Unveiling the Dark Side of Cryptocurrency: How a New 'Crypto Hawala' Network Threatens National Security

A new 'crypto hawala' network is raising alarms among security agencies in India, particularly in Jammu and Kashmir. This sophisticated system bypasses financial regulations, allowing untraceable foreign funds to flow into the region, potentially supporting terrorist activities. With the anonymity of cryptocurrencies, these funds are injected into the local economy without leaving a trace. Investigations reveal that individuals in foreign countries are directing locals to create private crypto wallets, often using VPNs to avoid detection. As authorities grapple with this emerging threat, the implications for national security are profound. Discover how this digital hawala system operates and the challenges it poses to law enforcement.

By Narendra Chaudhary Jan 18, 2026, 16:37 IST

Emerging Threats in Jammu and Kashmir

Srinagar/New Delhi: Security agencies have raised alarms about a sophisticated 'crypto hawala' network that is circumventing India's financial regulations to channel untraceable foreign funds into Jammu and Kashmir. Officials expressed serious concerns that these funds may be utilized to bolster terrorist activities.

This situation has prompted heightened vigilance among security forces, who fear that these illicit funds could empower separatist factions and revive anti-national sentiments in the Union Territory, which had been largely subdued by recent law enforcement actions.

Similar to the traditional hawala system, which operates outside banking channels, this digital variant exploits the anonymity of unregulated cryptocurrencies to obscure financial trails and inject cash into the local economy.

While India mandates that all Virtual Digital Asset Service Providers (VDA SPs) register with the Financial Intelligence Unit (FIU), this clandestine network operates entirely off the radar.

For the fiscal year 2024-25, only 49 exchanges have registered as legal reporting entities, prompting the government to introduce new guidelines that include mandatory liveness detection and geographical tracking. Users are now required to take a 'live selfie' using software that verifies their presence through eye movements or head gestures.

Additionally, the 'penny-drop' method, which involves processing a minimal Re 1 transaction to confirm the activity of a bank account, is now a requirement. Users must also provide a Permanent Account Number (PAN) along with a secondary ID, such as a Passport, Aadhaar, or Voter ID, verified via OTP.

A comprehensive investigation by the Jammu and Kashmir Police, in collaboration with central security agencies, has revealed that individuals in countries like China, Malaysia, Myanmar, and Cambodia are instructing residents in the Union Territory to establish private crypto wallets. These wallets are often created using Virtual Private Networks (VPNs) to evade detection and do not require Know Your Customer (KYC) or identity verification.

The Jammu and Kashmir Police have already banned the use of VPNs in the valley, as the registration of crypto wallets has surged in recent times. VPNs serve as a useful tool for both terrorists and separatists to remain undetected.

Officials noted that foreign handlers send cryptocurrency directly to these private wallets, placing the funds under local control without involving any regulated financial institutions. The wallet holders then travel to major cities like Delhi or Mumbai to engage with unregulated peer-to-peer (P2P) traders, converting crypto into cash at negotiated rates.

This process effectively 'breaks the financial trail,' allowing foreign money to enter the local economy as untraceable cash, according to officials.

Central to this network are 'mule accounts,' which serve as temporary parking accounts for transactions. To sustain the operation, syndicates have established a structured commission system, where account holders earn between 0.8% to 1.8% per transaction.

These mule accounts typically belong to ordinary individuals lured by the promise of commissions, who are assured that their involvement is safe and merely temporary. However, they relinquish control of their bank accounts, including net banking usernames and passwords, to the scammers.

A single scammer may manage multiple mule accounts, often ranging from ten to thirty at any given time, officials reported.

The emergence of crypto hawala presents a new challenge in off-exchange trading, allowing these traders to operate in the 'grey market' and evade anti-money laundering regulations that apply to registered entities.

Officials caution that the 'crypto-hawala' method is specifically designed to bypass formal banking systems and avoid leaving any financial traces. By transferring funds from a digital private wallet to a physical cash transaction in a different city, the 'financial trail' is effectively severed.

Despite the FIU's efforts to regulate 49 major exchanges, the rise of 'crypto hawala' poses a significant challenge for enforcement agencies, as it enables foreign-sourced funds to infiltrate the local economy without passing through regulated financial institutions.