Cryptocurrency, CBDC & Digital Assets — RBI's e-Rupee & India's Regulatory Framework

What Are Cryptocurrencies?

Cryptocurrencies are decentralised digital assets secured by cryptographic algorithms and recorded on a distributed ledger (blockchain). Unlike fiat currency, they are issued by no central authority. Bitcoin (launched 2009) and Ethereum are the most prominent examples. Key properties include:

• Decentralisation: No single point of control; consensus maintained by a network of nodes.
• Permissionless: Anyone with internet access can transact.
• Pseudonymity: Transactions are traceable on-chain but wallet addresses are not inherently linked to identities.
• Consensus mechanisms: Proof-of-Work (PoW — energy-intensive, used by Bitcoin) vs. Proof-of-Stake (PoS — energy-efficient, adopted by Ethereum post-2022 "Merge").

Non-Fungible Tokens (NFTs) are a distinct class of cryptographic tokens representing unique digital ownership (art, collectibles, intellectual property). India's Income Tax Act defines NFTs within the broader category of Virtual Digital Assets (VDAs).

Stablecoins are cryptocurrencies pegged to a fiat currency or commodity (e.g., USD Tether/USDT) to reduce volatility; they differ from CBDC in being privately issued.

India's Regulatory Journey

Phase 1 — RBI's Circular Ban (2018)

In April 2018, the RBI issued a circular prohibiting banks and regulated entities from providing services to individuals or businesses dealing in virtual currencies. This effectively shut down crypto exchange bank accounts.

Phase 2 — Supreme Court Strikes Down the Ban (2020)

In Internet and Mobile Association of India v. Reserve Bank of India (March 4, 2020), the Supreme Court set aside the RBI circular, holding that the restrictions were disproportionate to the risks cited and violated the right to carry on trade. No visible harm to the banking system from crypto activities had been demonstrated.

Phase 3 — Taxation Framework (2022)

The Union Budget 2022-23 introduced:

• 30% flat tax on income from transfer of VDAs, with no deduction except cost of acquisition.
• 1% TDS (Tax Deducted at Source) on VDA transactions above prescribed thresholds.
• Losses from one VDA cannot be set off against profits from another.

This de facto legitimised VDA transactions for tax purposes while stopping short of formal regulatory recognition.

Phase 4 — PMLA Notification (March 2023)

The Ministry of Finance issued a notification dated 7 March 2023 bringing all transactions involving VDAs within the ambit of the Prevention of Money Laundering Act, 2002 (PMLA). VDA service providers are now "reporting entities" required to:

• Conduct KYC verification of clients and beneficial owners.
• Maintain transaction records.
• Report suspicious transactions to the Financial Intelligence Unit–India (FIU-IND).

In December 2023, FIU-IND issued show-cause notices to several major offshore exchanges (Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, Bitfinex) for non-compliance with PMLA provisions, asserting extraterritorial jurisdiction.

Phase 5 — SEBI Oversight of Security-Like Tokens (April 2025)

From April 1, 2025, the Securities and Exchange Board of India (SEBI) began overseeing crypto tokens that resemble securities — specifically tokens offering voting rights, dividends, or returns based on a third party's efforts (analogous to equity). This created a two-tier regulatory structure:

This is India's first functional multi-regulator VDA framework, even without a comprehensive crypto bill — marking a shift from pure tax-based oversight toward securities regulation for certain digital assets. The RBI continues to oversee CBDC and monetary stability dimensions.

RBI's Central Bank Digital Currency (CBDC) — The e-Rupee

What Is a CBDC?

A CBDC is a digital form of sovereign currency issued and backed by the central bank. It is a direct liability of the RBI, unlike commercial bank deposits. It is distinct from cryptocurrency (no decentralisation, no anonymity) and from existing digital payment systems (which are claims on commercial banks, not the central bank).

India's e-Rupee Pilots

The RBI launched two parallel pilots in 2022:

The retail e-Rupee functions as a digital wallet. Users can transact peer-to-peer or at merchant points without requiring a bank intermediary for each transaction.

CBDC vs. Cryptocurrency — Key Differences

Benefits of CBDC

• Financial inclusion: Reaches unbanked populations with a digital wallet not requiring a full bank account.
• DBT efficiency: Direct Benefit Transfer disbursements without intermediaries reduces leakages.
• Reduced cash management costs: Printing, logistics, and security costs of physical currency are eliminated.
• Cross-border remittances: Potentially lower-cost, faster international transfers (e.g., Project mBridge involving BIS, RBI, and other central banks).
• Programmability: Smart contract–based conditional payments (e.g., funds released only on fulfilment of conditions).

