Author: Shaan Shaikh, Kirit P Mehta School of Law Navi Mumbai, NMIMS
To the Point
India has witnessed a surge in crypto-related scams like Gain Bitcoin and Morris Coin, exposing glaring loopholes in its legal and regulatory framework. With no specific cryptocurrency laws, enforcement agencies rely on outdated statutes like the IPC now Bhartiya Nyaya Sanhita (BNS), PMLA, and FEMA, often leading to delayed justice and poor investor recovery. These scams also highlight serious concerns around money laundering, lack of KYC norms, and absence of investor protection. As digital assets grow, India urgently needs clear crypto legislation to regulate the sector, protect investors, and prevent future financial frauds. The Existing laws are unfavourable and unfair to the investors.
Use of Legal Jargon
The proliferation of cryptocurrency scams in India, exemplified by the Gain Bitcoin and Morris Coin frauds, underscores the lacunae in the extant legislative framework governing digital assets. The absence of a sui generis statute regulating virtual currencies has resulted in regulatory ambiguity, forcing enforcement agencies to invoke general penal provisions under the Indian Penal Code (IPC) now Bhartiya Nyaya Sanhita (BNS), anti-money laundering norms under the Prevention of Money Laundering Act, 2002 (PMLA), and foreign exchange regulations under the Foreign Exchange Management Act, 1999 (FEMA).
Even though the Enforcement Directorate (ED) and state cyber cells are actively cracking down, it’s still tough to prosecute offenders and recover lost assets. The problem lies in complicated jurisdiction issues and the fact that blockchain transactions often don’t reveal real identities. Furthermore, the lack of ex-ante investor protection mechanisms, licensing norms for virtual asset service providers (VASPs), and statutory compliance obligations has exacerbated the risk of fraudulent misrepresentation, unlawful gain, and criminal breach of trust.
In the absence of a comprehensive regulatory code akin to the EU’s Markets in Crypto-Assets Regulation (MiCA) or the U.S. oversight by SEC and CFTC India’s crypto landscape remains a fertile ground for Ponzi schemes, illicit fundraising, and unregulated securities issuance. The legal imperative now is to enact a robust, technology-neutral framework that ensures due diligence, compliance, and investor restitution, while harmonizing with international best practices.
The Proof
1. Gain Bitcoin Scam – A Case Study of Unregulated Crypto Fraud
The Gain Bitcoin scam, led by Amit Bhardwaj, turned out to be one of the biggest crypto frauds in India. He lured people in with promises of huge returns claiming they’d earn 10% every month through what he said were Bitcoin mining contracts. In reality, it was just a cleverly disguised multi-level marketing scheme. This promise of unrealistic gains attracted thousands of investors across the country, resulting in a collective loss of over ₹20,000 crore.
Due to the lack of a dedicated legal framework for cryptocurrencies, law enforcement was compelled to fall back on general penal provisions such as Section 420 (cheating), Section 406 (criminal breach of trust), and Section 120B (criminal conspiracy) of the Indian Penal Code, along with proceedings under the Prevention of Money Laundering Act (PMLA). The case is also marked by significant delays in judicial processes and challenges in asset recovery, highlighting the inefficacy of current laws in dealing with digital frauds of this scale.
2. Morris Coin Scam – Shell Companies and Money Laundering
Another notable case is the Morris Coin scam, orchestrated by Nishad K., who allegedly created a fictitious cryptocurrency to dupe more than 900 investors. The total fraud amount exceeded ₹1,200 crore, and the money was siphoned through at least 18 shell companies spread across different states.
Since India lacks specific crypto laws, authorities had to initiate prosecution under the Foreign Exchange Management Act (FEMA) and the PMLA. Investigations by the Enforcement Directorate (ED) revealed that the defrauded funds were laundered through investments in real estate, luxury vehicles, and international transfers, exposing major regulatory loopholes in financial oversight.
3. Legal Vacuum Highlighted by the Supreme Court
In a game-changing case in 2020, Internet and Mobile Association of India v. RBI, the Supreme Court of India struck down the RBI circular that banned banks from servicing crypto-related businesses, calling the move “disproportionate and arbitrary”. While this was a win for crypto enthusiasts, the Court also emphasized that India lacks a specific statute to regulate cryptocurrencies.
The absence of comprehensive legislation not only hampers regulatory oversight but also makes it difficult to prosecute offenders effectively or safeguard investor interests. This judgment also highlighted just how urgently India needs a clear and consistent legal framework to deal with digital assets.
