Current State of Crypto Adoption in India
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As of 2024, crypto adoption in India thrives despite the government’s strict regulatory measures. A June 2023 survey revealed that around 20% of Indians now own digital currencies, with Bitcoin and Ethereum leading the way as favorites.
Fast forward to April 2024, there’s been a noticeable uptick among wealthier Indians using their annual remittance quotas to purchase spot-bitcoin exchange-traded funds (ETFs).
Under these remittance rules, citizens can send up to $250,000 abroad each financial year. Also, one platform, Vested Finance, reported over $5.3 million in Bitcoin ETF transactions, with 67% of this being buy orders.
India’s crypto adoption has continued to thrive, even amidst high trading taxes and strict regulations. For the second year in a row, India tops Chainalysis’s Global Adoption Index, which tracks crypto use across 151 countries.
“India has also got a fairly widespread level of adoption across different assets of crypto despite restrictions, implying new participants to crypto would have been participating via services that were not banned,”
The report highlights India’s high engagement with both centralized exchanges and decentralized finance (DeFi) platforms from June 2023 through July 2024. Thus, this solidifies its lead as a global crypto powerhouse.
Despite this enthusiasm, India’s government has maintained a strict approach toward crypto, especially since 2018. The Financial Intelligence Unit (FIU) issued notices to nine offshore exchanges in December 2023 for regulatory non-compliance.
Binance, the largest global exchange, registered with the FIU in May 2024 but still faced a $2.25 million fine in June. Likewise, KuCoin, which registered in March, received a lesser penalty of Rs 34.5 lakh (about $41,500).
Current Crypto Regulations and Policies in India
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India currently has no specific regulations for virtual digital assets (VDAs), and while cryptocurrencies are not prohibited, they aren’t recognized as legal tender. Back in 2018, the Reserve Bank of India (RBI) barred banks and financial intermediaries from working with crypto exchanges.
The Bank cited concerns over tax evasion and the challenges of enforcing compliance in peer-to-peer transactions. The RBI argued that this posed a risk to fiscal stability.
This decision was challenged, and in March 2020, the Supreme Court overturned the RBI’s ban, calling it disproportionate and unconstitutional. This landmark ruling allowed the crypto industry to resume trading and investment activities, thereby encouraging crypto adoption in India.
Since then, while there are still no direct regulations on crypto exchanges, the RBI has raised concerns about the potential for terrorist financing linked to cryptocurrencies. In March 2023, it urged financial institutions to apply strict anti-money laundering and foreign exchange regulations.
In 2021, a bill was introduced in Parliament aimed at creating a regulatory framework for a digital currency issued by the RBI while restricting most private cryptocurrencies. This bill, however, was pulled before any debate, and it hasn’t resurfaced since.
Meanwhile, the RBI launched its digital rupee in 2023, offering it as a secure alternative to cryptocurrencies but without the same tax obligations. By July 2024, the digital rupee had attracted around 5 million users. However, its uptake has been slower compared to the highly popular Unified Payments Interface (UPI), which has facilitated fast mobile payments since 2016.
Despite the popularity of the Unified Payments Interface (UPI), India’s real-time mobile payment system, crypto exchanges remain restricted from using it. This makes it challenging for exchanges to integrate with the country’s primary payment network.
The industry has advocated for access, but progress has been limited. As a result, the government’s stance on cryptocurrency continues to evolve, with debates ongoing.
Nonetheless, crypto remains popular in India, drawing interest from both individual and institutional investors as the government works on clearer guidelines.
AML and KYC Requirements
As of March 7, 2023, India’s central government has brought digital assets, including cryptocurrencies, under the Prevention of Money Laundering Act (PMLA).
Now, activities like trading between cryptocurrencies and fiat currencies, transferring digital assets, and exchanging one type of digital asset for another are regulated under this law.
With these changes, Indian crypto exchanges must report suspicious activity to the Financial Intelligence Unit (FIU-IND) and comply with anti-money laundering (AML) and Know Your Customer (KYC) standards.
