Supreme Court of India Warns of Crypto Threat to Economy

The Supreme Court of India has expressed grave concerns over the unregulated nature of cryptocurrencies, warning that they pose a significant threat to the country's economic stability. The court criticized the government for imposing a 30% tax on crypto transactions without providing a clear regulatory framework, creating a "parallel economy" that undermines the nation's financial integrity. This situation has led to a surge in fraud cases and legal uncertainties, prompting the court to demand swift action from policymakers.

During a recent hearing on a crypto fraud case, Justice Surya Kant highlighted the dangers of unregulated digital currencies, stating that they are forming a "parallel economy" that could destabilize the country's financial system. The court questioned the government's approach of taxing crypto at 30% without establishing a regulatory framework, pointing out the contradiction and the need for accountability and oversight. The justices also noted that the lack of regulation allows illicit actors to exploit the system, potentially bypassing traditional financial systems entirely.

The court's concerns were sparked by a bail plea involving Shailesh Bhatt, a Gujarat resident accused of operating one of the region’s largest Bitcoin fraud rings. This case reflects a broader trend of rising digital asset frauds, with victims and law enforcement struggling to navigate the legal vacuum. Justice N Kotiswar Singh compared unregulated crypto activity to hawala, an informal and illegal money transfer system, describing it as a "black box economy." Despite the Financial Intelligence Unit's mandate for crypto exchanges to comply with the Prevention of Money Laundering Act, enforcement remains fragmented due to the absence of overarching legislation.

Globally, countries are advancing regulatory frameworks for cryptocurrencies. In 2023, Europe approved the MiCA law, which sets rigorous requirements for crypto platforms. The U.S. is also working on passing laws through both SEC enforcement and congressional bills. However, India still lacks a central crypto bill, with a draft legislation existing since 2021 but yet to reach Parliament. The government previously pledged to release a policy discussion paper in 2023, but that deadline passed without delivery. Experts argue that India’s wait-and-watch approach may leave it exposed to systemic risks, particularly with the increasing volume of crypto activity shifting to peer-to-peer and offshore platforms.

The Reserve Bank of India (RBI) has consistently warned against private cryptocurrencies, describing them as risky and unstable. Instead, the central bank is promoting the Digital Rupee, a central bank digital currency (CBDC) intended to be a safe, government-backed option. While pilot programs have launched in limited settings, adoption remains in its early stages. However, analysts argue that banning or resisting private crypto altogether is no longer viable, as people worldwide are using Bitcoin and other digital assets for various transactions. India, they imply, cannot afford to stay behind in this rapidly evolving financial landscape.