Virtual Currency in India: Navigating Regulation, Innovation, and the Future of Digital Finance

Posted On - 8 October, 2025 • By - Siddartha Karnani

Introduction

The global financial landscape is evolving at an unprecedented pace, with virtual currencies (VCs) emerging as one of the most transformative innovations of the digital era. Broadly defined, a virtual currency is a digital representation of value that can be stored, transferred, or traded electronically through secure, often decentralized, networks. Unlike fiat money issued by governments, virtual currencies are typically created and managed by private developers or blockchain-based systems, operating largely outside traditional regulatory frameworks.

India, with its expanding fintech ecosystem and rapidly digitizing economy, finds itself at the crossroads of innovation and regulation. The debate surrounding virtual currencies in India raises critical legal, economic, and policy questions from their legitimacy as a medium of exchange to their implications for financial stability and consumer protection.

Advantages of Virtual Currencies

  • Elimination of Geographic and Institutional Barriers: Virtual currencies enable seamless, cross-border transactions, significantly reducing costs and delays associated with traditional banking systems.
  • Decentralization and Disintermediation: By removing intermediaries, decentralized virtual currencies empower individuals to transact directly, ensuring greater transparency and autonomy.
  • Programmable Transactions: Certain virtual currencies can be embedded with “smart contract” functionality, allowing automated and self-executing transactions based on predefined conditions.
  • Digital Store of Value: Virtual currencies can represent and preserve value across diverse assets from gaming tokens and intellectual property to digital art and real estate.

Disadvantages and Risks

  • Cybersecurity Vulnerabilities: The digital nature of virtual currencies makes them prime targets for hackers. Several high-profile cryptocurrency thefts have exposed the fragility of online exchanges and wallets.
  • Scams and Fraudulent Schemes: The absence of regulation has led to numerous fraudulent Initial Coin Offerings (ICOs), where developers sold tokens for speculative projects that never materialized.
  • Regulatory Ambiguity: In the absence of clear oversight, users and investors often lack legal recourse in the event of loss or fraud. The volatility and anonymity associated with virtual currencies also make them susceptible to misuse for illicit financial activities.

The Reserve Bank of India (RBI) has consistently expressed caution regarding virtual currencies, particularly Bitcoin. In its press release[1] dated December 24, 2013, the RBI clarified that virtual currencies are not recognized as legal tender in India. It warned users about potential risks, including volatility, lack of regulatory protection, and susceptibility to hacking and fraud.

Subsequently, the RBI issued several circulars reiterating its stance, culminating in the 2018 circular that effectively prohibited regulated financial entities from dealing in or providing services related to virtual currencies. The stated rationale was the protection of consumer interests and the prevention of money laundering, terror financing, and other unlawful activities.

However, this blanket approach soon came under judicial scrutiny.

Judicial Intervention: Internet and Mobile Association of India v. Reserve Bank of India

The landmark judgment in Internet and Mobile Association of India v. Reserve Bank of India[2] (2020) marked a turning point in India’s cryptocurrency narrative. The Supreme Court struck down the RBI’s 2018 circular, holding that the measure was disproportionate and lacked empirical justification.

The Court emphasized that while the RBI possesses broad powers to regulate the monetary and financial system, such powers must be exercised reasonably and within constitutional bounds particularly in light of Article 19(1)(g), which guarantees the right to trade and conduct business.

Importantly, the judgment did not legalize cryptocurrencies but focused on the need for a balanced regulatory framework, one that safeguards economic stability without stifling technological innovation. It reinforced the principle that regulatory decisions must be evidence-based and proportionate to the risks sought to be mitigated.

The Supreme Court’s decision raised several critical questions for policymakers and regulators alike:

  • Does the RBI have exclusive authority to determine the legality of virtual currencies?
  • Were its actions proportionate and procedurally sound under the law?
  • Should the RBI have collaborated with other stakeholders including SEBI, MeitY, and the Finance Ministry, for a more comprehensive approach?
  • Can differentiated regulation be developed for various categories of digital assets rather than a blanket prohibition?
  • How should India reconcile its constitutional commitment to economic freedom with the need for systemic financial safeguards?

These questions continue to shape the dialogue around India’s virtual currency regulation.

The Road Ahead

India is presently exploring the regulatory contours of digital finance through parallel developments including the Digital Rupee (Central Bank Digital Currency) initiative and proposed legislation on crypto-assets. The challenge lies in creating a framework that recognizes the economic potential of virtual currencies while ensuring robust mechanisms for investor protection, taxation, and anti-money laundering compliance.

A pragmatic, technology-neutral regulatory approach one that differentiates between genuine innovation and speculative excess will be essential. Collaboration among the RBI, SEBI, and other stakeholders could foster a coherent policy architecture that balances innovation with integrity.

[1] Reserve Bank of India, “RBI Cautions Users of Virtual Currencies against Risks” (Dec. 24, 2013), <https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247>.

[2] MANU/SC/0264/2020, 2020 INSC 264

 AIR 2021 SC 2720.