Risks of CBDC

• Disintermediation of banks: If households hold e-Rupee directly with the RBI, bank deposits (the basis of credit creation) could shrink.
• Data privacy: Central bank gains unprecedented transaction visibility; risk of surveillance.
• Cyber risk: A centralised digital currency is a high-value target for cyberattacks.
• Financial stability during crises: Digital bank runs could be faster and larger.

FATF, VASP Framework & India's Compliance

The Financial Action Task Force (FATF) mandates that Virtual Asset Service Providers (VASPs) — exchanges, custodians, wallet providers — be subject to AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) regulations equivalent to financial institutions. The Travel Rule requires VASPs to share originator and beneficiary information for transactions above a threshold.

India's March 2023 PMLA notification is a significant step toward FATF compliance, making India's crypto regulation consistent with the VASP framework. FIU-IND registration is now mandatory for VASPs operating in India.

Key Concerns

• Money laundering & capital flight: Pseudonymous transactions can obscure illicit flows.
• Investor protection: Retail investors face extreme price volatility with no consumer redress mechanism.
• Environmental cost: PoW cryptocurrencies consume energy comparable to small nations.
• Tax evasion: Pre-2022, crypto gains went largely unreported.

Global Regulatory Approaches

G20 Synthesis Paper on Crypto

India, during its G20 Presidency (2023), facilitated the adoption of the IMF-FSB Synthesis Paper on crypto regulation — a globally coordinated framework recommending that countries not ban crypto outright but regulate it comprehensively, apply FATF standards, and protect financial stability.

Cross-paper relevance

• GS3 — Indian Economy (primary) — Cryptocurrency regulation, RBI CBDC (e-Rupee) pilot, FATF compliance, crypto taxation, digital assets framework, SEBI oversight of security-like tokens (April 2025)
• GS2 — Governance: regulatory challenges of decentralised assets, RBI vs Finance Ministry/SEBI impasse, global coordination on crypto, multi-regulator VDA architecture
• GS3 — Science & Technology — Blockchain technology, distributed ledger applications, tokenisation of real-world assets
• Essay — "Cryptocurrency: revolution or roulette?"; "Digital currency — the future of money or a threat to financial sovereignty?"; "Regulating the unregulatable: India's crypto dilemma"

Recent Developments (2024–2026)

CBDC e-Rupee — Pilot Expanded, Programmable Features Added

India's e-Rupee (e₹) CBDC pilot expanded significantly: by March 2025 it had 17 participating banks and ~6 million retail users, with e-rupee in circulation at Rs. 1,016 crore (~$120 million) — up 334% from Rs. 234 crore in March 2024. By October 2025, the pilot expanded further to 19 banks and 7 million users (announced by RBI Governor Malhotra at the Global FinTech Festival). The RBI added programmable ("purpose-bound") payments on 30 August 2024 — enabling funds to be earmarked for specific categories (fuel, education, groceries, healthcare, travel), preventing misuse of government subsidies channelled through CBDC.

Offline NFC-based CBDC transactions were enabled by late 2024, allowing tap-and-pay without internet connectivity — a breakthrough for rural and low-connectivity areas. The RBI is piloting CBDC for cross-border wholesale payments (e₹-W) through the BIS (Bank for International Settlements) mBridge CBDC interoperability project, linking central banks of China, UAE, Hong Kong, Thailand, and Saudi Arabia (which joined in 2024). India is an observing member, not a full participant. RBI Governor Sanjay Malhotra (appointed December 2024) reaffirmed the CBDC expansion agenda as a 2026 priority.

At the Global FinTech Festival 2025 (October 2025), RBI launched a CBDC Retail Sandbox allowing fintech companies to experiment and build applications on top of the digital rupee. Non-bank entities — including MobiKwik and CRED — were permitted to launch CBDC wallets, extending reach beyond bank customers. UPI-CBDC interoperability testing commenced, enabling e₹ transactions with the same convenience as UPI. State-level programmable CBDC use cases include Gujarat's Saathi Scheme (geo-fenced agricultural subsidies) and Odisha's Subhadra Yojana (~88,000 beneficiaries paid via e₹).

UPSC angle: CBDC pilot data (19 banks, 7 million users — October 2025 GFF; 17 banks, Rs. 1,016 crore — March 2025 RBI Annual Report), programmable CBDC (August 2024), CBDC sandbox (GFF 2025), offline NFC feature, non-bank CBDC wallets, and the BIS mBridge cross-border CBDC project are important Prelims 2027 data points. CBDC's impact on financial inclusion vs banking sector disintermediation is a Mains 2026 GS3 topic.

