Cryptocurrency and Governance Risk in Emerging Markets: The Indian Experience

India’s cryptocurrency market has become a microcosm of the broader challenges facing emerging economies in balancing innovation with governance. High-profile corruption cases, such as the $240 million Voscrow Ponzi scheme and the Rs 200 crore CoinZx fraud, have exposed systemic vulnerabilities in regulatory oversight and investor awareness [1]. These incidents, coupled with the WazirX hack—a $234 million cyberattack attributed to North Korean actors—have catalyzed a reevaluation of India’s approach to digital assets [5]. The cumulative impact of these events has not only eroded investor trust but also forced policymakers to confront the inadequacies of existing frameworks.

The Investor Sentiment Shift

The Indian crypto market, once characterized by speculative fervor, now reflects a more cautious stance. Over 15 million active traders navigate a landscape where trust is increasingly tied to compliance and transparency [1]. The Voscrow and CoinZx scams, which exploited promises of unrealistic returns and multilevel marketing tactics, have led to a shift in investor preferences toward assets with verifiable governance, such as Bitcoin and Ethereum [4]. This trend is mirrored in global data: 78% of institutional investors now prioritize crypto assets with robust compliance frameworks, a response to the $2.17 billion in thefts reported in the first half of 2025 alone [5].

Retail investors, however, remain divided. While the government’s 30% capital gains tax and 1% TDS on transactions have created financial friction [1], the re-entry of major exchanges like Binance and the Fear and Greed Index’s upward trend suggest lingering optimism [2]. Yet, the psychological scars of frauds like the Bitcoin kidnapping case—where 176 BTC and ₹32 crore were extorted through coercion—have made investors more risk-averse [2].

Regulatory Responses and Systemic Gaps

India’s regulatory response has been a mix of punitive measures and structural reforms. The 2025 Crypto Framework, introduced in the wake of the Bitcoin kidnapping case, includes OECD-aligned reporting standards, AI-driven tax recovery mechanisms, and a 30% capital gains tax [2]. These measures aim to align India with global standards while addressing tax evasion and money laundering. However, the delayed implementation of the proposed COINS Act and the absence of a dedicated regulator—such as the envisioned Crypto Assets Regulatory Authority (CARA)—highlight systemic gaps [3].

The WazirX hack and the ₹1,646 crore Ponzi scheme have further underscored the need for institutional safeguards like mandatory proof-of-reserves and insurance mechanisms [7]. Despite these efforts, overlapping mandates among the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and the Ministry of Finance have created a fragmented oversight environment [3]. This ambiguity has allowed fraudsters to exploit jurisdictional loopholes, as seen in the Voscrow case, where shell companies and price manipulation concealed illicit flows [1].

The Path Forward

Emerging markets like India must navigate a delicate balance between fostering innovation and mitigating governance risks. The adoption of the OECD’s Crypto-Asset Reporting Framework (CARF) and the development of a Central Bank Digital Currency (CBDC) signal progress, but challenges persist in regulating decentralized platforms and privacy coins [8]. Investors are advised to prioritize due diligence, diversification, and awareness of tax obligations [4]. For regulators, the path forward lies in harmonizing strict enforcement with technological flexibility—a lesson drawn from the global fallout of the FTX collapse [6].

India’s experience underscores a universal truth: in the crypto era, governance risk is not a peripheral concern but a central determinant of market stability. As the sector matures, the interplay between investor caution and regulatory clarity will define the trajectory of digital assets in emerging economies.

**Source:[1] Cryptocurrency Regulations in India: A Guide for 2025 [https://www.kychub.com/blog/cryptocurrency-regulations-in-india/][2] India's Landmark Bitcoin Extortion Case and the Future of Regulatory Risk [https://www.ainvest.com/news/india-landmark-bitcoin-extortion-case-future-regulatory-risk-crypto-markets-2508][3] Regulatory Gaps and Systemic Risks in India's Crypto Market [https://www.ainvest.com/news/evolving-risks-opportunities-india-crypto-market-regulatory-gaps-fraud-investor-caution-2508][4] Lessons from India's $240 Million Crypto Fraud Case [https://www.onesafe.io/blog/navigating-crypto-fraud-lessons-global-regulation][5] 2025 Crypto Crime Mid-Year Update [https://www.chainalysis.com/blog/2025-crypto-crime-mid-year-update/][6] Top 10 Biggest Crypto Frauds in History [https://www.sanctionscanner.com/blog/top-10-biggest-crypto-frauds-in-history--1194][7] Crypto Crime and Regulation: A Catalyst for Institutional Adoption in India [https://www.ainvest.com/news/crypto-crime-regulation-catalyst-institutional-adoption-india-2508][8] Blockchain & Cryptocurrency Laws and Regulations | India [https://www.globallegalinsights.com/practice-areas/blockchain-cryptocurrency-laws-and-regulations/india/]