INTRODUCTION

India’s crypto ecosystem is witnessing rapid expansion, with millions of users participating through exchanges that operate in a regulatory grey zone. Even though cryptocurrencies are not recognised as legal tender, trading continues unchecked through global and domestic platforms. Simultaneously, enforcement agencies report increasing difficulty in conducting investigations, seizing digital assets, and identifying crypto flows due to lack of disclosure norms, anonymous digital wallets, and absence of a comprehensive cryptocurrency law.
As the RBI continues to caution against private crypto assets on grounds of financial instability, the mismatch between rapid adoption and weak regulatory architecture is emerging as a major economic and governance challenge.

WHY IN THE NEWS? 

The Indian crypto industry is projected to grow from $2.6 billion in 2024 to $15 billion by 2035, showing unprecedented expansion despite lack of regulatory oversight. This contrast, booming investments vs. near-absence of guardrails, has placed the industry at the centre of policy debate. Law-enforcement agencies have flagged that crypto-linked frauds, pump-and-dump schemes, and money-laundering networks are rising, while agencies lack legal backing and technical capability to tackle cases, making the issue urgent and nationally significant.

Understanding Cryptocurrencies and Exchanges

What are cryptocurrencies?

• Decentralised Digital Assets: Built on blockchain, enabling encrypted, irreversible peer-to-peer transactions.
• No Government Backing: Value based purely on demand-supply and market sentiment.
• Popular Coins: Bitcoin, Ethereum; Indian users largely rely on global exchanges.
• Not Legal Tender in India: Cannot be used for officially recognised payment obligations.

What are crypto exchanges?

• Online Trading Platforms: Allow users to buy, sell, hold crypto.
• Wide Accessibility: Millions of Indians use both domestic and offshore exchanges.
• India’s Absence of Recognition: Exchanges operate as digital intermediaries without formal regulatory status.

How Crypto Scams Proliferate in India

What mechanisms drive frauds?

1. Pump-and-Dump Rackets: Influencers artificially inflate coin prices before exiting.
2. Social Media-Driven Scams: Fraudsters lure users through WhatsApp/Telegram channels promising unrealistic returns.
3. Disappearing Exchanges: Operators collect deposits and shut down overnight.
4. Lack of Investor Awareness: Complex technology makes retail investors vulnerable.

Magnitude of India’s Crypto Adoption

How large is the user base?

• 11 Million Global Crypto Holders: India hosts one of the world’s largest user bases.
• 7 Million Indian Users (approx. 7%): Indicating wide penetration despite lack of backing.
• ₹45,000 Crore Transaction Volume: Public adoption remains high regardless of regulatory uncertainty.
• Young Demography: Primarily 18-35 age group investing through mobile apps.

Why Does RBI Oppose Private Crypto Assets?

What risks concern the central bank?

1. Threat to Monetary Stability: Crypto bypasses sovereign currency systems, undermining control.
2. Capital Flight Risks: Easy cross-border transferability allows funds to move outside the formal system.
3. Volatility Concerns: Extreme price swings harm financial stability and investor protection.
4. IMF FSR Context: RBI flags that widespread crypto usage could weaken monetary transmission and destabilise macroeconomic foundations.

Why Crypto Investigations Are a Minefield in India

What obstructs law-enforcement agencies?

1. Disclosing Data
   1. Opaquely Stored User Data: Off-shore exchanges hide ownership/trade history.
   2. No Mandatory Registration: Agencies struggle to compel disclosure.
   3. Jurisdictional Challenges: Crypto platforms operate globally.
2. Wallet Complexities
   1. Self-Custody Wallets: Google/MetaMask wallets controlled solely by users; agencies cannot freeze.
   2. Unregulated Cross-Border Flows: Enable illegal transfers with no paper trail.
3. Seizing Digital Assets
   1. Technical Restrictions: Investigators require passphrases; non-cooperation prevents seizure.
   2. Custodial Limitations: No authorised secure government platform for holding crypto.
   3. High-Risk Volatility: Digital assets fluctuate, affecting value during investigations.
4. Legal Blocks
   1. No Comprehensive Law: India lacks a crypto-specific statute.
   2. Ambiguity for Officers: Enforcement provisions unclear; actions challenged in court.
   3. Regulatory Vacuum: Agencies rely on IT Act, PMLA,insufficient for decentralised tech.
5. Technical Snag
   1. Privacy Coins (e.g., Monero): High anonymity and advanced obfuscation algorithms.
   2. Untraceable Transactions: Blockchain mixers complicate forensic trails.

Should Individuals Invest in Crypto?

What risks do investors face?

1. High Market Volatility: No asset backing; price fluctuations extreme.
2. Unregulated Exchanges: Shutdowns lead to permanent loss of funds.
3. Cyberattacks and Hacks: Wallets vulnerable to phishing and malware attacks.
4. RBI and Global Position: Institutions including the IMF, RBI, European regulators warn of structural risks.

CONCLUSION

India’s crypto sector is expanding rapidly without an accompanying regulatory architecture. While blockchain offers transformative potential, the risks of fraud, volatility, and money-laundering remain high. Strengthening legal frameworks, mandating registration of exchanges, and improving cross-border cooperation will be essential before mainstreaming digital assets. Balancing innovation with stability remains the core policy challenge.

PYQ Relevance

[UPSC 2021] Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels.

Linkage: This PYQ fits because the article shows how crypto and global digital platforms enable anonymous cross-border laundering. It also matches the article’s focus on legal gaps and enforcement challenges in tackling such flows.

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