Srinagar/New Delhi, Jan 18: Security agencies have flagged a sophisticated “crypto hawala” network that is bypassing India’s financial safeguards to funnel untraceable foreign funds into Jammu and Kashmir, raising serious concerns that the money is being used to support terror activities, officials said on Sunday.
Officials said the development has put the entire security establishment on high alert, as these shadow funds are believed to be aimed at reviving separatist elements and reigniting anti-national propaganda in the Union Territory, which had largely been neutralised following sustained crackdowns by police and central agencies.
Mirroring the traditional hawala system that operates through non-banking channels, the digital version exploits the anonymity of unregulated cryptocurrency to erase transaction trails and inject illicit cash into the domestic economy. While India mandates all Virtual Digital Asset Service Providers (VDA SPs) to register with the Financial Intelligence Unit (FIU), officials said this network operates completely outside the regulatory framework.
For the 2024–25 fiscal year, only 49 crypto exchanges have registered as legal reporting entities. In response, the government recently issued stricter guidelines, including mandatory liveness detection, geographical tracking, and a requirement for users to submit a “live selfie” verified through eye-blinking or head movement. A “penny-drop” verification involving a Re 1 transaction to validate bank accounts has also been made mandatory, along with PAN and a secondary identity document such as Aadhaar, Passport or Voter ID, verified through OTP.
However, a detailed study conducted by the Jammu and Kashmir Police in coordination with central security agencies revealed that handlers based in countries such as China, Malaysia, Myanmar and Cambodia are directing individuals in the Union Territory to create private crypto wallets. These wallets are often set up using Virtual Private Networks (VPNs) to evade detection and require no Know Your Customer (KYC) verification.
Officials said the growing misuse of VPNs for crypto registration had prompted the suspension of VPN usage in the Valley, as such tools are frequently used by terrorists and separatists to avoid surveillance.
According to investigators, foreign handlers directly transfer cryptocurrency into these private wallets, placing the funds under local control without involving any regulated financial institution. The wallet holders then travel to major cities like Delhi or Mumbai, where they sell the cryptocurrency to unregulated peer-to-peer (P2P) traders for cash at negotiated rates.
“This process effectively breaks the financial trail, allowing foreign money to enter the local economy as untraceable cash,” officials said.
A crucial component of the network is the use of “mule accounts”, described as parking accounts used to layer transactions. Syndicates operate a structured commission system, with mule account holders earning between 0.8 and 1.8 per cent per transaction. These accounts often belong to ordinary individuals lured by commission and falsely assured of safety, officials said, adding that full control of their bank accounts—including net banking credentials—is handed over to the operators.
A single scammer is typically provided access to 10 to 30 mule accounts at a time, enabling large-scale movement of funds, they said.
Security officials warned that the rise of crypto hawala poses a new and complex challenge due to off-exchange trading in the “grey market,” which allows operators to evade anti-money laundering laws applicable to registered entities.
Despite FIU oversight of registered exchanges, officials said the crypto hawala model continues to undermine enforcement efforts by allowing foreign-sourced funds to enter the country without passing through formal banking channels, posing a serious threat to national security.
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