India’s approach to crypto regulation and investment scams

In India, cryptocurrency and digital assets operate without the oversight of a central authority and, as a result, over the last 18 months, there have been reports of an increased number of crypto investment scams targeting Indian citizens. The schemes tend to attract investors with promises of high returns in exchange for a minimal initial investment. Too good to be true?

What is cryptocurrency?

Cryptocurrency is digital money that does not require a bank or financial institution to verify transactions and can be used for purchases or as an investment. It is secured by cryptography which makes it nearly impossible to counterfeit or double spend and as cryptocurrencies are not issued by a central authority – they are immune to government interference or manipulation.

The legal landscape in India

Trading in cryptocurrency is undertaken at investors’ risk and any disputes are resolved by reference to India’s hybrid legal system which is based in civil law, common law, equitable law, and customary and religious laws, and in matters of taxation and money laundering, statute. While the Indian legal system draws on principles of English common law, it does not recognise trusts in the same way, nor is a beneficiary of trust property classed as the equitable owner of the property. There is no dual-ownership overtrust property under Indian law. This is a clear differentiator from English law, particularly in the context of cryptocurrency, given its status as an asset under English law implies that it can be subject to trusts and proprietary remedies.

Rising crypto scams

The bogus investment schemes and the platforms in question have hidden fees, including a % fee charged for every withdrawal. However, after paying the fee, customers are left unable to withdraw their money as the websites request their credentials and then display a series of error messages.
Remedies sought against these platforms tend to be in the form of injunctive relief against the perpetrators of the scam and to block websites and mobile apps used by the scammers in India.

The Indian government’s response

The Indian Enforcement Directorate and Income Tax Department is currently investigating at least 10 crypto exchanges for allegedly assisting foreign firms in laundering money via crypto. The investigation uncovered a number of instances where firms approached crypto exchanges in India to buy crypto, which was then sent on to international wallets. KYC procedures were not followed rigorously.

As a result of the increase in these crypto investment scams, the Indian Government has taken steps to bring cryptocurrency and digital assets within the remit of its taxation and money laundering rules.

India’s crypto industry is now subject to a 30% tax on profit and a 1% tax deducted at source. Inevitably, the tax policy has had a negative impact on the Indian crypto market, with Indian crypto traders having moved significant volumes from local Indian exchanges to international crypto platforms.
Digital assets are also now within the country’s anti-money laundering rules, the ‘Prevention of Money Laundering Act’ (“PMLA”). This means that Virtual Asset Service Providers (“VASPS”) will have to follow similar reporting standards and KYC procedures as other regulated entities like banks, securities intermediaries and payment systems operators.

A global effort

While these developments will aid compliance and transparency in crypto transactions and protect investors, the Indian Government’s intent is to better regulate and not to ban crypto, with a clear desire to collaborate on an international scale to bring about a standard for regulation of the industry. This is not dissimilar to the UK’s approach.

The Cryptocurrency Bill 2021, is a legislative initiative that was introduced in the Lok Sabha by the Government to regulate the thriving market of cryptocurrency in India. The bill seeks to create a favourable structure for the creation of the official digital currency that will be issued by the Reserve Bank of India (RBI). It also seeks to prohibit all private cryptocurrencies in India, but allows for certain exceptions to boost the underlying technology of cryptocurrency and its uses.

The Cryptocurrency Bill 2021 is still under consultation by Indian parliamentarians.

Get In Touch

Sneha Nainwal is the Head of India Desk at Shakespeare Martineau. Sneha is dual-qualified to practise law in India and England & Wales.

Sneha’s practice has a strong focus on cross-border commercial disputes and financial services litigation.

Sneha has wide experience in acting for clients, both businesses and private individuals, in complex litigation before Indian and English Courts, as well as international arbitration and mediation.

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Published: 3rd October 2023
Area: Litigation & Dispute Resolution

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