India’s cryptocurrency landscape could be about to change as the Department of Economic Affairs (DEA) prepares a key consultation paper on cryptocurrency legislation. 

According to local media, the paper, which is expected in September or October, will invite feedback from various stakeholders, with the government playing an active role in the direction of digital currencies in India.

India’s crypto conundrum

The paper, led by a panel chaired by the secretary of the DEA, represents a significant step in India’s ongoing effort to balance innovation and regulation in its rapidly evolving crypto sector.

The release comes at a time when global scrutiny of cryptocurrencies is intensifying, particularly in light of the G20 nations’ unified approach to regulation , as highlighted by Indian Finance Minister Nirmala Sitharaman at a meeting of the group of nations in October 2023.

India, which has already implemented a stringent tax regime on cryptocurrency transactions, has taken a cautious approach to regulation. The 30% tax on unrealized crypto gains and a 1% tax deducted at source implemented in April 2022 marked the government’s first major move toward imposing some control over the crypto market. 

However, despite the measures, the Indian government has refrained from regulating the sale and purchase of cryptocurrencies , focusing instead on curbing crypto-related money laundering and terrorism financing.

DEA paper to address regulatory concerns

The DEA’s forthcoming paper is expected to address the broader concerns surrounding the regulation of crypto assets, including those raised by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). 

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In May, SEBI suggested a multi-regulatory approach , wherein different aspects of cryptocurrency trading would be overseen by various financial authorities. This fragmented approach underscores the complexity of regulating a technology that crosses traditional financial boundaries and poses unique challenges.

On the other hand, the RBI has consistently warned of the macroeconomic risks posed by digital currencies. The central bank’s stance reflects deep concerns about the potential impact of cryptocurrencies on India’s economic stability. 

This caution is mirrored in the government’s recent actions against offshore crypto platforms and digital asset service providers, including a high-profile ban on Binance, the world’s largest cryptocurrency exchange. 

Despite this, Binance managed to reestablish its presence in India by registering with the Financial Intelligence Unit, even as it faces a hefty $86 million tax demand from Indian authorities .

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