“With this inclusion, crypto dealers, exchanges, and intermediaries will now be required to perform KYC and maintain their records of their clients and users of the platform, as is usually done by the banks. Further, such dealers and exchanges will now have to report any suspicious activity to government agencies. This will enable the government to keep a closer watch on the crypto trading activities.”
Under the PMLA, crypto exchanges and other digital asset service providers in India must implement strict KYC processes to verify users’ identities. These regulations require exchanges to keep detailed records of all transactions.
They also require exchanges to maintain documentation that verifies client identities and share relevant information with the government.
As per Section 12 of the PMLA, exchanges are considered “Reporting Entities.” Additionally, they are legally required to monitor transactions, document identities, and report any suspicious activity to FIU-IND.
Likewise, under Rule 5(2) of the PMLA’s Maintenance of Records Rules, 2005, each reporting entity is responsible for creating an internal system to manage this information and ensure compliance.
In summary, exchanges in India are required to adhere to comprehensive AML and KYC standards, ensuring that crypto-related activities align with national financial laws.
Crypto Travel Rule in India
As stated earlier, the Indian Ministry of Finance officially included Virtual Digital Assets (VDAs) like cryptocurrency under the Prevention of Money Laundering Act (PMLA).
India then took a significant step to strengthen its anti-money laundering (AML) framework by applying the Financial Action Task Force (FATF) Travel Rule to Virtual Digital Assets (VDAs), including cryptocurrencies.
The rule, initially created for traditional banking, was expanded to include Virtual Asset Service Providers (VASPs) in 2019, requiring them to collect and share the sender and recipient information on transactions.
The “Travel Rule” requires essential data to accompany transactions, such as the sender’s name, account number (or wallet address), address, and identification details. Similarly, recipient data must also be included to ensure transparency.
Following this update, the Financial Intelligence Unit (FIU-IND) rolled out specific AML (Anti-Money Laundering) and CFT (Counter-Terrorism Financing) guidelines to VDA service providers, mandating compliance with the Travel Rule.
The guidelines specify that:
- Originating Service Providers (SPs) must collect accurate originator and beneficiary information for each VDA transfer. This includes details like the sender’s PAN (Permanent Account Number), name, wallet address, and verified physical address. They must securely transfer this information to the receiving institution and provide it to authorities upon request.
- Beneficiary Service Providers (SPs) are required to verify and hold accurate details about the originator, including the PAN or national ID and wallet address, as well as confirm the accuracy of the beneficiary’s name and wallet address. This information must also be available for authorities on demand.
By requiring that both sender and receiver details are tracked and shared, these regulations add transparency and help authorities monitor digital transactions more effectively.
Taxation of Crypto in India
In 2022, the Indian government introduced a new tax regime for cryptocurrencies and other digital assets, imposing a 30% tax on any income derived from these assets. This requirement comes along with a 1% Tax Deducted at Source (TDS).
Cryptocurrencies and NFTs are classified as “Virtual Digital Assets” (VDAs), with Section 2(47A) added to the Income Tax Act to define this category. Essentially, VDAs encompass all types of crypto assets, including tokens and NFTs, but exclude items like gift cards or vouchers.
Thus, when trading cryptocurrencies or NFTs, Indian investors must declare their income as capital gains if these assets are held as investments. Conversely, if they are held for trading, the income is classified as business income.
Furthermore, the new Income Tax Return (ITR) forms for the 2022-23 financial year now feature a specific section called Schedule – Virtual Digital Assets (VDA) to report gains from these digital assets.
Here’s how the taxation works:
- Any profits from selling or transferring cryptocurrencies will be taxed at 30%. This applies to all forms of digital asset transactions.
- A 1% TDS is deducted from crypto transactions that exceed Rs 10,000 annually or Rs 50,000 for specified individuals. This TDS is applicable from July 1, 2022.
