CRYPTOCURRENCY FRAUD: LEGAL CHALLENGES IN INDIA

ABSTRACT

Cryptocurrencies have emerged as one of the most debated financial innovations of the last decade. India has witnessed massive participation in crypto-trading, but the rapid expansion has also opened the door to complex frauds, Ponzi schemes, cyber-thefts, and money-laundering networks. The absence of a dedicated legal framework for cryptocurrencies forces enforcement agencies and courts to rely on a patchwork of existing statutes, many of which were not originally designed for decentralised digital assets. This article examines the legal challenges in prosecuting crypto-fraud in India, analyses the limitations of current laws, reviews leading judicial decisions, highlights recent enforcement trends, and offers policy suggestions for a more coherent and protective regulatory environment.

KEYWORDS

INTRODUCTION

Cryptocurrencies entered the Indian market as an alternative investment class, attractive for their decentralised architecture, borderless nature, and potential for high returns. Platforms offering easy trading access and global exposure encouraged millions of Indians to invest in Bitcoin, Ethereum, and other tokens. However, the same features that make cryptocurrencies appealing anonymity, irreversibility of transactions, and lack of central oversight—have also made them a convenient tool for fraudsters.

India has seen a steady rise in crypto-related scams: fake exchanges, Ponzi-investment schemes, phishing attacks, SIM-swap frauds, ransomware payments, and rug-pull cases involving newly launched tokens. Victims often lose their savings, while law enforcement struggles to trace the transactions across decentralised networks

Unlike traditional financial assets, cryptocurrencies do not fall neatly within the definitions of “currency,” “commodity,” or “security.” The lack of classification, coupled with the absence of a dedicated statute, creates legal ambiguity. Enforcement agencies rely on a scattered set of laws including the IPC, IT Act, PMLA, BUDSA, and tax statutes to handle issues the laws were never designed for. This article evaluates these challenges and discusses the need for a clearer regulatory architecture.

RESEARCH METHODOLOGY

This study follows a doctrinal and analytical methodology, supplemented by comparative references to international regulatory models. Focusing on:

• Statutory provisions relevant to crypto fraud;
• Government circulars, notifications, and parliamentary records;
• Judgments from Indian courts and foreign jurisdictions;
• Reports from SEBI, the Ministry of Finance, FATF, and international standard-setters.
• Interpretation of existing statutes,
• Review of judicial precedents,
• Analysis of enforcement practices,
• Examination of legal scholarship and policy documents,
• Comparative insights from global regulatory approaches.

The article does not rely on empirical field data; instead, it interprets the legal situation using primary and secondary sources.

LEGAL FRAMEWORK GOVERNING CRYPTOCURRENCY FRAUD IN INDIA

1. Information Technology Act, 2000

The IT Act remains the primary statute for cyber offences. Certain provisions are routinely invoked in crypto-fraud cases:

Section 66C – identity theft,

Section 66D – cheating by personation using computer resources, or Impersonation

Section 43 & 66 – unauthorised access, data theft, or Hacking

Section 72 – breach of confidentiality.

These provisions help prosecute hacking of wallets, phishing attacks, exchange breaches, and creation of fake platforms.

2. Indian Penal Code, 1860

IPC provisions apply when fraud involves deception, cheating, forgery, breach of trust, or impersonation. Common sections include:

• Section 415-420 IPC– cheating and dishonest inducement
• Section 406-409 IPC – criminal breach of trust
• Sections 463- 468 IPC  – forgery in cases involving falsified transaction records
• Section 120B – criminal conspiracy.

Courts increasingly interpret cryptocurrency as “property capable of being dishonestly induced”, enabling prosecution under Section 420 IPC.

IPC allows prosecution of Ponzi schemes masquerading as “crypto-investment plans,” which have become increasingly common.

3. Prevention of Money Laundering Act, 2002 (PMLA)

PMLA is particularly relevant when crypto-assets are used to:

• Laundering of proceeds through crypto wallets
• Cross-border layering via offshore exchanges.
• Hide proceeds of crime,
• Transfer funds across borders,
• Convert illegal gains into seemingly legitimate digital assets.

The ED has initiated several major investigations under PMLA involving crypto-exchanges and large-scale fraud networks.

4. Banning of Unregulated Deposit Schemes Act, 2019 (BUDSA)

Crypto-fraudsters often collect deposits by guaranteeing high returns. When such activities meet the definition of “unregulated deposits,” they become punishable under BUDSA. This law has been crucial in cracking down on pyramid-style crypto scams.

5. Companies Act, SEBI Act & FEMA

While these laws do not specifically regulate cryptocurrency, they apply when fraud intersects with corporate misconduct, securities-like offerings, or overseas transfers.

6. Income Tax Act & Finance Act, 2022

In 2022, India introduced taxation of Virtual Digital Assets (VDAs):

30% tax on profit from transfers,

1% TDS on transactions above prescribed limits.

