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We are pleased to launch a new Joint Letter prepared by , together with Fox & Mandal, one of India’s oldest full-service law firms, to provide side-by-side, practice-ready insights on topics drawing attention in both jurisdictions. Our aim is to distil fast-moving developments into concise takeaways that support timely, well-rounded decisions by in-house teams and executives.
This inaugural issue surveys the treatment of crypto-related tokens in Japan and India. For ease of reference, we:
Even as regulation of crypto assets has evolved rapidly in Japan and moved beyond the initial focus on anti-money laundering, terror financing, and user protection concerns, the evolution of such regulations in India has been a bit staid. At present, crypto assets in India lack legal status, classification norms, consumer-protection mechanisms, and prudential standards for service providers.
The legal structure governing the crypto assets ecosystem has emerged not from a unified legislative vision but from a patchwork of regulatory signals issued by tax authorities, financial-crime regulators, and, increasingly, the judiciary, as is evident from the landmark ruling of the Madras High Court in Rhutikumari v. Zanmai Labs Pvt Ltd (OA No. 194 of 2025), which, for the first time, affirmed that cryptocurrencies constitute property capable of being held in trust – a finding with significant implications for custody, insolvency treatment, and investor protection.
Even as the need for effective, objective, and clear regulations for crypto assets becomes increasingly apparent, India has a long way to go to catch up to the modern crypto assets regulatory frameworks across different jurisdictions.
Please note that this Letter is provided for general informational purposes only and does not constitute legal advice. Specific transactions may turn on facts, sector-specific rules, and ongoing policy shifts in each country. If you are considering a particular product or transaction, we encourage you to contact Chuo Sogo LPC or Fox & Mandal to discuss how the points raised here apply to your circumstances. We look forward to supporting your Japan–India initiatives with clear, comparative analysis in the issues to come.
In Japan, crypto tokens are broadly classified into the following four categories:
In addition, electronic money on a permissioned blockchain network - where users pre-load funds and make payments to affiliated merchants - is managed in a centralised, prepaid system.
Since it does not involve decentralised management on a permissionless blockchain network, it is not classified as a crypto asset or an Electronic Payment Instrument under the Payment Services Act (PSA). Instead, such electronic money is legally regulated as a prepaid payment instrument under the PSA or as a fund transfer transaction under the fund transfer services or banking services.
In Japan, crypto tokens that meet the following criteria are defined as crypto assets under the Payment Services Act (PSA). Currency-backed stablecoins and permissioned electronic money fall under the category of currency-denominated assets and therefore are not classified as crypto assets.
Crypto assets such as Bitcoin and Ethereum fall under the category of Type 1 crypto assets. The explanation of Type 2 crypto assets is omitted here.
Type 1 crypto assets: crypto assets that meet all of the following requirements:
Stablecoins denominated in legal currency and used as a means of remittance or settlement are defined as Electronic Payment Instruments under the PSA. Electronic payment instruments are classified into the following categories. Since there are currently no tokens that fall under the category of Type IV Electronic Payment Instruments, the explanation is omitted here.
Type I Electronic Payment Instruments
Type II Electronic Payment Instruments
Type III Electronic Payment Instruments (specified beneficial interests in trusts)
Beneficial interests in trusts that are electronically recorded and transferable, where the trustee manages all of the trust property (money) in the form of deposits and savings.
At present, it is required that all underlying assets be managed as deposits and savings. However, it is planned to allow investment, up to 50% of the issued amount, in short-term government bonds and redeemable time deposits, provided that the principal is not impaired (the effective date of the amendment has not yet been determined). In the case of specified beneficial interests in trusts, general acceptability is not a requirement, which makes it possible to issue permissioned-type stablecoins.
In Japan, security tokens are broadly classified as follows:
NFTs are subject to regulation under the PSA as crypto assets if they fall under the aforementioned definition of crypto assets. The Financial Services Agency (FSA) has stated that if they do not possess the same economic functions as a means of settlement like Type I crypto assets, they are not considered Type II crypto assets.
