Crypto Governance Risks in Emerging Markets: Lessons from India’s Bitcoin Extortion Case

India’s 2018 Bitcoin extortion case, involving builder Shailesh Bhatt and a network of corrupt officials, epitomizes the systemic vulnerabilities plaguing crypto ecosystems in emerging markets. The case, where 14 individuals—including 11 police officers—were sentenced to life imprisonment for extorting 200 bitcoins (worth ₹32 crore), exposed governance failures that continue to undermine investor confidence and economic stability [1]. This incident, coupled with India’s ongoing regulatory inertia, highlights a broader pattern: in jurisdictions where institutional corruption and outdated legal frameworks coexist, cryptocurrencies become both a tool for exploitation and a catalyst for systemic risk.

The Indian Paradox: Taxation Without Regulation

India’s approach to crypto governance is a study in contradictions. While the government imposes a 30% tax on crypto gains and a 1% tax deducted at source (TDS), it has failed to establish a regulatory framework to define ownership, enforce anti-money laundering (AML) measures, or provide legal clarity for dispute resolution [2]. The Supreme Court has repeatedly criticized this imbalance, noting that taxing cryptocurrencies without regulating them creates a “parallel economy” that threatens financial stability [3]. Justice Surya Kant’s 2025 rebuke—“If you can tax it at 30%, also please regulate it”—underscores the judiciary’s frustration with a policy vacuum that enables illicit activity while stifling legitimate innovation [4].

This regulatory ambiguity has driven Indian investors to offshore platforms, eroding the country’s potential to capitalize on crypto-driven growth. A 2025 report by the Reserve Bank of India (RBI) noted that over 60% of Indian crypto transactions now occur on foreign exchanges, a trend exacerbated by the government’s refusal to pass the 2021 Cryptocurrency Bill [5]. The absence of clear rules also complicates law enforcement, as seen in Bhatt’s subsequent legal troubles involving BitConnect promoters, where courts struggled to adjudicate cases involving digital assets [1].

Global Parallels: Corruption, Legal Gaps, and Investor Flight

India’s challenges are not unique. In Nigeria, where crypto adoption ranks second globally, a 2021 banking ban pushed transactions underground until the 2025 Nigerian Investment and Securities Act began formalizing digital asset oversight [6]. Similarly, Brazil’s proactive 2023 “Legal Framework for Virtual Assets” contrasts with India’s inaction, offering a model for balancing innovation with accountability [7]. These cases reveal a common thread: in markets with weak institutional trust, cryptocurrencies often become tools for corruption or speculative excess rather than engines of inclusive growth.

The FTX collapse in 2022 further illustrates the risks of unregulated crypto ecosystems. While FTX operated globally, its governance failures—such as opaque fund management and lack of oversight—mirror the vulnerabilities seen in India’s case. A 2023 study found that governance weaknesses at centralized exchanges (CEXs) can trigger systemic liquidity crises, even in diversified markets [8]. In emerging economies, where legal frameworks are less robust, such risks are amplified.

Strategic Due Diligence and Policy Reform: A Path Forward

For investors, the lesson is clear: due diligence in emerging market crypto ecosystems must extend beyond market fundamentals to assess governance quality. In India, for instance, the lack of regulatory clarity and the judiciary’s repeated calls for reform signal a high-risk environment. Investors should prioritize jurisdictions with transparent legal frameworks, such as Brazil’s 2023 act, which classifies cryptoassets as property and mandates central bank oversight [7].

Policy reform, meanwhile, requires addressing three pillars:
1. Anti-Corruption Measures: Strengthening institutional accountability to prevent crypto from becoming a tool for graft, as seen in Bhatt’s case.
2. Regulatory Sandboxes: Adopting models like Nigeria’s sandbox to test innovations while maintaining oversight.
3. International Coordination: Collaborating with bodies like the Financial Action Task Force (FATF) to harmonize AML standards and combat cross-border illicit flows [9].

India’s Supreme Court has already laid the groundwork for such reforms, but political will remains lacking. As the government delays action, investors and policymakers must recognize that crypto’s promise in emerging markets hinges on governance. Without it, the sector risks becoming a parallel economy of instability, where innovation is stifled and trust eroded.

Source:
[1] 14 sentenced to life imprisonment in Indian bitcoin extortion case, including 11 police officers [https://www.theblock.co/post/368846/14-sentenced-to-life-imprisonment-in-indian-bitcoin-extortion-case-including-11-police-officers]
[2] India’s Supreme Court urges government to regulate cryptocurrencies [https://cointelegraph.com/news/india-s-surpeme-court-asks-government-for-clearer-crypto-stance]
[3] SC Questions Govt on Crypto Oversight Amid Fraud Cases [https://www.medianama.com/2025/05/223-sc-questions-govt-on-crypto-oversight/]
[4] Indian Supreme Court Criticized the Government on Lack of Crypto Regulation [https://cryptorank.io/news/feed/774b2-indian-supreme-court-criticized-the-government-on-lack-of-crypto-regulation]
[5] India Dials Back Crypto Regulation Hopes, Industry Left in Uncertainty [https://www.ccn.com/news/crypto/india-crypto-regulation-dial-back-industry/]
[6] Grassroots Cryptocurrency Adoption in Nigeria [https://business.cornell.edu/article/2025/08/grassroots-cryptocurrency-adoption/]
[7] Blockchain & Cryptocurrency Laws & Regulations 2025 [https://www.globallegalinsights.com/practice-areas/blockchain-cryptocurrency-laws-and-regulations/brazil/]
[8] Systemic risks in the cryptocurrency market: Evidence from ... [https://www.sciencedirect.com/science/article/abs/pii/S1544612323000442]
[9] (PDF) A Comparative Analysis of the Regulatory Approach... [https://www.researchgate.net/publication/384675137_A_Comparative_Analysis_of_the_Regulatory_Approach_And_Management_Practice_For_Digital_Currencies_And_the_Role_Of_International_Financial_Organizations_In_Developing_A_Global_Regulatory_Framework_For_A]