Crypto Crime and Regulation: A Catalyst for Institutional Adoption in India?

The Indian cryptocurrency market, once a beacon of unbridled innovation, has faced a reckoning in recent years. High-profile crimes such as the 2023 multi-level marketing (MLM) scam—defrauding victims of ₹1,646 crore—and the 2024 WazirX hack, which erased $234 million in user funds, have exposed critical weaknesses in the sector’s infrastructure and governance [1]. These incidents, however, may also serve as a turning point. By forcing regulators, exchanges, and investors to confront systemic risks, they have accelerated the push for clarity and accountability—a necessary precursor to institutional adoption.

The WazirX Hack: A Wake-Up Call

The WazirX breach in July 2024, orchestrated by the North Korean Lazarus group, underscored the fragility of India’s crypto ecosystem. The theft of $234 million from a multisig wallet not only eroded user trust but also revealed glaring gaps in custody protocols and smart contract security [2]. In response, WazirX initiated a restructuring plan under Singapore’s High Court, creating recovery tokens and transferring fund management to Zanmai India, a reporting entity under India’s Financial Intelligence Unit (FIU-IND) [3]. While creditors approved the plan with 95% support, the process highlighted the absence of a domestic legal framework to handle such crises. As one analyst noted, “The WazirX case exposed the need for a statutory mechanism to protect investors, not just tax them” [4].

Regulatory Gaps and the MLM Scam

The 2023 MLM scam further illustrated the perils of regulatory ambiguity. Perpetrators exploited privacy coins like Monero and decentralized exchanges (DEXs) to mask transactions, leaving victims with no recourse [1]. This prompted the Indian government to introduce a new crypto law targeting crypto-based MLM schemes, mandating stringent KYC and AML norms [5]. The legislation explicitly bans pyramid schemes and requires platforms to register with regulatory bodies. While these measures aim to curb fraud, critics argue they lack enforcement mechanisms. “Regulation without oversight is just paperwork,” said a blockchain expert [6].

The Push for a Comprehensive Framework

India’s regulatory landscape remains fragmented, with heavy taxation (30% on gains, 1% TDS) but no investor protections [7]. Yet, the WazirX hack and MLM scam have spurred calls for a unified framework. The proposed COINS Act, developed by industry stakeholders, envisions a Crypto Assets Regulatory Authority (CARA) to oversee the sector, mirroring the U.S. SEC’s approach [8]. Such a body could enforce proof-of-reserves, insurance for user funds, and mandatory audits—measures critical to winning institutional confidence.

Institutional Adoption: Progress and Pitfalls

Despite regulatory uncertainty, India leads the Chainalysis Global Crypto Adoption Index, with 107 million users in 2025 [9]. Institutional interest is growing, particularly in blockchain applications for agriculture and digital identity. However, high taxation and the absence of UPI integration for crypto transactions remain barriers [10]. As one SEBI official noted, “India risks losing its edge if it doesn’t align with global standards like the EU’s MiCA” [11].

Conclusion: A Delicate Balance

The path to institutional adoption in India hinges on balancing innovation with oversight. While high-profile crimes have catalyzed regulatory momentum, the absence of enforceable protections and the brain drain of crypto firms to jurisdictions like Singapore suggest the work is far from complete. For India to realize its crypto potential, policymakers must move beyond taxation and embrace a framework that prioritizes security, transparency, and investor trust.

Source:
[1] India's crypto market faces regulatory gaps as investor risks mount [https://techobserver.in/news/business/indias-crypto-market-faces-regulatory-gaps-as-investor-risks-mount-316048/]
[2] WazirX's Legal Battle: A New Dawn for Crypto Banking in ... [https://www.onesafe.io/blog/wazirx-legal-challenges-future-crypto-banking-asia]
[3] WazirX users approve restructuring plan again after court ... [https://cointelegraph.com/news/wazirx-users-approve-new-restructuring-plan-after-hack]
[4] India's Crypto Crisis: Urgent Need for Consumer Protection and Cybersecurity Standards [https://government.economictimes.indiatimes.com/blog/indias-crypto-crisis-urgent-need-for-consumer-protection-and-cybersecurity-standards/122007545]
[5] India's New Crypto Law to Crack Down on Chit Funds and MLM Business Models [https://vocal.media/theChain/india-s-new-crypto-law-to-crack-down-on-chit-funds-and-mlm-business-models]
[6] COINS Act Model Law to Guide India's Crypto Regulation [https://cointelegraph.com/news/coins-act-india-crypto-model-law]
[7] Crypto Regulations in India 2025 [https://coinpedia.org/cryptocurrency-regulation/cryptocurrency-regulations-in-india/]
[8] WazirX's Restructuring: A Blueprint for Crypto Bankruptcy [https://www.ainvest.com/news/wazirx-restructuring-blueprint-crypto-bankruptcy-strategic-investment-opportunities-2508/]
[9] Crypto Adoption in India by 2024 [https://www.linkedin.com/posts/edulpatel_crypto-india-cryptoadoption-activity-7239895514404544512-ftRu]
[10] Crypto Adoption Continues to Rise in India Despite Government's Tough Stance [https://cryptoforinnovation.org/crypto-adoption-continues-to-rise-in-india-despite-governments-tough-stance/]
[11] Blockchain 2025 - India - Global Practice Guides [https://practiceguides.chambers.com/practice-guides/blockchain-2025/india/trends-and-developments]