Recently, cryptocurrency worth Rs 12.83 crore was frozen by the Enforcement Directorate (ED) as part of a probe into allegations of cheating against an online gaming app. In another probe, Kolkata Police froze Bitcoin worth Rs 14.53 crore while investigating a city-based promoter of the mobile gaming app, E-Nuggets.
The rising cases of fraud and cheating in the cryptocurrency ecosystem are becoming a growing concern. Experts urge utmost caution while investing in cryptocurrencies.
“The total amount of fraud in India in 2019 was a whopping Rs 1.87 lakh crore. This is money lost by banks and their customers. Therefore, it is very important to have the authorities and regulators investigate and be very proactive to help safeguard citizens against scams, crimes, hackers and ensure investor protection at all levels. Currently, there is no investor protection in place for investments and trade in crypto and digital assets. The central bank can only protect fiat currency and real assets. Therefore, it is very important for investors to do their due diligence before investing in crypto and digital assets. The authorities and regulators need to get better financial intelligence on these digital asset networks and ecosystems as there is currently no transaction audit and transparency,” Sudin Baraokar, global IT and innovation Advisor, said.
Experts point out that there has been a conscious shift in the crypto ecosystem from crypto-asset speculation to innovative use cases powering digital asset tokenisation. “Given the continued hawkish stance of US Federal Reserve on interest rate hikes to tame inflation and the co-relation between crypto and equity markets, overall crypto trading activity will remain subdued. Some of the forward looking states like Telangana have been leading from the front in enabling an entrepreneur friendly ecosystem for Web3 development. Web3 regulatory sandbox is a great initiative by the Telangana govt to foster response digital asset innovation,” said Sharat Chandra, Blockchain expert, IET Future Tech Panel.
Chandra, however, believes that digital assets are here to stay and will co-exist with the TradFi system. “Current crackdown on crypto players is justified to weed out non-compliant and rogue elements from the ecosystem. Regulatory action on erring entities is not going to have an adverse effect on those who follow the law and build for the new financial world order.”
Many crypto and industry experts also point out that cryptocurrencies run on the block chain, a public ledger that records all transactions. However, it only records the identifier of a unique wallet that one must have to transact on the blockchain. So, while the transaction being on a public ledger can show one how the money moved around, it will be impossible to link a person to a specific wallet if the service provider does not mandate a Know-Your-Customer (KYC). KYC is still not required by Indian law, but most exchanges have it in place in case the authorities come knocking.
“The current crackdown on cryptocurrency exchanges is owing to the anonymous nature of cryptocurrency. Traditionally, illegal movement of funds across borders has been through the hawala route. People use Indian exchanges to invest in cryptocurrencies and then transfer this to another exchange that might be registered in a country that might have given them a free hand.
Many cases have come up where people have laundered money offshore through the movement of funds from their Indian exchange to a foreign one,” observed Girish Linganna, aerospace & defence analyst and director, ADD Engineering Components India Pvt Ltd (An Indo-German Company).
He said one of the main reasons behind the crackdown is the loan app scam wherein instant loans were provided to Indian citizens, after which the app vanished from the app store. “Agents started extorting two to three times the money from those who availed of the facilities. These agents would often threaten to share personal images with their contacts which the app copied when it was installed. The Chinese mastermind behind these loan apps and their local accomplices have reportedly used the cryptocurrency route to funnel the money from India back to China,” said Linganna.