That choice of legal instrument tells you everything about where India's crypto regulation stands today.

Legal tender it is not - but it moves money anyway

Cryptocurrencies are not legal tender in India. The RBI has said so repeatedly, beginning with public cautions in 2013 and 2017. In 2018, RBI went further, directing all banks not to deal with crypto businesses- a ban the Supreme Court struck down in 2020 (IAMAI v. RBI, 2020 AIR 2021 SUPREME COURT 2720) on the ground that it was disproportionate. The court upheld the RBI's right to regulate crypto but said an outright banking ban went too far.

Since then, Parliament has taxed crypto, 30% flat tax on gains, 1% tax deducted at source on transactions; but has not regulated it. The proposed Cryptocurrency Bill of 2021 was never debated. There is still no dedicated crypto law, no single regulator, and no clear definition of what cross-border crypto transactions are legally permitted to look like.

Crypto falls outside the definition of “currency” under FEMA, is not classified as “foreign exchange,” and stablecoins like USDT, pegged to the US dollar and widely used for cross-border value transfers; sit in a definitional no-man's-land between currency and asset under Indian law. Yet millions of rupees move through them every day.

FEMA's unresolved question

FEMA requires all cross-border money flows to pass through RBI-authorised channels. When value moves as USDT rather than as dollars through a bank, it bypasses this framework entirely. An Indian exporter paid in USDT by a foreign client is, technically, not receiving "foreign exchange" as defined by law; and is therefore not complying with FEMA's repatriation requirements under Sections 7 and 8, regardless of whether the transaction is commercially legitimate.

This is the gap the five Bengaluru firms are accused of exploiting, not necessarily for money laundering, but for operating what the ED characterises as unauthorised cross-border remittance services, converting rupees to stablecoins and routing them abroad through a combination of OTC trading and offshore platforms.

This is not a new pattern. In 2021, the ED issued a show-cause notice to WazirX-then India's largest crypto exchange, for over ₹2,790 crore in alleged FEMA violations, having found that proceeds of a Chinese-run illegal online lending operation had been converted into USDT and sent to a Cayman Islands-registered exchange. The investigation found WazirX's pool accounts had received and transferred thousands of crore to Binance, which owned WazirX at the time.

Indirect laundering and the hawala comparison

In May 2025, the Supreme Court orally observed that unregulated crypto trading resembles “a more polished form of Hawala.” The comparison is not rhetorical. The ED has found instances where crypto and hawala networks were used in combination for Trade-Based Money Laundering, manipulating import and export invoices while using crypto transfers to move the actual value, a method investigators describe as extremely difficult to trace.

India's anti-money laundering law was extended to crypto businesses in March 2023 (MoF Notification S.O. 1072(E)), requiring exchanges and wallet providers to comply with KYC norms and report suspicious transactions to the Financial Intelligence Unit. But the compliance net applies only to registered platforms. Decentralised exchanges and offshore platforms operating without Indian registration remain largely beyond practical reach.

What needs to happen

The ED cannot indefinitely be India's de facto crypto regulator. FEMA and PMLA are enforcement tools, not a regulatory architecture. India needs, at minimum: a designated primary regulator for VDAs; an amendment to FEMA clarifying how cross-border crypto transactions are categorised; and a statutory definition of what VASPs are permitted and required to do. Until that exists, the enforcement actions will continue- and so will the ₹2,500 crore problems. The Supreme Court noticed. It is time Parliament did too.