Bitcoin Trading in India: Supreme Court Likens Cryptocurrency to "Refined Hawala" Amid Regulatory Vacuum

In a striking judicial observation that has sent ripples through India's cryptocurrency ecosystem, the Supreme Court on Tuesday compared Bitcoin trading to "a refined way of Hawala business," highlighting the continuing regulatory ambiguity surrounding digital assets in the world's fifth-largest economy.

Court's Sharp Rebuke

During a bail hearing for businessman Shailesh Babulal Bhatt, accused of illegal Bitcoin trading, a bench comprising Justices Surya Kant and N Kotiswar Singh expressed frustration over the government's failure to establish a comprehensive regulatory framework for virtual currencies despite previous directives.

"What concerns us is that as early as February 25, 2022, this court had directed the Centre to clarify its policy on cryptocurrency. Yet more than three years later, we still don't have a formal regime in place," remarked Justice Kant. "Without proper regulation, this Bitcoin trading is essentially a refined way of Hawala business."

The bench's comparison to Hawala—an informal value transfer system that operates outside traditional banking channels—underscores growing judicial concerns about the potential for cryptocurrencies to bypass financial oversight mechanisms.

The Case at Hand

At the center of Tuesday's hearing was Bhatt's counsel's argument that cryptocurrency trading isn't inherently illegal in India, particularly following the Supreme Court's landmark 2020 judgment that overturned the Reserve Bank of India's banking ban on crypto services.

The Court, however, appeared unconvinced by this reasoning, giving the Gujarat government and the Enforcement Directorate ten days to file detailed replies on the regulatory status of Bitcoin trading. The matter has been listed for further hearing on May 19th.

Regulatory Patchwork Without a Framework

India's approach to cryptocurrency regulation has been characterized by piecemeal measures rather than comprehensive legislation. While the government introduced a stringent 30% tax on crypto profits and a 1% tax deducted at source (TDS) on transactions in 2022, these fiscal measures were implemented without clarifying the legal status of digital assets.

In March 2023, the government brought virtual digital assets under the Prevention of Money Laundering Act (PMLA), requiring crypto platforms to register with India's Financial Intelligence Unit and comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) norms.

"The taxation and PMLA coverage created a peculiar situation where crypto is taxed like a legitimate asset class but treated with suspicion under money laundering statutes, all without a clear legal definition," explains Rahul Matthan, technology policy expert and partner at Trilegal, a leading Indian law firm.

Understanding the Hawala Comparison

The Court's analogy between Bitcoin trading and Hawala provides a revealing lens into how some of India's top jurists perceive unregulated cryptocurrency transactions.

What is Hawala?

Hawala is a centuries-old alternative remittance system that operates outside formal banking channels. It enables the transfer of money across borders without physically moving cash, relying instead on a network of money brokers known as hawaladars who settle debts through an honor-based accounting system.

While Hawala serves legitimate purposes—particularly in regions with limited banking infrastructure—its anonymity and lack of paper trail have made it vulnerable to misuse for money laundering, terrorist financing, and tax evasion, leading to increased global scrutiny after 2001.

Parallels with Cryptocurrency

The Supreme Court's comparison highlights several perceived similarities:

1. Operating Outside Traditional Finance: Both systems can function independently of regulated banking infrastructure.

2. Cross-Border Capabilities: Like Hawala, cryptocurrencies enable value transfers across international boundaries without conventional intermediaries.

3. Potential for Anonymity: While not inherently anonymous (Bitcoin transactions are recorded on a public ledger), cryptocurrencies can offer greater privacy than traditional banking when specific techniques are employed.

4. Regulatory Challenges: Both systems present unique enforcement difficulties for authorities accustomed to monitoring traditional financial channels.

"The Court's analogy reflects legitimate concerns about regulatory arbitrage," notes Jaideep Reddy, technology lawyer at Nishith Desai Associates. "However, unlike Hawala, blockchain-based transactions are traceable and can be designed for compliance if the right framework exists."

India's Regulatory Journey: A Timeline

India's relationship with cryptocurrency has been tumultuous:

• April 2018: The RBI issued a circular prohibiting banks from dealing with crypto businesses, effectively cutting off the industry from banking services.
• March 2020: The Supreme Court struck down the RBI circular as disproportionate, reopening banking channels to crypto exchanges.
• February 2022: Finance Minister Nirmala Sitharaman announced a 30% tax on income from virtual digital assets and a 1% TDS on transactions, implemented from July 2022.
• March 2023: Virtual digital assets were brought under the Prevention of Money Laundering Act.
• December 2024: The government indicated "no fixed timeline" for dedicated cryptocurrency legislation.
• February 2025: Department of Economic Affairs Secretary Ajay Seth cited evolving international regulatory landscapes as a reason for recalibrating India's approach.
• May 2025: The Supreme Court characterizes Bitcoin trading as "refined Hawala" in the absence of clear regulations.

