Security agencies have raised concerns about a sophisticated "crypto hawala" network allegedly being used to funnel untraceable foreign funds into Jammu and Kashmir, potentially to support terror activities. This digital "hawala" system mirrors the traditional one, but instead of using non-banking channels, it leverages the anonymity of unregulated cryptocurrencies to erase the financial trail.

The security establishment is on high alert, with officials suggesting these shadow funds aim to revive separatist elements and reignite "anti-national propaganda" in the region, which had been largely neutralized by crackdowns from police and central agencies.

How the "Crypto Hawala" Network Works

This network operates off the grid, using the anonymity of cryptocurrency to inject cash into the domestic economy while bypassing financial safeguards. Investigations by the Jammu and Kashmir Police, in coordination with central security agencies, have revealed that handlers in countries like China, Malaysia, Myanmar, and Cambodia are directing individuals in the Union Territory to create private cryptocurrency wallets.

These wallets are often set up using Virtual Private Networks (VPNs) to evade detection and typically do not require Know Your Customer (KYC) or identity verification. Jammu and Kashmir Police had previously suspended the use of VPN services in the region due to indications that they were being used to facilitate crypto wallet registrations. Foreign handlers then transfer cryptocurrency directly into these wallets.

Recent Regulatory Measures

The Indian government has been actively updating regulations for cryptocurrency service providers to combat fraud, money laundering, and terrorism financing. The Financial Intelligence Unit (FIU-IND) has issued new guidelines requiring all crypto entities serving Indian residents, including those operating offshore, to register and disclose specific details. Registered entities must implement strict client due diligence, including collecting identity documents, bank account details, and even geolocation data. These measures are deemed necessary due to the potential misuse of virtual digital assets by illicit actors. The rules also mandate continuous transaction monitoring and reporting of suspicious activities.

These updated regulations align with those for traditional financial institutions and reflect India's response to terrorism threats. By extending these requirements to offshore entities, India aims to ensure a competitive landscape for local businesses while curbing illegal activities.

Past Incidents and Current Concerns

In July 2025, the State Investigation Agency (SIA) conducted raids in Jammu, Doda, and Handwara in connection with a terror funding case involving cryptocurrency. The searches aimed to collect evidence to unravel a conspiracy involving cross-border funding through cryptocurrency to fuel terrorism and destabilize peace in Jammu and Kashmir. The operation also aimed to identify individuals inciting youth against the Union of India, thereby threatening national security.

The increasing use of cryptocurrency for terror funding raises concerns about political instability and violence in the region. Without cryptocurrency regulations, Indian law enforcement authorities may struggle to monitor financial flows through cryptocurrency platforms.