Cryptocurrency and governance risk in emerging markets: The Indian experience

Navigating the Storm: Why Governance is the Anchor for Crypto in Emerging Markets

The promise of cryptocurrency often shines brightest in emerging markets, offering unparalleled financial innovation. Yet, what happens when this promise is overshadowed by the dark clouds of fraud and cyberattacks? India's crypto landscape offers a critical case study, revealing the precarious balance between rapid adoption and the urgent need for robust governance. High-profile incidents, from the $240 million Voscrow Ponzi scheme and the ₹200 crore CoinZx fraud to the sophisticated $234 million WazirX hack, have not just cost investors dearly but have forced a fundamental re-evaluation of trust in digital assets.

The Shifting Sands of Investor Sentiment

Once driven by speculative zeal, the Indian crypto market, home to over 15 million active traders, now demands accountability. The sting of scams that exploited promises of unrealistic returns has profoundly altered investor preferences. Increasingly, individuals are gravitating towards assets with verifiable governance and transparency, such as Bitcoin and Ethereum. This shift isn't isolated; globally, a staggering 78% of institutional investors now insist on crypto assets underpinned by robust compliance frameworks. This collective caution is a direct response to the escalating financial toll, with crypto thefts reaching $2.17 billion in just the first half of 2025 alone.

Retail Reactions and Lingering Doubts

While the market sees the re-entry of major exchanges and an optimistic Fear and Greed Index, the psychological scars of past frauds run deep. Government measures, including a 30% capital gains tax and 1% TDS, create financial friction, yet the underlying need for security remains paramount. Cases like the Bitcoin kidnapping incident, involving 176 BTC and ₹32 crore extorted through coercion, underscore why risk aversion is a rational response for many.

India's Regulatory Maze: Progress Amidst Persistent Gaps

India’s response has been a mixed bag of progress and lingering challenges. The 2025 Crypto Framework, a direct consequence of past crises, aims to align with global standards through OECD-aligned reporting, AI-driven tax recovery, and a significant capital gains tax. These are vital steps towards legitimacy and combating illicit financial flows.

Systemic Vulnerabilities Persist

However, the journey is far from complete. The delayed implementation of critical legislation like the proposed COINS Act and the absence of a dedicated regulator, such as the envisioned Crypto Assets Regulatory Authority (CARA), leave significant systemic gaps. Fragmented oversight, with overlapping mandates across the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and the Ministry of Finance, creates jurisdictional loopholes that fraudsters readily exploit. The WazirX hack and other Ponzi schemes painfully highlight the urgent need for institutional safeguards, including mandatory proof-of-reserves and comprehensive insurance mechanisms.

Charting a Secure Course Forward

For emerging markets like India, the path ahead requires a delicate, yet firm, hand. Balancing the undeniable potential of blockchain innovation with the imperative of mitigating governance risks is key. The adoption of the OECD’s Crypto-Asset Reporting Framework (CARF) and the development of a Central Bank Digital Currency (CBDC) are positive indicators of progress. Yet, the challenge intensifies when regulating decentralized platforms and privacy coins, demanding adaptable and forward-thinking policies.

Actionable Steps for Investors and Regulators

Investors must become their own first line of defense: prioritize rigorous due diligence, diversify portfolios beyond single assets, and remain fully aware of their tax obligations. For regulators, the lesson is clear: strict enforcement must be harmonized with technological flexibility. The global fallout from events like the FTX collapse serves as a stark reminder that robust frameworks are not impediments to innovation, but rather its essential foundation.

India’s experience unequivocally demonstrates that in the evolving crypto era, sound governance isn't an afterthought—it's the central determinant of market stability and investor confidence. As the digital asset sector matures, the synergy between informed investor caution and crystal-clear regulatory clarity will undeniably shape the future of crypto in emerging economies.