Web3 and artificial intelligence (AI) are reshaping the digital economy. Blockchain enables decentralised applications, smart contracts and digital assets, while AI is increasingly being integrated into financial services, cybersecurity, trading platforms and decentralised applications. However, these technologies also create complex legal and regulatory questions.
In India, blockchain technology itself is not prohibited, but activities involving crypto assets and Virtual Digital Assets (VDAs) are subject to a developing regulatory framework. Rather than relying on one comprehensive cryptocurrency law, India currently regulates different aspects of the ecosystem through taxation, anti-money laundering requirements and sector-specific rules.
Understanding Virtual Digital Assets
The Income Tax framework defines a Virtual Digital Asset (VDA) broadly to include crypto assets, Non-Fungible Tokens (NFTs) and other specified digital assets. The Income Tax Department currently requires taxpayers to report VDA transactions through Schedule VDA in their income-tax returns. Income from transfer of VDAs is subject to taxation at the prescribed rate, with specific rules governing the computation of taxable income.
This approach means that taxation of crypto assets does not, by itself, amount to recognition of cryptocurrencies as legal tender or as regulated financial products.
Anti-Money Laundering Requirements
One of the most significant regulatory developments has been the inclusion of certain Virtual Digital Asset Service Providers (VDA SPs) within India’s anti-money laundering framework.
Since March 2023, VDA service providers carrying out specified activities—including exchange between VDAs and fiat currencies, transfer of VDAs, and custody or administration of VDAs—fall within the Prevention of Money Laundering Act (PMLA) framework. Such entities are required to register with the Financial Intelligence Unit–India (FIU-IND)and comply with applicable reporting, record-keeping and other AML/CFT obligations.
FIU-IND has continued to update its AML/CFT guidelines for VDA service providers, with updated guidance issued in January 2026.
Offshore Crypto Platforms and Enforcement
India’s regulatory approach also extends to offshore entities providing covered VDA services to Indian users. The Government has clarified that the relevant obligations are activity-based and are not dependent solely on whether the service provider has a physical presence in India.
Enforcement action has already been taken against offshore VDA service providers for non-compliance with the PMLA framework. FIU-IND has issued notices and other directions against entities that were allegedly operating without complying with applicable requirements.
This demonstrates that businesses operating in the Web3 ecosystem cannot assume that an offshore structure automatically places them outside Indian regulatory requirements.
Blockchain, Smart Contracts and AI
Blockchain applications extend well beyond cryptocurrencies. Businesses are increasingly exploring smart contracts, tokenisation, decentralised finance (DeFi), NFTs and blockchain-based identity solutions.
The legal analysis can differ depending on the underlying activity. A blockchain project involving financial services, investment products, payment mechanisms or VDA services may potentially trigger additional regulatory requirements.
The integration of AI with Web3 adds another layer of complexity. AI systems may be used for automated trading, fraud detection, smart-contract analysis, content generation or decision-making. Businesses must therefore consider not only financial and AML requirements but also issues involving data protection, cybersecurity, consumer protection and accountability.
Compliance Considerations for Web3 Businesses
Businesses developing blockchain or crypto-related products should consider:
- identifying whether their activities fall within the VDA definition;
- determining whether FIU-IND registration is required;
- implementing appropriate KYC and customer due diligence procedures;
- maintaining transaction and customer records;
- establishing mechanisms for suspicious transaction reporting;
- assessing sanctions and AML/CFT risks;
- reviewing smart contracts and cybersecurity controls; and
- assessing data-protection and sector-specific regulatory obligations.
Conclusion
India’s approach to blockchain and crypto regulation remains cautious and activity-based. While there is no single comprehensive statute governing every aspect of cryptocurrency and Web3, taxation and AML/CFT requirements already impose significant obligations on relevant businesses.
For Web3 companies combining blockchain with AI, regulatory compliance should be considered from the design stage rather than after a product has been launched. As the ecosystem develops, businesses that build strong KYC, AML, cybersecurity, data-governance and risk-management frameworks will be better positioned to navigate India’s evolving digital-asset landscape.
