Supreme Court slams central government for crypto inaction
SC said Center's prolonged failure to bring a clear regulatory framework for cryptocurrencies has created a breeding ground for “misuse”
The Supreme Court of India on May 19 strongly criticised the central government for its prolonged failure to bring a clear regulatory framework for cryptocurrencies, stating that the absence of such a framework has created a breeding ground for “misuse”.
The apex court reiterated its earlier observation that unregulated Bitcoin trading is “nothing but a more polished form of Hawala”, an illegal informal money transfer system.
A bench of Justices Surya Kant and N. Kotiswar Singh made these remarks while hearing a bail petition filed by Shailesh Babulal Bhatt, a Gujarat resident accused of multi-state cryptocurrency-related fraud.
While the bail plea itself was not directly related to broader policy, the bench expressed grave concerns about the lack of regulation in the crypto sector. They questioned why the Enforcement Directorate (ED), the prosecuting agency, chose to arrest Bhatt after completing its probe when he was not arrested during the ongoing investigation.
Call for regulation, not ban
The Supreme Court reminded the government that nearly two years ago, it had sought clarity on India’s policy regarding virtual currencies. The bench emphasised that outright banning cryptocurrencies would be unwise, especially as new financial mechanisms are evolving in global trade, but stressed that some form of regulation is absolutely essential. The top court asserted that the government’s failure to regulate this space amounted to turning a “blind eye” to a pressing issue.
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“Nobody is saying to stop it since you have said earlier that cryptocurrency is not illegal and banning it will not be wise for the economy. Banning may be shutting your eyes to the ground reality. But what about regulating it?” Justice Kant remarked.
Additional Solicitor General Aishwarya Bhati, representing the Union, sought time to obtain instructions on the matter. The Court also highlighted the practical and evidentiary challenges law enforcement faces in the absence of a legal definition or framework for crypto assets. “If tomorrow somebody asks, ‘Prove what is this asset, how are we going to prove it?’ We are not experts. Experts will have to examine it, but some steps to regulate it are necessary. We are told crypto trading is very volatile... today a Bitcoin might be worth lakhs, and tomorrow it can mean nothing,” the bench observed.
Senior advocate Mukul Rohatgi, representing Bhatt, argued that Bitcoin trading is not illegal in India, citing the Supreme Court’s 2020 decision that struck down a Reserve Bank of India (RBI) circular barring banks from facilitating crypto-related transactions. He contended that Bhatt's arrest was unjustified given the absence of a law explicitly banning such activity.
ASG Bhati informed the Court that an updated report on the investigation progress and the Centre’s position on cryptocurrency would be submitted by July.
Currently, India imposes a flat 30 per cent tax on profits from cryptocurrency transactions and a 1 per cent tax deducted at source on every trade. However, cryptocurrencies like Bitcoin and Ethereum are neither recognised as legal tender nor banned outright.
Manvinder Singh, Partner, JSA Advocates & Solicitors believes that “The Supreme Court’s remark reinforces the importance of striking a balance between innovation and regulatory oversight. It reflects a broader understanding that as the crypto market continues to mature, it’s important for the legal and regulatory system to keep pace and provide a robust, future-ready framework that ensures investor protection, market integrity, and innovation.”
The RBI has repeatedly warned of the risks associated with crypto investments, even as it promotes the Digital Rupee, a central bank digital currency. A draft bill to regulate cryptocurrencies was prepared in 2021 but is yet to be tabled in Parliament.
This is not the first time the Supreme Court has flagged the issue. In July 2023, another bench had directed the union government to clarify whether it intended to “set up a federal agency to investigate criminal cases involving cryptocurrencies,” lamenting the lack of both a regulatory law and an expert agency to probe such matters.
(With inputs from agencies)