According to the FSA, NFTs are deemed not to function as a means of settlement (and therefore not as crypto assets) if both of the following conditions are met:
India’s absence of statutory recognition for cryptocurrency means that the legal character of digital assets must, for now, be inferred almost entirely from judicial interpretation. Within this vacuum, the Madras High Court’s recent decision in the matter of Rhutikumari v. Zanmai Labs Pvt Ltd (OA No. 194 of 2025), where the Court affirmed that cryptocurrencies constitute property capable of being held in trust, stands as the first sustained judicial attempt to define the nature and rights associated with cryptocurrency.
The matter arose when a WazirX user challenged the exchange’s proposal to impose a uniform loss-distribution mechanism following a reported cyber-attack. Although the petitioner’s own holdings remained untouched, the platform sought to subsume all users into a collective risk-pooling arrangement, which led to claims that his proprietary interests were being arbitrarily diluted.
In holding that cryptocurrency constitutes property capable of ownership, control, transfer, and valuation, the Court placed digital assets squarely within established private-law frameworks. Crucially, it indicated that custodial exchanges may owe duties analogous to fiduciary obligations. In the absence of statutory custodial norms or legislative guidance, this judicial articulation fills a critical regulatory vacuum and provides the conceptual groundwork upon which future investor-protection rules may be built.
The Court’s analysis of territorial jurisdiction is equally notable. Despite the respondent’s foreign restructuring proceedings, the Court asserted jurisdiction because the petitioner’s transactions, banking touchpoints, and tax liabilities were situated in India. This reasoning is likely to shape India’s approach to cross-border crypto disputes going forward, particularly as Indian consumers increasingly engage with offshore platforms that operate beyond domestic regulatory oversight.
A complementary line of jurisprudence is developing before consumer fora in cases involving alleged service deficiencies or loss of assets. While the National Consumer Disputes Redressal Commission has so far been reluctant to assume jurisdiction due to the absence of statutory recognition, the Madras High Court’s property-based framework provides doctrinal support that consumer fora may rely upon in future disputes.
Collectively, these judicial interventions are effectively functioning as a surrogate regulatory mechanism underscoring the growing urgency for a coherent statutory regime. In assessing whether this judicially driven trajectory is sustainable, comparison with Japan is instructive. Following the Mt. Gox collapse, Japan adopted a proactive and highly structured regulatory framework with clear definitions of various crypto assets, mandatory registration, and segregation of customer assets.
The Japanese statutory architecture, premised on early codification and a coherent distribution of regulatory oversight, prescribes stringent audit and cybersecurity safeguards and codifies custodial obligations and investor protection. In contrast, India’s reliance on judicial innovation and regulatory patchwork leaves key issues such as token classification, exchange licensing, custody standards, and prudential safeguards unresolved.
Given the increasing economic significance of crypto assets, India could benefit from drawing from the jurisprudential maturity of jurisdictions such as Japan in order to move from ad hoc, case-driven regulation toward a structured, predictable statutory framework.
CRYPTO ASSETS
Even companies conducting crypto asset exchange services outside Japan are required to obtain registration if they provide services targeting users located in Japan.
Although there is no statutory definition of an ICO, it is generally defined as a scheme whereby a company issues tokens electronically to raise funds from the public in the form of legal currency or crypto assets. If the tokens issued in an ICO fall under the category of crypto assets or Electronic Payment Instruments, they are subject to regulation under the PSA. In such cases, registration with the FSA is required in order to sell them as a business or to exchange them for other crypto assets or Electronic Payment Instruments.
The following activities, when conducted as a business, constitute Electronic Payment Instruments Exchange Services and may not be carried out without registration with the relevant Local Finance Bureau:
Even companies conducting Electronic Payment Instruments Exchange Services outside Japan are required to obtain registration if they provide services targeting users located in Japan.
