INTRODUCTION:
Both cryptocurrency fraud and traditional white collar fraud rely on deception involving money; however, they differ significantly from one another in terms of the use of new technologies and regulatory difficulties. White-collar crime was defined by Edwin Sutherland in 1949 as crime committed by persons of higher social status and respectability in the course of their occupations[1]. The primary difference is that with respect to traditional white-collar frauds, the perpetrators are indicted under established legal systems, whereas cryptocurrency frauds are perpetrated using anonymous digital assets, creating unique difficulties for law enforcement. When comparing traditional white-collar frauds and cryptocurrency frauds legally, both UK and US case law are used to provide a comprehensive understanding of these fraudulent actions, their similarities regarding intent, differences regarding methods of perpetration and regulation, and how courts have responded thus far, with the need for updated laws regarding the internet and digital currencies.
THE CRYPTOCURRENCY SCAMS VERSUS TRADITIONAL WHITE COLLAR CRIME DOCTRINE
The comparison between ‘traditional white-collar crime’ and ‘cryptocurrency scams’ creates a framework for analysing both fraud schemes for illicit profit and treating them as financial misconduct, despite their differences in technology. Traditional crimes use physical assets as the medium of exchange; however, cryptocurrency scams employ blockchain technology[2]. The ‘theory of cryptocurrency fraud’ suggests that, similar to traditional white-collar crime, the principles of fraud can also apply to cryptocurrency; thus, cryptocurrency is seen as part of the continum of traditional white-collar crimes[3]. The doctrine emphasises similarities, including misrepresentation and harm, between cryptocurrency and regular white-collar crimes; therefore, courts can apply the same laws to both and can consider cryptocurrency tokens to be securities as defined by the Howey Test[4]. In contrast to the isolated nature of traditional crimes, cryptocurrency scams often involve extensive international networks, which require a fraud doctrine that links the two types of fraud.
WHEN ASSESSING THE LEGAL EFFICACY OF CRYPTOCURRENCY SCAMS
Factors involved in evaluating the distinction between the crypto scams and traditional white-collar crimes, ensuring appropriate legal classifications[5]:
- The Scheme’s Technological Use: Unlike traditional crime, which relies on material possessions and banking systems, bitcoin and, incidentally, other cryptocurrencies/good wallet use technology allowing criminals anonymity.
- Geographic Application: The ability for criminals to transfer money to other countries on the spot creates even more complexity in terms of jurisdictional enforcement of cybercrime than do traditional crimes that only occur within a single country.
- Adequacy of Current Legislation: The IT Act 2006 [6]does comply with basic requirements of law; however, depending on which country’s laws apply to a given cryptocurrency, certain additional State or Federal regulation (in the case of the USA via the SEC) will likely be needed.
- Victim Loss versus Victim Recovery: For traditional crimes, recovering from either type of offender is typically done by tracking down the bank account of the offender and freezing that account to recover those assets. However, due to fluctuations in price in relation to traditional fiat currencies, it becomes very difficult for victims of Cryptocurrency Crimes to recover their valuables.
JUDICIAL RESPONSE
Indian courts’ treatment of crypto scams and traditional white collar crimes continues to evolve through the application of established legal principles to new technologies, including continued reference to traditional fraud for referencing crypto’s unique challenges. The Supreme Court of India’s application of the principles relevant to traditional white-collar crimes has resulted in a significant number of judicial decisions addressing crypto-related crime. The most significant example of this is the Supreme Court’s ruling in Chloro Controls India (P) Ltd v Severn Trent Water Purification Inc[7], which established a method for binding non-signatories to arbitration agreements in the context of corporate disputes under Section 45 of the Arbitration and Conciliation Act of 1996[8]. The Supreme Court has extended this method to crypto crimes, whereby the courts have been able to consolidate and treat similar claims against operators of affiliated crypto-related businesses as a single defendant for the purpose of determining liability. This mirrors the traditional approach to embezzlement under Section 318 of the Bharatiya Nyaya Sanhita[9].
The Supreme Court in Cox and Kings Ltd v SAP India (P) Ltd[10], noted that digital disputes involve complex jurisdictional issues which require clarification from a larger bench on how arbitration laws and fraud laws apply to advanced technology, such as cryptocurrencies. The Court also expressed concern that cryptocurrency frauds are not easily susceptible to attribution, as they often appear anonymous and can be transferred across borders very easily, unlike traditional localised white-collar crimes, such as the Bank Fraud Act, Section 316 BNS for Cheating, which can be attributed directly to one individual’s actions. In line with this, during the prosecution of the Bit Connect scam[11]Indian courts relied on the provisions of the Bank Fraud Act Section 316 BNS. For cheating to prosecute this so-called ‘Ponzi-type’ scheme, attempting to handle it in the same manner as traditional financial fraud. In this regard, the Indian courts expressed difficulties in recovering assets because, once written on the blockchain, the transactions are irretrievable. The Supreme Court highlighted that dishonesty, as set out in R v Ghosh [12](which has also been adopted in Indian law), is relevant in the determination of both conventional scams and also in crypto scams. In both instances, the Court emphasised that to secure a conviction for fraud, there must be evidence proving that the individual acted with dishonest intent.