Crypto Regulation — FATF Compliance, PMLA Coverage, and Global MiCA Framework

India completed its FATF Mutual Evaluation in June 2024, receiving an overall "Largely Compliant" rating (not full "Compliant"). For VASPs specifically, FATF noted implementation is "in its early stages" with gaps in beneficial ownership controls and international cooperation channels. The evaluation followed the Ministry of Finance notifying VDA (Virtual Digital Asset) transactions under PMLA (Prevention of Money Laundering Act) in March 2023 — making FIU-IND the financial intelligence unit for crypto platforms. All major crypto exchanges operating in India (CoinDCX, WazirX, Coinbase India, Binance) are now required to register with FIU-IND and implement full KYC/AML compliance.

The EU's MiCA (Markets in Crypto Assets) Regulation — fully effective January 2025 (stablecoin/e-money token rules fully in force; 102 licensed Crypto Asset Service Providers registered with ESMA as of December 2025) — represents the global benchmark for comprehensive crypto regulation. MiCA's iXBRL whitepaper formatting requirements entered application on 23 December 2025, further operationalising the framework. India is closely watching MiCA's implementation to refine its own regulatory framework. The IMF-FSB Synthesis Paper on crypto (adopted during India's G20 Presidency, September 2023) recommended against blanket bans, instead urging comprehensive regulation — India's approach aligns with this.

UPSC angle: PMLA coverage of VDAs (March 2023), FIU-IND as VASP supervisor, India's FATF Mutual Evaluation (2024), EU MiCA regulation, and the G20 IMF-FSB crypto synthesis paper are all high-frequency current affairs items for Prelims and Mains on digital economy regulation.

Crypto Taxation — Punitive Design, Offshore Migration, and Regulatory Stalemate

(Tax framework data — 30% flat rate, 1% TDS, no loss-offsetting — is covered in the Phase 3 section above. This section analyses why the rates persist and what it reveals about India's regulatory posture.)

Why the punitive rates have not moved: India's crypto tax framework (Budget 2022-23) was intentionally punitive — the government's stated intent was to discourage speculative crypto trading while still generating a tax information trail via TDS. Despite industry requests across every budget cycle (2023, 2024 interim, 2025, 2026) for TDS reduction to 0.01–0.1% and progressive gain-slab taxation, all four budgets maintained 30% + 1% unchanged. The government's calculation: lowering TDS would validate crypto as a mainstream asset class, which conflicts with the pending regulatory bill.

The offshore migration problem: KoinX research (January 2026) found 72.7% of Indian crypto trading now occurs on offshore platforms — up from 45% in mid-2023 and 58% in early 2025. The 1% TDS on every transaction locks up working capital for high-frequency traders (a Rs. 100 trade generates Rs. 1 TDS credit that must be claimed via ITR), making Indian exchanges structurally uncompetitive against zero-TDS offshore platforms (Binance, KuCoin, Bybit). The FRBM-like trade-off: high TDS generates compliance information but destroys the regulated-exchange ecosystem it was meant to supervise.

Regulatory stalemate — multiple fronts:

1. CRDC Bill perpetually deferred: The Cryptocurrency and Regulation of Official Digital Currency Bill (CRDC Bill, 2021) has been repeatedly deferred — the government's stated position is that comprehensive regulation requires a global consensus framework first (aligned with the IMF-FSB G20 synthesis paper approach).

2. RBI Discussion Paper shelved (April 2026): In April 2026, a long-anticipated RBI Discussion Paper on a domestic crypto regulatory framework was shelved again — representing at least five public deferrals. The RBI's formal position: regulating crypto would confer "legitimacy" and risk making the sector "systemic." This reflects a genuine inter-institutional impasse — the Finance Ministry and SEBI are more open to a regulatory framework; the RBI firmly resists.

3. Asset Tokenisation (Regulation) Bill, 2026 — Private Member Bill: On March 14, 2026, Rajya Sabha MP Raghav Chadha (AAP) introduced India's first dedicated legislative proposal for tokenised real-world assets. The 27-section, 11-chapter Bill proposes a framework for the issuance, trading, custody, and settlement of tokenised real-world assets (real estate, commodities, carbon credits, IP). It proposes a multi-regulator model and provides a pathway for stablecoin regulation. Important caveat: this is a Private Member Bill — only 14 such bills have become law since Independence, the last in 1970. It has significant symbolic value (signals legislative intent) but low probability of enactment without government adoption.

4. Lok Sabha Standing Committee VDA Study (May 2026): The Standing Committee on Finance (chaired by Shri Mehtab) formally commenced a study on Virtual Digital Assets in May 2026 — consulting ZebPay, Binance, WazirX, IFSCA, and the Ministry of Finance. This is a pre-legislative consultation phase, not an imminent bill.

