Impact of Digital Currencies and Cryptocurrencies on Money Laundering in India

Abstract

Cryptocurrencies and its increasing prevalence is a topical issue in recent times as it is a decentralised form of currency which completely eliminates the usage of physical cash and thus omits the challenges associated with the conventional physical banking system. While this digitised money has its own advantages, we can not help but talk about the potential financial threats it brings in with it. Cryptocurrencies are a very volatile form of currencies and are not regulated by any organisation making its users vulnerable to various financial frauds. This paper briefly reviews the impact of this new form of tech on the Indian economy and how criminals have targeted it to launder money.

The paper explores the evolution and growth of cryptocurrencies in India and how it has impacted the financial market in the overall world. It delves deeper into how criminals are using this new technology to launder money , incorporating case studies from throughout the world in order to get a better understanding of what steps the Government of India needs to take in order to prevent such scams. By the end of it, the paper focuses on suggesting technological solutions, policies and potential legal frameworks in order to regulate crypto , exercise taxations on the profits generated via it and prevent crimes based on it.

Keywords- Cryptocurrencies, Money Laundering, Physical banking system, Taxation

Introduction

The current generation is witnessing an upsurge in the usage of digital currencies worldwide. With the boom in Information and Technology, crypto has become a trending topic. It is estimated that the market size of cryptocurrencies will increase by 34.5 billion USD at a CAGR ( Compound Annual Growth Rate) of 16.64% between 2023 and 2028.

Talking about India particularly, the fast and cheap internet has made all the data accessible to every citizen at the tips of his fingers. The rise in the usage of mobile payment apps like Paytm and BHIM- UPI has educated people about the possibilities of digital currencies. The Central Bank Legal Currency (CBLC) is a digital currency issued by the Central Bank of India but it is entirely different from other Digital Currencies like Bitcoin, Etherium etc. It has legal tender and thus is equivalent to the value and safety in use just as physical money (The Indian Rupee). On the other hand, cryptocurrencies are also digital currencies only but they are not regulated by any bank or a financial authority. Noticing the latest trends in the market, they are being seen as one of the biggest financial revolutions in recent times. Since cryptocurrencies are not government controlled and are relatively a new form of technology, they are accompanied by a high risk of potential financial frauds, money laundering being one of them.

The paper addresses the risk of money laundering via cryptocurrencies/digital money on the Indian market and how India can introduce new effective policies that can help prevent such frauds. At a time when access to the internet is so effortless, it becomes the responsibility of the government to regularly introduce laws to safeguard people from security breaches.

Literature Review

Methodology: For the fulfilment of the objectives as stated in the abstract, this study will rely on the secondary data collected from various sources such as articles, research papers, governmental websites and official legal documents provided by the government of India.

A PWC report, “Future of digital currency in India”, talks about how the world is exploring digital currencies and how the Indian government considers E-Rupee as a revolution in the Indian financial market. The article focuses on the advantages and future of CBDC in India. According to it, this digitised currency can bring structure and stability in the financial system since it automates the process of transactions and acts like a footprint for it making it easier for everyone to carry out day-to-day money exchanges. Though the article provides us with the advantages that come with this kind of system, it fails to shed light on the potential threats that come with it. The frauds are bound to increase if all the transactions take place over the internet. There is still a technological gap present in the nation and the world as a whole which makes this digitised system relatively harder to implement.
In 2019, Simon Butler published a research paper “ Criminal Use of Cryptocurrencies- a great new threat or is still cash the king?”, which challenged the Federal Reserve Chairman’s statement (July,2018). The chairman said that “Cryptocurrencies are great for money laundering”. Butler found that even though bitcoins and other cryptocurrencies can be used for money laundering, cash still is the real issue since the percentage of these crimes carried out via physical money is far greater than that carried out via the digitised money. He made an extreme statement that “ Cash is the greatest facilitator of crimes, not cryptocurrencies, and is likely to remain so as long as it exists.” Though it is true that physical currency is posing a larger threat today comparatively but completely dissing the probability of cryptocurrencies being the new suitable place for carrying out frauds easily is not right. The technology is still building and we need to be prepared for every type of risk that comes with it.
The research paper “ How does the Price of Bitcoin Volatility change?” written by Kurihara and Fukushima in 2018 examines how the volatile prices of bitcoin changes using the empirical method. The results suggest that traders should keep both long term and short term volatility in mind before investing since it is a very risky market to invest in given that its market value fluctuates rapidly (even in minutes).
An article on VentureBeat “ Crypto can prevent money laundering better than traditional finance” states how less than 0.5% of transactions taking place via cryptocurrencies like Bitcoin and Etherium are used for illicit purchases and how blockchain technology can easily facilitate compliance. It focuses on how successful compliance and safe transactions can happen with the existing AML regulatory frameworks. But we can not deny the fact that if cryptocurrencies are not that big of a threat in the present time, it won’t be one in the future too. Technology is constantly evolving, in order to minimise the risk it might possess in the future, we should start building technologies to make it even more safe to use.