1.1 Introduction
The rise of cryptocurrency has fundamentally reshaped the global financial landscape, offering a new and innovative approach to conducting financial transactions. Cryptocurrencies such as Bitcoin, Ethereum, and other altcoins have garnered significant attention and adoption due to their decentralized nature, which offers both users and businesses enhanced privacy, lower transaction fees, and seamless cross-border payment capabilities. Unlike traditional financial systems, which often rely on intermediaries like banks and payment processors, cryptocurrencies enable peer-to-peer transactions directly between individuals without the need for centralized control. This decentralized feature has proven especially valuable for those seeking to bypass traditional banking systems or participate in markets that are otherwise underserved by conventional financial institutions. However, as cryptocurrencies have become more widespread, they have also become a double-edged sword. The very qualities that make cryptocurrencies attractive—anonymity, decentralization, and cross-border nature—also make them susceptible to exploitation by malicious actors. With the absence of a centralized regulatory authority overseeing cryptocurrency networks, criminals have been able to take advantage of the relative lack of transparency and weak enforcement mechanisms to engage in various illicit activities. These crimes range from money laundering, terrorist financing, and fraud, to identity theft, ransomware attacks, and the hacking of cryptocurrency exchanges. The ease with which transactions can be made anonymously or pseudonymously on blockchain networks presents significant challenges for regulators and law enforcement agencies attempting to trace the flow of illicit funds. Moreover, the irreversible nature of cryptocurrency transactions adds to the difficulty of recovering stolen or misappropriated funds.[1]
In recent years, regulators, financial institutions, and cybersecurity professionals have raised growing concerns about the risks associated with cryptocurrency transactions.[2] While blockchain technology—the decentralized, distributed ledger system that underpins cryptocurrencies—is inherently secure, the weaknesses often lie within the various systems and platforms that interface with it. For instance, cryptocurrency exchanges, where users buy and sell digital currencies, have become prime targets for hackers. Cybersecurity breaches and hacks have resulted in significant financial losses, as seen in high-profile incidents such as the Mt. Gox exchange hack, where millions of dollars worth of Bitcoin were stolen, or the 2019 Binance hack, which saw a similar breach. Furthermore, the unregulated nature of the cryptocurrency market has created an environment where bad actors can thrive, often without fear of legal or regulatory repercussions. This lack of oversight has raised alarms about the potential for cryptocurrencies to be used in facilitating criminal activity, which can undermine financial systems, jeopardize personal security, and hinder the adoption of cryptocurrencies as legitimate financial instruments.[3]
As the cryptocurrency market continues to evolve, the need for robust cybersecurity measures and effective regulatory frameworks has become more pressing. Although several countries have introduced varying degrees of regulation concerning cryptocurrency activities, there remains a significant gap in global consensus regarding the best approach to combat financial crimes in this domain. Moreover, many of the cybersecurity practices currently in place are reactive rather than proactive, and there is a lack of comprehensive strategies that can address the full range of vulnerabilities inherent in the cryptocurrency ecosystem.
This dissertation seeks to explore how financial crimes in cryptocurrency transactions can be mitigated through enhanced cybersecurity strategies and improved regulatory frameworks. The research aims to examine existing cybersecurity measures, regulatory policies, and legal frameworks, identifying their strengths and weaknesses in combating financial crimes such as money laundering, fraud, and cybercrime.
1.2 Literature Review
The regulation of cryptocurrency transactions in India is still evolving, with legal and regulatory frameworks struggling to keep pace with the rapid rise of digital currencies and the associated financial crime risks.[4] While cryptocurrencies have gained significant popularity in India, they remain under intense scrutiny due to concerns about their use in money laundering, fraud, and terrorism financing. This section examines the legal provisions in India, drawing from actual case studies and legal interpretations, and compares them with international regulatory practices, especially in jurisdictions like the European Union and the United States.
