Government Scrutiny of Cryptocurrency Exchanges over Large-Scale Money Laundering

Context:

• India has intensified its crackdown on cryptocurrency-linked financial crimes, with multiple central agencies examining the misuse of digital asset platforms.

• The action follows the detection of large-scale cyber fraud and money laundering routed through crypto exchanges, raising concerns over regulatory compliance, internal security, and governance gaps.

Key Highlights:

Government Action / Institutional Oversight

• The Ministry of Home Affairs (MHA) flagged 27 cryptocurrency exchanges for their alleged role in laundering ₹623.63 crore.

• The laundering involved 2,872 victims during the period January 2024 to September 2025.

• Data inputs were provided by the Indian Cyber Crime Coordination Centre (I4C).

• Investigations are being conducted by:

  • Financial Intelligence Unit (FIU-IND)

  • Enforcement Directorate (ED)

Modus Operandi of Cybercriminals

• Victims were lured into investing through fake trading and investment apps.

• Funds collected were:

  • Converted into cryptocurrencies

  • Transferred across multiple digital wallets (layering)

  • Routed through various exchanges to obscure money trails

• Authorities suspect the use of “crypto mules”—intermediaries who convert scam proceeds into digital tokens.

Exchanges Under Scanner

• Crypto platforms with significant market share were flagged, including:

  • CoinDCX

  • WazirX

  • Giottus

  • ZebPay

  • Mudrex

  • CoinSwitch

• Several of these exchanges are registered with FIU-IND but are under scrutiny for KYC and AML compliance failures.

Industry Response and Structural Concerns

• Some exchanges claim:

  • They only facilitate lawful trading

  • KYC/AML gaps were rectified post-FIU registration in 2023

• Cybersecurity breaches, notably the WazirX hacking incident (July 2024), have:

  • Eroded user confidence

  • Pushed exchanges to adopt asset custodians, insurance covers, and stronger safeguards

• Many Indian crypto platforms have foreign holding company structures, citing:

  • Ease of capital raising

  • Regulatory uncertainty in India

Taxation and Trust Deficit

• The Directorate General of GST Intelligence (DGGI) reported:

  • ₹824.14 crore GST evasion by 17 crypto exchanges

  • ₹122.29 crore recovered by December 2024

• This has deepened the trust deficit between the government and the crypto industry.

UPSC Relevance (GS-wise):

• GS Paper 2 (Governance):

  • Regulatory oversight

  • Institutional coordination in financial governance

• GS Paper 3 (Economy):

  • Digital economy

  • Financial regulation and taxation

• GS Paper 3 (Internal Security):

  • Cybercrime

  • Money laundering through emerging technologies

• Prelims:

  • Crypto regulation

  • FIU, ED, I4C

  • KYC and AML frameworks