The Evolving Risks and Opportunities in India's Crypto Market: Regulatory Gaps, Fraud, and Investor Caution

India’s cryptocurrency market in 2025 stands at a crossroads, balancing explosive growth with systemic vulnerabilities. While the sector has attracted 107 million users, it remains plagued by regulatory ambiguity, high-profile fraud, and cybersecurity threats. The WazirX hack (2024), the ₹1,646 crore Ponzi scheme (2025), and the proliferation of privacy coins for money laundering underscore the urgent need for institutional safeguards. This article examines how India’s evolving regulatory landscape—marked by the proposed COINS Act and fragmented oversight—shapes investment risks and opportunities.

Regulatory Gaps and Systemic Risks

India’s crypto regulatory framework remains a patchwork of overlapping mandates. The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Ministry of Finance each claim jurisdiction over different aspects of virtual digital assets (VDAs), creating confusion for investors and operators alike [3]. The absence of a dedicated regulator has left critical gaps, such as the lack of enforceable custody protocols and proof-of-reserves requirements. For instance, the WazirX hack exploited vulnerabilities in custody systems, with attackers manipulating transaction data undetected [1]. Similarly, the Ponzi scheme leveraged unregulated wallets and privacy coins like Monero to obscure $1.5 billion in stolen funds [3].

The government’s 30% tax on crypto gains, introduced in 2022, has further complicated the landscape. While it formalized VDAs as taxable assets, it also discouraged retail participation and pushed activity into shadow markets [3]. Meanwhile, the proposed COINS Act—a model law drafted by Hashed Emergent and Black Dot—seeks to address these issues by establishing the Crypto Assets Regulatory Authority (CARA) and eliminating the 30% tax [2]. However, the Act remains non-binding, and its adoption hinges on political and institutional alignment.

High-Profile Crimes and Investor Implications

India’s crypto ecosystem has become a magnet for fraudsters. In May 2025, the Enforcement Directorate (ED) froze assets linked to a Ponzi scheme that defrauded investors of ₹1,646 crore using fake platforms and privacy coins [3]. Separately, INTERPOL Silver Notices were issued to trace assets in two major fraud cases, including a ₹113 crore scam by MTC and a Dubai property purchase linked to bribes [1]. These incidents highlight the ease with which bad actors exploit weak oversight and the need for real-time monitoring tools.

For investors, the risks are twofold: operational vulnerabilities (e.g., exchange hacks) and legal uncertainties (e.g., unclear recourse for fraud). The WazirX restructuring under Zanmai India, while a step toward accountability, revealed the lack of a domestic legal framework for crypto bankruptcies [1]. Similarly, the CoinDCX hack in 2025—despite its multi-layered security—exposed the fragility of even well-established platforms [4].

Institutional Safeguards and the Road Ahead

The COINS Act proposes a tiered regulatory approach to mitigate these risks. It envisions CARA as a specialized regulator, distinct from the RBI or SEBI, to enforce proof-of-reserves, mandatory audits, and investor protections [2]. The Act also introduces a two-year grace period for innovation and a national Bitcoin reserve to bolster digital sovereignty [3]. However, its success depends on implementation. For example, while CoinSwitch and CoinDCX have adopted proof-of-reserves and monthly audits, many smaller exchanges lack the resources or incentives to follow suit [4].

Globally, India’s challenges mirror those of Nigeria and Vietnam, where regulatory lags have enabled crypto criminal ecosystems [4]. To avoid similar pitfalls, India must align with Financial Action Task Force (FATF) guidelines and strengthen anti-money laundering (AML) requirements for virtual asset service providers (VASPs) [3].

Navigating Volatility and Governance Challenges

Investors in India’s crypto market must adopt a cautious, informed approach. Key strategies include:
1. Due Diligence: Prioritize exchanges with transparent proof-of-reserves and third-party audits. Platforms like CoinSwitch and CoinDCX have set benchmarks in this regard [4].
2. Regulatory Awareness: Monitor developments around the COINS Act and CARA. A dedicated regulator could reduce systemic risks but may also introduce compliance costs.
3. Diversification: Avoid overexposure to high-risk assets like privacy coins, which are increasingly linked to fraud [3].
4. Tax Planning: Factor in the 30% tax and 1% TDS on transactions, which remain in effect despite the COINS Act’s proposed reforms [4].

Conclusion

India’s crypto market is a paradox: a hub of innovation and adoption, yet riddled with regulatory gaps and fraud. The COINS Act and institutional safeguards like proof-of-reserves offer hope, but their effectiveness will depend on execution. For investors, the path forward lies in balancing optimism with vigilance—leveraging the sector’s potential while mitigating its inherent risks. As the Financial Stability Board (FSB) reviews global crypto policies in October 2025, India’s ability to harmonize innovation with oversight will determine whether it becomes a leader or a cautionary tale in the digital asset era.

**Source:[1] Blockchain 2025 - India - Global Practice Guides, [https://practiceguides.chambers.com/practice-guides/blockchain-2025/india/trends-and-developments][2] COINS Act Model Law to Guide India's Crypto Regulation, [https://cointelegraph.com/news/coins-act-india-crypto-model-law][3] Crypto Crime Report: 2025 Statistics & Trends, [https://coinledger.io/research/crypto-crime-report][4] Crypto Regulations in India 2025, [https://coinpedia.org/cryptocurrency-regulation/cryptocurrency-regulations-in-india/]