Don’t let crypto be deployed as a Trojan Horse against India

Cryptocurrencies made their debut in 2009 with the invention of Bitcoin. By design, a cryptocurrency uses blockchain technology for records and verification, with an unchangeable internet ledger that tracks transfers. These virtual assets have emerged as a unit of account, medium of exchange and store of value, and thus challenge the monopoly of fiat currencies. 

Today, thousands of cryptocurrencies are  floating around globally. The notable ones are Bitcoin, Ethereum, Altcoin, Utility and Governance tokens, apart from various stablecoins that are typically pegged to a fiat currency. Virtually anybody can write a program, set up a blockchain and create a cryptocurrency.

Also Read: Act now: Crypto regulation cannot be left for another day

At the beginning, crypto use in India was limited to tech enthusiasts attracted by its decentralized governance that allowed borderless transactions and promised high returns. The proliferation of users over time led to regulatory unease. 

In April 2018, the Reserve Bank of India (RBI) prohibited banks from providing services to crypto exchanges and businesses on the grounds that such instruments raised the risk of money laundering and  terror financing, while offering no consumer  protection. In March 2020, the Supreme Court declared the ban unconstitutional, as the RBI failed to adduce credible evidence of actual harm caused by cryptocurrencies. 

One striking risk we cannot ignore is that of fraud, which causes financial losses, undermines trust in the financial system and drives calls for increased regulation. Yet, according to CoinLaw, a website, the global crypto market is growing fast: it will reach $1.8 trillion in 2025 and is expected to grow at an annual 11.7% through 2030. 

The number of users worldwide is anticipated to grow from 617 million in 2024 to 992.5 million by 2028. The global market for crypto exchange platforms is expected to grow at a compound annual rate of 24.1% from $50.95 billion in 2024 to $150.1 billion by 2029. Investors in India too have grown rapidly. 

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Although the crypto use market is dominated by trading (32%) and retail and e-commerce (27%), the banking industry and governments account for shares of 18% and 11% respectively. Apparently, banking systems are integrating cryptocurrencies as modes of payment. 

With crypto proliferation looking inevitable, moves to regulate these tokens have been made. The 2023 Markets in Crypto-Assets (MiCA) Regulation of the EU and the recently enacted Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (GENIUS Act) in the US are two important pieces of regulation. Both aim at providing legal certainty, protecting consumers and investors, supporting innovation and preventing money laundering and terror financing. 

The GENIUS Act defines virtual asset service providers (VASPs) as financial institutions. MiCA regulations also subject crypto assets service providers (CASPs) to prudential requirements, supervision, inspections and anti-money laundering and counter-financing of terrorism obligations,  with sanctions to apply in case of violations. 

Also Read: America’s Genius Act for crypto regulation shows no ingenuity

The Indian response has included a 30% tax on gains from any transfer of virtual digital assets, with a 1% tax deduction at source on crypto transactions. Like several other central banks, RBI has launched a digital rupee to provide a central bank-issued alternative to private cryptocurrencies.

India did very well in its 2023 Mutual Evaluation by the FATF and was rated as ‘largely compliant’ with technical requirements for virtual assets. The Indian legal framework treats VASPs as designated non-financial businesses and professions (DNFBPs), requiring them to register with India’s Financial Intelligence Unit and comply inter alia with KYC and customer due diligence norms as well as suspicious transaction reporting requirements. 

The key global concerns relate to cryptos not being backed by an underlying asset or currency and risks  in the contexts of financial stability, consumer protection and money laundering/terror financing, apart from the potential impact of crypto use on monetary policy. 

Also Read: Subhash Chandra Garg: Don’t vacillate on a regulatory framework for crypto assets

Dealing in cryptos that are not backed by a stable asset (like currency) is like gambling, vulnerable to price manipulation and a systemic collapse. Stablecoins pose worries too. While highlighting the use of stablecoins by illicit actors, linking them with terrorism, drug trafficking, gambling and layering of funds by criminals, the FATF has cautioned that banning cryptos does not insulate a country from these risks, given an interlinked world and challenges in identifying operators that flout the ban as well as in monitoring decentralized finance (DeFi) arrangements. Also, merely establishing a regulatory framework may not be enough if there is no supervisory and enforcement action. 

On 9 July, Reuters reported that Pakistan was planning to mine Bitcoin and integrate it into its financial system. Pakistan, which has persistently taken a hostile stance towards India, has been on the FATF watch-list for money laundering and terror financing risks to the international financial system. Given its history of stoking terror in India, we need to assess risks emerging from Pakistan via crypto channels with due care. 

Also Read: Defence alert: Crypto is turning into a geopolitical weapon

For India, the key to security lies in being ahead of the curve on mitigating the risks of emerging technologies in general and ring-fencing our financial system in particular. While a crypto ban  is no longer feasible, we must monitor this space closely to prevent digital tokens from being deployed against India as a Trojan Horse. 

The authors are, respectively, former chairman Sebi and LIC, and former financial advisor, CFATF.