Cryptocurrency

A cryptocurrency is a kind of digital money that is not issued by any government or central bank. It exists only as entries in a shared computer record called a blockchain, kept by thousands of computers around the world. Bitcoin is the most famous example. In India, the law calls crypto and similar items virtual digital assets (VDAs).

India taxes them heavily and watches them for money laundering, but has not made them legal tender, and has not passed a full law to regulate them either.

Why was crypto created?

Normal money depends on trust in a bank and a central bank. In 2008, the world went through a big financial crisis, and many people lost trust in banks. Crypto was designed as money that needs no bank in the middle. Two strangers can send value to each other directly over the internet. No single company or government can freeze, print or control it. Supporters see this as freedom. Central banks see it as a risk, as we will learn below.

Where did it come from?

• 31 October 2008: A person or group using the name Satoshi Nakamoto published a short paper called "Bitcoin: A Peer-to-Peer Electronic Cash System". Nobody knows for sure who Satoshi is.
• 3 January 2009: The first block of the Bitcoin blockchain (called the genesis block) was created. Bitcoin went live.
• 30 July 2015: Ethereum launched. It added smart contracts: small programs on the blockchain that run on their own when set conditions are met. This allowed many new crypto "tokens" to be built on top of it.
• After this, thousands of other cryptocurrencies appeared, along with stablecoins (crypto tokens whose value is tied to a normal currency, usually the US dollar).

How does crypto work?

Imagine a village notebook in which every money transfer is written down. Instead of the village head keeping it, every family keeps an identical copy. When Ravi pays Sita, the entry is shared with everyone. Families check it, and once most agree, the entry is added to all copies. Nobody can secretly change an old entry, because everyone else's copy would not match. That shared notebook is a blockchain.

1. A user owns a digital wallet with a secret key (like a password that proves ownership).
2. The user sends coins by signing a transaction with that key.
3. Computers in the network, called nodes, check that the sender really has the coins.
4. Valid transactions are grouped into a block. In Bitcoin, special computers called miners compete to solve a hard maths puzzle to add the block. This method is called proof of work. The winner earns new coins as a reward.
5. The new block is linked to the earlier one using cryptography, forming a chain. Changing an old block would mean redoing the work for every block after it, which is practically impossible.

Bitcoin's total supply is capped at 21 million coins. This fixed supply is one reason some people call it "digital gold".

Main types of crypto assets

• Unbacked cryptocurrencies like Bitcoin and Ether: no issuer, no backing; their price depends only on what buyers will pay. Prices can rise or fall very sharply.
• Stablecoins: tokens that promise a stable value, for example 1 token = 1 US dollar, backed by reserves such as cash and short-term government bonds. The United States passed its first federal stablecoin law, the GENIUS Act, on 18 July 2025.
• Non-fungible tokens (NFTs): unique digital tokens, often linked to digital art or collectibles. "Non-fungible" means one cannot be swapped equally for another, unlike two ₹100 notes.

Why are central banks worried?

These are the concerns the RBI repeats most often:

• Monetary sovereignty: The RBI controls how much rupee money exists and what it costs to borrow. If many people start using a private crypto or a dollar stablecoin instead of rupees, the RBI loses part of this control. In a small way, India's money would be decided outside India.
• Monetary policy: When the RBI changes the repo rate, the effect travels through banks and rupee loans. Money held in crypto sits outside this system, so rate changes work less well.
• Capital flows: India has rules on how much money can move in and out of the country (capital controls). Crypto can be sent abroad in minutes without going through a bank. This can let money escape the rules, which is risky for an emerging economy like India.
• Singleness of money: In a healthy system, a rupee in any bank is always worth exactly one rupee, with no questions asked. The Bank for International Settlements (BIS), in its Annual Economic Report 2025, said stablecoins fail three tests of good money: singleness, elasticity and integrity. A stablecoin can slip below its promised value if people doubt its reserves.
• Financial stability, fraud and crime: Prices swing wildly. Exchanges can collapse. Crypto can be used for scams, ransom payments, drug trade and terror funding.

