The arrest of members of the Gogi gang in October uncovered how members of such cartels acted as crypto intermediaries for foreign handlers, especially Pakistan-based scammers who converted money collected through fraud loan apps and UPI transactions. Such cases raise concerns regarding national security, crypto-enabled crime, money laundering, and even terror financing. The core issue is regulatory lacuna — there is a lack of user accountability, user protection and trans-jurisdictional law enforcement.
At present, anyone can launch a token or a crypto coin with negligible oversight. The lack of legal infrastructure creates a suitable niche for pump-and-dump schemes. While gains through crypto transactions are heavily taxed, there is minimal verification of the legitimacy of the crypto assets. The result is a taxed but unregulated market that functions as a digital jungle for fraudsters. In 2023, India was ranked as one of the top countries worldwide for crypto scams. Take, for instance, the FTX scam of 2022, where the crypto exchange collapsed and Indian users were left with almost nothing.
There are hardly any legal mandates for custody of users’ assets. Some of these platforms use customers’ deposits for risky investments that lack reasonable cyber security, leading to severe losses. This has thus transformed into a predator’s playground. Several cases were flagged by the Enforcement Directorate and Financial Intelligence Unit in 2024, where Indian crypto customers were victims of monetary loss since there were no well-stated and transparent practices regarding crypto fund allocation. While there exist certain voluntarily enforced cold wallets and insurance-like measures, neither is uniform, compulsory, or bound by legal safeguards. This leads to financial victimisation of small-scale investors.
Crypto transactions are inherently international. But the legal framework fails to directly address this aspect. A criminal in Pakistan can transact with a counterpart in Delhi using a decentralised protocol based in Seychelles with servers scattered globally. Contemporary bilateral or multilateral agreements are mostly useless in this context, creating an ecosystem for growth in crypto-based delinquencies. This becomes a new avenue of ‘Hawala 2.0’ where encrypted anonymity is coupled with terror financing, ransomware, and organised cybercrime. India’s FIU has blacklisted several offshore exchanges for violating anti-money-laundering laws. But such measures only appear as reactions rather than being preventive.
Existent regulatory gaps expose citizens to foreign interference, threatening not only the country’s digital sovereignty but also opening several other security dilemmas. While the government ardently advocates in favour of the digital rupee and the scope of UPI, the absence of a parallel paradigm of crypto regulation creates a blind spot. India must urgently implement a licensing regime for crypto-centric issuers, modelled on the European Union’s Markets in Crypto-Assets framework. Such frameworks decree compulsory disclosure of financial reserves and safeguards of investor protection. Countries like the United States of America and Singapore have implemented innovative measures of regulatory sandboxes while ensuring digital security.
India must sign cross-border pacts with allied nations, establishing standardised, real-time data sharing channels that bypass slower diplomatic routes. Domestically, the government must implement the ‘travel rule’ which dictates that verified customer data is shared securely among all Virtual Asset Service Providers. The FIU must be empowered to penalise any exchange if found illegal. Apart from this, India’s present regulatory approach remains highly fragmented. A devoted digital asset regulator is the need of the hour. The need for regulatory policies is not about control. Rather, it is to avert a crisis in the making.
Aniba Junaid is Assistant Professor of Political Science, Department of Humanities and Social Sciences, Adamas University, Calcutta. Subhra Dan studies law at AU