- Investors cannot claim deductions for expenses or losses related to cryptocurrency trading, except for the cost of acquisition. Notably, losses from one cryptocurrency cannot offset gains from another.
- If someone receives a digital asset as a gift, such a person will be taxed on its value.
The 30% tax applies to various transactions, including:
- Spending cryptocurrencies to buy goods or services
- Exchanging one cryptocurrency for another
- Trading cryptocurrencies with fiat currency (like the Indian Rupee)
- Receiving cryptocurrency as payment for services
- Mining cryptocurrencies
- Getting paid in cryptocurrency
- Earning staking rewards or receiving airdrops
However, not every crypto transaction automatically incurs the 30% tax rate. The Income Tax Department (ITD) may classify certain activities, such as receiving cryptocurrencies as gifts, as different forms of income. This could then be taxed at your individual tax slab rate.
Furthermore, the 1% TDS on crypto transactions was introduced to promote transparency and monitor investments in the crypto market. This TDS applies when there is a transfer of ownership like selling or trading assets, not just moving them between wallets.
Factors Driving Crypto Adoption in India
Source: Freepik
India’s crypto market is booming and it is driven by several factors. These factors include:
Future of Money
About 37% of Indians see crypto as “the future of money.” This idea that cryptocurrency could one day replace or supplement traditional currency systems fuels excitement, especially among younger generations.
Additionally, The decentralized nature of cryptocurrencies offers an appealing contrast to traditional banking systems. Essentially, crypto provides faster, more secure transactions without intermediaries.
Curiosity
Curiosity is another powerful driver of crypto adoption in India. Many people are intrigued by crypto’s potential to revolutionize the financial world and want to understand how digital currencies work.
Crypto news, trends, and discussions are widespread on social media platforms and news channels, sparking public interest. As such, stories of significant returns, innovations, and celebrity endorsements create a buzz, drawing people to learn more.
Long-Term Returns
Another reason people use crypto in India is the chance to achieve long-term financial gains. With crypto’s historic price surges, Indians see it as a potential vehicle for wealth accumulation, especially for those willing to invest and hold for the long run.
The crypto market allows small investments, meaning people from various economic backgrounds can participate.
This accessibility enables many Indians to dip their toes into investing without needing a large upfront sum. Thus, it allows more people to capitalize on crypto’s growth potential over time.
Hedge Against Inflation
With India experiencing fluctuations in currency values and inflation, many see crypto as a safeguard against these issues.
The fixed supply of major cryptocurrencies, like Bitcoin, positions them as a form of “digital gold” that can protect against inflation. Consequently, it sparks the interest of those who want more control over their finances.
Portfolio Diversification
Crypto assets are generally non-correlated with traditional financial markets, meaning their value is not directly influenced by the same economic factors that affect stocks and bonds.
Thus, investors see crypto as a way to diversify. Unlike stocks or mutual funds, crypto operates independently, offering a hedge against market volatility and inflation.
Benefits of Cryptocurrency in India
The adoption of cryptocurrencies in India brings several benefits. These include:
Financial Inclusion
Cryptocurrencies provide access to financial services for the underbanked and unbanked populations. With just a smartphone and internet connection, individuals can participate in the crypto economy.
Thus, they can easily access savings, loans, and investment opportunities without needing a traditional bank account.
Reduced Transaction Costs
For businesses, accepting cryptocurrencies can lower transaction fees compared to traditional credit card payments.
For cross-border transactions, crypto significantly reduces the costs and time involved. This makes it an attractive option for international trade and remittances.
Economic Growth and Job Creation
The growing crypto industry in India has led to the creation of new jobs in fields like blockchain development, crypto analysis, digital asset management, and cybersecurity.
Startups in this space, such as WazirX, have expanded rapidly, contributing to economic growth, attracting foreign investments and also facilitating crypto adoption in India.
Transparency and Security
The decentralized nature of cryptocurrencies and blockchain technology enhances transparency and reduces the risk of fraud. This is particularly beneficial in sectors like supply chain management.
