Assessing Liquidity and Legal Exposure in India's Evolving Crypto Ecosystem

India's cryptocurrency market has emerged as a global powerhouse, with over 107 million users and a projected $6.4 billion in revenue by 2025, per a FinLaw analysis. However, the regulatory landscape remains a double-edged sword, balancing innovation with investor protection. As the Securities and Exchange Board of India (SEBI) intensifies its enforcement actions and the Financial Intelligence Unit-India (FIU-IND) cracks down on non-compliant exchanges, liquidity dynamics and legal risks are reshaping the ecosystem. This analysis unpacks the implications for investors and the broader market.

Regulatory Tightening: A Multi-Agency Approach

India's regulatory approach to crypto has evolved into a multi-agency model, with SEBI, the Reserve Bank of India (RBI), and the Finance Ministry collaborating to enforce compliance. Since April 2025, SEBI has actively monitored crypto tokens resembling securities, signaling a shift toward aligning with global standards like the Financial Stability Board (FSB), as noted in a TechStory analysis. Meanwhile, the RBI's push for its Central Bank Digital Currency (Digital Rupee or e₹) aims to provide a government-backed alternative to private cryptocurrencies, according to a Cryip overview.

The most immediate impact of these efforts is the imposition of stringent anti-money laundering (AML) and Know Your Customer (KYC) protocols. Exchanges, wallets, and mining pools are now classified as "reporting entities," requiring them to submit transaction data to tax authorities, as TechStory reports. This has created a compliance burden for platforms, particularly offshore exchanges like BingX, LBank, and Poloniex, which have faced show-cause notices from FIU-IND for failing to meet AML requirements, according to a TechCrunch report.

Liquidity Metrics: A Tale of Two Markets

The regulatory crackdown has had a measurable impact on liquidity. According to data from Q3 2025, trading volumes on centralized exchanges like WazirX, CoinDCX, and CoinSwitch have declined by approximately 40% compared to 2023 levels, per a CryptoPunditZ report. This decline is attributed to the 30% flat tax on crypto gains, 1% tax deducted at source (TDS) on transactions over ₹10,000, and the 18% Goods and Services Tax (GST) on exchange service fees, as outlined in an IndWallet analysis. These costs have discouraged high-frequency trading and pushed retail investors toward decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms, a trend noted in the CoinGecko report.

However, global liquidity metrics tell a different story. For major assets like Bitcoin and Ethereum, platforms like Binance and Bitget maintain robust order-book depths, with Binance reporting $8 million in liquidity within a $100 price range, as shown in a LinkedIn analysis. This suggests that while domestic liquidity has contracted, Indian traders are still accessing global markets-often through unregulated or offshore platforms, which introduces new risks.

Legal Exposure: Enforcement Actions and Investor Protection Gaps

India's regulatory focus on enforcement has led to high-profile legal cases. In October 2025, FIU-IND issued notices to 25 offshore exchanges, ordering them to block access for Indian users and register as reporting entities under the Prevention of Money Laundering Act (PMLA) 2002, as reported by TechCrunch. Platforms like CEX.IO are exploring compliance pathways, but others have yet to respond. This enforcement reflects a broader strategy to bring crypto under the same regulatory umbrella as traditional financial markets.

Yet, investor protection remains a critical gap. Legal experts at firms like Key Juris Legal Firm (KJLF) report a surge in cases involving Ponzi schemes, fake exchanges, and phishing attacks, according to a Legal Affair report. The Delhi High Court recently acknowledged the need for a robust legal framework, noting that current laws are inadequate to address crypto-specific risks in a BharatLaw post. Without clear recourse for investors, the market remains vulnerable to fraud, particularly as users shift to decentralized platforms with limited oversight.

The Path Forward: Balancing Innovation and Risk

India's regulatory approach is a work in progress. While the government has resisted a full legislative framework, it is piloting sandbox initiatives and promoting the Digital Rupee to foster innovation, as Cryip notes. These efforts aim to create a regulated ecosystem that supports growth while mitigating systemic risks. However, the current environment demands caution.

For investors, the key takeaway is to prioritize platforms registered with FIU-IND and compliant with KYC/AML protocols. Offshore exchanges, despite their liquidity advantages, expose users to legal and operational risks, as seen in the recent enforcement actions. Additionally, the rise of P2P and DEX platforms underscores the need for due diligence, as these markets lack the safeguards of traditional exchanges.

Conclusion

India's crypto ecosystem is at a crossroads. Regulatory clarity has attracted institutional interest, but the high tax burden and enforcement actions have stifled retail participation. As the government prepares for an FSB peer review in October 2025, the focus will remain on aligning with global standards while addressing domestic challenges. For now, investors must navigate a landscape where innovation and risk coexist, with liquidity and legal exposure hinging on compliance and adaptability.