As crypto exchanges continue to face probes, experts call for caution while investing


Recently, the Enforcement Directorate (ED) froze a cryptocurrency worth Rs 12.83 crore as part of a investigate allegations of cheating against an online gaming application. In a separate investigation, the Kolkata police froze Bitcoin worth Rs 14.53 crore while investigating a promoter of the mobile gaming app, E-Nuggets, based in the city.

The increasing cases of fraud and cheating in the cryptocurrency ecosystem are becoming a growing concern. Experts urge maximum caution while invest in cryptocurrencies.

“The total amount of fraud in India in 2019 was a whopping Rs 1.87 crore lakh. This is money lost by the banks and their customers. Therefore, it is very important that authorities and regulators investigate and are very proactive to help safeguard citizens against scams, crime, hackers, and ensure investor protection at all levels. Currently, there is no investor protection for investments and trading of crypto and digital assets. The central bank can only protect fiat currency and real assets. Therefore, it is very important that investors do their due diligence before investing in crypto assets and digital assets. Authorities and regulators need to gain better financial intelligence on these digital asset networks and ecosystems as there is currently no transparency or audit of transactions,” said Sudin Baraokar, Global IT and Innovation Advisor.

Experts note that there has been a conscious shift in the crypto ecosystem from speculation on crypto assets to innovative use cases driving digital asset tokenization. “Given the US Federal Reserve’s continued aggressive stance on interest rate hikes to control inflation and the correlation between the crypto and equity markets, overall cryptocurrency trading activity will remain subdued. Some of the forward thinking states like Telangana have been leading from the front in enabling an entrepreneur friendly ecosystem for Web3 development. The Web3 regulatory sandbox is a great initiative by the Telangana government to encourage responsive 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. “The current crackdown on crypto players is justified to remove non-compliant and rogue elements from the ecosystem. Regulatory action on entities that make mistakes will not have an adverse effect on those who follow the law and build the new world financial order.”

Many cryptocurrency and industry experts also point out that cryptocurrencies run on the blockchain, a public ledger that records all transactions. However, it only records the identifier of a unique wallet that must be held to transact on the blockchain. So while the transaction in a public ledger may show how the money was moved, it will be impossible to link a person to a specific wallet if the service provider does not require Know-Your-Customer (KYC). KYC is not yet required by Indian law, but most exchanges have it in case authorities come knocking on the door.

“The current crackdown on cryptocurrency exchanges is due to the anonymous nature of cryptocurrencies. Traditionally, the 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 carte blanche.
There have been many cases where people have laundered money abroad through moving funds from their Indian exchange to a foreign one,” observed Girish Linganna, Aerospace & Defense Analyst and Director, ADD Engineering Components India Pvt Ltd (a Indo-German company).

He said one of the main reasons behind the crackdown is the loan app scam where instant loans were given to Indian citizens after which the app disappeared from the app store. “The agents began to extort two to three times the money from those who used the facilities. These agents often threatened to share personal images with their contacts that the app copied when it was installed. According to reports, the Chinese mastermind behind these lending apps and their local accomplices have used the cryptocurrency route to funnel money from India to China,” Linganna said.

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