Harmonising Crypto Regulation: Combating Financial Crime in a Borderless Digital Economy

Introduction

Cryptocurrencies and digital assets have fundamentally transformed the global financial landscape by introducing decentralised, borderless, and technologically driven systems of value transfer. Their ability to facilitate cross-border investment and near-instant payments has attracted retail investors, corporations, and, increasingly, sovereign interest.

However, the very characteristics that make cryptocurrencies attractive—decentralisation, pseudonymity, and the absence of territorial boundaries—also render them vulnerable to misuse for financial crime.

In recent years, criminal actors have increasingly leveraged virtual asset ecosystems including centralised exchanges, decentralised finance (DeFi) protocols, mixers, and privacy-enhancing tokens to launder illicit proceeds, perpetrate fraud, and evade sanctions. This misuse is exacerbated not by a complete absence of regulation, but by regulatory fragmentation and uneven enforcement across jurisdictions, enabling actors to exploit gaps between legal systems.

This article examines the rise and transnational nature of crypto-enabled financial crime, the challenges posed by fragmented regulatory frameworks, and India’s evolving regulatory posture. It further evaluates the global push toward harmonised standards and argues that coordinated international regulation, structured information-sharing mechanisms, and aligned enforcement strategies are essential to mitigate regulatory arbitrage and safeguard the integrity of the global financial system.

The Rise of Crypto Crime and Its Global Reach

Since the launch of Bitcoin in 2009, digital assets have evolved from experimental instruments into widely recognised financial assets. Regulatory authorities worldwide have increasingly engaged with the sector, though approaches remain uneven.

While some jurisdictions have permitted or recognised the use of cryptocurrencies in payments or investment contexts, very few treat them as legal tender (with limited and evolving exceptions). This distinction is important for legal accuracy.

The growth of the ecosystem has expanded financial inclusion and reduced transaction costs, but it has also created new avenues for illicit activity. Crypto-assets are frequently associated with:

• Money laundering
• Ransomware attacks
• Dark web marketplace transactions
• Investment and romance (“pig-butchering”) scams

According to widely cited industry reports (e.g., Chainalysis¹), illicit crypto activity continues to represent a small proportion of total transaction volume, but remains significant in absolute terms, with billions of dollars linked to scams and fraud annually.

A defining feature of crypto-enabled crime is its transnational character. Blockchain transactions are not confined by geography, complicating traditional jurisdictional frameworks. For instance, a perpetrator operating in one jurisdiction may target victims globally without any physical nexus to the victim’s location, creating substantial enforcement challenges.

The activities of groups such as the Lazarus Group² illustrate this complexity. These actors have been linked to large-scale crypto thefts and the use of laundering tools such as mixers (e.g., Tornado Cash). It is important to note, for accuracy, that:

• The U.S. Department of the Treasury (OFAC) sanctioned Tornado Cash in 2022 for facilitating laundering, including funds linked to Lazarus Group activity
• The figure of $455 million refers specifically to funds attributed to Lazarus-linked laundering through the protocol, not total laundering volume through Tornado Cash

Such cases highlight the regulatory challenges posed by decentralised and non-custodial platforms.

Fragmented Regulation and Regulatory Arbitrage

Despite the inherently global nature of crypto markets, regulatory responses remain jurisdiction-specific and highly fragmented.

Jurisdictional Approaches

• Singapore regulates crypto intermediaries under the Payment Services Act, with licensing requirements
• Dubai (VARA framework) has positioned itself as a crypto-friendly jurisdiction with dedicated regulatory oversight
• China has imposed a comprehensive ban on cryptocurrency transactions and mining activities

Classification Challenges in Major Economies

• In the United States, regulatory fragmentation persists due to overlapping jurisdiction of agencies such as the SEC, CFTC, and banking regulators
• The European Union, by contrast, has introduced the Markets in Crypto-Assets (MiCA) Regulation, establishing a harmonised framework across Member States (phased implementation beginning 2024–2025)³

The Financial Action Task Force (FATF)⁴ has repeatedly noted that many jurisdictions lack fully implemented or consistent frameworks for virtual assets and Virtual Asset Service Providers (VASPs). This creates opportunities for regulatory arbitrage, where actors relocate operations to jurisdictions with weaker AML/CFT enforcement.

Importantly, the issue is not simply absence of law, but inconsistent implementation and supervisory intensity.

Impact on Legitimate Actors

This fragmentation also affects legitimate actors:

• Financial institutions often adopt de-risking strategies, limiting exposure to crypto businesses
• Cross-border compliance becomes complex where AML/KYC obligations differ significantly between jurisdictions

India’s Crypto Challenges: Local Realities, Global Linkages

India exemplifies the tension between domestic regulatory caution and global crypto integration. Contrary to common perception, India does not operate in a complete regulatory vacuum.

