Author: Sakshi Patil, Shahji Law college Kolhapur
Abstarct
Cryptocurrencies are becoming popular in India, but at the same time, cases of fraud and scams are also increasing. Because crypto works online and across borders, it is often used for cheating, fake investment schemes, and money laundering. India does not yet have a special law for cryptocurrencies. Instead, existing laws like the Bharatiya Nyaya Sanhita (BNS), Prevention of Money Laundering Act (PMLA), and Information Technology Act (IT Act) are used. Agencies such as the Enforcement Directorate, FIU-IND, and cybercrime cells handle these cases, but they face many problems, like lack of clear rules, limited technical tools, and difficulty in tracing cross-border transactions.Courts in India have tried to balance the freedom to trade with the need to control illegal use, especially in the IAMAI v. RBI (2020) case. This article explains the present legal framework, enforcement gaps, and judicial approach. It also gives suggestions for reforms, such as making a clear crypto law, better training for agencies, stronger cooperation, and spreading public awareness. A stronger legal system will help protect investors and allow safe use of digital assets in India.
Introduction
Cryptocurrencies have emerged as a new class of digital assets in India, attracting investors and innovators alike. At the same time, the sector has become a fertile ground for frauds, scams, and money laundering due to its decentralized and anonymous nature. Victims often face difficulties in recovery, while enforcement agencies struggle with technical, legal, and jurisdictional hurdles. Although statutes such as the Prevention of Money Laundering Act, the Information Technology Act, and provisions of the Bharatiya Nyaya Sanhita are invoked, India still lacks a dedicated law to address cryptocurrency-related offences. This article explores the existing legal framework, the role of enforcement bodies, judicial developments, enforcement gaps, and possible reforms to strengthen investor protection and regulatory oversight.
Concept of Cryptocurrency and Nature of Fraud
•Cryptocurrency is an online-based currency that has no physical existence. It is based on blockchain technology, which records every transaction in a secure and transparent way. Unlike regular money issued by the Reserve Bank of India, cryptocurrency is not controlled by any government or central authority. Instead, it works through computer networks and is stored in digital wallets. Popular examples include Bitcoin and Ethereum, which are used for trading, investment, or payments.
•The special features of cryptocurrency—such as fast transfers, global reach, and user anonymity—make it attractive but also risky. Criminals often take advantage of these features to cheat people or hide illegal money. Some common examples are fake investment schemes promising very high returns, online scams where fraudsters steal wallet passwords, fake exchanges, or “rug pulls,” where creators of a new coin suddenly disappear with investors’ money.
•Contrary to traditional fraud, cryptocurrency scams are harder to trace and recover because transactions happen quickly and often move across countries. This makes victims helpless and creates a big challenge for regulators and investigators.
•Understanding what cryptocurrency is and how fraud takes place is the first step to examining India’s legal framework and finding where enforcement still falls short.
Existing Legal Framework in India
i)India does not yet have a single comprehensive law that governs cryptocurrencies. Instead, different laws and regulations are applied depending on the type of offence or activity. The framework is therefore fragmented but still provides certain tools to deal with cryptocurrency-related frauds.
ii)The Bharatiya Nyaya Sanhita (BNS), 2023, which replaced the Indian Penal Code, contains general provisions on cheating, criminal breach of trust, forgery, and conspiracy. These sections are often invoked when cryptocurrency investors are cheated through fake schemes or when money is misappropriated.
iii)The Information Technology Act, 2000 (IT Act) is also relevant, as it deals with cybercrimes such as identity theft, hacking, and cheating by impersonation using digital platforms. Because the majority of crypto scams happen digitally, the police commonly depend on this law to take action against culprits and collect electronic proof.
iv) The Prevention of Money Laundering Act, 2002 (PMLA) has become one of the most important statutes in this field. In 2023, the government notified that Virtual Digital Asset (VDA) service providers, including crypto exchanges and wallet operators, would be treated as “reporting entities.” This means they must follow Know Your Customer (KYC) rules, maintain transaction records, and report suspicious transactions to the Financial Intelligence Unit (FIU-IND).The Enforcement Directorate (ED) uses the PMLA to investigate laundering of funds through cryptocurrencies and to attach assets linked with criminal proceeds.
v)The Foreign Exchange Management Act, 1999 (FEMA) applies where cryptocurrencies are used in cross-border transfers. Since most exchanges and wallets have an international dimension, FEMA is often relevant in determining whether transactions comply with India’s foreign exchange rules.
vi) Consumer protection mechanisms are also engaged. Under the Consumer Protection Act, 2019, misleading advertisements or unfair trade practices by crypto platforms or influencers may invite liability. The Advertising Standards Council of India (ASCI) has issued specific guidelines for crypto-related advertisements to prevent investors from being misled.
vii)In addition, the Income-tax Act now taxes income from transfer of Virtual Digital Assets at a flat rate of 30%, and imposes 1% TDS on transactions. Although primarily fiscal in nature, these provisions create an official record of transactions, which can assist in investigations.
