A surge in the value of Crypto assets after the pandemic combined with the availability of multiple wallets and exchanges has led to an investment spree in the crypto market. It is estimated that as many as 1.5 crore Indians hold Crypto assets worth of billions of Dollars. The word Crypto is trending but the word which is buzzing even more is Crypto Scams. Crypto investors lost a total of $2.8 billion globally in crypto scams.
What Is Cryptocurrency?
Cryptocurrency is a type of digital currency that generally only exists electronically. It is a digital payment system that doesn’t rely on banks to verify transactions and is based on blockchain technology. Unlike the fiat currency, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
Cryptocurrency Scams
Scammers are always finding new ways to steal your money. But with the boom of crypto space, the risk of cybercriminals scamming innocent investors have risen by many folds. Here is the list of some of the major cryptocurrency scams one should watch out for:
- Ponzi Schemes: A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from new investors. In the case of a crypto Ponzi scheme, the fraudsters set up imaginary crypto enterprises and lure new investors. The money received from new investors is distributed to earlier backers, under the pretense that this money is profits accrued from a legitimate investment activity. Eventually, such a system unravels when the flow of new investments dries up ultimately causing huge losses to the later investors. Read about 5 of the Biggest Crypto Ponzi Schemes
- Phishing Websites: Crypto scams include phishing websites designed to steal sensitive information from users. Phishing emails are employed extensively to lure gullible investors into providing credentials. Sometimes cloning websites are also used by scammers to steal user’s money or data. It is highly pertinent in such scenarios to enter exact URL into the browser. SMS Phishing scam is one other way when hackers send text messages that are designed to steal personal or financial information from you, whether by pretending to be a reputable site, or getting you to download malware onto your phone. Apart from it, it is also seen that employees of exchanges are sharing database of crypto owners to the cyber criminals leading the users prone to such phishing attacks.
- Unknown fake Cryptos: Fake Alt coins are released into the market to dupe investors their hard earned money. For example, Rs 1,200 crore were duped from thousands of people of Kerala promising high returns on investment in a non-existent cryptocurrency called ‘Morris Coin’. Read More about Morris Coin Scam
- Crypto Investment Schemes: Sometimes a third party attract investors to invest through them by promising high returns. Initially a small amount is raised from the investor and profits are shared with them. Later on, playing on the greed of investors a much higher amount is taken and finally the firm disappears causing investors huge losses.
Major Challenges with Crypto
The biggest problem with crypto is the Decentralization. The involvement of the Central Authority provides anonymity to transactions, and it becomes extremely difficult even to detect illegal transactions. Cryptocurrency is stored in a digital wallet and if something unexpected happens — your online exchange platform goes out of business, you send cryptocurrency to the wrong person, you lose the password to your digital wallet, or your digital wallet is stolen or compromised — you’re likely to find that no one can step in to help you recover your funds. And, because you typically transfer cryptocurrency directly without an intermediary like a bank, there is often no one to turn to if you encounter a problem.
The fact that in India there is no regulation related to cryptos or any other forms of digital assets has added to the problem of crypto scams. As users don’t know which coins are legitimate and which are not. Regulation will ensure what is criminal and what is permissible. Even though the Indian Government in Union Budget 2022-23 levied a 30 percent tax on cryptocurrency gains and income, it has not given cryptocurrencies a legal status. Regulation will ensure what is criminal and what is permissible. Even though the Indian Government in Union Budget 2022-23 levied a 30 percent tax on cryptocurrency gains and income, it has not given cryptocurrencies a legal status.
The Current state of Regulations in India:
In 2018 RBI imposed a ban forbidding banks and other financial institutions from providing banking services to anyone dealing in crypto assets. the Hon’ble Supreme Court lifted the ban in IAMAI vs RBI (2020) stating that ban was “disproportionate”. RBI failed to show losses suffered by entities it regulates caused due to their transactions in crypto. In Hitesh Bhatia vs Kumar Vivekananda (2021), It was stated that mala fide opportunists try to exploit the absence of legislation don’t have any route for legal or regulatory escape. All transactions in crypto must comply with general laws in force in India until specialized legislation is passed.
RBI through its circular “Customer Due Diligence” for transactions in virtual currencies stated that entities have to carry customer due diligence which is in line with the registration that governs standards for KYC (Know Your Customer), AML (Anti Money Laundering), CFT (Combating Financing of Terrorism) obligation of entities under PMLA 2002 (Prevention of Money Laundering Act). In the absence of regulations dealing particularly with Cryptocurrency, we have some special legislations like FERA and PMLA in cases where dealing with cryptocurrencies leads to a threat to national security. For example, the use of crypto for drug trafficking can be dealt with by the provisions of the NDPS act of 1985.
Legal Remedies available
Cryptocurrencies are not regulated in India, but scammers and cybercriminals can be prosecuted under the existing laws
- Fraud Committed by the Exchange or Any other Party: If a cryptocurrency exchange or a third party commits any fraud it will come under the ambit of Section 403 (Dishonest misappropriation of property) Section 411 (Dishonestly receiving stolen property) Section 420 (Cheating and dishonestly inducing delivery of property) of IPC. In this regard, a complaint can be filed at the local police station.
- If users detect any suspicious activity in the trader’s exchange wallet it must be informed to customer care services and a copy of the conversation should be maintained. If the user doesn’t get the solution a registered complaint to the local cybercrime investigation cell should be filed (In case of absence of such cell to the local police station). Local Police can also refrain from filing the complaint due to technical unawareness. The victim can then approach the Judicial Magistrate under Section 200 CrPC to file their complaint. The movement of crypto can be traced through blockchain analysis but it is difficult to establish a connection with malicious account holders if the exchange is not adhering to KYC norms. Therefore, it should be a basic minimum standard to choose an exchange.
