Bitcoin scam: The legality of cryptocurrencies in India explained

Bitcoin and cryptocurrencies are back in the spotlight following allegations against Congress’s Maharashtra president Nana Patole and NCP (SP)’s Supriya Sule. Both are accused of involvement in “illegal bitcoin activities” to fund their election campaigns. While investigations continue, let’s unpack what cryptocurrencies are and where they stand in India’s legal and regulatory framework.

 

What are cryptocurrencies?

 

Cryptocurrencies are digital or virtual currencies secured by cryptography, making them resistant to counterfeiting. They operate on decentralised networks using blockchain technology, which functions as a distributed ledger maintained across multiple computers.

 

Bitcoin, the most well-known cryptocurrency, was created as a decentralised alternative to traditional financial systems. Unlike fiat currencies:

 

< Cryptocurrencies lack intrinsic value and cannot be redeemed for commodities such as gold.

< They exist only in digital form.

< Supply is determined by underlying protocols, not by central banks.

 

Legality of cryptos

 

India has not classified cryptocurrencies as illegal, but they are not recognised as legal tender. Sahil Arora, partner at Saraf and Partners, described their position as “legally nuanced.”

 

“Cryptocurrencies are not banned but exist in a grey area,” Arora said. “Trading and investing in digital assets is allowed, but they are not authorised for use as currency. This legal ambiguity creates challenges for investors, traders, and even enforcement agencies.”

 

Arora also noted, “The government’s taxation framework—such as the 30% tax on gains and the 1% TDS—indicates an acknowledgment of cryptocurrencies as financial assets without giving them full legal status.”

 

How are cryptocurrencies taxed?

 

India’s tax policy treats cryptocurrency profits similarly to speculative gains.

 

“The taxation framework complicates matters,” Arora explained. “A 30% tax on gains coupled with TDS means traders are heavily taxed, while still navigating an unregulated space. The Prevention of Money Laundering Act (PMLA) applies if transactions involve undeclared funds or overseas assets without proper disclosures.”

 

“Non-declaration of crypto earnings constitutes an offence under PMLA,” said Dinesh Jotwani, co-managing partner at Jotwani Associates. “Every crypto transaction must reflect in the taxpayer’s returns. Failure to disclose can lead to prosecution, especially if tainted funds are used or assets are acquired overseas without Reserve Bank of India (RBI) approval.”

 

Jotwani emphasised the importance of compliance. “The risks are not just financial but legal. Individuals must tread cautiously and ensure proper disclosures to avoid falling foul of money laundering laws.”

 

Regulatory stance

 

In March 2020, the Supreme Court of India overturned the RBI’s 2018 circular banning banks from offering services for virtual currencies.

 

“By striking down the RBI’s ban, the Supreme Court ensured that cryptocurrencies could not be outrightly prohibited,” said Jotwani. “However, this does not mean they are treated as legal tender. It only allows trading to continue under existing laws.”

 

Despite the ruling, regulatory clarity remains elusive. Arora highlighted the challenges: “India’s financial regulators, including the RBI, view cryptocurrencies with caution due to their volatile nature and potential misuse for illicit activities. The RBI continues to stress that only central bank-issued digital currencies can be considered as legal currency.”

 

Private cryptocurrencies have grown in popularity over the past decade, but global regulators remain wary of associated risks, including illicit transactions and financial instability.

 

Anti-money laundering and compliance

 

India regulates cryptocurrencies under anti-money laundering laws. Transactions must be declared in income tax returns, and failure to do so may invite penalties under the Prevention of Money Laundering Act, 2002.

 

The speculative nature of crypto trading has made it a playground for scams,” Arora said. “From fraudulent schemes to cyberattacks, there are numerous examples, such as the 2018 crypto fraud case and breaches on major platforms. These underline the need for thorough research and caution.”

 

Jotwani added, “The market’s inherent volatility often turns it into a speculative instrument rather than a medium for economic transactions. This speculative nature, combined with the lack of legal clarity, makes it a high-risk endeavour.”

 

What’s next for crypto in India?

 

An inter-ministerial group (IMG), comprising officials from the RBI, Sebi, and the finance ministry, is drafting a policy framework for cryptocurrencies. A discussion paper is expected soon, which will invite stakeholder feedback and shape India’s long-term stance.

 

For now, crypto assets remain unregulated but are subject to taxation and compliance under Indian law.

 

What about the recent Bitcoin controversy?

 

A major political controversy erupted in Maharashtra just hours before the Assembly elections on Wednesday. Former IPS officer Ravindranath Patil alleged that cryptocurrency funds, converted from Bitcoins seized by the Pune police during a 2018 investigation, were misappropriated and used to fund election campaigns. The allegations implicate NCP (SP) MP Supriya Sule and Maharashtra Congress chief Nana Patole.

 

At the centre of the controversy lies the GainBitcoin Ponzi scheme, a scam that defrauded thousands of people across India. Led by brothers Ajay and Amit Bharadwaj, the scheme promised investors extraordinary returns on their Bitcoin investments, luring them with claims of guaranteed payouts of 10 Bitcoins per month. In reality, the Bharadwaj brothers concealed the funds in obscure digital wallets and left victims with nothing.

 

The Enforcement Directorate (ED) estimated that the scheme collected Bitcoins worth Rs 6,600 crore in 2017. The accused claimed these funds would be used for Bitcoin mining, assuring investors of enormous profits. Instead, they diverted the ill-gotten cryptocurrency to private wallets, leaving participants with no means to recover their investments. The scam, which operated through GainBitcoin and its affiliates, relied heavily on trust and exaggerated promises to ensnare people.

 

One of the victims, speaking anonymously, told The Indian Express, “I was told my investment would double within months. The returns seemed too good to miss. By the time I realised it was a scam, it was too late.” Similar stories of financial ruin emerged as the Pune police launched an investigation in 2018, registering over 40 cases linked to GainBitcoin across the country.

 

The Bharadwaj brothers and their associates ran the scheme as a pyramid, encouraging existing investors to bring in new participants in exchange for commissions. Many unsuspecting individuals poured their savings into the scam, only to be left empty-handed. Amit Bharadwaj died in 2022, and Ajay Bharadwaj, a key figure in the fraud, was never apprehended.

 

The scam also led to allegations of misappropriation against those tasked with investigating it. Former IPS officer Ravindranath Patil and cybercrime expert Pankaj Ghode, who assisted the Pune police in the probe, were accused of diverting Bitcoins seized during the investigation. Using forged blockchain screenshots, they allegedly transferred cryptocurrency from the accused’s wallets into accounts under their control. Patil and Ghode were arrested in 2022, adding another layer of betrayal to the scandal.

 

Many victims felt doubly cheated—first by the scammers, then by the individuals who were supposed to bring them justice. “We believed the police would recover our money and bring the fraudsters to book,” said one investor. “Instead, it feels like we’ve been betrayed again.”