Sucheta Dalal / Why the government wants to regulate or ban cryptos

"There may be another reason for the rush to bring legislation this time. It is indicated by PM Modi’s comment that “all democratic countries need to work together on cryptocurrency and ensure that it does not end up in the wrong hands".

After a long silence and dilly-dallying over regulating cryptocurrencies (cryptos), while tacitly allowing them to spread across India and even target low-income groups, the government is finally rushing to regulate or, maybe, ban cryptos. With just a couple of hurried meetings in November, one called by the prime minister (PM) himself and one by the parliamentary committee on finance, a Bill is being introduced in the parliament session.

The trigger for the quick action was perhaps the outrage triggered by the brazen puffery, exaggerated by the crypto industry in their advertisements that dominated an international cricket event with mammoth audiences. As I wrote earlier, by then, crypto currencies had spread with the cult-like frenzy generated by MLM schemes, while government watched in silence.

We can only hope that the rushed draft leads to a non-partisan discussion in parliament and a new law, when enacted, does not unleash confusion as was triggered by the new tax portal or the much-trumpeted midnight launch of the Goods and Services Tax (GST). Advocate Prashant Mali, an expert in cyber fraud tweeted, “I have made a suggestion to parliamentary affairs that Parliamentarians participating in the #cryptocurrency bill debate should first declare how much #crypto assets they hold directly or indirectly and talk over the bill in parliament.”

This subtly explains the absence of pressure and lack of haste in banning/regulating cryptos before they reportedly attracted investment from 15 million Indians. A recent advertisement by the Blockchain and Crypto Assets Council (BACC) claims that Indians have invested over Rs6 lakh crore in crypto assets, while the total market-cap of all crypto currencies, globally, is estimated at US$3 trillion.

Details of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 are not in the public domain at the time of writing this column. A government notification has said, “The Bill also seeks to prohibit all private cryptocurrencies in India. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.” A ‘facilitative framework for introducing an official digital currency’ by the Reserve Bank of India (RBI) is also on the cards. RBI’s attempt to ban cryptocurrencies had earlier been struck down by the Supreme Court and the government made no effort to curb their untrammelled spread, despite warnings by the RBI governor.

There may be another reason for the rush to bring legislation this time. It is indicated by PM Modi’s comment that “all democratic countries need to work together on cryptocurrency and ensure that it does not end up in the wrong hands.” While he did not allude to criminals and terrorists taking a fancy to crypto, government investigation agencies have raised a serious alarm about this possibility. This column will look at these specific concerns through data that is already in the public domain as part of the follow-up investigation into terror attacks or work done by global intelligence agencies. Here are a few known examples of the increased use of cryptocurrency for terror funding.

In August 2020, the US Department of Justice, revealed information on donation drives by the Al Qaeda, ISIS and an Hamas affiliate, Al Qassam Brigades (AQB), through layered transactions routed through the Syrian crypto exchange BitcoinTransfer (BT) and redistributed to individual groups. AQB had three official websites since 2019 for collecting donations through Bitcoin and cryptocurrency.

In September 2020, the French police had arrested 29 people for raising funds in that country and converting them to Bitcoin for funding jihadi activities in Syria.

In June 2021, the Financial Action Task Force ATF, in its report titled “Ethnically or Racially Motivated Terrorism Financing”, wrote about the growing use of crypto by extreme right wing groups. It said that Brenton Tarrant, who carried out the Christchurch mosque terror attack of 2019 in New Zealand, had been a donor to such groups using Bitcoin. Another South African group had created its own currency and app that made transaction data untraceable after 24 hours. This group raised over €14,000, and the coin operated on a 1:1 ratio with the South African Rand. FATF has also reported donations in cryptocurrencies raised by the Scandinavian right wing group Nordisk Styrke.

A crypto analytics firm Chainalysis, involved in investigating the Capitol Hill riots in the US, found US$522,000 worth of Bitcoin payments to extreme right groups. Part of the money was donated by a French national.