Taken together, these laws show that while India has no dedicated cryptocurrency legislation, a combination of criminal, cyber, money-laundering, foreign exchange, consumer, and tax laws is currently used to address frauds and regulate activities in the sector.
Judicial Approach and Key Cases
Indian courts have taken a careful yet firm stance on cryptocurrency-related matters, balancing the need for innovation with the realities of fraud and financial deceit. Key judicial decisions reflect two overarching trends: a willingness to uphold the right to trade in crypto until specific laws are passed, and a resolute enforcement response against fraud and money laundering.
Landmark Rulings:
In Internet and Mobile Association of India v. Reserve Bank of India (2020), the Supreme Court invalidated the RBI’s blanket ban on banks servicing crypto-related businesses, stating the restriction was disproportionate in absence of a clear legal prohibition. This judgment upheld the legitimacy of crypto trading while underscoring the demand for regulatory clarity.
Recent High-Impact Cases:
ED Actions in GainBitcoin Ponzi (2024–2025):
The Enforcement Directorate (ED) arrested Nitin Gaur in early 2024 in connection with the GainBitcoin Ponzi scheme, alleged to have defrauded investors of over ₹6,600 crore through promises of monthly returns in Bitcoin .
The ED later attached assets worth over ₹10.63 crore in India and Dubai linked to the scheme, signaling strong judicial acceptance of PMLA-based enforcement .
Mega Crypto Asset Seizure – BitConnect (2025):
In what is reportedly the largest-ever crypto seizure in India, the ED confirmed confiscation of virtual assets worth ₹1,646 crore linked to the BitConnect fraud investment scheme .
This demonstrates judicial and investigative agencies’ growing capabilities in tracing and immobilizing digital assets across complex networks.
Himachal Pradesh High Court Denies Bail in Massive Crypto Scam (2025):
In a case involving alleged online fraud platforms Voscrow and Hypenext, the Himachal Pradesh High Court refused bail to an accused involved in a ₹500 crore crypto fraud, citing the gravity of the offence and its impact on the economy .
This reflects courts’ inclination to prioritize public interest and the potential for economic harm over procedural delays in trial proceedings.
Enforcement Gaps and Challenges
Despite the presence of multiple laws and agencies, enforcement against cryptocurrency fraud in India faces several practical difficulties. These challenges are,
Lack of Dedicated Legislation
India does not have a single, comprehensive law to regulate cryptocurrencies or define offences specific to them.Enforcement agencies often stretch existing laws like the PMLA, IT Act, or BNS, which were not originally designed for digital assets.
Jurisdiction and Cross-Border Issues
Most exchanges and wallets are based outside India.Fraudsters transfer funds abroad within seconds, making it difficult for Indian agencies to freeze or recover assets.Mutual legal assistance with foreign authorities is slow and ineffective.
Anonymity and Technology Barriers
Cryptocurrencies allow anonymous or pseudonymous transactions.Fraudsters use mixers, multiple wallets, and decentralized platforms to hide the money trail.Limited blockchain forensic skills and tools at the state police level add to the challenge.
Fragmented Enforcement
Different agencies (police, ED, FIU-IND, RBI, CERT-In) have overlapping roles.Lack of coordination and a central nodal agency often results in duplication or delay.
Delay in Asset Recovery
Even when wallets are traced, procedures for freezing, attaching, or liquidating digital assets are unclear.Victims often remain uncompensated for long periods.
Awareness and Capacity Gaps
Many victims are not aware of how to report crypto fraud.Investigators and courts require specialized training to handle blockchain evidence and complex digital records.
Consumer Protection Deficit
Misleading advertisements and influencer promotions often go unchecked.Investors are exposed to high risks without strong disclosure norms or grievance redressal systems.
Conclusion
Cryptocurrencies have opened new ways of doing business and investment, but they also bring risks of cheating and misuse. In India, cases of crypto fraud are increasing, yet the laws used today are old and not made for digital assets. Different agencies like police, ED, and FIU-IND are working on such cases, but the process is often slow and confusing.
Courts have tried to balance the right to trade with the need to stop illegal activities. Still, problems like lack of a clear law, cross-border issues, and low awareness make enforcement difficult.India now needs strong rules made specially for cryptocurrencies, better training for investigators, and more public awareness. If these reforms are done, it will be possible to protect people from fraud while still allowing safe use of digital currency.
FAQs
What is cryptocurrency fraud?
Cryptocurrency fraud happens when people use digital currencies to cheat investors, steal money, or run scams such as fake exchanges, Ponzi schemes, or phishing attacks.
Is cryptocurrency legal in India?
Cryptocurrency is not illegal in India, but it is also not fully regulated. The government has not banned it, but it has not given it the status of legal tender like the rupee.
Which laws apply to crypto fraud cases in India?
Cases are usually handled under the Indian Penal Code (Bharatiya Nyaya Sanhita), Prevention of Money Laundering Act (PMLA), Information Technology Act (IT Act), and rules made by RBI and FIU-IND.
