SRINAGAR: 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 and separatist activities, officials said on Sunday.
Officials said the development has put the security establishment on high alert, warning that these shadow funds are intended to revive separatist elements and reignite 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, where money is transferred through non-banking channels, the digital version exploits the anonymity of unregulated cryptocurrency to erase financial trails and inject 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 the flagged network operates completely off the regulatory grid.
During the 2024–25 financial year, only 49 crypto exchanges have registered as legal reporting entities, prompting the government to introduce stricter compliance guidelines. These include mandatory liveness detection, geographical tracking, and a requirement for users to submit a live selfie verified through software that detects eye movement or head motion.
Under the updated norms, users must also undergo a “penny-drop” verification, involving a nominal Re 1 transaction to confirm the authenticity of a bank account. In addition to a Permanent Account Number (PAN), users are required to submit a secondary identity document such as a Passport, Aadhaar, or Voter ID, verified via OTP.
A detailed study conducted by the Jammu and Kashmir Police in coordination with central security agencies identified handlers operating from countries including China, Malaysia, Myanmar, and Cambodia. These handlers reportedly instruct individuals in the Union Territory to create private crypto wallets that do not require Know Your Customer (KYC) verification and are often accessed using Virtual Private Networks (VPNs) to evade detection.
Officials said the J&K Police has suspended the use of VPNs in the Valley after a spike in such activities was detected. VPNs, they added, are frequently used by terrorists and separatists to conceal their digital footprints.
According to officials, 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 cities such as Delhi or Mumbai, where they meet unregulated peer-to-peer (P2P) traders to convert the crypto into cash at negotiated rates.
This process effectively breaks the financial trail, allowing foreign funds to enter the local economy as untraceable cash.
Officials said the network relies heavily on “mule accounts”, which serve as temporary parking accounts to layer transactions. Account holders are promised commissions ranging from 0.8 to 1.8 per cent per transaction and are assured that their role is safe. In many cases, full control of the bank account, including net banking credentials, is handed over to the operators.
A single operator is typically provided with multiple mule accounts, often ranging between 10 and 30 accounts at a time, officials said.
The rise of crypto hawala, officials warned, presents a new enforcement challenge as it involves off-exchange trading in the grey market, allowing perpetrators to evade anti-money laundering regulations applicable to registered entities.
Despite FIU oversight of registered exchanges, officials said the growing use of crypto hawala enables foreign-sourced funds to enter the local economy without passing through formal banking channels, posing a serious threat to national security.
