Cryptocurrency Fraud Booms in India Amid Regulatory Vacuum

Cryptocurrency, an unregulated investment, faces growing scrutiny from regulators and advocates due to its vulnerability to fraud. Despite its increasing popularity, compliance with global regulations on virtual assets remains low. As India emerges as a crypto hub, it faces numerous challenges, including human trafficking, drug abuse, money laundering, and terrorism financing. Cryptocurrency scams have proliferated in India, resulting in significant financial losses. The unregulated nature of cryptocurrency in the country poses risks of proliferation financing, highlighting the need for robust regulations and oversight to mitigate these threats.

Cryptocurrency: A Caveat for Financial Fraud and its Implications on India

Unregulated Digital Assets: A Breeding Ground for Fraud

In the burgeoning landscape of digital finance, cryptocurrencies have emerged as a highly volatile and largely unregulated investment domain. This absence of oversight has rendered this sector susceptible to rampant fraud, prompting warnings from federal regulators and consumer advocates alike. The popularity of cryptocurrencies has surged during the pandemic, enticing investors with the promise of lucrative returns. However, the industry's current valuation of $2.65 trillion belies a deceptive allure, as these assets remain vulnerable to fraudulent schemes.

International Regulatory Shortcomings: Hindering Compliance

In 2019, the Financial Action Task Force (FATF) adopted a standard on virtual assets (VA) and virtual asset service providers (VASP) as per recommendations 15, R.15. This standard sought to combat money laundering and terrorist financing associated with cryptocurrencies. However, the implementation of these regulations has been sluggish globally, with compliance lagging behind other financial sectors. Based on 98 FATF mutual evaluations and follow-up reports, three-quarters of jurisdictions have exhibited only partial compliance or outright non-compliance with FATF's requirements.

India: A Hub for Crypto Adoption and Financial Crimes

India has emerged as the world's fastest-growing crypto hub, boasting the largest share of global crypto users. In 2024, India accounted for approximately 269.10 million crypto users, a figure projected to reach 328.80 million by 2028. This growth has propelled India to the forefront of cryptocurrency adoption, according to Chainalysis Global Crypto Adoption Index report (2023).

However, India's economic landscape is marred by a range of illicit activities, including human trafficking, drug use and smuggling, gold smuggling, and nuclear-related thefts. These crimes often rely on virtual digital assets for settlement and money laundering purposes.

Surge in Cryptocurrency Scams: A Peril for Investors

The lack of regulation in India's cryptocurrency market has fueled a surge in scams that have led to substantial financial losses for internet users. In recent months, countless individuals have fallen prey to fraudulent investment schemes, losing significant sums of money. Scammers have typically targeted victims through social media platforms like WhatsApp or Telegram, luring them with promises of high returns.

Notable cryptocurrency scams in India include the 2018 GainBitcoin Ponzi scheme orchestrated by Amit Bhardwaj, which defrauded over 8,000 individuals of INR 2,000 crore. The Morris Coin Scam of 2022 swindled over 900 investors with a counterfeit cryptocurrency scheme, amounting to INR 1,200 crore. The Karnataka Bitcoin Scandal of 2021 saw the Central Crime Branch seizing 31 Bitcoins worth INR 9 crore from a Bengaluru-based hacker. Additionally, STA Token deceived over 20,000 individuals and amassed INR 1,000 crore through fraudulent crypto investments.

Proliferation Financing: A Grave Threat

The largely unregulated nature of India's cryptocurrency environment poses a significant risk of proliferation financing, due to the absence of proper regulations and oversight. This risk includes potential money laundering and financing of illegal arms trade, potentially contributing to the spread of weapons of mass destruction.

It is imperative for countries to promptly inform regulated entities and regulators about any amendments in the United Nations Security Council-designated lists. India has raised concerns regarding its delayed notification of regulated entities about changes in the 1718 committee sanctions list. Moreover, the timely issuance of notifications by regulatory authorities and the Financial Intelligence Unit (FIU) following amendments in sanction lists remains inadequate.

Consolidated List: An Essential Tool for Compliance

The availability of a consolidated list on the website of the FIU and regulatory authorities for name screening and matching by regulated entities is crucial for effective compliance and enforcement measures. This would strengthen India's ability to mitigate the risks associated with proliferation financing and terrorist financing.

Conclusion: A Call for Vigilance and Regulation

The proliferation of cryptocurrency scams and the inherent risks of proliferation financing underscore the urgent need for robust regulation and oversight of the cryptocurrency sector in India. While cryptocurrencies may offer potential for financial innovation, their unregulated nature poses significant risks to investors and the broader economy.

As India continues to grapple with illicit activities such as human trafficking and drug abuse, cryptocurrencies could exacerbate these problems if not adequately regulated. The government must prioritize the implementation of effective regulatory measures to curb financial fraud, protect investors, and safeguard the integrity of the financial system.

It is incumbent upon policymakers, financial institutions, and law enforcement agencies to collaborate in developing a comprehensive regulatory framework for cryptocurrencies. This framework should incorporate measures to prevent money laundering, proliferation financing, and other financial crimes associated with these digital assets.

By embracing a proactive approach to regulating cryptocurrencies, India can harness their potential while mitigating the associated risks. This will foster a more robust and transparent financial ecosystem, safeguarding the interests of investors and the nation as a whole.