Here, tracking the movement of goods can be streamlined and made more secure using blockchain.
Current Usage of Cryptocurrency in Various Sectors in India
Source: freepik
The cryptocurrency landscape in India has evolved significantly over the past few years. Despite regulatory uncertainties, digital currencies like Bitcoin, and the popular domestic token Polygon (MATIC) have found practical applications in several fields.
This shift signals a transformative potential in the economy and reflects the increasing crypto adoption in India. Some of the applications of crypto in India include:
Finance and Investments
The most prominent use of cryptocurrency in India is as an investment vehicle. Millions of Indians are investing in digital currencies through platforms like CoinSwitch, WazirX, and CoinDCX.
These exchanges have seen a surge in user registrations, particularly among young adults aged 18 to 35. Cryptocurrencies offer a new avenue for diversification beyond traditional assets like stocks and real estate, especially as many view them as a hedge against inflation.
In addition, there is a rising interest in decentralized finance (DeFi) platforms. DeFi allows users to lend, borrow, and earn interest on their crypto holdings without intermediaries like banks.
This is appealing in a country where a large segment of the population is underbanked, providing them access to financial services in a decentralized manner.
E-commerce and Retail Payments
Although direct cryptocurrency payments are not yet mainstream in India, several online retailers and service providers are starting to accept digital currencies.
For instance, Unocoin, a leading crypto exchange, allows its users to buy vouchers with Bitcoin for popular brands like Amazon, Flipkart, and Myntra.
This enables people to indirectly use their cryptocurrency holdings for everyday purchases.
Furthermore, small businesses, particularly tech-savvy startups, are beginning to accept crypto payments.
This acceptance is essentially a means to tap into a global customer base and reduce transaction fees associated with traditional payment gateways. The adoption of crypto payments is more prevalent in major urban centers like Bengaluru, often referred to as India’s tech capital.
Technology and Innovation
India’s tech sector is a significant player in the global cryptocurrency ecosystem. Indian developers contribute extensively to blockchain projects, and companies like Polygon are building scalable solutions to enhance the efficiency of blockchain transactions.
Polygon, for example, has gained global recognition for reducing Ethereum gas fees, making transactions faster and cheaper. Additionally, blockchain technology is being explored for various use cases beyond finance.
For instance, in 2021, the Indian state of Maharashtra started experimenting with blockchain for issuing tamper-proof educational certificates, reducing the risk of document fraud. This adoption highlights the broader potential of blockchain technology in enhancing transparency and security across different sectors.
Remittances and Cross-Border Transactions
India is one of the world’s largest recipients of remittances, with millions of Indians living abroad sending money back home. Traditional remittance channels like Western Union or bank transfers can be slow and expensive due to high fees.
Cryptocurrencies however offer a faster, cheaper alternative. Several blockchain-based platforms, such as Ripple, are working with Indian banks to facilitate low-cost cross-border transactions.
For example, Ripple has partnered with major Indian banks like Kotak Mahindra to improve the efficiency of remittance services. This demonstrates the practical utility of cryptocurrencies in enhancing financial inclusion.
Charity and Donations
Cryptocurrency has also found a niche in the charitable sector. Non-profits like CryptoRelief, a community-run fund initiated during the COVID-19 crisis, raised millions of dollars in cryptocurrency donations to support pandemic relief efforts.
The transparency of blockchain technology makes it easier to track how donations are used, which increases donor trust. This has encouraged more individuals, especially those in the tech community, to donate via cryptocurrencies.
Challenges to Crypto Adoption in India
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India’s journey towards embracing cryptocurrency has been full of potential, but also significant obstacles that have slowed widespread adoption.
Here are some of the main challenges facing crypto in India:
Lack of a Clear Regulatory Framework
One of the biggest roadblocks is the absence of a defined regulatory structure for cryptocurrency. Without clear guidelines, both investors and businesses operate in uncertainty, unsure of how policies may shift in the future.
