August 13, 2020
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Black Stash Of Secret Money

Money laundering haunts governments as they struggle to adapt to crypto-currencies

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Black Stash Of Secret Money
Photograph by Vijay Pandey
Black Stash Of Secret Money

When the Income Tax Dep­artment raided nine Bitcoin exchanges across the country on December 13, they did so suspecting money laundering. This was far from una­nticipated. In 2016, former Res­earch & Analysis Wing official R.K. Yad­av wrote a 46-page letter to PM Narendra Modi and Minister of Fin­ance Arun Jaitley, alerting them to closed-door seminars on crypto-currencies organised by a visiting Swiss national in the capital and in Chennai.

“High-profile persons attended the seminar and when I found out about it, I wrote a cautionary note to the PM and the FM. The Swiss national was urging people to get involved with crypto-currency. It was timed in November 2016, right after demonetisation,” says Yadav.

Yadav also pointed out that crypto-currency was being used in money-laundering and hawala to fund terrorism. In 2014-15, investigative reporters found that the Eastern European mafia were using crypto-currency to launder their proceeds from running guns and drugs.

A traditional way to launder money is to park dirty cash (earned from crime or corruption) into a business. This is done through fake invoices generated in the company’s books for non-existent or fake transactions. That cash is then dep­osited into the business’ bank accounts and declared to be income, and tax is paid on it, thus cleaning the dirty cash into “legitimately earned” income.

In the case of  crypto-currency, one can convert the illicit cash into digital coins and pump it into a business to launder it. The other way is to take the converted digital currency, park it in accounts and reveal it as a capital gain on trading cry­pto-currency through exchanges.

Doing this on networks such as Bitcoin and Ethereum is not possible because the ledger is public and the ecosystem survives by publicly recording every transaction, and therefore any illicit use can eventually be tracked back to the source. But there are crypto-currencies such as Monero, which guarantee complete anonymity to their users and do not require a public key or a public ­recording of a transaction.

In 2016, dark net traders through a post on endorsed Monero so long as transfers were made directly from  buyer to seller, bypassing any exchange.

All exchanges in India offer a digital wallet where the crypto-currency is held on your behalf and all user data is held on servers. During the recent raids, the IT officials cloned the servers and hard drives, acquiring complete user records.

“Every time the government says something ­negative about crypto-currency, more users sign up with us.”
Shivam Thakral, CEO. BuyUCoin

In many cases, the sleuths did not have to poke very far because several of the exchanges had implemented the Know Your Customer (KYC) standards mandated by the RBI for banks and FIs. The crypto-currency exchanges had obt­ained income tax PAN cards and Aadhaar cards before verifying the users and letting them use their services. If any users had cashed out their crypto-currency into their personal digital wallets, the rec­ords of such transactions were with the exchanges. It is far from the original privacy-guaranteed philosophy of the cip­her punks but was meant to safeguard the exchanges from any future crackdown or impending regulation. Any enf­orcement agency would have the legal writ to seek any information it req­uired from a corporate body or firm.

Yet, there are reports aplenty of operators offering to change cash into cry­pto-currency. However, it is being done wit­hin a closed network of people right now, restricted to coders and the rich. There have also been cases where such transactions (some advertised through newspapers and social media) were fraudulent. Delhi Police cracked down on such a fraud ring a few months ago.

The privacy feature is not to benefit criminals alone. Private corporations mine your data at all times to track your purchases and related meta data in order to study and influence consumption habits and preferences. With anonymity, there is no third party peeking into how you spend your money.

Coming back to Monero, you can acq­uire this crypto-currency without rev­ealing your information even on an exc­hange. One can break the digital trail on the blockchain by buying multiple currencies. A user can buy Bitcoins directly but then use these to purchase Monero, pay for contraband and then cash out the remaining Bitcoin, leaving no trail leading to the money’s origin or destination.

It is still not clear where the Indian government stands on crypto-currency. On January 2, the finance minister ass­erted that it wasn’t legal tender, also ann­ouncing that a committee had been set up under the Department of Economic Affairs to assess crypto-currency and possibly set up a regulatory framework. The committee includes representatives of Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), the Department of Revenue and others.

The RBI has been issuing notes of caution to all trading in crypto-currency bec­ause neither the government nor the central bank backs it. Sources in SEBI told Outlook, “at present, no regulator can claim jurisdiction over crypto-currency because it has undetermined legal status in the country.” This is because while the government has not accepted it as currency, it is yet to be recognised as security by SEBI or any other government body. Despite this, crypto-cur­rency is being traded through exchanges in Ind­ia, with transactions having peaked shortly after demonetisation.

