Indiaโs security agencies have sounded a high alert over the emergence of a sophisticated โcrypto hawalaโ network allegedly being used to funnel untraceable foreign money into Jammu and Kashmir, bypassing the countryโs regulated financial systems. Officials warn that these funds could potentially be channelled to support terror-linked and separatist activities in the region.
๐ The development has raised serious concerns within the security establishment. Authorities fear the inflow of such shadow funds is aimed at reviving dormant separatist networks and reigniting anti-national propaganda in the Union Territoryโactivities that had largely been curtailed following sustained crackdowns by central and state agencies.
๐ Digital Hawala: Old System, New Technology
Mirroring the traditional hawala mechanismโwhere money is transferred through informal, non-banking channelsโthe digital variant leverages the anonymity of cryptocurrencies. By operating outside regulated exchanges, the system effectively erases financial trails, allowing illicit funds to enter the domestic economy undetected.
โ ๏ธ While India mandates that all Virtual Digital Asset Service Providers (VDA SPs) register with the Financial Intelligence Unit (FIU), officials say this shadow crypto network operates entirely off the grid, beyond regulatory oversight.
๐ Regulatory Gaps & New Safeguards
During the 2024โ25 financial year, only 49 crypto exchanges registered as legal reporting entities in India. In response to rising misuse, the government rolled out stricter compliance measures, including:
โข ๐ธ Mandatory liveness detection, requiring users to submit a live selfie
โข ๐๏ธ Verification through eye-blinking or head-movement detection
โข ๐ Geographical tracking to confirm physical presence
Additionally, authorities introduced the โpenny-dropโ verification method, where a nominal โน1 transaction confirms that a linked bank account is active and belongs to the user.
๐ชช Along with a PAN, users must now submit a secondary IDโsuch as Aadhaar, passport, or voter IDโverified through OTP authentication.
๐ง Findings From Security Investigations
A detailed study conducted by the Jammu and Kashmir Police, in coordination with central agencies, revealed that handlers operating from China, Malaysia, Myanmar, and Cambodia were directing individuals in the Valley to create private crypto wallets.
๐ These wallets were often set up using Virtual Private Networks (VPNs) to evade surveillance and require no KYC or identity verification, making them ideal tools for covert fund transfers.
๐ซ Authorities have since suspended VPN usage in the region, noting that such tools are frequently exploited by terror groups and separatist operatives to avoid detection.
๐ธ How the Crypto Hawala Network Operates
According to officials:
โข Foreign handlers send cryptocurrency directly into private wallets
โข Local operatives gain full control without involving regulated institutions
โข Wallet holders travel to cities like Delhi or Mumbai
โข Crypto is sold via unregulated peer-to-peer (P2P) traders
โข Funds are converted into hard cash at negotiated rates
๐งพ โThis process effectively breaks the financial trail,โ officials said, allowing foreign money to enter the local economy as untraceable cash.
๐งฑ Role of Mule Accounts
Central to the operation are โmule accountsโโbank accounts used to layer and park transactions. Investigators say syndicates follow a structured commission model, paying account holders 0.8% to 1.8% per transaction.
๐ฅ Many mule accounts belong to ordinary individuals, lured by easy commissions and falsely assured of safety. Victims are often persuaded to hand over full banking access, including usernames and passwords.
๐ Each handler typically controls 10 to 30 mule accounts simultaneously, significantly complicating enforcement efforts.
โ๏ธ A New Enforcement Challenge
Officials describe crypto hawala as a โnew-generation threatโ, as off-exchange crypto trading operates in legal grey zones and evades anti-money laundering (AML) norms applicable to registered platforms.
๐ฃ๏ธ โCrypto hawala is specifically designed to bypass formal banking channels and leave no trace,โ officials said. By converting crypto to cash across cities, the audit trail is completely severed.
๐ The Road Ahead
Despite the FIU regulating 49 major exchanges, authorities warn that crypto hawala networks pose a serious national security challenge, enabling foreign-sourced funds to infiltrate the local economy without passing through monitored systems.
Security agencies say tighter coordination, advanced digital forensics, and public awareness will be critical to countering this evolving threat.