Intermediation of transactions in crypto assets or Electronic Payment Instruments between users and crypto asset exchange service providers or Electronic Payment Instruments exchange service providers is permitted upon registration as an Electronic Payment Instruments and crypto-asset service intermediary business operator.
The regulations imposed on Electronic Payment Instruments and crypto-asset service intermediary business operators are less stringent compared to those applied to crypto asset exchange service providers or Electronic Payment Instruments exchange service providers.
Solicitations to acquire the aforementioned security tokens are regulated under the Financial Instruments and Exchange Act (FIEA) as Security Token Offerings (STOs).
When tokens are issued based on underlying assets such as stocks, corporate bonds, or investment trusts (i.e., Paragraph 1 Securities), disclosure obligations are imposed on the issuer. Furthermore, the sale or solicitation of such tokens requires registration as a Type I Financial Instruments Business Operator (FIBO).
Similarly, tokens issued based on beneficial interests in trusts, interests in collective investment schemes, or membership interests in LLCs are, with limited exceptions (e.g., where they are deemed non-transferable), also regulated as Paragraph 1 Securities. Their sale or solicitation likewise requires registration as a Type I FIBO. However, where the issuer itself conducts solicitation for acquisition, registration as a Type II FIBO is sufficient.
With respect to LLC membership interests, if token holders do not receive profit distributions in excess of their contributed amount, such tokens are treated as Paragraph 2 Securities. In this case, regulations relating to self-offerings and disclosure obligations do not apply. This framework has raised expectations that DAOs may use the LLC form as a means of raising funds.
While some countries continue to ban cryptocurrencies (such as China) and others are actively developing regulatory frameworks for virtual assets (such as Japan and Australia), India remains indecisive and continues to maintain partial oversight on virtual digital assets (VDAs). The country’s regulatory approach to crypto-related businesses and cryptocurrencies is largely a consequence of changing policies and perspectives peppered by judicial intervention. In the absence of a comprehensive regulatory framework or a unified digital-asset law, businesses operating exchanges, custodial platforms, or wallet services navigate a patchwork built primarily on taxation rules, anti-money laundering obligations, and emerging judicial interpretations.
India’s approach to regulating VDAs has evolved from early caution to active fiscal intervention, yet without establishing a comprehensive regulatory framework. The Reserve Bank of India (RBI) was one of the first institutions to flag concerns, issuing public advisories around 2013 that warned users about volatility, fraud, and the absence of legal protections. This caution hardened significantly in 2018 when the RBI directed banks and other regulated entities to cease servicing crypto businesses, effectively cutting these platforms out of the formal financial system.
The Supreme Court struck down this prohibition in 2020 in the matter of Internet and Mobile Association of India v. Reserve Bank of India (Civil Writ Petition No. 528 of 2018), holding that although the RBI has a legitimate mandate to safeguard financial stability, its response must be proportionate to the risks identified. The ruling underscored that oversight cannot rely on blanket restrictions in the absence of demonstrated systemic harm.
While there have been attempts in the past to introduce legislations that did not see the light of day, several existing statutes have been amended and guidelines/notifications issued to regulate specific aspects pertaining to VDAs and attendant service providers, such as the Ministry of Electronics and Information Technology (MeitY) notification on reporting of cyber incidents by entities dealing in cryptocurrency; AML & CFT Guidelines For Reporting Entities Providing Services Related To Virtual Digital Assets; Ministry of Corporate Affairs notification on disclosure requirements for companies dealing in VDAs; and Advertising Standards Counsel of India guidelines for advertising VDAs.
Some of the pertinent developments that are shaping the VDA regulatory ecosystem in India are as follows:
CRYPTO ASSETS
Transfers of crypto assets conducted through domestic crypto asset exchange service providers are not subject to consumption tax. However, the act of lending crypto assets in exchange for payment of usage fees is subject to consumption tax, with the standard tax rate being 10%.
