India's Evolving Crypto Regulatory Landscape: Strategic Entry Points for Institutional Investors

India's cryptocurrency market is undergoing a pivotal transformation in 2025, marked by legal, regulatory, and tax developments that are reshaping the environment for institutional investors. While the sector remains in a paradoxical state-taxed but unregulated-the recent judicial and policy shifts offer both challenges and opportunities. For institutions seeking to navigate this complex terrain, understanding the evolving framework is critical to identifying strategic entry points.

Legal Recognition and the Madras High Court Ruling

A landmark development in 2025 was the Madras High Court's recognition of XRP as a form of property under Indian law, according to a Cryptofront News report. This ruling, emerging from a dispute involving the crypto exchange WazirX, clarified that cryptocurrencies are transferable assets with exclusive control, aligning them with traditional property rights. This legal precedent is significant for institutional investors, as it provides a degree of certainty regarding ownership and dispute resolution. However, the broader regulatory vacuum persists: while the court affirmed property rights, India still lacks a comprehensive legal framework for cryptocurrencies, leaving taxation and licensing ambiguities unresolved, as noted in a Bar & Bench column.

Regulatory Framework: Licensing and Compliance

Institutional investors must also contend with the Prevention of Money Laundering Act (PMLA) and its 2023 Virtual Digital Asset Service Provider (VASP) Notification, as detailed in a Global Legal Insights article. Entities engaging in crypto-related activities-such as exchanges, custodians, or financial services-are classified as "reporting entities" and must register with the Financial Intelligence Unit-India (FIU-IND). Compliance involves stringent anti-money laundering (AML) measures, including KYC processes, transaction monitoring, and suspicious transaction reporting (STRs). Notably, these requirements apply regardless of an entity's physical presence in India, meaning offshore firms serving Indian clients must also adhere to PMLA obligations, as noted in a Chambers practice guide.

For institutions, this creates a dual challenge: navigating the PMLA's operational demands while operating in a sector where legal recognition remains absent. The lack of a centralized regulator further complicates compliance, as institutions must interpret guidelines from multiple bodies, including the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Taxation: A Paradox of Obligation Without Clarity

India's taxation regime for cryptocurrencies remains a key barrier to institutional adoption. Under Section 115BBH of the Income Tax Act, a flat 30% tax applies to profits from crypto transactions, with an additional 1% TDS for transactions exceeding ₹50,000, as noted in a Bar & Bench column. Starting July 2025, an 18% GST will also apply to services provided by crypto exchanges, as noted in a OneSafe blog. These measures, while generating revenue for the government, create a paradox: investors are taxed on assets that lack legal recognition or regulatory oversight.

The absence of loss-set-off mechanisms exacerbates the issue, as institutions cannot offset crypto losses against gains in other asset classes, as noted in a Bar & Bench column. This has led to strategies such as loss harvesting and diversification into Bitcoin ETFs or non-GST financial services to mitigate tax exposure. Automation tools for TDS and capital gains compliance are also gaining traction among fintech startups and institutional players, as noted in a OneSafe blog.

Strategic Entry Points for Institutional Investors

Despite these challenges, several strategic opportunities emerge for institutions willing to navigate the regulatory maze:

1. Leveraging Legal Precedents: The Madras High Court's ruling on XRP, as reported by Cryptofront News, provides a foundation for institutional participation in crypto assets with clearer property rights. Institutions could prioritize investments in tokens with established legal precedents or partnerships with exchanges that align with PMLA compliance.

2. Compliance-Driven Partnerships: Collaborating with regulated entities-such as SEBI-registered custodians or PMLA-compliant exchanges-can help institutions mitigate regulatory risks. The recent amendments to SEBI's ICDR norms, which increased anchor investor allocations in IPOs, as reported by Business Standard, suggest a broader regulatory trend toward institutional inclusion. Institutions could mirror this approach by engaging with crypto platforms that demonstrate robust compliance frameworks.

3. Tax Optimization Strategies: Given the current tax regime, institutions should adopt proactive tax planning. This includes diversifying into crypto ETFs (which may offer indirect exposure with reduced tax complexity) and leveraging automation tools for real-time TDS and GST compliance, as noted in a OneSafe blog.

4. Advocacy for Regulatory Clarity: The government's 2025 remarks on stablecoins by Finance Minister Nirmala Sitharaman indicate a potential shift in policy orientation, as noted in a Bar & Bench column. Institutions could engage with regulatory bodies to advocate for a balanced framework that addresses tax fairness, legal recognition, and investor protections.

Conclusion

India's crypto market is at a crossroads. While the regulatory and tax landscape remains fragmented, recent judicial and policy developments signal a gradual move toward institutional inclusion. For investors, the path forward requires a nuanced approach: balancing compliance with innovation, and leveraging legal precedents to navigate the paradox of taxation without recognition. As the government contemplates reforms-particularly in light of its growing acknowledgment of digital currencies-the next 12–18 months could define India's position in the global crypto ecosystem.