Untraceable, unregulated and unstoppable?
Crypto’s dark side is testing India’s legal boundaries and exposing just how costly the gaps can be.”
SYNOPSIS
Introduction: The Promise and the Peril
Cryptocurrency has been hailed as the dawn of a new financial era – borderless, decentralised, and fast. For young investors, it feels like digital gold; for businesses, a disruptive opportunity. But beneath this shiny promise lies a darker reality. Across the globe, crypto has become a channel for laundering black money, funding terror networks, and running elaborate scams.
India is no exception. The country’s growing base of crypto users makes it an attractive market for innovation – but also a vulnerable one. With regulations still catching up, crypto has created a legal blind spot where criminals thrive, investors stumble, and regulators struggle. The urgency is clear: India needs sharper safeguards, stronger enforcement, and smarter compliance strategies.
⚖️ The Rise of Crypto Crimes in India
1. Money Laundering Made Easy-
Unlike bank transactions that leave a trail, crypto transfers can be anonymised and routed across multiple wallets, making it nearly impossible to trace the original source. This has made cryptocurrencies an attractive tool for money launderers.
2. Terror Financing Through the Digital Backdoor-
Global watchdogs like FATF (Financial Action Task Force) have raised red flags on the use of crypto for funding terrorism. In India’s context – where national security is constantly tested, the risk is not theoretical. Reports have shown extremist groups experimenting with Bitcoin to bypass financial surveillance.
3. Fraudulent Exchanges and Ponzi Schemes
Indians have lost crores to fake Initial Coin Offerings (ICOs), pump-and-dump schemes, and fraudulent trading platforms. These scams flourish because crypto investments are not protected under investor-friendly laws like SEBI’s (Securities and Exchange Board of India) securities framework.
4. Investor Exploitation
Ordinary retail investors, lured by promises of high returns, often don’t realise that if an exchange collapses or a scam unfolds, they have little to no legal remedy.
📜 The Legal Vacuum in India
India has taken cautious steps toward regulation, but gaps remain:
• PMLA Extension (2023): Crypto transactions were brought under the Prevention of Money Laundering Act, requiring exchanges and intermediaries to report suspicious activities. While a step forward, enforcement is patchy.
• Taxation without Regulation: Crypto is taxed at 30% on gains and 1% TDS on transactions, but without a dedicated regulatory framework. This paradox means the government profits from crypto activity without fully regulating it.
• Regulatory Turf War: Should crypto be treated as currency (RBI – Reserve Bank of India), a security (SEBI – Securities and Exchange Board of India), or a digital asset (MeitY – Ministry of Electronics and Information Technology)? The lack of a single regulator creates confusion.
• No Investor Safeguards: Unlike mutual funds or stocks, crypto lacks consumer protection laws, grievance redressal mechanisms, or insurance coverage.
The result? A regulatory limbo where compliance is inconsistent, enforcement is reactive, and criminals exploit loopholes faster than they can be closed.
📊 Crypto Crime Risks vs. Legal Safeguards in India
| Crypto Crime Risks | Current Legal Safeguards in India |
| Money Laundering | PMLA, 2002 extended to cover Virtual Digital Assets (VDAs), but enforcement gaps remain |
| Terror Financing | No specific anti-terror crypto law; monitored under UAPA & intelligence coordination |
| Fraud & Scams | IT Act & IPC provisions invoked, but no crypto-specific fraud protection framework |
| Investor Exploitation | No dedicated investor protection law for crypto; reliance on general consumer protection laws |
| Regulatory Evasion | Regulatory uncertainty between RBI, SEBI, and MeitY—no single authority |
🏛️ Why This Matters for Businesses and Investors
The stakes are high:
• For Businesses: Companies dealing in crypto (exchanges, start-ups, fintechs) face the risk of investigations and penalties if their compliance systems don’t meet evolving expectations under PMLA or FEMA. Even unintentional lapses can attract scrutiny.
• For Investors: Retail participants face a double risk – falling prey to scams and having no formal legal recourse. Fraudulent losses are rarely recoverable.
This uncertainty discourages innovation while leaving the system open to abuse.
💡 Solutions: Building a Safer Crypto Ecosystem in India
Here’s how India can address the blind spot:
| Problem | Proposed Solution | Who Leads? |
| Money Laundering | Mandate KYC/AML checks for all crypto transactions and exchanges; align with FATF’s “Travel Rule.” | RBI, FIU-IND |
| Terror Financing | Establish a dedicated crypto terror-monitoring unit under UAPA with intelligence-sharing protocols. | MHA, NIA |
| Frauds & Scams | Introduce crypto investor protection law; mandatory licensing of exchanges and platforms. | SEBI, MeitY |
| Investor Exploitation | Launch a crypto grievance redressal mechanism, backed by insurance for retail investors. | SEBI, MCA |
| Regulatory Evasion | Form a single unified crypto regulator or inter-agency task force to avoid turf wars. | Govt. of India |
👩⚖️ How Law Firms Can Help
Law firms have a critical role in closing the gap between regulation and practice. Their expertise isn’t limited to courtrooms – it extends to risk-proofing businesses and protecting investors:
• Compliance Advisory: Helping companies design AML/KYC frameworks aligned with PMLA and FATF guidelines.
• Due Diligence: Vetting crypto transactions to avoid exposure to laundered assets or scam-tainted coins.
• Dispute Resolution: Representing clients in cases of fraud, misrepresentation, or exchange defaults.
• Structuring & Tax Guidance: Advising on how to legally structure crypto holdings and transactions within India’s tax regime.
• Policy Advocacy: Working with regulators to frame laws that balance innovation with accountability.
In essence, law firms act as navigators in uncharted waters, giving clients the tools to engage with crypto confidently, while mitigating risks.
For businesses and investors, navigating the uncertainties of crypto law requires more than caution—it demands strategy. Law firms act as partners in this journey, offering compliance frameworks that keep operations aligned with evolving regulations, due diligence that protects against fraudulent dealings, and representation when disputes or investigations arise. Beyond safeguarding against risk, firms provide structured guidance on transactions, taxation, and policy developments, ensuring clients remain future-ready in an unpredictable landscape. With the right legal support, crypto is no longer a blind spot – it becomes an opportunity managed with clarity and confidence.
✍️ Conclusion: Closing the Blind Spot
India’s crypto journey is at a defining moment. The technology is not going away – it will only grow. The real question is whether India will let the legal blind spot persist, or move swiftly to create a regulatory ecosystem that is transparent, fair, and enforceable.
The path forward lies in collaboration: regulators must tighten the law, businesses must strengthen compliance, and investors must educate themselves. Law firms, as interpreters and guardians of the law, bridge these worlds – helping to transform crypto from a potential liability into a structured opportunity.
Because in crypto, ignorance isn’t bliss – it’s risk. And with the right legal guidance, risk can be managed, innovation can be embraced, and the future of finance can be secured for India.