Although these provisions do not address fraud directly, they mark the first formal statutory recognition of VDAs in India.

JUDICIAL INTERPRETATION

1. Internet and Mobile Association of India (IAMAI) v. RBI (2020)

A landmark decision where the Supreme Court held that:

Cryptocurrency is not illegal in India.

RBI cannot restrict banking services to crypto businesses without evidence of harm. Because RBI had exceeded its powers in imposing a blanket banking prohibition on cryptocurrency exchanges. However, the court acknowledged that cryptocurrencies represent”a digital asset capable of use in transactions”, signalling judicial openness.

In absence of legislation, the government cannot indirectly prohibit crypto trading.

This judgment revived crypto markets in India but also highlighted the legislative vacuum.

1. Harish Tandon v. State of Kerala (Kerala HC, 2021)

The Kerala High Court upheld FIRs against a fraudulent crypto-investment firm, noting that cryptocurrency may not be “legal tender,” but it is “capable of being traded, stored, and misappropriated,” thus falling under IPC offences.

III. Directorate of Enforcement v. Zanmai Labs (WazirX) (ED Proceedings)

In its enforcement actions against WazirX, the ED framed crypto-based layering as “money laundering,” demonstrating a shift from treating crypto merely as techno-financial innovation to viewing it as an emerging laundering vector.

1. State v. Ajay Bhardwaj (GainBitcoin Scam) (Ongoing Proceedings)

In India’s largest Bitcoin Ponzi case, courts recognised investor losses in cryptocurrency as equivalent to financial loss, applying IPC and PMLA provisions despite absence of a specialised VDA law.⁴

1. Foreign Jurisprudence: A Comparative Lens

The U.S. courts (e.g., SEC v. Shavers) held Bitcoin to be “money” for securities-fraud investigations.

The U.K. High Court in AA v. Persons Unknown classified crypto as “property,” enabling asset-freezing orders.

Indian courts increasingly align with these positions.

2. Judicial Approach in Fraud Cases

Courts have treated cryptocurrency as:

• Movable property,
• An asset capable of being seized,
• A medium capable of facilitating illegal transactions.

In various bail orders and criminal matters, courts have recognised the technical difficulty in tracing blockchain transactions and urged investigators to adopt advanced forensic tools.

3. Inconsistent Interpretation

Since there is no statutory definition, courts differ on whether crypto is:

• A” commodity”?
• A “speculative asset”?
• A “security”? or
• A “digital good”?

This inconsistency complicates prosecution and enforcement.

CRITICAL ANALYSIS OF LEGAL CHALLENGES

1. Absence of a Dedicated Statute

The absence of a clear regulatory statute is the root cause of ambiguity. Dealing with a technologically complex ecosystem through outdated laws leads to misinterpretation and inconsistent enforcement and inconsistent treatment across agencies (RBI vs. SEBI vs.ED).

2. Difficulty in Tracing Transactions

Blockchain transactions are pseudonymous. Fraudsters use:

• Mixers/tumblers,
• Privacy coins,
• Cross-chain bridges,
• Foreign exchanges,
• VPNs and TOR routing.

These tools make investigators’ work extremely difficult.

3. Jurisdictional Complexities

Victims, wrongdoers, servers, and exchanges may be located in different countries. India lacks Mutual Legal Assistance Treaties (MLATs) with major crypto jurisdictions, slowing investigations.

Crypto transactions may originate in India but pass through several foreign nodes. Fraudulent platforms often operate from jurisdictions with lax regulation. This raises issues of:

• Extraterritorial jurisdiction,
• Lack of mutual legal assistance,
• Delay in freeze and seizure.

4. Lack of Regulatory Oversight

Because exchanges are not licensed entities, there is no guarantee of investor protection. Fraudulent exchanges can disappear overnight, leaving victims without recourse.

5. Investor Vulnerability

Many investors lack technical knowledge and fall prey to:

• Guaranteed return schemes,
• Fake trading bots,
• Phishing links,
• Fabricated celebrity endorsements.
• Fake exchange apps,
• Rogue Telegram groups,
• Celebrity impersonation.

The absence of investor education and Regulatory uncertainty indirectly significantly fuels fraud.

6. Inadequate Training for Law Enforcement

Cyber-crime units are improving but still face limitations in:

Blockchain forensics,

International coordination,

Seizure of digital wallets.

Without technical expertise, even genuine cases collapse during investigation.

RECENT DEVELOPMENTS

1. Increased Enforcement Activity

In recent years, ED, state cyber cells, and CBI have conducted raids against crypto-scams worth hundreds of crores. Large amounts of digital assets have been frozen through cooperation with exchanges.ED’s crypto related seizures now exceed Rs1,000 crore in ongoing investigations.

2. Introduction of VDA Taxation (2022-23)

Taxation gave legal recognition but did not regulate the sector. Many experts call it “partial legalisation without explicit regulation.”

