India’s cryptocurrency landscape is about to change, with the nation’s regulatory future hanging in the balance as the Department of Economic Affairs (DEA) prepares to release a pivotal consultation paper.

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

India’s crypto conundrum

The forthcoming 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 the 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 in October 2023.

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

However, despite these 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).

Related: Nigerian SEC to issue crypto platform licenses as market size grows: Report

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 Virtual Digital Asset (VDA) service providers, including the 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.