India adopted a risk-averse conservative approach to cryptocurrency regulation at the cost of sparking innovation for keeping financial risk in check. Starting Virtual Digital Assets (VDAs) under the Prevention of Money Laundering Act (PMLA) already indicated that India has charted the path of treating crypto firms as intermediaries within the financial sector. But the story on crypto licensing -- an anchor of legitimacy and compliance -- remains to be written in the years to come.
As India gears up for a more mature regime of regulation, crypto exchanges, Web3 companies, and foreign investors watch intently how the regime of licensing is being shaped. Will it be Singapore's robust licensing by MAS? Or will it be the Philippines and Japan's tiered sandbox regimes?
This is an insider's perspective on where India stands today, the future ahead, and what companies need to know in order to stay future-proof.
Where We Are Today: A Patchwork of Regulation
Today, at least as of 2024, India does not possess an express regime of licensing cryptocurrency. Instead, the landscape is controlled by virtue of a patchwork of tax law, anti-money laundering and terrorist finance regulation, and ad hoc clarifications by financial regulators.
Key points are:
MLA inclusion: Crypto exchanges and custodial wallets need to become registered with the Financial Intelligence Unit (FIU-IND) from March 2023 and comply with AML/CFT provisions — KYC, transactional monitoring, reporting, etc.
Fixed 30% tax on crypto gains, and 1% TDS on all transactions above ₹10,000 — both as de facto gatekeepers.
No institutional licence-granting authority: Crypto businesses are technology platforms and not financial institutions, except fiat conversion ones.
The implication?
A "grey-zone" regulatory framework, where platforms enjoy high compliance but no standing and investor trust that derives from a licence. CREBACO and Indiatech.org reports indicate that this is causing capital flight and talent drain to other crypto-friendly nations.
How Crypto Licensing Can Be Imposed in India
The Reserve Bank of India (RBI), Ministry of Finance, and SEBI are said to be drafting a Digital Assets Bill — one with a formal licensing regime for crypto service providers. While the specifics are speculative, this is what the future regime can have:
1. Function-Based Categorized Licenses
Just like Singapore and Japan, India can issue function-specific licenses:
Custodial Wallet Providers
Crypto Exchanges
DeFi Platforms
Stablecoin Issuers
Blockchain-as-a-Service Providers
2. Dual Oversight Model
Dual regulation by RBI and SEBI is likely:
RTEBI can regulate fiat-crypto gateways and stablecoins.
SEBI can regulate investment tokens, STOs, and ICOs.
3. Tech and Compliance Standards Mandatory
Future licenses will most likely require:
Firm data localization
Source-of-funds authentication
Annual security audits
Real-time transaction monitoring software
GDPR-type consumer data protection
4. Cross-Border Compliance
As India comes under the obligation of FATF's Travel Rule, regulated exchanges may be requested to render foreign transfers traceable and compliant with Indian as well as global AML regimes.
Lessons from Abroad: What India Might Borrow
Singapore's MAS Model
Singapore's Payment Services Act makes digital payment token services register for a license based on stringent due diligence conditions. Though stringent in compliance, it is certain with regards to regulations, and more than 250 blockchain firms have been drawn to the island state.
Philippines' Sandbox Approach
Under its Innovation Sandbox, the Bangko Sentral ng Pilipinas (BSP) allows fintech firms to test crypto services on a pilot basis before a license is issued. This provides a sandbox in risk-free mode and phased rollout — a model that can be replicated by India's IFSC at GIFT City.
Japan's Exchange Registration
Japan compelled all crypto exchanges to register with its Financial Services Agency (FSA). It made Japan a secure, if highly regulated, crypto hub. Post-FTX, most Indian crypto business leaders favor instituting similar investor protections.
What Businesses Need to Do Now
1. Get FIU-Registered
If your exchange is handling VDA transactions, FIU-IND registration is a requirement now. More than 30 foreign and Indian exchanges have already registered, including Binance and CoinDCX.
2. Get AML Audits Ready
Licensed or unlicensed, being compliant with the FIU would mean having clean KYC documents, transaction reports, STRs and continuous due diligence.
3. Developing Legal Resilience
Appoint legal professionals to future-proof your business model. Whoever the ultimate license, SEBI, RBI, or new regulator will be, businesses have to be flexible enough to adapt.
4. Cybersecurity First
Future licenses will incorporate cyber security as a prerequisite. Add ISO certification, smart contract audit, and user fund segregation to your list.
5. Public Transparency
Licensing will come under the spotlight. Get ahead of the pack by releasing transparency reports, Proof of Reserves, and audit reports — which Kraken and Bitstamp already do in the United States.
Why Licensing Will Be a Game-Changer
India's licensing won't be a rubber stamp of red tape — it will change the crypto finance trust map. A licensed exchange will benefit from:
Greater banking connectivity
Confidence of investors
Reputation for crossing borders
Eligibility for insurance and venture capital
And with India's Digital Public Infrastructure (DPI) such as Aadhaar, UPI, and DigiLocker already revolutionizing the fintech sector, registered crypto companies can be incorporated into India Stack and spearhead the Web3 revolution on the earth.
Last Thoughts
The future of crypto regulation in India is two-edged. It will lead India to become the Web3 innovation hub of the Global South if executed well. Over- or tardily regulated, and it will watch talent and capital flee to Dubai, Singapore, or Zug.
In today's time, the companies that strike an effective balance between compliance and innovation will be ready for the transition from the "Wild West" to a regulated frontier.