI and Securities Scam episodes made it politically unavoidable; commodity derivatives moved from the Forward Markets Commission (FMC) to SEBI through the FMC-SEBI merger of 2015; insurance moved from the Controller of Insurance to the Insurance Regulatory and Development Authority (IRDA) through the IRDA Act 1999. In each case, a regulatory mandate was created or reallocated by Parliament after executive decision, because the existing custodian either resisted or declined the function. On VDAs, no actor in the current system has proposed creating or reallocating the mandate, and the RBI has no interest in absorbing it. The discussion-paper deferral is therefore not a processing delay; it is the absence of a forcing mechanism that would override the convention.
The state has not refused to regulate VDAs everywhere. It has refused to regulate them onshore. The International Financial Services Centres Authority (IFSCA) at GIFT City, operating under the IFSCA Act 2019, has published frameworks for VDA activity within the International Financial Services Centre, subject to its own licensing architecture. The effect is that a firm can offer VDA services inside GIFT City under a formal regulatory regime while the same activity offered to domestic Indian customers remains under the incomplete architecture described above. This bifurcation reveals the specific institutional concern the state is actually managing: not the asset class in itself, but its interaction with the capital account, the banking system, and the deposit base that the RBI supervises. Where capital controls and monetary policy do not bind, the state has been willing to regulate. Where they do, it has not.
Three years of domestic industry advocacy have not moved the architecture. Approximately 119 million Indian users and $4.5 billion in acknowledged holdings have not moved the architecture. The July 2024 WazirX hack of approximately $234 million reinforced rather than shifted the RBI's position. What could shift the equilibrium is pressure from outside the domestic industry channel, and four vectors are visible.
The first vector is international standard-setting. India endorsed the International Monetary Fund-Financial Stability Board Synthesis Paper and the G20 roadmap on crypto-asset regulation during its 2023 presidency. Compliance with the Financial Stability Board's High-Level Recommendations and the International Organization of Securities Commissions policy framework on crypto and digital asset markets creates an external benchmark against which the Indian architecture is periodically measured.
The second vector is bilateral trade architecture. The US GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins Act), signed into law on 18 July 2025, has turned dollar-denominated stablecoins into a federally-regulated financial instrument with extraterritorial provisions on issuance. The question of whether Indian customers can access US-issued stablecoins, and whether US-issued stablecoins can clear through Indian banking infrastructure, is now a financial-services trade question that the US can raise in any bilateral or World Trade Organization forum. The European Union's Markets in Crypto-Assets Regulation (MiCA) and its Directive on Administrative Cooperation Version 8 (DAC8) reporting regime effective from January 2026 apply similar pressure from the Brussels side.
The third vector is judicial. The Delhi High Court's January 2025 direction to RBI, SEBI, the Ministry of Finance, and the Ministry of Electronics and Information Technology to articulate their positions was the kind of proceeding that could have required the state to state a regulatory stance rather than defer it; the Court's February 2026 dismissal of the petition on writ-jurisdiction grounds closed that particular pathway, but the 2020 precedent remains that the Supreme Court is willing to apply proportionality review to RBI positions on VDAs. A fresh constitutional challenge on proportionality grounds would travel along the same doctrinal track the 2020 judgment opened.
The fourth vector is internal mandate reallocation at Prime Minister's Office level. This is how SEBI received derivatives jurisdiction, how the FMC-SEBI merger was effected, and how the IRDA was created. It is an executive decision that does not require RBI concurrence, and it is the only domestic pathway through which the architecture can move without external pressure.
A company engaging this architecture needs to read which of these vectors is nearest, not argue the RBI's position from within. Market participants including BitDelta, Coinbase, CoinDCX, CoinSwitch Kuber, and Delta Exchange operate inside the architecture as it stands. What is changing is not the architecture itself, but the density of international pressure against which it is being held, and the point at which that pressure will make the fourth vector institutionally unavoidable.