Scams involving cryptocurrencies are rising in India, along with a surge in popularity for the virtual assets.

How big a threat are cryptocurrencies for a well-run financial system?

The question resonates louder as scams involving cryptos are quietly on the rise in India through the last few months.

Over the weekend, such an incident unfolded in Kerala where Highrich Online Shoppe Pvt Limited, a little-known company founded by a couple, KD Prathapan and Sreena Prathapan, illegally placed about Rs 1,138 crore raised from public in a cryptocurrency HRCC launched on its own.  According to local reports citing investigators, the company launched 10 crypto coins in 2022 that are valued differently by different exchanges.

According to Coinbase, one HRCC is valued at Rs 147, while Coingecko shows the value at Rs 149. It’s not clear how many investors have put money in cryptocurrency. The Prathapan duo is allegedly on the run for defrauding investors and an investigation is underway.

In another instance, local cops in Odisha busted a crypto racket that conducted frauds worth $1.6 million. As per local police, the accused operated from Cambodia and amassed Rs 15 crore through fake mobile applications. The scam surfaced when a complaint of fraud was lodged with the Rourkela cyber police station on December 30, claiming that he was swindled of Rs 65 lakh. Police started an investigation by registering a case late in 2023 and detected frauds committed by a big racket, according to reports.

Where will the investors go?

The problem with such cryptocurrency scams in India is that the investors have nowhere to go with a grievance, except for complaining with the local cops. That’s because cryptocurrencies are not regulated yet in India. The Reserve Bank of India, which regulates India’s banking sector and conducts monetary policy management, has been pitching for a ban on cryptos, citing the far-reaching implications of these instruments in the financial system, including being used by hawala operators to transfer money.

Realising the danger, the RBI banned all banks from dealing in cryptocurrencies in 2018 but a Supreme Court order later overturned this ban on a plea by Internet and Mobile Association of India (IMAI). The court said that while the RBI has the power to regulate the virtual currencies, in the absence of any legislation, the business of dealing in these currencies ought to be treated as a legitimate trade that is protected by the fundamental right to carry on any occupation, trade or business under Article 19(1)(g) of the Constitution.

Cryptos are here to stay

One thing is clear. Cryptocurrencies are not going anywhere. Due to a mix of factors such as the Covid-19 crisis, the poor rate of returns on banking

investments, cryptos stand to gain popularity as they are believed to have the potential of a good investment alternative, like gold or real estate. The number of investors is also rising. According to an estimate by domestic cryptocurrency exchange CoinSwitch, India has around 1.9 crore cryptocurrency investors as at the end of 2023.

Cryptos are gaining popularity among the tech-savvy young investors, despite the government imposing a 30 percent tax on crypto profits and a 1 percent TDS on the sale of crypto assets exceeding more than Rs 50,000 in a single financial year. That means, crypto has takers and the number of such investors are bound to grow.

More than the risk to investors while investing in an asset with no underlying asset, the government needs to worry more about crypto being used for illegal money deals involving cross-border transactions. These virtual currencies also pose threat of being used for transactions involving terrorist organisations.

In July 2023, speaking at the inaugural session of the G20 Conference on crime and security in the age of NFTs, AI and Metaverse, Union Home Minister Amit Shah highlighted the exploitation of virtual assets by terrorists for financial transactions. Additionally, he pointed out that terrorists are using the dark web to mask their identities and propagate radical materials. Shah stressed the need to comprehend the activities occurring on the dark web and adopt a coherent approach to crack down on the use of virtual assets.

Time for clarity on regulation?

Even at the recently concluded Davos 2024 summit, the RBI chief warned against the crypto risks. “Cryptocurrencies have huge risks, particularly for emerging market economies because it can impact your financial stability, currency stability, and monetary system,” Shaktikanta Das said. The government shouldn’t delay national regulation governing cryptocurrencies to address the risks these assets pose to the country’s economy and national security.

In the 2024 Budget, the Centre has a good opportunity  to bring in clarity on the government’s thinking on regulation of virtual assets.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector’s most important events for readers.