I-T Probe Flags Crypto Asset Misuse by Exchanges in India
The Income Tax probe exposes crypto asset misuse by exchanges that deploy client-deposited tokens without disclosure or earnings. Without specific law to curb such practices, user safety remains at risk.
I-T Department Uncovers Risky Practices
The Income Tax Department has revealed serious concerns over crypto asset misuse by Indian cryptocurrency exchanges. In its latest investigation, officials found that exchanges have been deploying users’ deposited assets—such as tokens—for internal purposes without consent or profit-sharing.
Exchanges Profiting Without Disclosure
Under vague terms and conditions, many platforms reserve the right to use client assets for lending, staking, or liquidity operations. Investors retain the right to sell, but they often lack clarity on whether or how their assets are being used—or if they earn any returns from that usage. This practice amounts to crypto asset misuse, warn experts familiar with the probe.
They cite global collapses such as FTX, where unmanaged client funds resulted in significant investor losses. By failing to separate user and proprietary assets, exchanges expose clients to heightened risk.
Tax Evasion Adds to Regulatory Concerns
The probe also uncovered widespread tax evasion among cryptocurrency traders. Several individuals failed to pay dues under Section 115BBH of the Income Tax Act. Investigators pointed to automated trading bots, primarily in Tether (USDT), that executed arbitrage trades across platforms—but evaded taxation on the gains.
An official emphasized the gravity of the situation:
“While individuals evade taxes on their gains, exchanges also misuse client assets without transparency or protection.”
This adds another layer of concern on top of crypto asset misuse.
Regulation Gap Leaves Enforcement Powerless
Despite uncovering these violations, enforcement has reached a standstill. Indian law currently lacks specific provisions that prevent exchanges from using client assets without permission. As a result, regulatory bodies find themselves unable to take legal action against exchanges engaging in crypto asset misuse.
Officials urge the creation of robust regulations that mandate asset segregation, user consent, and profit-sharing to prevent misuse and restore investor trust.
Investor Trust Hangs in the Balance
This investigation underscores how fragile trust in the Indian crypto ecosystem has become. Users expect their assets to remain secure and undisclosed in their use. When exchanges operate without transparency, investor confidence erodes rapidly.
To restore credibility, policymakers must act decisively. Reforms should include:
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Clear guidelines prohibiting the reuse of user assets
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Mandatory disclosure when assets are deployed
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Legal frameworks enabling enforcement when misuse occurs
Conclusion
The Income Tax Department’s probe spotlights the risks tied to crypto asset misuse in Indian exchanges. Without immediate regulatory intervention, such practices not only open the door to investor losses but also weaken the potential of the burgeoning crypto industry in India.
