Are Indian Investors Safe If Government Bans Cryptos? Here're Possible Risks And Scenarios

It will be a huge blow to crypto investors in India if the government enforces a sudden ban on crypto trading, although such an abrupt move is doubtful
Amid Reports Of Crypto Ban, Exchanges Ask Investors To Avoid Panic Selling
Amid Reports Of Crypto Ban, Exchanges Ask Investors To Avoid Panic Selling

The cryptocurrency market enjoyed a bull run last year, driven by the rapid emergence of smart contracts and NFTs and the hype surrounding its jaw-dropping returns that drew scores of new investors to the world of digital assets.

However, amid a topsy-turvy crypto market this year, governments around the world have begun tightening their grip on the industry, fearing a major meltdown that could leave investors high and dry and vulnerable to frauds and scams.

A report published by the crypto exchange Gemini showed that 54 per cent of Indian investors joined the crypto bandwagon in 2021, and 40 per cent of Indian investors plan to purchase cryptos as a hedge against inflation. 

Although cryptos still seemed a lucrative investment, the market has fallen sharply this year, with exchanges like Coinbase, Celsius, and Vauld facing bankruptcy and legal scrutiny even as they halt withdrawals to minimize losses. 

What Happens If The Government Bans cryptocurrency?

P.M. Mishra, the founder of Finlaw, a law consultancy firm, said the exchange of funds between banks and cryptocurrency exchanges would cease if the government outlaws cryptocurrencies. Mishra added that "you won't be able to purchase cryptocurrency using local cash" and "you won't be able to cash them in." 

However, he believes the government wouldn't take a hasty decision. Such decisions can cause panic among investors. 

Mishra said it is important for the government to start securing investors' funds, and it might be the right time to do it. 

The government could create an expert committee comprising industry professionals and enforcement agencies to monitor and audit the activities of crypto exchanges. 

He said that investors should also be given time to reach out to the banks to liquidate their crypto holdings and pay the requisite tax to the government.

Gaurav Mehta, the founder of crypto tax and compliance company, Catax, said, "Finance Ministry had said earlier that if this scenario occurs, then the investor would be given appropriate time to exit their investment."  

He added, "when the market is all selling, I'm not sure who would be buying, because whenever any market sells, someone ought to be buying, exchange themselves serve as a platform that facilitates buying and trading."

How To Recover Funds In Case of Fraud?

According to the US Federal Trade Commission (FTC), some $575 million worth of cryptos has been stolen on the pretext of bogus investment opportunities since 2021. 

The FTC report further notes that nearly half of the people who reported losing cryptos to a scam were lured by ads or social media messages posted by scamsters. 

In Q1 2022 alone, $329 million worth of cryptos was stolen. It shows frauds in the crypto space have been rapidly rising.

So, what happens if an exchange shuts down and the owners are untraceable as the market is unregulated? Is the investors' money safe?

Mehta explains, "Whenever someone is siphoning my funds for whatever reasons - if there is a scam - then chit funds cases are filed. So there exists a proper framework for anybody to protect investments." 

He noted that it is a fraud case when the crypto platforms shut down, and owners run away with investors' money. 

It is possible that investors would never get their money back, and if they're lucky enough, they might get it after a long legal battle, he said. 

"We have a lot of illegitimate crypto businesses springing up in our country. Therefore, investors need to know what they are investing in. Crypto platforms adhering to KYC norms are legitimate, and there's no way they can run away with your money," Mehta added. 

He also advises: "The government needs to be more diligent and has to come up with regulations that can curb the rampant crypto crimes."

However, what if the exchange is outside India, such as Vauld? Can Indian investors get back their money? 

According to Mehta, there is no legal remedy as the entity is based outside the country, and the Indian laws will not be applicable there. 

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