The rapid evolution of blockchain technology has reshaped the global technological
landscape, introducing transformative changes across various industries. The Web3
ecosystem has witnessed the emergence of distinct sub-sectors such as VDA, NFT,
Asset Tokenization, and DeFi, each contributing to the dynamic expansion of blockchain
applications. Notable industry trends include the utilisation of blockchain in cross-border
payments, play-to-earn models, asset tokenization, and regenerative finance, all poised
for widespread adoption.
Despite global recognition for its technological innovation, the Web3 space in India faces
challenges stemming from a lack of regulatory clarity and compliance. Instances of non-
compliance and regulatory oversights, leading to the collapse of prominent industry
players, underscore the pressing need for a robust regulatory framework. The country’s
regulatory journey, from contemplating a total cryptocurrency ban in 2019 to recent
strides in introducing taxation provisions and mandatory registration for virtual asset
service providers, reflects a nuanced approach.
India lacks a specific legislation on regulation of Virtual Digital Assets (VDAs) which
makes it difficult to ascertain the legal characteristics of Asset Tokens in India. Existing
legal provisions only regulate taxation and AML related aspects of VDAs. Amendments in
the Prevention of Money-Laundering Act, 2022 (PMLA) and subsequent guidelines by
Financial Intelligence Unit, India (FIU) mandates registration and prescribes certain
disclosure, reporting and monitoring obligations on entities engaged in notified activities
relating to VDAs. But, there are no comprehensive guidelines on issuance of any type of
VDAs.
While the Financial Intelligence Unit (FIU) Guidelines offer significant clarity regarding
operations and compliance for Web3 projects in India, certain issues remain unresolved.
The report acknowledges the need for further clarity on specific operational and
transactional aspects. Web3 projects are expected to align with the FIU framework and
may seek additional guidance on intricate matters.
The process of developing a compliant Web3 project requires meticulous consideration
of various legal dimensions. Beyond adherence to the Prevention of Money Laundering
Act (PMLA), FIU Guidelines, and taxation laws, projects may fall under the regulatory
purview of existing laws based on their nature and scope. For instance, compliance with
securities law, copyright law, and banking regulations becomes mandatory for projects
that intersect with these domains.
Given the multitude of statutes governing diverse aspects of law and the extensive
range of potential Web3 project applications, accurately preempting the legal issues
applicable to a specific project remains challenging. The report addresses this
complexity by highlighting potential legal issues relevant to specific sub-sectors,
offering insights into the legal landscape for Web3 projects in India.
