The Crypto Underbelly: Risks and Opportunities in India's Evolving Digital Asset Landscape

India's digital asset ecosystem in 2025 stands at a crossroads. On one hand, the country's regulatory ambiguity and enforcement-heavy approach have stifled institutional investment and driven traders to offshore platforms. On the other, a burgeoning blockchain infrastructure and a vibrant Web3 startup scene suggest India could emerge as a global leader in digital innovation-if it navigates its regulatory challenges effectively. For investors, the interplay between India's evolving crypto regulations and its infrastructure development presents a complex calculus of risk and reward.

Regulatory Preparedness: A Double-Edged Sword

India's regulatory framework for digital assets remains a patchwork of existing laws and ad hoc enforcement. The March 2023 PMLA VASP Notification, which classified Virtual Digital Asset Service Providers as "reporting entities" under the Prevention of Money Laundering Act (PMLA), marked a pivotal shift. This move brought VASPs under anti-money laundering (AML) and know-your-customer (KYC) obligations, effectively ending the era of regulatory ambiguity. However, the lack of a comprehensive legislative framework has left critical gaps. For instance, decentralized finance (DeFi) protocols remain in a legal gray area, with regulators applying PMLA provisions based on the nature of activities rather than the decentralization of platforms.

Enforcement actions have further complicated the landscape. Major global exchanges like Binance, KuCoin, and Bybit have faced show-cause notices, penalties, and even URL blocking for non-compliance. In June 2024, Binance was fined for operating without registration, while Bybit was hit with a ₹9.27 crore penalty in January 2025. These actions signal a regulatory philosophy focused on activity-based oversight rather than platform structure, creating uncertainty for developers and investors.

The tax regime exacerbates these challenges. Gains from digital assets are taxed at 30%, with a 1% tax deducted at source (TDS) on transactions exceeding specified thresholds. This has driven liquidity to offshore platforms and discouraged institutional participation. Industry leaders have called for reforms, including loss offsets and alignment with traditional asset classes, to create a more equitable environment.

Market Infrastructure: A Foundation for Growth

Despite regulatory headwinds, India's digital asset infrastructure is advancing rapidly. The National Blockchain Framework, launched in September 2024 with a ₹64.76 crore budget, is a cornerstone of this development. The framework includes the Vishvasya Blockchain Stack, a blockchain-as-a-service (BaaS) platform with distributed infrastructure across data centers in Bhubaneswar, Pune, and Hyderabad. This initiative has already verified over 34 crore documents, including academic records from the Central Board of Secondary Education.

Private-sector initiatives are equally transformative. Maharashtra's plan to tokenize real-estate assets, potentially unlocking ₹50 trillion in dormant capital, highlights blockchain's potential to reshape India's financial landscape. Meanwhile, the Indian Banks' Blockchain Infrastructure Co (IBBIC)-a consortium of 15 major banks-aims to digitize letters of credit using blockchain, mirroring the success of the National Payments Corporation of India (NPCI) in the payments sector.

India's renewable energy surplus also presents a unique opportunity. By leveraging green energy for crypto mining, the country could monetize its excess capacity while attracting investment to rural areas. This aligns with global trends, as institutions increasingly treat Bitcoin as a balance-sheet asset.

The Interplay of Regulation and Infrastructure: Risks and Opportunities

The tension between regulatory caution and infrastructure innovation defines India's digital asset landscape. On one hand, the government's reluctance to adopt global regulatory models-such as the EU's MiCA framework-has delayed clarity for market participants. On the other, India's focus on blockchain for public-sector applications, such as on-chain credentialing and rural programs, demonstrates a strategic vision.

Case studies underscore this duality. The WazirX hack in 2024, which wiped out $325 million from 15 million investors, exposed vulnerabilities in custodial models. Yet the same year, Tamil Nadu's blockchain policy and the Binance Blockchain Yatra 2025 highlighted India's shift from experimentation to practical deployment.

Experts argue that a national digital assets strategy could future-proof India's economy by spurring innovation and attracting capital. However, the absence of specific regulations for tokenized securities and stablecoins-coupled with SEBI's prohibition on tokenizing publicly traded securities-limits the sector's potential.

Conclusion: Navigating the Underbelly

For investors, India's digital asset landscape is a high-stakes bet. The risks are clear: regulatory ambiguity, enforcement volatility, and a tax regime that disincentivizes participation. Yet the opportunities are equally compelling. With over 1,000 Web3 startups and 12% of the world's crypto developers, India is primed to become a global blockchain hub. The National Blockchain Framework and private-sector initiatives like IBBIC suggest the country has the infrastructure to support this growth.

The key lies in balancing innovation with oversight. A regulatory sandbox, tax reforms, and international coordination could mitigate risks while fostering development. For now, India's crypto underbelly remains a volatile but potentially lucrative frontier-one where patience and strategic foresight may yield outsized rewards.