India’s legal stance on cryptocurrencies has been a subject of significant debate. Historically, the Reserve Bank of India (RBI) took a cautious approach to digital currencies, leading to the 2018 banking ban, which prohibited banks from providing services to cryptocurrency exchanges.[5] This decision was challenged by several cryptocurrency exchanges in the Supreme Court, which ultimately ruled in 2020 that the RBI’s banking ban was unconstitutional (Internet and Mobile Association of India v. RBI).[6] The Court’s decision was a major victory for cryptocurrency proponents, who argued that the ban hindered the growth of legitimate businesses and the broader fintech ecosystem in India. Despite the Supreme Court’s ruling, cryptocurrency regulation in India remains fragmented, as there is no specific legal framework addressing cryptocurrencies. Various regulatory bodies such as the Securities and Exchange Board of India (SEBI), the Ministry of Finance, and the Enforcement Directorate (ED), have issued directives on cryptocurrency-related matters, but their scope is limited.[7] The Prevention of Money Laundering Act (PMLA), which applies to all financial institutions, including cryptocurrency exchanges, has been invoked in a limited manner, especially in the context of suspected illegal activities involving cryptocurrencies.[8] A significant issue in India is the potential use of cryptocurrencies for money laundering and terrorist financing, with authorities frequently citing these concerns as barriers to clearer regulation. In response to these concerns, the Indian government has explored the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, which seeks to ban private cryptocurrencies and introduce a central bank digital currency (CBDC).[9] The bill, however, has yet to be enacted and remains a point of contention within the Indian legal system. G Soana (2024) suggest that the introduction of a CBDC could help combat financial crimes while providing a more secure and traceable form of digital currency.[10] Further regulatory efforts include proposals for implementing Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations, as required by international standards such as the Financial Action Task Force (FATF).[11] According to Bhatia and Kumar (2020), India’s lack of clear regulatory guidance on cryptocurrencies leaves a significant gap in the enforcement of AML and CFT measures.[12] While the FATF’s Recommendation 15 calls for the application of AML/CFT regulations to cryptocurrency exchanges, Indian authorities have not yet fully implemented these guidelines, leading to concerns over their effectiveness in preventing illicit activities like money laundering and fraud. The Enforcement Directorate (ED) has been actively investigating cryptocurrency exchanges in India under the PMLA. In 2021, the ED froze the assets of WazirX, one of India’s largest cryptocurrency exchanges, in a case involving an alleged $380 million money laundering scheme. This case underscores the challenges faced by Indian regulators in tackling financial crimes in cryptocurrency transactions and highlights the need for a more robust regulatory framework.
While India’s approach to cryptocurrency regulation remains somewhat fragmented, other countries, particularly those in the European Union and the United States, have made significant strides in addressing the legal and cybersecurity challenges posed by cryptocurrencies.
The European Union (EU) has adopted a more comprehensive regulatory approach to cryptocurrencies through its Fifth Anti-Money Laundering Directive (5AMLD). This directive, which came into force in 2020, requires cryptocurrency exchanges and wallet providers to comply with stringent Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) requirements. According to Van der Voort (2020), 5AMLD mandates that cryptocurrency exchanges and custodian wallet providers apply Know Your Customer (KYC) procedures, report suspicious transactions, and retain customer data for a minimum period of five years. The 5AMLD’s regulatory framework applies to both EU-based cryptocurrency service providers and those operating in the EU from outside its borders. This is particularly important given the cross-border nature of cryptocurrency transactions and the increasing globalization of digital finance. Seitz (2020) argues that the EU’s proactive stance in enforcing AML and CFT measures has helped reduce the vulnerability of cryptocurrency exchanges to criminal activities such as money laundering. Despite these advancements, however, challenges remain in enforcing these measures across the diverse jurisdictions of the EU. Discrepancies in national enforcement mechanisms across EU member states have led to a lack of uniformity in the implementation of AML/CFT regulations. This issue is exacerbated by the anonymity that some cryptocurrencies, such as Monero and Zcash, provide through advanced encryption methods, making it difficult for authorities to trace transactions effectively.[13]