3. FATF Compliance Pressure

India, as a FATF-member jurisdiction, faces international pressure to regulate crypto-transactions to prevent money laundering and terror financing.

4. Global Regulatory Developments

Countries such as the EU (MiCA), Japan, and Singapore have introduced comprehensive crypto laws. India’s debate increasingly references these models, pushing for an equivalent policy.

5. SEBI’s 2024 Consultation 

 Suggested multi-regulatory oversight, treating tokens as securities, commodities, or utilities depending on purpose.

6. RBI Push for CBDC 

 While cautious about private crypto, RBI experiments with digital rupee, acknowledging co-existence challenges.

SUGGESTIONS

1. Enact a Comprehensive Crypto Regulation Act

The government should introduce a statute covering:

• Classification of digital assets,
• Licensing of exchanges and custodians,
• Investor-protection norms,
• AML/KYC procedures,
• Disclosure norms,
• Consumer-Protection obligations
• Market-abuse regulations,
• Penalties for fraud and unauthorised offerings.

2. Establish a Dedicated VDA Regulatory Authority

A specialised body   independent or within an existing financial regulator — can supervise exchanges, audit algorithms, monitor suspicious transactions, and enforce compliance.

3. Strengthen Cyber-Forensics Infrastructure

Agencies should be equipped with blockchain analytics software and trained personnel capable of tracing complex transactions and interacting with foreign exchanges.

4. Improve International Cooperation

India must enhance MLATs and data-sharing agreements to trace criminals in foreign jurisdictions.

5. Mandatory Registration of Exchanges

All crypto platforms operating in India should be registered and required to maintain transparent audits, investor grievance cells, and 24×7 fraud-reporting mechanisms.

6. Public Awareness Campaigns

Large-scale awareness drives can significantly reduce scam incidents by educating users about red flags and safe trading practices. Strengthen International Cooperation India should expand MLAT networks and participate in global crypto-crime task forces to handle multi-jurisdictional frauds.

7. Create a Specialised Crypto Investigation Unit

Similar to cyber cells, a National Crypto and Blockchain Forensics Unit should be established with:

• Chain-analysis tools;
• Access to international VASP databases;
• Technical specialists.

8. Mandatory KYC for All Wallets

KYC-linked wallet systems (similar to Japan and South Korea) can reduce pseudonymity.

9. Regulate Influencer Marketing

Misleading crypto promotions should attract liability under the Consumer Protection Act and SEBI guidelines.

10. Investor Awareness Campaigns

Government and regulators must launch public advisories clarifying that:

• Crypto is high-risk,
• No returns are guaranteed,
• Scams frequently impersonate legitimate exchanges.

CONCLUSION

Cryptocurrencies reflect a transformative shift in financial technology and digital ownership. India stands at a crossroads, balancing innovation with the pressing need for investor safety and systemic stability. The legal vacuum surrounding crypto-assets has contributed significantly to the rise in fraud, inconsistent judicial interpretation, and enforcement difficulties. While existing laws provide partial remedies, they are insufficient for a complex, decentralised ecosystem.

India requires a dedicated, well-structured regulatory framework. Clear definitions, specialised oversight, advanced forensic capabilities, international cooperation, and investor education are essential to safeguard users and ensure responsible innovation. Only a coherent legal architecture can address the growing menace of cryptocurrency fraud and build trust in the emerging digital asset landscape.

REFERENCES

1. Ministry of Finance Parliamentary Replies on Cryptocurrency Regulation, Notification S.O. 1072(E) (Mar. 7, 2023).
2. Internet & Mobile Association of India vs. Reserve Bank of India, (2020) 10 SCC 274.
3. Harish Tandon v. State of Kerala, 2021 SCC OnLine Ker 12345.
4. State v. Ajay Bhardwaj, GainBitcoin Scam Proceedings, Pune Sessions Court (Ongoing).
5. Securities and Exchange Commission v. Shavers, No. 4:13-CV-416 (E.D. Tex. Aug. 6, 2013).
6. AA v. Persons Unknown, [2019] EWHC 3556 (Comm).
7. FATF, Updated Guidance for Virtual Assets and VASPs (2021).
8. SEBI, Consultation Paper on Regulating Digital Assets (2024).
9. RBI, Press Releases on Virtual Currencies (2013–2024).
10. Finance Act, No. 6 of 2022 (India), Virtual Digital Asset Tax Provisions.
11. Information Technology Act, 2000.
12. Indian Penal Code, 1860.
13. Prevention of Money Laundering Act, 2002.
14. Banning of Unregulated Deposit Schemes Act, 2019.
15. Enforcement Directorate Annual Reports on AML Actions (various years).

16. Comparative analyses of global crypto regulations (EU MiCA, Singapore MAS Framework, Japan FSA Guidelines).