India's Strategic Crypto Regulatory Shift and Its Impact on Market Legitimacy

India's cryptocurrency market has undergone a transformative regulatory evolution from 2023 to 2025, marked by stringent anti-money laundering (AML) compliance measures and aggressive enforcement actions. These developments, driven by the Prevention of Money Laundering Act (PMLA) and the Financial Intelligence Unit (FIU-IND), are reshaping the landscape for institutional participation and long-term investor confidence. By aligning with global standards and addressing systemic risks, India is positioning its crypto sector as a legitimate asset class while balancing innovation with financial stability.

Regulatory Evolution: From Ambiguity to Clarity

The Indian government's approach to crypto regulation has shifted from ambiguity to structured oversight. Virtual Digital Assets (VDAs) are now explicitly recognized as reporting entities under the PMLA, requiring crypto service providers to adhere to Know-Your-Customer (KYC) norms, suspicious transaction monitoring, and enhanced reporting obligations according to regulatory analysis. This formalization mirrors global efforts, such as the Financial Action Task Force (FATF) recommendations, to combat financial crime while fostering transparency as research indicates.

A pivotal moment came in 2025 when the Madras High Court ruled that cryptocurrencies qualify as "property," providing a legal foundation for their recognition and use in contracts according to legal analysis. This judicial endorsement, coupled with the FIU-IND's mandate for VDA service providers to register, has created a framework that reduces regulatory arbitrage and encourages compliance as regulatory reports show. The enforcement of these rules has been particularly aggressive: 25 offshore exchanges, including BitMEX, Binance, and Coinbase, were blocked for Indian users due to non-compliance with AML standards, leaving only five platforms-Binance, Mudrex, Coinbase, CoinSwitch Kuber, and ZebPay-as compliant operators according to enforcement data.

Enforcement Mechanisms: Tightening the Noose on Illicit Flows

India's regulatory strategy has prioritized enforcement to curb money laundering and illicit activities. The FIU-IND's crackdown on unregistered virtual asset service providers (VASPs) has been a cornerstone of this effort. By mandating registration and imposing penalties for non-compliance, the unit has effectively narrowed the market to platforms adhering to AML protocols according to enforcement reports.

The Enforcement Directorate (ED) has further reinforced this approach. Under the PMLA, the ED froze crypto assets worth ₹4,189.89 crore ($503 million) in 2024–25, while the Central Board of Direct Taxes (CBDT) leveraged blockchain forensics to uncover ₹888.82 crore ($107 million) in unreported crypto transactions according to regulatory updates. These actions signal a government committed to treating crypto with the same rigor as traditional financial systems, deterring illicit actors while reassuring legitimate participants.

Market Impact: Growth Amidst Regulatory Uncertainty

Despite the aggressive enforcement, India's crypto market has shown resilience and growth. Transactions in 2024–25 reached ₹51,000 crore ($6.12 billion), a 41% increase from the previous year according to market data. This growth is driven by younger investors and fintech platforms adopting crypto as an alternative asset. The government's imposition of a 1% Tax Deducted at Source (TDS) on crypto transactions also spurred behavioral shifts, with investors opting for longer-term holdings to mitigate tax burdens as market analysis shows.

Institutional confidence has been bolstered by the regulatory clarity. Financial institutions, while cautious, have expressed optimism about the sector's potential. As one report notes, "Regulatory clarity comparable to traditional banking standards enhances user protection and facilitates institutional engagement" according to industry reports. This sentiment aligns with global trends, where frameworks like the EU's Markets in Crypto-Assets (MiCA) regulation and the U.S. GENIUS Act have paved the way for institutional adoption as policy analysis indicates. India's enforcement-driven approach, though distinct, shares the goal of creating a secure environment for investment.

Global Context and Future Outlook

India's regulatory trajectory is part of a broader global shift toward legitimizing crypto. The Basel Committee's reassessment of prudential rules for banks' crypto exposures and the U.S. Securities and Exchange Commission's (SEC) approval of digital asset products highlight a softening of traditional financial institutions' stance according to global policy analysis. India's alignment with these trends-through AML compliance and legal recognition-positions it to attract international capital while avoiding the pitfalls of regulatory arbitrage.

However, challenges remain. A comprehensive legal framework for crypto is still pending, with analysts anticipating a potential overhaul under the Digital India Act by 2026 according to industry forecasts. Until then, the sector will operate under a patchwork of existing laws, creating uncertainty for investors. Yet, the enforcement-driven model has already demonstrated its efficacy: India reasserted its position as the world's largest crypto market in 2025, with adoption expanding into Tier-2, Tier-3, and Tier-4 regions according to market reports.

Conclusion: A Legitimacy-Driven Transformation

India's strategic regulatory shift-from ambiguous oversight to structured AML enforcement-has redefined its crypto market. By tightening compliance frameworks, blocking non-compliant platforms, and recognizing crypto as property, the government has enhanced market legitimacy while mitigating financial crime risks. For institutional investors, this environment offers a balance of innovation and security, fostering confidence in a sector once viewed as speculative. As global standards continue to evolve, India's enforcement-centric model may serve as a blueprint for other emerging markets seeking to integrate crypto into their financial ecosystems.