The New Face of Underground Banking: Crypto Meets Hawala
India's traditional hawala system has undergone a dramatic digital transformation, embracing cryptocurrency to create a hybrid network that offers unprecedented anonymity and efficiency for covert financial transactions. This emerging crypto-hawala system is attracting substantial illicit fund flows that regulatory authorities are struggling to monitor and control.
Recent investigations have uncovered multiple high-value cases demonstrating the scale of this new threat. A Ghaziabad trader successfully channeled crime proceeds amounting to Rs 1.3 crore to a Dubai-based cryptocurrency wallet in 2024. In another significant case, investigators charged a Delhi businessman with moving over Rs 4,000 crore internationally using fabricated invoices and shell companies. Enforcement agencies have recorded more than Rs 1,000 crore of cyber fraud proceeds exiting India through crypto wallets this year alone.
How Crypto Adds Multiple Blindfolds to Traditional Hawala
The integration of cryptocurrency has fundamentally altered the hawala landscape by adding multiple layers of anonymity to what was already a trust-based network of faceless individuals operating outside formal banking channels. According to a senior compliance officer with a leading Indian crypto platform, "The blindfold is now multi-layered. A traditional hawala deal typically involves only two jurisdictions and no more than four layers between sender and receiver. With cryptocurrency, one can add potentially infinite layers and jurisdictions to fund flow, protected by the inherent pseudonymity of blockchain transactions."
This grey regulatory zone cutting across international borders has significantly enhanced both the anonymity and efficiency of underground money transfers. The technology enables transactions that are virtually impossible to trace through conventional monitoring systems.
Key Sectors and Methods Exploiting Crypto-Hawala
The hybrid crypto-hawala system has found particular traction in several key sectors. Real estate, cricket and non-cricket betting, gold trading, and forex trading have emerged as primary areas utilizing these methods. While the system is also used for general remittance purposes, the major concerns remain terror funding, narcotics financing, and fintech frauds.
A private recovery consultant who helps retrieve funds informally when deals go wrong explained, "While terror or narcotics funding and fintech frauds are key red flags, the rest is primarily about black money and FEMA violations."
The scale of money moving through hawala channels to and from India remains difficult to estimate accurately. During the 2023-24 financial year, the Reserve Bank of India reported $118.7 billion as total remittance to India and an outflow of $31.73 billion under the Liberalised Remittance Scheme (LRS). Various assessments indicate that funds moving through hawala channels constitute between 20-40% of India's total remittance, with a substantial portion now utilizing cryptocurrency routes.
The Technical Maze: How Crypto-Hawala Operates
The system operates through a complex combination of shell bank accounts, Over-The-Counter (OTC) or Peer-To-Peer (P2P) transfers, self-custody wallets, and non-compliant cryptocurrency exchanges. Unlike formal platforms that comply with anti-money laundering regulations, OTC or P2P transactions typically involve only two individuals and remain below enforcement radar.
Self-custody wallets, which are not hosted by any crypto exchange, provide additional anonymity since owners control them with private keys. This ensures complete privacy as long as the wallet doesn't interact with regular crypto platforms that require enhanced KYC diligence for transactions with self-custody wallets.
To further complicate tracking, sophisticated tools like "tumbler" or "mixer" wallets pool and mix cryptocurrency coins from multiple users before transferring equivalent amounts to new wallets, effectively obscuring fund sources. Additionally, "bridge" and "swap" methods enable switching assets between different blockchains, such as Bitcoin and Solana, to obfuscate money trails completely.
The Transaction Process: From Rupees to Crypto and Back
The crypto-hawala process typically begins with remitters organizing funds in India, usually through multiple dummy accounts, which are then transferred to shell bank accounts belonging to unknown individuals. Unified Payments Interface (UPI) QR codes have emerged as the most popular transfer mode for these transactions.
According to a bank official who has assisted multiple investigative agencies in probing money laundering cases, such mule accounts are often maintained for short periods due to increasing bank vigilance about structured transfers under Rs 50,000, frequent fund pooling, or repeated deposits followed by immediate digital outward transfers.
Once the rupee deposits are made, remitters receive USDT or stablecoins at pre-negotiated rates in their overseas crypto wallets, typically in locations like Dubai. The USDT can then be immediately exchanged for local currency through crypto ATMs or in cash at compliant OTC desks. Cash withdrawal options are better suited for non-custody wallet users dealing with smaller remittances.
The hawala money trail doesn't necessarily stop at the initial destination. As the compliance officer noted, "It can keep travelling virtually anywhere through one or more rogue, non-compliant crypto platforms, to be encashed at preferred times and locations. Many exchanges available to Indian users aren't registered with the Financial Intelligence Unit."
Regulatory Response and Enforcement Challenges
Indian authorities have begun taking action against this emerging threat. Last month, FIU-India issued notices to 25 offshore Virtual Digital Asset service providers for violating provisions of the Prevention of Money Laundering Act (PMLA), 2002. The list includes platforms such as Huione from Cambodia, BC.game from Curacao, LBank and BingX from British Virgin Islands, BitMex and Probit Global from Seychelles, among others.
While some foreign exchanges like OKX have exited the Indian market and others including Binance and Coinbase have registered with FIU, users still have multiple secrecy options available through remaining platforms.
Enforcement Directorate sources confirmed they have cracked several hawala cases involving cryptocurrency. The agency obtained crucial information from the UAE through FIU-IND via the Ottawa-based EGMONT Group of FIUs, in addition to relying on the Common Reporting Standard system that enables automatic exchange of financial and tax information between countries.
When Deals Go Wrong: The Risks of Underground Transactions
The crypto-hawala system isn't without risks for participants. When deals go wrong, victims have limited recourse options. According to the recovery consultant, such victims are typically high-net-worth individuals who avoid approaching law enforcement agencies for "obvious reasons" and instead rely on private negotiators for techno-legal assistance.
"Hawala is based on trust and new players can be unreliable. One broker disappeared after receiving rupee deposits. In another case, USDTs vanished from the wallet before realization. But approaching police would attract charges under PMLA," the consultant revealed, highlighting the precarious position of participants in these illegal transactions.
As cryptocurrency continues to evolve and regulatory frameworks struggle to keep pace, the hybrid crypto-hawala system represents a significant challenge to India's financial security and regulatory enforcement capabilities. The combination of traditional trust networks with cutting-edge digital technology has created a formidable underground financial system that demands sophisticated countermeasures from authorities.