India is effectively in regulatory stratification: crypto is taxed (legitimate via Income Tax Act), partially monitored (AML via PMLA/FIU-IND), partially regulated for securities-like tokens (SEBI from April 2025), but has no comprehensive regulatory law (unprotected for investors).

The 1% TDS rate has remained unchanged — Union Budgets 2023, 2024 (Interim), 2025, and 2026 all maintained the rate. The 30% base tax also remains unchanged.

Income Tax Act, 2025 (effective April 1, 2026): The new Income Tax Act 2025 carries forward India's crypto taxation framework with the 30% flat tax and 1% TDS unchanged in substance. Notably, the new Act explicitly adds "crypto-asset" to the VDA definition and introduces a dedicated penalty regime for crypto-asset reporting failures. Taxpayers must now report crypto gains under Schedule VDA in ITR forms from FY 2025-26 onwards. GST also applies to platform service fees (not trading profits) from July 7, 2025.

UPSC angle: Crypto tax framework (30% + 1% TDS, Budget 2022-23), SEBI's security-token oversight (April 2025), the deferred CRDC Bill, RBI's April 2026 discussion paper shelving, the Asset Tokenisation (Regulation) Bill 2026 (private member), Lok Sabha Committee VDA study (May 2026), and the India-offshore volume shift due to punitive taxation are current Mains 2026 themes on the "regulation vs innovation" balance and on India's multi-regulator digital assets architecture.

Exam Strategy & Key Terms

For Prelims: Know the e-Rupee pilot dates (wholesale: Nov 1, 2022; retail: Dec 1, 2022); CBDC is a direct RBI liability; PMLA notification for VDAs: March 7, 2023; 30% tax + 1% TDS from Budget 2022-23 — unchanged through Income Tax Act 2025 (effective April 1, 2026); "crypto-asset" explicitly added to VDA definition under the new Act; Schedule VDA mandatory in ITR from FY 2025-26; PoW vs. PoS distinction; SEBI oversight of security-like tokens from April 2025; CBDC pilot data: 17 banks, Rs 1,016 crore in circulation, 60 lakh (6 million) users (March 2025 RBI data); 19 banks, 70 lakh (7 million) users (October 2025); EU MiCA fully effective January 2025; Asset Tokenisation (Regulation) Bill 2026 — Private Member Bill, Rajya Sabha, March 14, 2026.

For Mains (GS3 — Indian Economy / Internal Security): CBDC benefits for financial inclusion and DBT; risks of bank disintermediation; India's FATF compliance journey (Largely Compliant, June 2024); G20 IMF-FSB crypto synthesis paper (India's G20 Presidency, September 2023); tension between innovation and regulation in India's crypto policy; the RBI vs Finance Ministry/SEBI impasse; India's multi-regulator VDA architecture (post April 2025); offshore migration of Indian crypto trading due to punitive TDS.

Key Terms: CBDC, VASP, VDA, PMLA, FATF Travel Rule, PoW, PoS, Stablecoin, NFT, MiCA, FIU-IND, e₹-W, e₹-R, CRDC Bill, Asset Tokenisation Bill 2026, Security Token Offering (STO).

Key Terms

Cryptocurrency Regulation

• Definition: Cryptocurrency regulation refers to the legal, tax and anti-money-laundering framework governing virtual digital assets (VDAs) such as crypto-tokens and NFTs. In India, crypto is neither legal tender nor banned — it is taxed and brought under anti-money-laundering oversight, while a comprehensive regulatory law is still pending.
• Context: India's approach has shifted from prohibition to regulation-by-taxation-and-oversight. The RBI's 2018 banking ban on crypto was struck down by the Supreme Court in 2020 as disproportionate, after which the government chose taxation (Budget 2022) and anti-money-laundering registration (2023) rather than an outright ban. The RBI remains sceptical and has launched its own Central Bank Digital Currency (the digital rupee), even as a standalone crypto law continues to be deferred.
• UPSC Relevance: This is a foundational GS3 topic under the economy and science-and-technology syllabus, intersecting financial markets, money-laundering, financial stability and emerging technology (blockchain/DLT). For Prelims, expect factual questions on VDA taxation (30% under Section 115BBH, 1% TDS), the digital rupee/CBDC, and the distinction between cryptocurrency and a CBDC. For Mains GS3, the analytical angle is whether India should regulate or restrict crypto — weighing investor protection, tax revenue and innovation against monetary-sovereignty and financial-stability risks. No direct PYQ exists for the exact term, but it underpins recurring questions on digital currencies, money-laundering and financial regulation.