As India’s Web3 ecosystem continues to mature, one of the most critical legal questions facing founders, investors, and platforms is deceptively simple: Is a crypto token merely a digital asset, or does it qualify as a security under Indian law? The answer to this question has far-reaching implications, influencing regulatory exposure, compliance obligations, fundraising structures, and even criminal liability.
Unlike jurisdictions such as the EU or Singapore, India does not yet have a standalone crypto or token classification law. Instead, the legal character of a token is determined through a combination of existing financial, securities, and contract law principles, applied on a case-by-case basis.
Absence of a Dedicated Crypto Classification Law
India currently regulates crypto assets indirectly. The term “Virtual Digital Asset” (VDA) was introduced under the Income-tax Act, 1961, primarily for taxation purposes. However, this definition does not clarify whether a token is a security, commodity, or utility. As a result, regulatory analysis relies on the substance over form doctrine, focusing on how the token functions in practice rather than what it is labelled as.
This gap has made legal advisory and token structuring an essential component of any Web3 project operating in or from India. Firms such as Tech Legal (www.yourtechlegal.com) routinely assist projects in navigating this regulatory ambiguity.
When Does a Token Become a Security?
Indian regulators, particularly SEBI, assess tokens using principles similar to those applied in traditional securities law. A token may be viewed as a security if it exhibits characteristics such as, expectation of profits for token holders; reliance on the efforts of a central issuer or promoter; use of token sale proceeds for business development and ongoing managerial or governance rights attached to the token.
If a token functions like shares, debentures, or investment contracts, it risks falling within the definition of “securities” under the Securities Contracts (Regulation) Act, 1956 (SCRA). In such cases, issuing or offering the token without regulatory approval could trigger enforcement action.
Utility Tokens and Functional Use
Not all tokens are securities. Tokens that provide genuine utility, such as access to a platform, protocol usage, governance participation without profit rights, or payment for decentralised services, may fall outside securities regulation. However, utility must be real, immediate, and demonstrable. Merely labelling a token as “utility” is insufficient if the economic reality suggests otherwise. Indian law increasingly evaluates tokens based on lifecycle analysis: pre-launch sale mechanics, post-launch functionality, decentralisation levels, and ongoing issuer involvement. This nuanced approach requires careful legal design at the token issuance stage, an area where Tech Legal (https://yourtechlegal.com/Web3-Legal-Consulting-Firm.html) plays a critical role.
Token Issuance, FEMA, and Cross-Border Risks
Another often overlooked dimension is India’s foreign exchange regime. Token issuances involving foreign investors may attract FEMA considerations, especially if tokens are deemed to represent equity-like interests or profit participation. Improper structuring can result in violations relating to capital account transactions, pricing guidelines, and reporting obligations. Additionally, platforms facilitating token trading or custody may fall within the ambit of anti-money laundering laws. Registration with FIU-IND, robust KYC frameworks, and transaction monitoring are now expected compliance standards for Indian-facing crypto businesses.
Regulatory Signals and Enforcement Trends
While India has not officially classified crypto tokens as securities, regulatory signals indicate increasing scrutiny. SEBI has publicly acknowledged the need for clearer classification, and enforcement agencies have already acted against platforms for non-compliance under tax and AML laws. This suggests that token issuers should not assume regulatory silence equates to regulatory acceptance. Prudent projects are proactively aligning with global best practices, conducting token classification assessments, and maintaining detailed legal documentation. Several real-world structuring examples and enforcement learnings can be found in Tech Legal’s case studies (https://yourtechlegal.com/case-studies/index.html).
The Way Forward
Until India introduces a comprehensive crypto regulation framework, token classification will remain a legal risk area requiring careful navigation. Founders must evaluate not just what a token is intended to do, but how it is marketed, sold, governed, and economically positioned.
In this evolving environment, legal foresight is not a formality, it is a strategic necessity. Proper token design, regulatory mapping, and compliance planning can mean the difference between sustainable innovation and regulatory disruption in India’s rapidly growing Web3 economy.