In August 2017, SEBI formed a Committee on Financial and Regulatory Technologies, to assess how it could use blockchain technology (the tech behind crypto-currency) in “FinTech” services. The source in SEBI clarified that the committee was “tasked with assessing the potential of blockchain technology and the public ledger system in all financial technology such as leveraging it for the purpose of regulating markets.”

The state governments are also looking for ways to use blockchain technology, says a top official of the Ministry of Electronics and Information Technology. There is also discussion amongst media innovators as to how to use blockchain technology to combat fake news.

Even to regulate crypto-currency ­und­er the Foreign Exchange Management Act, the RBI would first have to dec­lare it a foreign currency. Once the committee has presented a report to the finance ministry, it will be clear if the government will adopt the Egyptian Grand Mufti’s stance or that of Japan and Russia. Japan having declared Bitcoin a legal tender, thousands of retail services are now accepting it as payment. Russia is considering a crypto-Rouble on the lines of the crypto-currency called Ethereum, developed by a Russian entrepreneur.

In 2016, former RAW ­official R.K. Yadav wrote a letter to the PM and the FM, highlighting the danger of crypto-­currencies being used for money laundering.

Meanwhile, celebrities in India and abroad have started endorsing cry­pto-currency in the non-regulated environment with little reaction from the aut­horities. When Paris Hilton tweeted support for an upcoming crypto-coin, the United States Securities and Exc­hange Commission (SEC) took note imm­ediately and released an advisory on “Pot­entially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others.” The media pointed out the ambivalence in this because the SEC was yet to classify digital coins as either a currency or as a speculative asset. There have also been rep­orts by Indian media of domestic cel­ebrities endorsing cry­pto-cur­rency by highli­g­h­ting how much they have been trading in it. But no warnings have been iss­ued by Indian aut­horities to these celebrities.

Many “miners”—coders who verify cryptocurrency transactions— prefer to trade with exchanges abroad. This shows the potential for use of crypto-currency in hawala. Cash, turned into crypto-currency, can be passed through the internet and encashed in several countries without revealing its origin.

For now, any trade in crypto-currency would attract a capital gains tax as is the case with securities. With user data in their hands, the IT ­Department is likely to send notices to those who don’t declare gains.

The Indian exchanges seem to work on the “trust” model—the very system that Bitcoin’s mythical “inventor”, Satoshi Nakamoto, was working against. In his 2008 White Paper on crypto-currency, he outlined the philosophy for Bitcoin. Governments had failed to regulate currency, banks overcharged on transactions and crooks in the financial system went unpunished. The middleman must be rooted out—but the exchanges have proved to be middlemen, albeit ones who charge far less than banks.

Crypto-currency exchanges in India offer a digital wallet that they hold on beh­alf of the users. Thus, a user can view the wallet and issue directions to buy or sell digital coins, but cannot do it direc­tly. BuyUCoin is a Delhi-based start-up that has 21,200 KYC-verified users, ano­ther 27,540 awaiting KYC with documents uploaded and a total 1,11,900 signed up. The verified users hold around Rs 5 crore in their bank accounts.

CEO Shivam Thakral points out that all these accounts are being maintained by a public sector bank “because private banks do not want to deal with companies that have anything to do with cry­pto-currency”. But the underlying philosophy is the “trust” of the user.

In 2016, Thakral and his friends were buying and selling coins through credit and debit card transactions. In November 2016, following demonetisation, Thakral found more Indians taking an interest in crypto-currencies. That led him and his friends to register as a company in 2017, hire space on servers and start operating out of an office in West Delhi’s Karol Bagh commercial area.

In December 2017, when IT authorities turned up at his home, Thakral’s family was not thrilled. It took some explaining, especially when some local newspapers reported that the IT department had seized Rs 33 crore from them. The seizure list showed otherwise—the sleuths cloned their cloud servers and digital drives for the data on users and “took Rs 20,000 in petty cash that we had kept in the office to buy food,” smiles Thakral.

“Every time the government says something negative about crypto-currency, we find more users sign up with our exchange,” says Thakral.

The official warnings against investing or dealing with crypto-currencies have not dampened its price. Bitcoin price soared post-demonetisation, apparently because Indians started taking an interest in the crypto-currency. In Dec­ember 2016, the price of a Bitcoin had peaked to approximately $19,500 and then crashed by 25 per cent. On January 2, when the finance minister clarified that cry­pto-currency was not legal tender, this did not impact the price of Bitcoin. In fact, it rose back to $17,000 on January 5.

The Eastern European mafia have used crypto-currency to launder their profits from gun and drug running, and it has also been employed to fund global terrorism.

“As an investor who seeks long-term capital appreciation, I find the idea of 1000 per cent annual returns to be more indicative of investment bubbles than anything else, especially since there is no underlying asset represented by these crypto-currencies. While I appreciate the power of blockchain technology and how it can result in smart contracts that can revolutionise many sectors, I refuse to believe that the crypto-mania is very different from the tulip mania of the 1600s,” says Gurgaon-based entrepreneur and CFA Ashwini Anand.

