What legal recourse is available to victims of cryptocurrency scams in India: A lawyer’s


Satya Muley 

Cryptocurrency is decentralised and encrypted digital money, which has already touched the lives of people across the world. It is based on a digitally distributed and decentralised public ledger known as blockchain technology. It is estimated that at least 1.5 crore Indians hold crypto-assets worth a billion dollars.

The ban imposed by RBI in 2018 forbade banks and other financial institutions from providing banking services to those individuals and business entities that dealt in cryptocurrency. Therefore, cryptocurrency trading in India was restricted to crypto-to-crypto, and not crypto-to-Rupee. The Supreme Court lifted this ban in Internet & Mobile Assn. of India v. RBI (2020) by stating that the ban was “disproportionate”, as RBI failed to show any loss suffered by the entities it regulates which was caused due to their transactions in cryptocurrency. Thereafter, in India, neither is cryptocurrency illegal nor is it regulated by specific legislation yet.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was listed for introduction in the winter session of the Lok Sabha. However, now that the winter session is over, it is likely that the government will bring the bill back on the table at the next earliest possible opportunity. Therefore, at present, there is no concrete legislation governing cryptocurrency, and uncertainty about the digital coin ecosystem still prevails in India.

Can existing laws govern cases related to cryptocurrency in India?

In Hitesh Bhatia v. Kumar Vivekananda (2021), the judiciary has stated that mala fide opportunistic activities, which try to exploit the absence of legislation on cryptocurrency in India, do not have any route for legal or regulatory escape. The judiciary has stated that transactions in cryptocurrency will still have to comply with the general law in force in India until a special legislation is passed. Therefore, it is important to understand what is the legal recourse in India for the victims of cryptocurrency scams.

In an RBI circular titled ‘Customer Due Diligence for Transactions in Virtual Currencies’ (2021), while trading in cryptocurrency, RBI has advised all entities regulated by it to carry out customer due diligence process which is in line with regulations that govern the standards for KYC (Know Your Customer), AML (Anti-Money Laundering) and CFT (Combating Financing of Terrorism), and obligations of regulated entities under PMLA, 2002 (Prevention of Money Laundering Act).

In the past, cryptocurrency has been used to fund various serious offences, proving that it has the potential to be a threat to national security, and facilitate anti-national activities. However, most serious offences are already regulated by special legislation, and the use of cryptocurrency to commit such offences is consequently regulated by the same legislation. For example, drug trafficking is regulated by the NDPS Act, 1985 (Narcotic Drugs and Psychotropic Substances Act). Therefore, when cryptocurrency is used for drug trafficking, it is also regulated by the same act. Recently, the NCB (Narcotics Control Bureau) had been investigating cases where drugs were bought using Bitcoin. Consequently, Makarand Adivirkar, who is known as the “crypto king” in Mumbai, was arrested in June 2021, for allegedly using Bitcoins to buy illegal narcotic drugs. Thereafter, NCB requested “Binance”, Advirkar’s cryptocurrency exchange, and got his account frozen.

Furthermore, cryptocurrency is also known to be used in money laundering, in hiding the source of the money, and subsequently encashing the money from ‘safe haven’ countries where there is an absence or lack of regulations on cryptocurrency.

The aforesaid aspect is regulated by the FERA Act, 1973 (Foreign Exchange Regulation Act), PMLA, 2002 (Prevention of Money Laundering Act) and AML (Anti-Money Laundering) requirements. Therefore, certain aspects of cryptocurrency trading are already regulated by existing laws in India.

Exchanges or intermediaries like CoinDCX, Coinswitch Kuber or WazirX are popular platforms for trading in cryptocurrency. These platforms facilitate transactions that convert money (INR) into a digital form i.e. cryptocurrency, and vice-versa. Therefore, frauds committed through these transactions come under the ambit of Section 403 (Dishonest Misappropriation of Property), 411 (Dishonestly Receiving Stolen Property) and 420 (Cheating and Dishonestly Inducing Delivery of Property) of IPC, and victims of such scams can seek justice under criminal law in India. Although trading in cryptocurrency happens across national borders, the jurisdiction of Indian Courts comes into play under Sections 179 (Offense Triable Where Act is Done or Consequence Ensues) and Section 180 (Place of Trial Where Act is Offense because of Relation to Other Offense) of CrPC.

What can a victim of cryptocurrency scam in India do?

Here are some steps to be taken to seek justice in India when one is a victim of scams and frauds while trading in cryptocurrency:

It is advised that when any suspicious activity is detected in a trader’s exchange wallet, they should contact customer service of that exchange, and voice their concern with the representatives. As a precautionary measure, the copy of any communication with the exchange should be maintained.

If the issue escalates further, to seek legal recourse, the first step that can be taken is to register a complaint with the local Cyber-Crime Investigation Cell (in the absence of access to such cell, visit local police station) and provide details about the nature of the crime, the extent of the damage and attach the relevant documents, data, and other information relevant to the complaint. A copy of the communication with the customer service of the exchange can be attached to the complaint.

It has been noted that police often refrain from registering such cases. This is because they are often not technically aware of how the law governs cryptocurrency. In such cases, or in cases where the police refuse to accept the complaint, the victims can approach the Judicial Magistrate for filing their complaint and seeking justice under Section 200 of CrPC.

How can users protect themselves from such scams?

The movement of cryptocurrency through the exchanges can be traced through Blockchain Analysis. However, establishing their connection with the malicious actors who own these accounts is a complex issue, in case the transaction intermediaries (exchanges) are not adhering to the KYC norms. This is why, even countries like the United States, which have crypto-facilitating legislations, have some of the most stringent AML-KYC regulations on Virtual Asset Service Providers (VASPs).

Practising “due diligence” is elaborately discussed by the judiciary in the judgment of Hitesh Bhatia v. Kumar Vivekananda (2021). The court further stated that KYC is the responsibility of the intermediary, and cannot be left to the individuals, be it institutional transfer or person to person trade. Therefore, the intermediaries are advised not to shy away from their responsibility to ensure the legitimacy of the source and destination of money and the establishment of the real identity of the account holders.

Nevertheless, it is important for the traders to choose an intermediary which complies with the necessary standards laid down in the RBI circular. For starters, the use of the intermediaries which have mandatory KYC regulation should be the basic minimum standard used to choose an exchange for crypto trading.

Furthermore, for legal advice on the matter, litigants should approach criminal and cyber law practising lawyers who are familiar with crypto trading.

Looking forward, India will have to innovatively chalk progressive legislation to allow its citizens to participate in a globally thriving market that provides access to advanced technological features. Moreover, it will also have to ensure that the authority of the government enshrined in Article 110 of the Constitution of India, to regulate and give a guarantee for the value of money, is not compromised. The impact of cryptocurrencies on national security as well as criminal activities is too big for the regulation to be delayed any further. All players in the cryptocurrency space await this critical stance of the government, which will be India’s contribution to the evolution of the historic concept of money.

Satya Muley is an advocate in the Bombay High Court.

Read More: What legal recourse is available to victims of cryptocurrency scams in India: A lawyer’s

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