Global Context: India Lags Behind

India's regulatory uncertainty stands in contrast to the more defined approaches being taken by other major economies:

• European Union: The Markets in Crypto-Assets (MiCA) regulation, which came into effect in 2024, provides a comprehensive framework for crypto assets.
• United States: While regulations vary across federal agencies, the SEC, CFTC, and FinCEN have established clearer guidelines for different aspects of crypto activities.
• Singapore: The Payment Services Act provides a licensing framework for digital payment token services, offering regulatory clarity while fostering innovation.
• Japan: The Financial Services Agency has regulated cryptocurrency exchanges since 2017, providing one of the earliest comprehensive frameworks.

"India risks falling behind in the global digital asset race," warns Sumit Gupta, co-founder of CoinDCX, one of India's largest cryptocurrency exchanges. "While other jurisdictions are attracting talent and investment with clear rules, our industry continues to operate under a cloud of uncertainty."

The Hawala Economy: Relevant Lessons

Traditional Hawala networks have presented significant challenges for regulators worldwide, offering valuable insights for cryptocurrency governance:

Enforcement Difficulties

Hawala's effectiveness stems partly from its simplicity—transactions often leave minimal documentation and rely on trust-based relationships rather than formal contracts. This makes traditional enforcement methods largely ineffective.

Similarly, decentralized cryptocurrency networks operate without central authorities, requiring novel regulatory approaches that balance oversight with the technology's inherent design.

Financial Inclusion vs. Oversight

In regions with limited banking access, Hawala has historically served as a vital financial lifeline, particularly for migrant workers sending remittances home. Any effective regulation must recognize such legitimate uses while curbing illicit activities.

Cryptocurrencies present a similar dual nature, offering financial services to the unbanked while potentially enabling illicit transactions when unregulated.

"The challenge for regulators is designing frameworks that mitigate risks without stifling innovation or financial inclusion," explains Sathvik Vishwanath, CEO of Indian crypto exchange Unocoin. "Drawing false equivalences to Hawala without understanding the fundamental differences doesn't help this cause."

Economic and Innovation Impact

The protracted regulatory uncertainty has taken a toll on India's cryptocurrency ecosystem:

• Talent Migration: Numerous Indian blockchain developers and entrepreneurs have relocated to more crypto-friendly jurisdictions like Singapore, Dubai, and Portugal.
• Investment Chill: Venture capital funding for Indian crypto startups has declined significantly amid regulatory concerns.
• Compliance Burden: Existing tax and anti-money laundering requirements have imposed substantial operational costs on platforms without providing corresponding legal certainty.

"The innovation potential of blockchain technology extends far beyond cryptocurrencies," notes Ashish Singhal, founder of CoinSwitch. "Without regulatory clarity, India risks missing out on the next wave of financial and technological innovation."

What Lies Ahead

The Supreme Court's directive gives the government a narrow window to articulate its cryptocurrency stance before the next hearing on May 19. Industry experts anticipate several potential outcomes:

1. Interim Guidelines: The government might issue temporary directives until comprehensive legislation is ready.

2. Consultation Paper: A formal discussion document outlining regulatory options could be released for public feedback.

3. Limited Framework: Regulations focusing specifically on investor protection and anti-money laundering might be prioritized.

4. Continued Ambiguity: The government could request additional time, further extending the regulatory uncertainty.

Whatever approach is taken, the Supreme Court's characterization of Bitcoin trading as "refined Hawala" has added urgency to the regulatory discussion while highlighting the perceived risks of unregulated digital asset markets.

"The Court's observation should serve as a wake-up call," says Nischal Shetty, founder of WazirX exchange. "Either we develop a forward-looking regulatory framework that addresses legitimate concerns while enabling innovation, or we risk pushing this entire ecosystem underground, which would truly make it resemble Hawala."

As the May 19 hearing approaches, India's cryptocurrency industry finds itself at another crucial juncture, hoping that regulatory clarity might finally emerge from the shadows of uncertainty that have plagued it for years.

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For a deeper understanding of cryptocurrency regulation and its implications, read our companion pieces on global regulatory approaches and the evolution of digital asset policies.