The Supreme Court of India in P. Mohanraj v. Shah Brothers Ispat Pvt Ltd [13]was the first to apply the doctrine of piercing the corporate veil to crypto-related entities. It held that promoters of crypto scams can be held accountable for their actions in the same way that promoters of traditional insider trading and embezzlement can be held accountable.
Indian regulatory authorities have worked in collaboration with international authorities to freeze assets and prosecute those involved in cryptocurrency fraud, including One Coin fraud[14], under the Prevention of Money Laundering Act 2002[15]. In effect, regulatory authorities consider crypto laundering as an extension of traditional money laundering under the category of white-collar crime.
As illustrated by the Delhi High Court case, Internet and Mobile Association of India v. Reserve Bank of India[16], while the Delhi High Court held that the Reserve Bank of India’s ban on cryptocurrency was unconstitutional in that it inhibited the development of cryptocurrency innovation, it did uphold the authority and power of the Reserve Bank of India as a regulatory authority to prevent scams and frauds associated with cryptocurrency to the same degree as the traditional means of protection against fraud.
Indian courts generally support a pragmatic approach to extending equitable estoppel or implied consent to hold cryptoperpetrators accountable through arbitration clauses, as seen in several arbitration decisions made under the Arbitration Act[17]. Critics have raised concerns that this creates the potential for an ambiguous definition of consent in the context of electronically entered digital contracts. Supporters, on the other hand, argue that this will allow for better consolidation of related disputes, making it more cost-effective and accessible for all involved. In white-collar crime cases (for example, Section 316 of the Companies Act[18]), courts also place a greater weight on compensating victims above all else. However, given the dramatic shifts in value associated with cryptocurrencies, new legislation must be made, as seen with the Ministry of Finance’s new cryptocurrency [19]taxation guidelines and proposed amendments to the Arbitration Act to bring India more in line with the international community, as represented by the UNCITRAL [20]rules, while fixing India’s unique enforcement issues related to cryptocurrency.
CONCLUSION
While cryptocurrency-based fraud and white collar crimes both share fraudulent nature, their differences are mostly in how they are perpetrated (technology-based) and in how the legal system addresses them (different enforcement agencies). Although fraud law’s judicial extensions will create legal continuity, there continues to be a gap between existing federal fraud law regarding the regulation of cryptocurrencies and the current state of regulatory response to cryptocurrency-related frauds. Case law supports Harmonising different approaches to cryptocurrency fraud through examples such as Chloro Controls. The legal system is rapidly evolving, and future fraud law will create new laws to support innocent victims of digital fraud while allowing innovation to flourish.
Author(s) Name: Preeti Priyasha (SOA National Institute of Law)
References:
[1] Edwin Sutherland, White Collar Crime (1949) 9.
[2] See, e.g., United States v OneCoin Ltd, No. 18-cr-00651 (SDNY 2019).
[3] Gauri Anand and Akanksha Sinha, ‘Group Of Companies’ Doctrine: An Analysis In The Context Of Arbitration’ (Mondaq, 28 November 2022) https://www.mondaq.com/india/arbitration–dispute-resolution/1217422/group-of-companies-doctrine-an-analysis-in-the-context-of-arbitration accessed 14 June 2023 (adapted analogy).
[4] SEC v W.J. Howey Co, 328 U.S. 293 (1946).
[5] Chloro Controls India (P) Ltd v Severn Trent Water Purification Inc (2013) 1 SCC 641 (analogous test structure).
[6] IT Act, 2000,
[7] Chloro Controls India (P) Ltd Severn Trent Water Purification Inc (2013) 1 SCC 641
[8] Arbitration and Conciliation Act 1996, s 45.
[9] Bharatiya Nyaya Sanhita, 2023 s 318.
[10] Cox and Kings Ltd v SAP India (P) Ltd (2022) SCC Online SC 570.
[11] State of Kerala v BitConnect India (2021) (unreported, but analogous to fraud prosecutions).
[12] ¹³ R v Ghosh [1982] QB 1053 (applied in Indian cases like Shiv Kumar Jatia v State of NCT of Delhi (2013) 14 SCC 161).
[13] Mohanraj v Shah Brothers Ispat Pvt Ltd (2021) 6 SCC 258.
[14] United States v One Coin Ltd, No. 18-cr-00651 (SDNY 2019) (with Indian extradition elements).
[15] Prevention of Money Laundering Act 2002, s 3.
[16] Internet and Mobile Association of India v Reserve Bank of India (2020) 10 SCC 274.
[17] Arbitration and Conciliation Act 1996, s 7.
[18] Ramalinga Raju v State of Andhra Pradesh (2013) (unreported, but under s 316 BNS).
[19] Ministry of Finance, ‘Budget 2022: Taxation of Virtual Digital Assets’ (Press Information Bureau, 1 February 2022) https://pib.gov.in/PressReleasePage.aspx?PRID=1795646 accessed 15 October 2023.
[20] UNCITRAL Arbitration Rules, art 17.
