Is Crypto Legal in India? A Guide to the Unregulated Market and Its Risks (2024)

Is cryptocurrency legal in India?

The legal status of cryptocurrency in India is a complex issue with no simple answer. Using cryptocurrency as a direct method of payment for goods and services is not legal in India as of March 19, 2024. There are 3 aspects to it:

1. Not Legal Tender: Cryptocurrencies like Bitcoin are not recognized as legal money in India. Only the Indian Rupee issued by the Reserve Bank of India holds that status. This means businesses are not obligated to accept crypto, and doing so could be seen as an unregulated transaction.
2. Government Taxes Crypto: Despite the lack of regulations, the Indian government has imposed a 30% tax on crypto gains and a 1% tax deducted at source (TDS) for all crypto transactions since the 2022 Union Budget.
3. Unregulated Market: The Indian crypto market itself is largely unregulated. While you can buy and sell cryptocurrencies on exchanges, there are no specific laws governing their use as a form of payment. Currently, there's no specific legislation governing cryptocurrency use or trading in India.

RBI Circular & Supreme Court Verdict: There was a Reserve Bank of India (RBI) circular in 2018 restricting banks from dealing with crypto businesses, but the Supreme Court overturned it in 2020. Cryptocurrency isn't illegal in India, but it operates in an unregulated space. The government is considering a bill that could potentially ban or regulate cryptocurrencies. It's important to stay updated on any new developments.

What risks can an unregulated market of cryptocurrency have?

The unregulated nature of cryptocurrencies in India poses a number of potential risks, both for individual investors and the Indian economy as a whole.

Investor Risks:

• Increased Vulnerability to Scams and Fraud: Without regulations, there's less oversight on cryptocurrency exchanges and Initial Coin Offerings (ICOs). This can create a breeding ground for scams like pump-and-dump schemes and fraudulent ICOs, where investors lose money due to manipulation or fake projects.
• Security Threats: Unregulated exchanges might have weaker security protocols, making them more susceptible to hacking and theft of investor funds.
• Limited Dispute Resolution: In the absence of clear regulations, resolving disputes between investors and exchanges can be challenging.

GainBitcoin (2017): GainBitcoin, a prominent Indian cryptocurrency exchange, abruptly shut down in 2017, allegedly taking millions of dollars worth of investors' Bitcoin with them. This incident highlighted the vulnerability of investors in the absence of exchange regulations and proper oversight.

ICO Scams: Several fraudulent ICOs (Initial Coin Offerings) have targeted Indian investors. These schemes raise money through token sales based on false promises or non-existent projects. Due to the lack of regulations, it's challenging for investors to verify the legitimacy of these ICOs, leading to financial losses.

• ATC Coin was marketed as India's first digital cryptocurrency and was promoted through multi-level marketing (MLM) schemes. However, concerns were raised about the legitimacy of the project, and it faced allegations of being a Ponzi scheme. The promoters of ATC Coin were arrested in 2018 for fraud and cheating.

Market Risks:

• Market Manipulation: The lack of regulations makes the Indian crypto market more susceptible to manipulation by large investors or groups, leading to artificial price swings and increased volatility for smaller investors.
• Money Laundering and Terror Financing: Cryptocurrency's anonymity can be attractive for criminals looking to launder money or finance illegal activities. This can destabilize the financial system and pose security risks.
• Financial System Instability: The widespread adoption of unregulated cryptocurrencies could potentially impact the stability of the traditional financial system, especially if there's a sudden crash or crisis in the crypto market.

Pump-and-Dump Schemes: These schemes involve artificially inflating the price of a cryptocurrency through coordinated buying and misleading marketing. Once the price reaches a peak, the manipulators sell their holdings, causing the price to plummet, leaving unsuspecting investors with significant losses. The unregulated nature of the Indian market makes it easier for such manipulation to occur. How do Pump-and-Dump schemes operate?

• Sudden Price Surge: In a pump-and-dump scheme, the price of a particular cryptocurrency experiences a sudden and significant increase over a short period, often accompanied by high trading volumes.
• Aggressive Promotion: Organizers of pump-and-dump schemes often use aggressive marketing tactics, including social media channels, online forums, and messaging platforms, to hype the targeted cryptocurrency and attract investors.
• False Information: Pump-and-dump organizers may disseminate false or misleading information about the cryptocurrency's fundamentals, partnerships, or potential price movements to create FOMO (fear of missing out) among investors.
• Dump Phase: Once the price reaches a peak and unsuspecting investors start buying into the hype, organizers execute the "dump" phase by selling off their holdings at a profit, causing the price to plummet.
• Victims' Losses: Investors who bought into the pump at inflated prices are left holding worthless assets as the price crashes, resulting in significant financial losses.

Government and Regulatory Risks:

• Uncertain Tax Environment: While the Indian government taxes crypto gains, the lack of clear regulations creates uncertainty for investors regarding future tax implications.
• Potential for Bans or Restrictions: The Indian government is considering a crypto bill that could potentially restrict or even ban cryptocurrencies altogether. This uncertainty discourages long-term investment and innovation in the crypto space.

Tax on Crypto Gains (2022): The Indian government introduced a 30% tax on crypto gains in the 2022 Union Budget. However, the lack of clear regulations regarding the legal status of cryptocurrency creates uncertainty for investors regarding future tax implications. This discourages long-term investment and creates a wait-and-see approach. The unregulated nature of cryptocurrencies in India creates a high-risk environment for investors and poses potential threats to the stability of the financial system. Clear regulations could help mitigate these risks and promote responsible innovation in the crypto space.

Disclaimer: Investing in cryptocurrency carries inherent risks. This article is for informational purposes only and should not be taken as financial advice. Please consult a financial professional before making any investment decisions. The information provided in this article is based on current regulations and is subject to change. The information provided above is for educational and informational purposes only. It does not constitute financial, investment, legal, or tax advice, and should not be construed as such. Investing in cryptocurrencies involves inherent risks, including the potential for loss of capital. The content provided is based on sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Readers are advised to conduct their own research and due diligence before making any investment decisions. Additionally, laws and regulations regarding cryptocurrencies vary by jurisdiction, and readers are responsible for understanding and complying with applicable laws. The author and publisher of this content disclaim any liability for any loss or damage resulting from reliance on the information provided herein. Furthermore, readers understand and acknowledge that cryptocurrencies and related investments are subject to volatility, regulatory changes, and other risks beyond the control of the author and publisher.