The United States has been at the forefront of regulatory action concerning cryptocurrencies. In 2013, the Financial Crimes Enforcement Network (FinCEN) issued guidelines categorizing cryptocurrency exchanges as money services businesses (MSBs), subjecting them to the same AML and CFT regulations as traditional financial institutions. As a result, cryptocurrency exchanges in the U.S. are required to register with FinCEN, implement KYC procedures, and report suspicious activities to authorities. The Securities and Exchange Commission (SEC) has also played an active role in regulating cryptocurrency transactions, particularly with regard to initial coin offerings (ICOs) and the classification of cryptocurrencies as securities. In 2020, the SEC charged Ripple Labs with conducting an unregistered securities offering through the sale of XRP, a cryptocurrency developed by the company. This case exemplifies the SEC’s aggressive stance on regulating cryptocurrencies and ensuring that they comply with securities laws, which have traditionally governed financial instruments. The U.S. approach, particularly in the regulation of exchanges and cryptocurrency offerings, contrasts with India’s more cautious stance, which has resulted in a lack of regulatory clarity. However, the U.S. has faced its own challenges, particularly in terms of cybersecurity and the enforcement of AML/CFT measures. High-profile hacks, such as the 2016 Bitfinex hack and the 2018 Coincheck hack, in which millions of dollars in cryptocurrencies were stolen, highlight the vulnerabilities of cryptocurrency exchanges to cybercrime.[14]
The regulation of financial crimes in cryptocurrency transactions is a pressing issue for governments worldwide. India, while making significant strides in developing a regulatory framework for digital currencies, continues to grapple with the complexities of regulating a rapidly evolving technology. The country’s legal framework is still in development, and while measures like the PMLA and FATF compliance offer some regulatory coverage, there is a clear need for more comprehensive laws tailored to the unique challenges posed by cryptocurrencies.
In comparison, jurisdictions like the European Union and the United States have made more substantial progress in implementing regulatory frameworks that address the risks of money laundering, terrorist financing, and cybercrime in the cryptocurrency space. While the EU’s 5AMLD and the U.S.’s FinCEN guidelines set valuable precedents, challenges remain in terms of enforcement and ensuring uniformity across borders.
[1] Balthazor, A. W. (2018). The Challenges of Cryptocurrency Asset Recovery. FIU L. Rev., 13, 1207.
[2] Ibid.
[3] Rao, S., & Shaen, C. (2022). Mt. Gox–The fall of a giant. Understanding Cryptocurrency Fraud, 71.
[4]“Kumar, C. (2023). Legal Perspective on Cryptocurrency Regulation-Regulatory Framework and Challenges. Jus Corpus LJ, 4, 1.
[5] Kashyap, A. K. (2024). Central Bank Currency in India: Policy and Regulatory Aspects. In Global Developments in Central Bank Digital Currency (pp. 230-248). IGI Global.
[6] AIRONLINE 2020 SC 298
[7] Reddy, J. (2019). The case for regulating crypto-assets. Indian Journal of Law and Technology, 15(2), 5.
[8] Sinha, Y. (2022). PMLA and Crypto-Laundering: A Catallaxy. Available at SSRN 4193666.
[9] Belke, A., & Beretta, E. (2020). From cash to central bank digital currencies and cryptocurrencies: a balancing act between modernity and monetary stability. Journal of Economic Studies, 47(4), 911-938.
[10] Soana, G., & de Arruda, T. (2024). Central Bank Digital Currencies and financial integrity: finding a new trade-off between privacy and traceability within a changing financial architecture. Journal of Banking Regulation, 1-20.
[11] Beekarry, N. (2011). International anti-money laundering and combating the financing of terrorism regulatory strategy: a critical analysis of compliance determinants in international law. Nw. J. Int’l L. & Bus., 31, 137.
[12] Global Legal Insights, ‘Blockchain & Cryptocurrency Laws and Regulations – India’ (Global Legal Insights, 2025) https://www.globallegalinsights.com/practice-areas/blockchain-cryptocurrency-laws-and-regulations/india/ accessed 14 February 2025.
[13]Azinge, N. N. V. (2018). Compliance with the global AML/CFT regulation: parameters and paradoxes of regulation in African countries and emerging economies (Doctoral dissertation, University of Warwick).
[14]Charoenwong, B., & Bernardi, M. (2024). Lessons from a decade of cryptocurrency hacks, 2011-2021. In The Elgar Companion to Decentralized Finance, Digital Assets, and Blockchain Technologies (pp. 147-166). Edward Elgar Publishing.