Amendments to the Income Tax Act, 1961 introduced the category of ‘VDAs’, subjecting profits from their transfer to a flat 30% tax rate while disallowing the set-off of losses. Section 115BBH of the Income Tax Act, 1961 essentially provides that where the total income includes any income from the transfer of any VDA, the amount of income tax is calculated on the income from transfer of such VDA at the rate of 30% and no deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set-off of any loss shall be allowed, in addition to carry-forward of loss from transfer of the VDA to succeeding assessment years.
Additionally, a 1% tax deducted at source (TDS) has been levied on most crypto transactions. Introduced through insertion of Section 194S in the country’s tax regime by the Finance Act 2022, this provision has become a de facto compliance and traceability mechanism. For businesses, this means that every transaction – whether conducted on a domestic exchange or an offshore platform accessed by Indian users – falls within the tax-reporting perimeter, effectively drawing these operations into the state’s financial monitoring framework.
It must be noted that this expansion of fiscal control occurred without corresponding regulatory clarity: crypto assets still lack legal status, classification norms, consumer-protection mechanisms, and prudential standards for service providers. The result is a structural imbalance, wherein crypto activity is taxed, traced, and visible to the state, but remains unregulated in every substantive sense.
This regulatory vacuum leaves users exposed to platform failures, market abuse, and operational risks, while the financial system continues to grapple with concerns repeatedly expressed by the RBI regarding monetary sovereignty, capital-flow management, and macroeconomic stability.
In Japan, in response to economic and social changes such as digitalisation, several reforms have been implemented in recent years. These include relaxing the framework for funds transfer services, strengthening of regulations on cryptocurrency exchange businesses, and establishing a regulatory framework for Electronic Payment Instruments.
Further revisions have been made to accommodate the emergence of new services that were not anticipated under traditional financial regulations. These measures include allowing greater flexibility in the management and operation of reserve assets backing trust-type stablecoins, introducing domestic custody requirements for cryptocurrency exchange service providers, and establishing a framework for intermediary businesses involved in cryptocurrency transactions – all while ensuring user protection.
Lacking a formal regulatory structure governing VDAs, India has attempted to enforce a semblance of oversight on this sector by issuing several guidelines and notifications aimed at cyber threat assessment/reporting, disclosure requirements for enhancing transparency, preventing money laundering and terror financing, as well as protecting the users from inaccurate claims in advertisements pertaining to crypto assets. These efforts have been supplemented by amendments to the country’s laws governing payment systems, money laundering, taxation and other aspects.
Notwithstanding the above, the absence of a sector-specific statute leaves critical uncertainties unresolved. Token classification remains undefined, making it unclear whether certain crypto-tokens should be treated as securities, commodities, payment instruments, or something else entirely. For businesses, this poses operational and compliance risks, particularly for platforms dealing in staking, lending, token issuance, or custodial services.
Moreover, traditional consumer-protection norms do not automatically apply, exposing users and businesses alike to procedural grey zones. While the Madras High Court’s recent recognition of cryptocurrency as ‘property’ introduces a degree of legal coherence, this judicial doctrine cannot by itself replace comprehensive legislative guidance.
In Japan, gains from cryptocurrency transactions are subject to comprehensive taxation, with a maximum tax rate of 55%. This has been criticised as imbalanced when compared with income from securities transactions, which is subject to separate taxation at approximately 20%. Meanwhile, in other jurisdictions such as Dubai, individuals are not subject to income tax or capital gains tax on cryptocurrency trading or disposal gains, and in Singapore as well, capital gains on cryptocurrencies for individuals are generally non-taxable. Consequently, there has been a trend of relocating to regions offering such tax advantages, raising concerns over the hollowing-out of the Japanese market and a decline in its competitiveness.
In response to these circumstances, Japan’s FSA has been advancing institutional reforms through councils and deliberations, aiming to strike a balance between user protection and market development. Within this process, issues such as disclosure requirements, improper solicitation, and unfair trading practices have been recognised as highly compatible with the existing framework of the FIEA. As a result, a policy direction has been indicated to transfer the regulatory framework for cryptocurrencies from the current PSA to the FIEA system. In parallel, discussions are also underway to address tax-related issues.