Sound investments don’t fluctuate in value by 30 per cent on a daily basis, contends Anand. “This does not mean that I am risk-averse. I have a significant ­allocation to a diversified portfolio of small-cap and mid-cap stocks (via mut­ual funds), from which I expect to get about 18-24 per cent p.a. compounded over holding periods of 5-7 years. These return expectations are rational and ­justify the volatility inherent to these types of investments,”

There are several theories as to what drives the price of the volatile Bitcoin (or other crypto-currency). In 2013, Bitcoin value had peaked at $1,000 before it crashed following an announcement by an exchange, MT GOX, which then ­controlled a majority of the Bitcoin trades. The exchange revealed that it had lost 8,50,000 Bitcoins to hackers. While coders and developers went back to the drawing board, MT GOX filed for ­bankruptcy. Conspiracy theories raged on dark web chat rooms about it being a covert operation by government spies.

In early 2017, when the price of ­a Bitcoin surged to $1,000, experts predicted that the end-of-year price would be $3,000. After ­Japan accepted Bitcoin as a currency in April, the ­value crossed the $3,000 mark by June and kept ­climbing. Another mad dive for ­purchases ensued, and the price peaked further.

The highest concentration of cry­pto-currency miners is in China, which stopped withdrawals in February 2017, restarting them some months later. The resumed trading in China and elsewhere pushed the Bitcoin price to $19,500 in mid-December before dropping 25 per cent, only to have climbed back up to $17,000 at the time of writing.

In 2017, Asian markets overtook the US in crypto-currency trading and accelerated the evolution of Bitcoin from the egalitarian, de-centralised currency into the speculative asset it now is. It is not surprising then that Goldman Sachs is rumoured to have created a trade desk exclusively for crypto-currency fut­ures—one that will permit calling shorts as in conventional financial markets.

In Japan, more than 5,000 merchants accept the currency, but with a cap on the maximum amount allowed for a single transaction from a single entity. The largest car dealership in the country has capped it at $100,000. Global companies like EY Switzerland have also started to accept clients’ fees in crypto-currency, set up wallets for employees to receive emoluments and set up advisory servi­ces on the new currency.


The foundation for crypto- currency was laid through an academic paper written by Cynthia Dwork and Moni Naor. They proposed a system to deter attacks on computers through spam email. It was later named “proof-of-work”, by its dev­eloper Adam Back in 1997. It verified that the sender of an email was genuine and not someone trying extortion.

In 1998,  Wei Dai theorised a currency that would exclude central control. “I am fascinated by Tim May’s crypto-anarchy. Unlike the communities traditionally associated with the word “anarchy”, in a crypto-anarchy the government is not temporarily destroyed but permanently forbidden and permanently unnecessary,” states his paper.

In 2008, Dai’s philosophy was reflected in the White Paper on Bitcoin that was authored by “Satoshi Nakamoto”. This was ­transmitted over an email group for cryptographers and attracted coder Hal Finney, who went on to develop the code.

The first Bitcoin transaction was Nakamoto transferring 50 Bitcoins to Hal Finney. Once it was put out to SourceForge, other coders started to mine the hash keys by verifying the transactions through “proof-of-work”. The first 36,000 blocks were mined by Nakamoto. At 50 Bitcoins per mining, that places the total number mined by him at 18,14,400, of which around 11 lakh were never spent. That makes his net worth on December 17 about $22.5 billion, making him one of the richest men in the world, albeit a missing one (see box 2).

Crypto-currency carries the baggage of speculation on an unknown quantity and money-laundering. So does fiat ­currency, but no major bank officials are currently behind bars. Blockchain and crypto-currency are innovations at the intersection of finance and technology. How will India react? Issue a fatwa or climb out of the matrix?


The Digital Currency Revolution


  • Breakthrough in financial technology
  • Decentralised: Not controlled by any bank or corporation
  • Potential to be only true global currency
  • 24-hour global trading exchanges
  • Transaction cost for buying and selling is in decimal percentage
  • Cost of encashing same across the world
  • Can be stored offline in a thumb-drive
  • Peer-peer: no middlemen


  • Not guaranteed by any sovereign entity or nation-state
  • Not eco-friendly: annual power consumption same as 160 countries
  • Has been reduced from currency to a speculative asset
  • Elitist proposition for third world nations
  • Coins held in cloud can be attacked
  • Fast-paced technology can outdate concept
  • Unpredictable how governments will regulate it
  • Carries baggage of contraband purchase on dark web