Current Regulatory Framework

• While there is no comprehensive standalone crypto statute, virtual digital assets (VDAs) are taxed at 30% on gains (Income Tax Act amendments, 2022) and subject to 1% TDS on transfers
• Since March 2023, VASPs have been brought within the ambit of the Prevention of Money Laundering Act, 2002 (PMLA), requiring KYC compliance, suspicious transaction reporting, and registration with the Financial Intelligence Unit (FIU-IND)

Earlier legislative proposals (2019 and 2021 draft bills) contemplated restrictive approaches, including potential bans, but were not enacted.

Enforcement Actions

Enforcement actions in India have included:

• Blocking access to certain offshore exchanges for non-compliance with AML obligations
• Issuing notices to foreign platforms operating without registration

However, the statement that “25 foreign exchanges were shut down” should be qualified—in most cases, authorities have restricted access or issued compliance directives, rather than formally “shutting down” entities globally.

International Engagement

• India, during its G20 Presidency (2023), actively advocated for global coordination on crypto regulation
• India is a member of the FATF and has committed to international standards
• India has agreed to implement the OECD’s Crypto-Asset Reporting Framework (CARF), which facilitates automatic exchange of tax-relevant crypto information

This reflects a broader recognition that domestic regulation alone is insufficient in a borderless ecosystem.

Costs of Regulatory Fragmentation

Regulatory fragmentation imposes significant legal and economic costs:

1. Facilitation of Illicit Activity: Criminal actors exploit jurisdictional gaps to route funds across multiple networks, complicating detection and enforcement.
2. Enforcement Limitations: Traditional tools such as Mutual Legal Assistance Treaties (MLATs) are often too slow for blockchain-based transactions, which may be executed and obfuscated rapidly.
3. Compliance Uncertainty: Legitimate businesses face inconsistent regulatory expectations, increasing costs and discouraging participation by institutional actors.

This results in a persistent asymmetry, where illicit actors benefit from speed and flexibility, while regulators remain constrained by jurisdictional boundaries.

Global Standard-Setting and Harmonisation Efforts

Recognising systemic risks, international organisations are advancing coordinated frameworks:

FATF Standards

• Extension of the 40 Recommendations to virtual assets and VASPs
• Introduction of the “Travel Rule”, requiring transmission of originator and beneficiary information
• Ongoing concern regarding inconsistent global implementation

Financial Stability Board (FSB)

• 2023 Global Regulatory Framework based on the principle: “Same activity, same risk, same regulation”
• Focus on aligning crypto regulation with traditional financial risk frameworks, including stablecoins

OECD Crypto-Asset Reporting Framework (CARF)

• Enables automatic exchange of crypto transaction data between jurisdictions⁵
• Expected phased implementation by participating countries through the latter half of the decade
• Primarily tax-focused, but with broader enforcement utility

European Union – MiCA Regulation

• Establishes a single licensing regime, prudential and conduct requirements, consumer protection safeguards, and stablecoin reserve obligations
• Includes passporting rights, reducing intra-EU regulatory arbitrage

Challenges to Global Harmonisation

Despite progress, several structural challenges persist:

• Sovereignty concerns limit willingness to adopt externally driven standards
• Technological evolution outpaces regulatory frameworks
• Privacy considerations create tension with surveillance-based compliance tools
• Capacity constraints affect implementation in developing jurisdictions

Nevertheless, international law has historically addressed cross-border challenges through cooperative frameworks. FATF and FSB advocate risk-based, proportionate regulation, balancing innovation with oversight.

Enforcement incentives such as FATF grey-listing play a critical role in driving compliance.

Conclusion

Crypto-enabled financial crime has evolved into a sophisticated, transnational ecosystem, leveraging regulatory inconsistencies to facilitate illicit activity ranging from large-scale fraud to state-linked cyber operations.

Divergent national approaches—ranging from prohibition to permissive licensing—have, in many cases, exacerbated regulatory gaps rather than closing them. Fragmentation undermines enforcement, increases compliance burdens, and creates systemic vulnerabilities.

There is an urgent need for greater international coordination, including:

• Harmonised AML/CFT standards
• Interoperable KYC and reporting frameworks
• Real-time or near real-time information sharing
• Coordinated enforcement strategies

Alignment with global frameworks such as FATF standards, OECD CARF, FSB principles, and regional models like MiCA will be essential in addressing regulatory arbitrage.

A balanced approach—preserving innovation while ensuring accountability—will be critical to maintaining trust and integrity in the evolving digital financial ecosystem.