India's journey with crypto

• 6 April 2018: The RBI issued a circular telling banks and regulated entities not to provide services to anyone dealing in virtual currencies. This cut crypto exchanges off from banks.
• July 2019: An inter-ministerial committee chaired by Subhash Chandra Garg (then Finance Secretary) recommended banning private cryptocurrencies. It attached a draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, with fines up to ₹25 crore and jail up to 10 years. It also praised the underlying DLT and suggested an official digital currency.
• 4 March 2020: In Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court struck down the RBI's 2018 circular. The Court accepted that the RBI has the power to regulate crypto-related risks. But it said a near-total cut-off was not proportionate, because the RBI had not shown real evidence of harm to the banks it regulates. The case was argued under Article 19(1)(g) (the right to carry on any trade or business).
• 2021: The government listed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 for Parliament, but it was never introduced.
• Finance Act, 2022: Crypto was brought into the tax net as a "virtual digital asset" (VDA), defined in Section 2(47A) of the Income-tax Act, 1961. Profit on transfer is taxed at a flat 30% (Section 115BBH). No deduction is allowed except the cost of buying, and a loss on one VDA cannot be set off against any other income. A 1% TDS (tax deducted at source) applies on transfers (Section 194S).
• 7 March 2023: The government brought VDA service providers (exchanges, wallet providers and similar businesses) under the Prevention of Money Laundering Act (PMLA), 2002 as "reporting entities". They must register with the Financial Intelligence Unit-India (FIU-IND), verify customers (KYC) and report suspicious transactions. This applies even to foreign exchanges that serve Indian users.
• From 1 April 2026: The new Income-tax Act, 2025 replaced the 1961 Act. The same tax treatment continues: the 30% rate is now in Section 194 of the new Act, and the 1% TDS in Section 393(1).

So, as of October 2026, crypto in India is not banned, not legal tender, heavily taxed and watched for money laundering. A long-promised government discussion paper on crypto has been delayed many times.

The global picture

• El Salvador made Bitcoin legal tender on 7 September 2021, the first country to do so. In January 2025, after an agreement with the International Monetary Fund (IMF), it changed the law so that businesses no longer have to accept Bitcoin.
• The Financial Action Task Force (FATF), the global anti-money-laundering watchdog, extended its rules to virtual assets in October 2018 (Recommendation 15). In June 2019 it added the "travel rule": crypto firms must collect and share the names of the sender and receiver of transfers, just as banks do.
• Under India's G20 Presidency, the IMF and the Financial Stability Board (FSB) wrote a Synthesis Paper on crypto-assets (7 September 2023). The New Delhi Leaders' Declaration welcomed it, and G20 finance ministers adopted its roadmap in October 2023 in Marrakesh, Morocco.

Commonly confused concepts

• Cryptocurrency vs CBDC: A cryptocurrency is private, has no issuer standing behind it, and its value floats. A CBDC (in India, the e₹) is issued by the central bank, is legal tender, and is always worth the same as paper rupees. Both may use similar technology, but they are opposites in who controls them.
• Cryptocurrency vs stablecoin: Bitcoin's price floats freely. A stablecoin tries to keep a fixed value against a real currency, by holding reserves. Stablecoins are still private, not central bank money.
• Blockchain vs cryptocurrency: Blockchain is the technology (the shared notebook). Cryptocurrency is one use of that technology. You can use blockchain for land records or trade papers without any cryptocurrency at all. This is exactly the line the RBI draws: yes to the technology, caution on the coins.
• Legal vs legal tender: Owning and trading crypto is not a crime in India, and it is taxed. But it is not legal tender, so nobody is obliged to accept it as payment, the way they must accept rupee notes.
• "VDA" vs "virtual currency": "Virtual currency" was the term in the RBI's 2018 circular. "Virtual digital asset" is the wider legal term used in income tax and PMLA, and also covers NFTs.

Issues, criticism and the way forward

• Regulatory gap: India taxes crypto and applies money-laundering rules, but has no dedicated law that says who regulates exchanges, how investors are protected, or what happens if an exchange fails.
• High tax and the flight of activity: Critics say the 30% tax plus 1% TDS pushed many Indian traders to foreign platforms, reducing tax collected and oversight. The government's view is that heavy taxation discourages speculation by ordinary people.
• Different views inside the system: The RBI has consistently argued for strong caution, even a ban. Others in policy circles have been more open to regulating crypto, especially stablecoins, rather than discouraging it.
• Need for global rules: Crypto crosses borders easily, so no single country can control it alone. India has pushed for a common global framework, as seen in the G20 work of 2023.
• Way forward suggested by experts: a clear national framework (licensing exchanges, investor protection, reserve rules for any stablecoin), alignment with FSB and FATF standards, and continued use of the underlying technology through regulated tools like the e₹ and tokenisation.

Concepts to Know

• Legal tender: Money that everyone in a country must accept for payment of debts. In India, RBI notes, coins and the e₹ are legal tender.
• Monetary sovereignty: A country's power to issue its own money and decide its interest rates without outside control.
• Capital controls: Rules that limit how much money people and companies can move in or out of a country.
• Miner / mining: Computers that do heavy calculations to add new blocks to a blockchain like Bitcoin's, earning new coins as a reward.
• Reporting entity (under PMLA): A business that the law requires to keep records of customers and report suspicious transactions to FIU-IND, such as banks and, since 2023, crypto exchanges.
• TDS (Tax Deducted at Source): A small part of a payment that is cut and sent directly to the government at the time of the transaction, so tax is collected early.
• Proportionality: A legal test courts use to check that a government action is not harsher than needed to achieve its goal.