4. Enforcement Directorate Reports & FIU Alerts
Both the Enforcement Directorate (ED) and the Financial Intelligence Unit (FIU) have raised red flags regarding the misuse of cryptocurrencies in India. The ED has identified crypto as an emerging vehicle for money laundering, hawala transactions, and even terror financing.
Additionally, the FIU has issued compliance notices to several crypto exchanges for failing to adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) norms. These warnings highlight the systemic risk posed by the absence of a regulated environment and raise questions about the accountability of crypto platforms operating in India.
5. Global Comparison – India Lagging Behind
While India struggles with an undefined legal stance on cryptocurrencies, other jurisdictions have made significant strides. In the United States, the Securities and Exchange Commission (SEC) enforces securities laws on Initial Coin Offerings (ICOs) and has clearly defined the status of crypto tokens.
In the European Union, the recently enacted Markets in Crypto-Assets (MiCA) Regulation mandates strict investor protection, compulsory registration for crypto providers, and regulation of stablecoins. In contrast, India has no official classification for crypto assets, no licensing requirements, and no restitution mechanisms for victims of crypto scams.
Abstract
The exponential rise of cryptocurrency in India has been paralleled by a surge in crypto-related scams, notably the Gain Bitcoin and Morris Coin frauds, which collectively defrauded investors of thousands of crores. Despite the growing adoption of digital assets, India continues to lack a dedicated legal framework to regulate cryptocurrencies, resulting in a dangerous regulatory vacuum. This article critically examines how the absence of specific legislation, inadequate investor protection mechanisms, and challenges in prosecuting money laundering have allowed such scams to flourish. By analysing key cases and enforcement efforts under existing laws such as the IPC now Bhartiya Nyaya Sanhita (BNS), PMLA, and FEMA, the article exposes systemic gaps and underscores the urgent need for comprehensive crypto legislation. A comparative outlook with international frameworks further highlights how India can evolve its regulatory architecture to ensure accountability, transparency, and investor security in the crypto space.
Case Laws
1. Internet and Mobile Association of India v. Reserve Bank of India (2020)
The Supreme court took the question whether crypto trading was legal in India. The Reserve Bank of India had issued a circular in 2018 prohibiting banks from providing services to crypto-related entities, effectively restricting the operation of crypto exchanges. The Supreme Court struck down the RBI circular, stating that it violated Article 19(1)(g) of the Constitution, which protects every citizen’s right to choose and carry out their profession, trade, or business. The Court’s decision reaffirmed that cryptocurrency trading is not illegal in India, but also drew attention to the lack of a dedicated regulatory framework, thereby leaving investors vulnerable to fraud. The Court remarked, “There is no legislative ban on cryptocurrency in India,” underlining the prevailing legal vacuum.
2. Enforcement Directorate v. Amit Bhardwaj & Others
The case of Enforcement Directorate v. Amit Bhardwaj & Others, popularly known as the Gain Bitcoin scam, further illustrates the challenges posed by unregulated cryptocurrencies. Bhardwaj operated a Ponzi scheme that promised high returns through fake Bitcoin mining contracts, ultimately defrauding investors of over ₹20,000 crore. Since there are no specific laws in India to deal with crypto crimes, the Enforcement Directorate had to fall back on existing laws. They used Section 5 of the Prevention of Money Laundering Act (PMLA) to seize assets and booked offenders under Sections 420 (cheating), 406 (criminal breach of trust), and 120B (criminal conspiracy) of the Indian Penal Code. This case exemplifies how authorities are forced to repurpose general criminal laws to tackle crypto fraud, often inadequately.
3. State of Kerala v. Nishad K.
A similar pattern can be observed in the State of Kerala v. Nishad K., the accused in the Morris Coin scam. Nishad K. allegedly created a fictitious crypto token named “Morris Coin” and used it to orchestrate a massive Ponzi scheme that defrauded over 900 investors, with the fraud amounting to more than ₹1,200 crore. The scam involved extensive money laundering through 18 shell companies, real estate investments, and foreign transactions. In the absence of crypto-specific statutes, the prosecution had to invoke provisions under PMLA, FEMA, and the IPC. The case highlights the complex nature of crypto scams, which often involve multi-layered financial operations and a lack of investor protection mechanisms.
