The rapid growth of cryptocurrency investments in India has exposed widening gaps in the country’s regulatory framework, leaving millions of investors vulnerable to fraud, exchange collapses and jurisdictional challenges. With no clear legal safeguards, Indian crypto users are increasingly finding themselves at the mercy of foreign legal systems when disputes arise, a situation that experts warn could lead to catastrophic financial losses if left unaddressed.
The severity of this issue was the focal point of a recent high-level discussion hosted by IndiaTech.org, an industry body representing India’s technology startups and investors. Titled “Virtual Digital Assets: Regulations, Responsibility, and the Road Ahead,” the panel brought together legal experts, financial analysts and crypto industry stakeholders to dissect the challenges plaguing India’s digital asset ecosystem.
The consensus was unanimous: India must establish a robust regulatory framework immediately or risk leaving its investors defenceless in an increasingly volatile market.
Indian Investors, Foreign Courts
One of the most pressing concerns is the migration of Indian-origin crypto exchanges to offshore jurisdictions such as Singapore and Dubai. This shift has created a legal quagmire where Indian investors are forced to seek recourse in foreign courts when disputes arise, a costly and complex process that often yields little justice.
A case in point is the ongoing WazirX-Zanmai controversy, where Indian users are struggling to recover funds following an alleged hack in 2024. Since WazirX’s parent entity is registered in Singapore, Indian investors have no choice but to navigate Singapore’s legal system, a scenario that highlights the urgent need for domestic regulations. The situation is further compounded by reports that several of these exchanges smartly moved their assets to places like the Cayman Islands, ensuring that even Singaporean authorities lack jurisdiction over them.
Rashmi Deshpande, founder, Fountainhead Legal, underscored the gravity of the situation: “The absence of enforceable regulation in India has left users vulnerable, especially when assets are transferred offshore without recourse. There is an urgent need for frameworks that mandate solvency norms, data disclosures and legal remedies within the country.”
The problem is further exacerbated by the fact that many exchanges have relocated not just their headquarters but also user funds, intellectual property and server infrastructure to jurisdictions favourable to cryptocurrency operations. This means that even if Indian courts rule in favour of investors, enforcing such judgments becomes nearly impossible when assets are held abroad.
Sanjay Saxena, a digital payments and blockchain expert, emphasised: “The current investor situation exposes serious regulatory and jurisdictional challenges in the crypto sector. Without transparent oversight and a third-party audit of crypto holdings, user trust is undermined.”
Taxation Without Protection
India’s approach to cryptocurrency regulation has been paradoxical at best. While the government has imposed a 30% tax on crypto gains and brought exchanges under the Prevention of Money Laundering Act (PMLA), it has stopped short of recognising digital assets as legitimate financial instruments. This half-measure has created a precarious environment where investors are taxed but denied the protections afforded to traditional financial markets.
Chirayu Bagree, a legal counsel and crypto investor, highlighted this contradiction: “We are taxing crypto at a high rate, but we are not providing the protections that come with regulated markets. If we taxed it like stocks, with proper safeguards, the government could earn far more while keeping investors safe.”
The lack of clarity has also driven traders to foreign exchanges like Binance and KuCoin, where tax liabilities are reduced but regulatory risks are increased due to the absence of Indian oversight. This exodus not only deprives the Indian exchequer of potential revenue but also leaves investors exposed to unregulated platforms that operate beyond the reach of domestic authorities.
At the heart of the issue is the absence of a clear regulatory authority for cryptocurrencies in India. While the Reserve Bank of India (RBI) maintains a cautious stance and the Securities and Exchange Board of India (SEBI) has yet to claim jurisdiction, crypto exchanges are left in a legal limbo, complying with anti-money laundering laws but lacking operational guidelines.
Bagree stressed the need for a specialised oversight mechanism: “We are currently operating in a regulatory vacuum. The lack of a unified and transparent framework leaves both investors and exchanges exposed to uncertainty. There’s an urgent need for India to introduce a crypto-specific regulatory body, one that is recognised globally and rooted in investor protection.”
Such a body, modelled after the US Securities and Exchange Commission (SEC), could enforce mandatory KYC norms, proof of reserves and insurance coverage for user funds, measures that are standard in traditional finance but conspicuously absent in the crypto space.
Rameesh Kailasam, CEO and President, IndiaTech.org, echoed this sentiment: “In a world where assets are borderless and transactions can occur across multiple jurisdictions, investors should know what their rights are and how their assets are protected. It is critical to enforce laws that apply in case of disputes, hacks, bankruptcies and insolvencies.”
Need for Investor Education
Compounding the regulatory challenges is the proliferation of fraudulent schemes and dubious tokens that prey on inexperienced investors. With over 11,000 active cryptocurrencies in existence, many of them outright scams or pump-and-dump schemes, the lack of oversight has turned the market into a minefield for unsuspecting traders.
Deshpande cautioned: “Many people invest in crypto without understanding the risks. High rewards mean high risks, and without education, more investors will lose money.”
The situation calls for a concerted effort by both the government and the industry to improve financial literacy among crypto users. Initiatives could include public awareness campaigns on the risks of leverage trading and unverified tokens, collaboration with exchanges to promote secure storage solutions like cold wallets and integration of crypto education into financial literacy programmes.
Without such measures, experts warn, India’s crypto market will remain a breeding ground for fraud, deterring serious investors and stifling the sector’s growth potential.
Roadmap for Reform
As India grapples with the evolving challenges in its virtual digital asset (VDA) ecosystem, panellists at the IndiaTech Dialogues emphasised a set of critical steps that policymakers must undertake to ensure investor protection and strengthen the overall regulatory environment.
A primary recommendation was the enactment of a comprehensive cryptocurrency law that would define the legal status of digital assets, clearly outline the responsibilities of exchanges and introduce structured mechanisms for safeguarding investors. Referencing international frameworks, the European Union’s Markets in Crypto-Assets Regulation (MiCA) was highlighted as a possible model for India to consider.
Another key proposal was the requirement for crypto exchanges operating in India to maintain a portion of their reserves within the country. This step, the panellists argued, would help prevent scenarios similar to past incidents involving offshore fund transfers and enable Indian courts to exercise effective jurisdiction in the event of disputes.
In addition, the establishment of a unified regulatory authority was identified as a necessary step. Such a body, potentially under the oversight of SEBI or the Finance Ministry, would be responsible for monitoring the crypto sector, enforcing compliance and coordinating with international regulatory entities including the Financial Action Task Force (FATF).
Also, strengthening investor protection mechanisms was viewed as essential to building long-term confidence in the sector. Suggestions included mandatory insurance for user funds, routine third-party audits of exchange reserves and the creation of a formal grievance redressal framework to resolve investor complaints. According to the speakers, these combined measures could contribute to a more resilient, transparent and accountable digital asset market in India.
Ticking Time Bomb
India’s cryptocurrency market stands at a critical juncture. With one of the largest crypto user bases in the world, the country cannot afford to delay regulation any longer. The WazirX-Zanmai case is a stark reminder of what happens when investors are left without legal safeguards.
As Kailasam aptly said: “India needs to step in to enforce a mechanism for handling such cases in the larger interest of investor protection.”
The question is no longer whether India should regulate crypto, but how quickly it can implement these safeguards before another crisis erupts. Without decisive action, millions of investors will remain at risk and India’s aspirations of becoming a global digital economy leader could be severely undermined.