This unpredictability can discourage innovation, as companies may hesitate to develop new crypto solutions in a volatile regulatory environment.
“Despite the opportunities, the road to crypto adoption in India is fraught with challenges. The primary concern is the lack of a clear regulatory framework, which creates uncertainty for investors and can stifle innovation. There is also a significant digital divide in the country. Urban areas may boast high levels of tech literacy and infrastructure, rural regions lag significantly behind…”
Government and Regulatory Risks
Indian regulators and government bodies have been cautious, sometimes outright hostile, towards cryptocurrency.
With frequent warnings from the Reserve Bank of India (RBI) and the Ministry of Finance, crypto businesses and users face the constant risk of restrictions. This problem creates hesitation for those interested in entering the market, thereby limiting crypto adoption in India.
High Tax on Crypto Gains
The 30% tax on crypto gains, coupled with the 1% Tax Deducted at Source (TDS) on transactions, is another deterrent.
These high tax rates can limit the profitability of crypto investments and make crypto trading less appealing. This can discourage retail investors and new entrants who are already navigating unfamiliar territory.
Barriers to User Entry
For many potential users, the technicalities of managing digital wallets, understanding exchanges, and navigating private keys can be overwhelming.
Additionally, with limited educational resources, new users may struggle to gain the confidence needed to enter the market.
Extreme Volatility
Cryptocurrency prices are notoriously volatile, which adds risk to the investment. Rapid price swings, sometimes in a matter of minutes, can lead to significant financial losses for inexperienced investors.
This unpredictability deters cautious investors who would otherwise consider crypto as a long-term asset.
Perception of Crypto as a Scam
Many still view cryptocurrency with suspicion, associating it with scams or Ponzi schemes.
High-profile frauds and hacking incidents only add fuel to this perception, creating skepticism and distrust among the general public. Overcoming this will require ongoing efforts to educate the public and highlight the legitimate uses of crypto.
Future of Crypto Adoption in India
Alt text: Coins falling on humanoid robot
Source: Freepik
The future of cryptocurrency adoption in India holds a lot of promise, but it’s also fraught with several challenges.
With a young, tech-savvy population and one of the world’s largest digital user bases, India has the potential to become a leader in the crypto space. Let’s look into what the future could look like for crypto adoption in India.
Regulatory Clarity
The regulatory environment around cryptocurrency in India has been largely ambiguous. As stated earlier, crypto was initially met with skepticism and even restrictions.
However, recent moves by the government such as bringing crypto under AML and CFT guidelines suggest that regulators are now open to considering crypto as part of the financial ecosystem.
Looking forward, a clearer, well-defined regulatory framework is crucial for the crypto industry to flourish. If done thoughtfully, these regulations could transform India into a regional crypto hub.
Blockchain for Governance and Financial Inclusion
India has been a global leader in leveraging technology for financial inclusion, as evidenced by initiatives like the Unified Payments Interface (UPI).
Blockchain and digital assets can further support financial inclusion by reducing transaction costs. Essentially, this will make cross-border transfers more accessible, and even enable smart contracts for various governance functions.
Crypto-Friendly Policies to Attract Global Investments
Many countries are competing to become global crypto hubs by creating favorable policies for crypto businesses.
India could join this race by drafting crypto-friendly policies that attract global investors and crypto companies.
If India adopts pro-crypto regulations, it could attract foreign direct investment in blockchain projects, increase technological exchange, and boost the economy.
Conclusion
In India, cryptocurrency appeals to many as the “future of money” and a unique tool for diversifying investment portfolios.
This resonates with Indians eager to shape their financial future. Yet, realizing this potential requires balanced efforts from all stakeholders including regulators, industry leaders, and the public.
As India moves toward clearer regulations, fosters innovation, and raises awareness, we can envision a higher rate of crypto adoption in India. Additionally, Indians can envision a future where cryptocurrency and blockchain integrate seamlessly into the mainstream economy.