4. Ajay Bhardwaj v. Union of India (2021)
In the 2021 case Ajay Bhardwaj v. Union of India, the Supreme Court looked into a request for anticipatory bail by one of the accused involved in the infamous Gain Bitcoin scam. The Court denied bail, acknowledging the seriousness and scale of the scam. This judgment reflects the judiciary’s increasing recognition of cryptocurrency frauds as serious financial crimes, despite the continued absence of codified regulations governing digital assets.
5. Nischint Sanghavi v. State of Gujarat
Another significant case is Nischint Sanghavi v. State of Gujarat, which involved a crypto exchange accused of misrepresenting the nature and value of crypto assets to its users. An investor lost funds after allegedly being misled on the platform. Since there was no crypto-specific statute applicable, the charges were framed under the Indian Penal Code and the Information Technology Act, 2000. This case is indicative of a growing trend in India of litigation against crypto platforms, but the courts and enforcement agencies continue to rely on ad hoc legal interpretations due to the lack of a clear statutory framework.
Conclusion
The emergence of cryptocurrency as a financial innovation in India has unfortunately been accompanied by a parallel rise in large-scale frauds such as the Gain Bitcoin and Morris Coin scams. These cases expose not only the ingenuity of crypto-based Ponzi schemes but also the alarming inadequacy of India’s current legal and regulatory framework. The absence of a dedicated statute to govern virtual assets has forced enforcement agencies and the judiciary to rely on outdated laws like the IPC now Bhartiya Nyaya Sanhita (BNS), PMLA, and FEMA, often with limited success and delayed justice.
While the Supreme Court has recognized the right to trade in crypto assets, it has also indirectly acknowledged the legislative vacuum that continues to endanger investor interests and national financial security. In contrast, jurisdictions like the United States and the European Union have implemented comprehensive laws and regulatory mechanisms to address the legal and economic risks associated with digital assets.
India must urgently bridge this regulatory gap through a specialized, tech-neutral legal framework that clearly defines, classifies, and governs cryptocurrencies, while incorporating strong enforcement, investor protection, and anti-money laundering provisions. Without timely legislative intervention, the crypto landscape in India risks becoming a breeding ground for financial crime, eroding public trust and stalling legitimate innovation in the blockchain sector.
FAQS
Q1: Are cryptocurrencies legal in India?
A: Currently, cryptocurrencies are not illegal in India. the Supreme Court struck down the RBI’s ban that had stopped banks from offering services to crypto businesses. However, there’s still no specific law in place to regulate cryptocurrencies, which means the legal landscape remains uncertain.
Q2: What makes cryptocurrency scams like Gain Bitcoin and Morris Coin possible in India?
A: The absence of specific crypto legislation, lack of regulatory oversight, poor investor awareness, and the pseudonymous nature of blockchain transactions create an ideal environment for fraudsters to exploit unsuspecting investors.
Q3: How are such scams currently prosecuted in India?
A: Authorities use general laws such as:
Indian Penal Code (IPC) – for cheating, criminal breach of trust, conspiracy.
Prevention of Money Laundering Act (PMLA) – for tracing and attaching proceeds of crime.
Foreign Exchange Management Act (FEMA) – for illegal cross-border transfers.
However, these laws are not tailored for digital assets, causing enforcement delays.
Q4: What is the role of the Enforcement Directorate (ED) in crypto scams?
A: The ED investigates and prosecutes crypto-related money laundering cases under PMLA. In high-profile cases like Gain Bitcoin and Morris Coin, the Enforcement Directorate (ED) has taken strong action seizing assets, freezing bank accounts, and carrying out nationwide crackdowns to tackle the fraud.
Q5: Is there any investor protection mechanism in place for crypto losses?
A: No. Currently, there is no statutory mechanism or regulatory body in India that offers investor protection or compensation in case of losses due to crypto scams or exchange failures.
Q6: Has the government proposed any crypto laws?
A: The Indian government has proposed a Digital India Bill and discussed a Cryptocurrency and Regulation of Official Digital Currency Bill, but no legislation has been passed yet. The RBI is promoting its own Central Bank Digital Currency (CBDC).
Q7: What can investors do to protect themselves?
A: Investors should:
Deal only with reputable, compliant exchanges.
Avoid guaranteed returns or unsolicited crypto schemes.
Verify licensing and KYC compliance.
Report suspected frauds to law enforcement and the ED.
Q8: How do other countries regulate crypto?
A: Other countries regulation:
USA: SEC regulates crypto as securities; strict compliance norms.
EU: MiCA Regulation provides uniform rules for crypto markets.
India: Still lacks such clarity and remains in a regulatory grey zone.
