Cryptocurrency–Hawala Nexus

GS3 – Internal Security

Context:

The Supreme Court has raised serious concerns, noting that Bitcoin trading resembles an evolved form of Hawala, highlighting the urgent need for a clear regulatory framework for cryptocurrencies in India.

Understanding the Nexus: Cryptocurrency and Hawala

Cryptocurrency

• A digital or virtual currency built on blockchain technology, secured through cryptographic codes (e.g., Bitcoin, Ethereum).
• Operates outside central bank control and is not legal tender in India, though trading is not prohibited.

Cryptocurrency Regulation in India

• In 2020, the Supreme Court overturned the RBI’s 2018 ban, allowing crypto trading.
• The Cryptocurrency Bill (2021) proposed banning private cryptocurrencies and introducing a Central Bank Digital Currency (CBDC), but it remains pending.
• From 2022, crypto gains are taxed at 30%, with a 1% TDS on transactions above ₹10,000.
• The RBI has initiated a pilot for the Digital Rupee (e₹).
• Enforcement agencies are actively monitoring crypto for its misuse in money laundering and hawala.
• As a FATF member, India is working to align with global AML-CFT norms, but a comprehensive legal framework is still lacking.

Hawala

• An informal, trust-based money transfer system operating outside formal banking channels.
• Carried out through intermediaries (hawaladars).
• Frequently used for illicit financial activities, money laundering, and bypassing foreign exchange laws.

Why the Nexus is Growing

Factor	Cryptocurrency	Hawala	Combined Impact
Outside Formal Banking	Operates beyond banks	Operates informally	Evades regulatory scrutiny
Low Transaction Cost	No bank fees	No formal charges	Attractive for black money
Anonymity	Encrypted & pseudonymous	Based on trust & secrecy	Conceals user identity
Lack of Transparency	Blockchain records, but anonymous	No documentation	Difficult to track funds
Cross-Border Nature	Instant global transfers	Informal international network	Bypasses legal capital flow controls
Unregulated Space	No specific crypto law in India	Operates in grey zones	Exploitable legal vacuum
Low Traceability	Hard to reverse or trace	No paper trail	Complicates law enforcement

Implications for India

• Internal Security Threats:
  Facilitates terror financing, organised crime, and illegal international fund transfers.
• Economic Consequences:
  Leads to tax evasion, revenue loss, and unregulated financial flows, undermining the formal economy.
• Monetary Policy Impact:
  Weakens the RBI’s control over money supply and capital movement.
• Regulatory Uncertainty:
  Absence of a structured framework creates confusion for investors, traders, and law enforcement agencies.

Global Compliance Issues:

Non-alignment with FATF’s AML-CFT standards risks India’s global financial reputation.