In September 2021, Hisham Chaudhary, a UK national, was convicted by the Birmingham Crown Court for raising and converting £52,000 into Bitcoin and transferring them for the release of ISIS supporters from Syrian detention camps.

Intelligence agencies have tracked several Al Qaeda-affiliated organisations that openly used social media platforms to raise Bitcoin and cryptocurrency donations for purchase of ‘drones for artillery adjustments and reconnaissance’ activities. The administrator of a pro–Al Qaeda Telegram channel in Syria sent $175,000 worth Bitcoin between February 2019 and February 2020 to a central Bitcoin hub for redistribution. One beneficiary was a jihadist training organisation. ‘SadaqaCoins’ is believed to be the first ‘cryptocurrency crowd source platform’ on the dark web created to ‘anonymously’ fund jihadi activities.

Israel’s national bureau, that tracks counter-terror financing, seized 84 crypto wallets in July 2021 used by entities linked to Hamas for raising donations. They contained US$7.7 million worth of digital currencies such as Bitcoin, dogecoin, cardano and ether. Whitestream, an Israeli blockchain intelligence firm, also found that Bitcoin was used by ISIS, to fund the Easter bombings in Sri Lanka via a Canada–based payment gateway CoinPayments for Bitcoin to fiat currency conversion. Two transactions originating from the Bitcoin wallet addresses listed on the ISIS fund-raising website were involved in funding the terrorist attack.

Similar terror funding activities have been traced to terror networks in Bangladesh, The Philippines and, closer home, in Kashmir.

Money Laundering, Ransom-ware and Cybercrime Clearly, the use of crypto in cybercrime and ransom-ware is widespread and well known among the intelligence community. US investigation agencies have traced global networks of cyber criminals linked to high-risk activities, illicit exchanges, scamming and ransom-ware with links to Russia, the Czech Republic, Ukraine and other countries that carried out ransom-ware attacks in the US, without any physical presence in the country. Their operations run into hundreds of millions of dollars.

A study by the crypto intelligence firm Chainalysis has found that Eastern Europe has emerged as a hub for illicit cryptocurrency-based money laundering through the dark web using the Hydra Market. A Russia-based Ponzi scheme, named Finiko, apparently accounts for half of the total value spend in East European scams.

The UK police seized £180 million worth cryptocurrency as part of an anti–money laundering operation in July 2021, in addition to £114 million worth cryptocurrencies seized in June 2021.

In November 2021, the US Department of Justice, through Operation Dark HunTor, busted an international dark-net-based opioid trafficking operation, US$31.6 million in cash and virtual currencies and a big haul of drugs.

China’s ‘Operation Card Breaking’, a nationwide crackdown against cryptocurrency-linked money laundering in June 2021, led to the arrest of over 1,100 and action against 170 criminal organisations. In September 2021, the Chinese government banned cryptocurrency and notified all cryptocurrency transactions in the country, including offshore exchanges, as illegal.

In India, the enforcement directorate (ED) issued a show-cause notice to WazirX, India’s largest crypto exchange, in June 2021, for Rs2,790 crore of transactions in contravention of the Foreign Exchange Management Act. An ED investigation into money laundering by a Chinese mobile betting app that used the crypto exchange had allegedly led to the discovery. It found that Chinese nationals had converted Indian currency into cryptos (Tether) and transferred them to a wallet based in the Cayman Islands.

All this is just the tip of the iceberg and India lags far behind in tracking and tracing such activities, let alone warning people about its potential dangers and misuse. The very first step in this process would be a clear national stance on cryptos and an enabling legislation that would allow government investigation agencies to act against them. Legislation, however flawed or hasty, may be the first step in that direction and, like everything else, may be tightened or corrected over time. In any case, an enabling legislation is urgently needed not just for cracking down on cryptocurrencies used for terror funding and money laundering but also valuing them for various genuine purposes including income and assets under various laws such as the Benami Transactions (Prohibition) Act and Income-Tax Act.