Top Digital Currencies

  • Bitcoin (BTC) Rs 9,04,288 ($14,126)
  • Bitcoin Cash (BCH) Rs 1,79,564 ($2,805)
  • Ethereum (ETH) Rs 45,131 ($705)
  • Litecoin (LTC) Rs 17,412 ($272)
  • Ripple (XRP) Rs 75.82 ($1.18)

Prices and conversion rate on December 26, 2017

Bitcoin-Friendly Countries

  • Japan
  • United States
  • Canada
  • Scandinavian countries
  • UK
  • Australia

Milestones And Scandals


  • Paper on proof-of-work system against spam


  • e-gold used to transfer gold over internet


  • Adam Back creates Hashcash, a proof-of-work system against spam, now used for Bitcoin mining


  • Wei Dai writes a paper to start a digital, de-centralised currency


  • e-gold shut down


  • Satoshi Nakamoto’s White Paper on Bitcoin


  • First/genesis block of 50 Bitcoins created.
  • First transfer between Nakamoto and developer Hal Finney


  • From 33 paise per coin, Bitcoin overtakes dollar.
  • Satoshi Nakamoto drops off the map; untraceable till today


  • Silk Road starts operations using crypto-currency for contraband on dark web


  • First Silk Road wrapped up as founder Ross Ulbricht is arrested with millions of dirty dollars in Bitcoins


  • Suspected use of Bitcoin for money laundering by East-European mafia


  • Bitcoin forked into new version, increasing capacity


  • Globally multiple merchants start accepting Bitcoins as payment, 500+ active digital currencies


  • Interest peaks in India following demonetisation


  • Hits and crosses $1,000 mark. Power consumption of Bitcoin same as 160 countries


  • Bitcoin value jumps, kisses $19,500 and drops 25 per cent


Blockchain Technology

The Bitcoin model can be compared to a nuclear reaction sans the speed and damage. The programme, which was written in C++, generated a first or ‘genesis’ block of 50 coins. It was released to open-source software directory SourceForge with a hidden message which set the date at January 3, 2009 and contained a statement of the bank-bypassing philosophy. It is somewhat akin to the game Monopoly, where the players are first seeded with ‘cash’ from the ‘bank’. About every ten minutes another block was released, and ‘mining’ the blocks carried a reward of 50 Bitcoins (now 25).

Transactions between users are recorded in a block, which is verified by coders (‘miners’) who solve a complex maths problem on their computers and are given 25 Bitcoins for each block that they verify by generating a hash key. The verified blocks are chained (hence the name blockchain) to each other through the ‘hash’ and recorded in a public register or ledger which is not held centrally and thus, not susceptible to attacks.

The “hash” is a unique identifier, and multiple results are put to rest through a majority vote. Theoretically, that can be a chink in its armour because an attacker could gang up with multiple false results to force-verify a false transaction as a genuine one. That would throw the system out of gear.

The incremental difficulty (reset every few days) of the maths problem and the high cost of mining make it difficult for attackers to outvote honest miners. Mining requires a faster, heat-resistant (ASIC) chip working full time, which costs around Rs 3-4 lakh each, plus the high-watt power requirements. Bitcoin miners now work in pools, with the largest rigs reported to be in China, accounting for around 80 per cent of the hash rate.

The Hunt For Satoshi Nakamoto

Satoshi Nakamoto cut the umbilical cord and fell off the internet in 2011, starting a race to locate and identify him. This happened just after another Bitcoin developer, Gavin Andresen emailed Nakamoto to tell him that he had accepted an invitation from the CIA to speak about crypto-currency. Like Andresen, Hal Finney had only communicated with Nakamoto through the internet, using an anonymous email service.

There has been no conclusive proof of who Nakamoto might actually be. Conspiracy theories have even pointed at Elon Musk, without much of a reaction. There is another set that believe that Nakamoto was a combination of Dai, Finney and another cryptographer, Nick Szabo, who wrote about crypto-currency in a 1998 research paper on “bit gold”. Amongst the first lot of cypherpunks was Wikileaks founder Julian Assange.

All denied being Nakamoto, though Forbes came close to identifying Finney as the Bitcoin founder. This was based on forensic analysis that matched Finney’s writing with that of Nakamoto. A media house had also found a Dorian Satoshi Nakamoto living not far from Finney’s house in California. Two theories emerged. Either, Dorian Nakamoto was the real person or else Finney had assumed his neighbour’s name as a cryptic identity.

In the first blockchain of Bitcoin, Nakamoto had kept a line of text: “03/Jan/2009 Chancellor on brink of second bailout for banks,” referring to a news report published by The Times in the UK. Some claim that it was done to establish a time stamp of the first blockchain. Others say that it was the reason that Bitcoin was finally released to the world—central banks were simply inflating the capitalist system, the philosophy on which the crypto-currency was developed.

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