REGULATORY REFORMS (EXCLUDING TAXATION)
At present, there is little necessity to impose on crypto asset exchanges regulatory requirements equivalent to the licensing regime for financial instruments exchanges or the regulations applicable to proprietary trading systems (PTS). However, since these exchanges provide a collective trading venue involving many counterparties, appropriate trade management and system controls are essential.
Currently, insider trading is not directly regulated in relation to unfair trading practices involving crypto assets. Monitoring systems equivalent to those for listed securities have not been established. Methods of regulation are being considered to enhance deterrence against insider trading in the crypto asset market. Three possible approaches under discussion are:
TAX REFORMS
Currently, gains from cryptocurrency transactions are subject to comprehensive taxation and are aggregated with salary and business income, which can result in a maximum tax rate of 55%. In contrast, financial instruments such as stocks and bonds are subject to separate taxation at approximately 20%, leading to criticism that the current tax system lacks fairness and balance.
If the regulatory framework for cryptocurrencies is to be transferred to the FIEA as an asset that contributes to the wealth formation of the people, it is considered essential to apply separate taxation to cryptocurrencies to effectively realise this objective. Accordingly, discussions on revising the tax system are underway. In addition, tax measures to address cryptocurrency ETFs are also under consideration.
From a complete ban on VDAs by the country’s central bank in 2018 to the rudimentary regulatory edifice presently governing this sector, India’s efforts to regulate VDAs have come a long way, and the future crypto-regulatory landscape is expected to evolve toward a more structured and compliance-focused regime. Any such development is likely to include multiple regulators, especially SEBI (the securities and capital markets regulator), RBI (banking sector regulator) and FIU-IND (money laundering and terror financing oversight body).
Stakeholders anticipate the introduction of a licensing framework for crypto asset service providers, offering clearer regulatory status and oversight. The government seems committed to strengthening investor protection through enhanced KYC/AML norms and formal measures for customer redress. Meanwhile, tax policies may be reoriented to balance revenue generation with market stability, possibly revisiting the treatment of losses and reporting thresholds.
Amid these reforms, some experts suggest establishing a dedicated regulatory authority to oversee cryptocurrencies, while existing bodies like FIU-IND and SEBI could play more significant roles in enforcement and standard-setting. This prospective shift reflects India’s attempt to reduce systemic risk, improve transparency, and safeguard users without stifling innovation.
While Japanese regulation for VDAs is predominantly public-law driven, with statutory compliance forming the backbone of market conduct, India, by contrast, is currently developing a private-law foundation for crypto governance through judicial recognition of property rights and custodial responsibilities.
Ultimately, India’s trajectory may converge toward Japan’s structured model, but its path is likely to be shaped by domestic market realities, judicial reasoning, and evolving policy priorities. The Indo–Japan comparison suggests that while India has adopted a cautious and incremental approach, the eventual emergence of formal crypto legislation is both inevitable and desirable. As India moves towards this next phase, the interplay between judicial doctrine and legislative policy will shape the contours of digital-asset law for years to come.
Japan’s experience offers a useful blueprint for addressing the gaps in India’s crypto assets regulatory framework. Japan moved toward early statutory recognition of crypto asset service providers, subjecting them to licensing, capital-adequacy norms, mandatory asset-segregation, cybersecurity standards, and ongoing supervisory oversight. By placing exchanges under a clear regulatory perimeter and embedding investor-protection obligations into law, it created a framework that balances innovation with systemic safety. For India, where users currently rely on fragmented tax rules, AML obligations, and judicial interventions, adapting elements of Japan’s structured, custody-oriented model could help mitigate investor exposure, establish accountability for intermediaries, and reduce the systemic risks highlighted by the RBI.
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