The Rise of Crypto Hawala: A New Challenge for India’s Security Agencies

Security agencies in Srinagar and New Delhi have raised alarm over a sophisticated “crypto hawala” network that is circumventing the country’s financial regulations to funnel untraceable foreign funds into Jammu and Kashmir. This development has raised serious concerns that the funds are being used to support terrorist activities within the region.

The security establishment is on high alert as these shadow funds aim to revive separatist elements and reignite anti-national sentiments in Jammu and Kashmir. Despite recent crackdowns by law enforcement agencies, this digital hawala system poses a significant threat due to its use of unregulated cryptocurrency to conceal financial transactions.

Unlike traditional hawala channels, the crypto hawala network operates outside the official financial system, making it difficult to track and monitor. While India mandates registration for Virtual Digital Asset Service Providers (VDAs) with the Financial Intelligence Unit (FIU), this shadow network operates clandestinely.

As of the 2024-25 fiscal year, only 49 exchanges have registered as legal reporting entities, prompting the government to introduce new guidelines to enhance oversight. These measures include liveness detection, geographical tracking, and user verification through live selfies using advanced software.

The use of private crypto wallets, often established through VPNs to evade detection, has been identified as a key tactic employed by foreign handlers to transfer cryptocurrency to individuals in Jammu and Kashmir. The funds are then converted into cash through unregulated peer-to-peer traders in major cities like Delhi and Mumbai.

The network relies on “mule accounts” to layer transactions and distribute commissions among account holders. Ordinary individuals are recruited as account holders, unaware that they are facilitating illegal financial activities. These mule accounts play a crucial role in masking the origins of the funds and avoiding detection.

The emergence of crypto hawala presents a new challenge for enforcement agencies, as it operates in a grey market outside the purview of traditional banking systems. By bypassing regulated financial institutions, foreign funds can enter the local economy without leaving a trace.

Despite efforts by the FIU to regulate exchanges, the rise of crypto hawala poses a significant threat to India’s financial security. Enforcement agencies are facing difficulties in monitoring and preventing these illicit transactions, which allow foreign funds to flow into the economy unchecked.

Overall, the proliferation of crypto hawala highlights the evolving nature of financial crimes and the need for enhanced regulatory measures to safeguard India’s financial integrity.