Nepal’s Crypto Ban Backfires as Fraud Soars and Victims Fear Legal Consequences

Cryptocurrency Bans Fuel Rising Fraud in Nepal

Nepal’s strict cryptocurrency ban, enforced by the central bank, is unintentionally enabling an upsurge in frauds linked to digital assets.

Despite an official prohibition on crypto trading, criminals have found cryptocurrencies to be a convenient tool to launder illicit funds, leaving authorities grappling with how to trace and recover stolen assets.

The Rise of Crypto Fraud and Its Hidden Impact

The Financial Intelligence Unit (FIU), which operates under Nepal Rastra Bank, has recently raised alarm over the growing use of digital currencies in cyber-related fraud.

According to their Strategic Analysis Report, dated 18 November 2024, fraudsters are increasingly using crypto to convert illegal funds, making it nearly impossible for authorities to track and seize the assets.

The ease of transferring cryptocurrencies offshore only adds to the complexity of tracking down criminals.

The FIU's report revealed that a large portion of fraud reported to the authorities until May 2024—around 64%—was cyber-enabled.

These frauds include sophisticated techniques like "smurfing," where large sums of money are broken into smaller transactions to avoid detection.

Social Media Becomes The Perfect Platform for Fraud

Fraudsters have turned social media into a primary tool for scamming unsuspecting citizens.

Through online ads and direct messages, they promise quick and lucrative returns on cryptocurrency investments.

Once victims send money to fake crypto wallets or bank accounts, the criminals vanish, leaving no trace behind.

The FIU’s report highlighted how these scams are often carefully orchestrated to exploit the promise of high rewards, preying on people's lack of awareness and financial desperation.

The Fear of Legal Consequences Keeps Victims Silent

The illegal status of cryptocurrency trading in Nepal has created a chilling effect on victims of crypto fraud.

In September 2021, Nepal implemented a blanket ban on cryptocurrency trading and mining.

By January 2023, the Nepalese Telecommunications Authority had also instructed internet service providers to block access to crypto-related websites.

While these measures were intended to reduce exposure to scams, they have created a paradox.

Many of those scammed hesitate to report their losses to authorities out of fear of legal repercussions.

As a result, victims of fraud are now stuck in a legal grey area, unable to seek help without risking criminal charges for engaging with digital assets.

As one victim, who fell prey to a crypto investment scam, stated,

"We were promised high returns, but after depositing the money, it disappeared without a trace. Reporting it would only bring trouble, given how crypto trading is illegal here."

Such reluctance to report fraud has made it challenging for the authorities to address the growing problem as victims are afraid that they could face legal action themselves.

Calls for Stricter Monitoring and Better Awareness

The FIU's report urged the government to tighten its grip on crypto transactions by improving monitoring systems.

They also suggested that financial institutions be trained to spot suspicious transactions and promptly report them.

Public awareness campaigns about the risks of crypto investment scams could also help reduce the number of victims.

Additionally, the report called for stronger inter-agency cooperation to better tackle the complex nature of digital asset fraud.

Neighbouring Countries Show Diverging Approaches

Nepal is not alone in banning cryptocurrencies.

Countries like China, Russia, Iran, and Bangladesh have similarly cracked down on digital assets.

However, not all of Nepal’s neighbours share this view.

India, while not banning cryptocurrency trading, imposes heavy taxes on profits from digital assets, yet provides no relief for losses, which could hinder investor confidence.

In contrast, Pakistan has moved toward legalising virtual assets, aiming to establish a central bank digital currency (CBDC) rather than fully embrace decentralised cryptocurrencies like Bitcoin.

Meanwhile, Bhutan stands out with a more progressive stance, having accumulated over $1 billion in Bitcoin, benefiting from the currency’s rising value.

Bhutan’s approach offers a stark contrast to its neighbours, who remain cautious or outright restrictive when it comes to cryptocurrency.