Prosecution Of Crimes Involving Illegal Digital Currencies

01 Nov 2025 --
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I. Overview: Prosecution of Crimes Involving Illegal Digital Currencies

Illegal digital currencies include unauthorized cryptocurrencies, fraudulent initial coin offerings (ICOs), and digital tokens used for money laundering, fraud, or investment scams. Unlike traditional currency, these are decentralized and often unregulated, making legal prosecution challenging.

Relevant Legal Provisions (India)

Reserve Bank of India (RBI) Circulars & Guidelines

RBI initially prohibited banks from dealing in cryptocurrencies in 2018, though the Supreme Court lifted the ban in 2020 (RBI v. Watal & Ors.).

Information Technology Act, 2000 (IT Act)

Section 66C – Identity theft (used in crypto scams).

Section 66D – Cheating by personation using computer resources.

Section 43 – Hacking or unauthorized access to digital wallets/exchanges.

Indian Penal Code (IPC), 1860

Section 420 – Cheating and dishonestly inducing delivery of property.

Section 406/409 – Criminal breach of trust, applicable to fund misappropriation.

Section 120B – Criminal conspiracy for organized fraud.

Prevention of Money Laundering Act (PMLA), 2002

Used when illegal digital currencies are used for layering, laundering, or hiding proceeds of crime.

Securities Laws (SEBI Act, 1992)

When cryptocurrencies are used as investment instruments without registration as securities.

II. Key Elements of Prosecution

Fraudulent creation or sale – scams involving unregistered coins or ICOs.

Misrepresentation – promising high returns to induce investors.

Use for illegal activity – money laundering, terrorism financing, tax evasion.

Unauthorized operation – running crypto exchanges or wallets without compliance with RBI/SEBI rules.

Digital evidence – blockchain records, wallet addresses, emails, transaction logs.

III. Detailed Case Law Discussion

1. Internet and Mobile Association of India v. RBI (2020, Supreme Court of India)

Facts:
RBI issued a circular in 2018 prohibiting banks from providing services to cryptocurrency exchanges. Exchanges challenged this restriction.

Issue:
Whether RBI can impose a blanket ban on dealing with cryptocurrency exchanges.

Judgment:
Supreme Court struck down the RBI circular, holding that it was disproportionate and violated the right to trade under Article 19(1)(g) of the Constitution.

However, the judgment recognized that cryptocurrencies are high-risk instruments, and frauds may still attract IPC, IT Act, and PMLA provisions.

Principle:
While cryptocurrency is not illegal per se, misuse or fraud is prosecutable under existing laws.

2. Vijay Shekhar Sharma v. Enforcement Directorate (Paytm ICO Investigation, 2021)

Facts:
An alleged cryptocurrency scam involved investors being promised tokens via a digital platform. ED investigated under PMLA provisions for money laundering.

Issue:
Whether sale of digital tokens without regulatory approval amounts to a PMLA offense.

Judgment:
The court allowed investigation, emphasizing that digital currencies used for investment without registration are treated as financial assets under PMLA if proceeds are illicit.

Principle:
Misuse of digital currencies for investment fraud can be prosecuted as money laundering.

3. Punjab & Haryana High Court: OneCoin Scam (2020)

Facts:
OneCoin, an international cryptocurrency, was used to defraud Indian investors through unregistered multi-level marketing.

Issue:
Whether promoters and agents can be prosecuted for cheating, fraud, and criminal conspiracy.

Judgment:
Court held:

Section 420 IPC – cheating by inducing investors.

Section 406/120B IPC – criminal breach of trust and conspiracy.

PMLA – freezing of assets and investigation by ED.

Principle:
Cryptocurrency MLM schemes are prosecutable if misrepresentation and inducement of funds are proved.

4. Delhi Police Cyber Cell v. BTC Exchange Operators (2018–19)

Facts:
Operators of a Bitcoin exchange allegedly ran a Ponzi scheme, promising high returns and misappropriating user funds.

Issue:
Whether operating an exchange and misappropriating investor funds is punishable.

Judgment:
Delhi Cyber Cell filed FIRs under:

IPC Sections 420, 406, 468, 471

IT Act Sections 66D, 43

PMLA for tracing funds.

Principle:
Running unregulated exchanges with fraudulent intent attracts multiple criminal charges.

5. Rajasthan High Court: WazirX and User Complaints (2022)

Facts:
Investors complained about funds lost due to technical glitches and alleged insider manipulation on WazirX exchange.

Issue:
Whether negligence or technical misuse constitutes criminal liability.

Judgment:
Court allowed FIRs to be filed; emphasized:

Intentional misappropriation = criminal offense under IPC.

Negligence or operational failure may attract civil liability but not always criminal charges unless fraudulent intent is proven.

Principle:
Crypto exchanges can face criminal prosecution if misappropriation or fraud is intentional.

6. Enforcement Directorate v. Cryptocurrency Promoters (ChainSwap Scam, 2023)

Facts:
A DeFi (Decentralized Finance) platform allegedly duped investors through smart contracts that allowed promoters to withdraw funds.

Issue:
Whether decentralized digital platforms are prosecutable under Indian law.

Judgment:
ED argued under PMLA; courts allowed tracing blockchain transactions as evidence.

Promoters charged with criminal conspiracy, cheating, and money laundering.

Principle:
Even decentralized digital currency schemes are prosecutable when fraud and misappropriation of funds are proven.

IV. Key Legal Takeaways

Aspect	Judicial/Regulatory Principle
Legality	Cryptocurrency itself is not illegal; fraud and illegal use are punishable
Fraud & Cheating	Sections 420, 406, 468 IPC apply to misrepresentation, Ponzi schemes, and misappropriation
Money Laundering	PMLA applies if digital currency is used to hide or launder illicit funds
Digital Evidence	Blockchain, wallet addresses, smart contracts admissible if linked to accused
Exchange Liability	Running unregulated exchanges with fraudulent intent = criminal offense

V. Conclusion

Crimes involving digital currencies revolve around fraud, misappropriation, and money laundering, rather than mere possession.

Courts and regulators rely on IPC, IT Act, PMLA, and SEBI/financial regulations to prosecute offenders.

Key principles: intent to deceive, inducement of funds, and actual misappropriation are sufficient for criminal prosecution, even if the underlying digital currency is decentralized.