-Advait Sharma and Bhadra Anil
“In a world coded without consequence, shadows become the currency and silence the law.”
Introduction
In any society where substantial transactions occur, be it in markets, industries, or the virtual world, in the absence of robust regulatory oversight, crime inevitably concurs to exploit the system or leverage it for greater illegality. This is very often witnessed in the global securities market, where every major scam is attributed to a weak regulatory framework. Whether it was the USA’s Enron Scandal, Germany’s Wirecard Scandal, or India’s Harshad Mehta scam, white-collar individuals have always found regulatory loopholes and exploited them for their personal interests. Moreover, the journey of the securities market was never limited to trading stocks; instead, it widened with the advent of cryptocurrencies, non-fungible tokens (NFTs), and virtual assets. Along with this progress came a million-dollar question: “Where would these assets be used?” and this led to the culmination of what we currently term the ‘Metaverse’, where such assets could be owned, traded and stored. This sci-fi fantasy has transcended into a functional digital economy, where multi-million-dollar virtual land deals to NFT-based asset trading occur, making itself a flourishing financial ecosystem. However, the line between business, profit, and crime obfuscates at this juncture. This brings into light a risk that no regulator can afford to ignore: the rise of white-collar crimes like money laundering and insider trading, ultimately making the regulatory framework ease out the rigidity it beholds.
Why Metaverse?
The foundational characteristics of the metaverse make it a fertile ground for white-collar crime to thrive, as these characteristics collectively foster a regulatory blind spot. Beginning with the central pillar of the metaverse, i.e., ‘anonymous transactions’, which require little or no personal identification coupled with a lack of regulators over specific virtual assets, it facilitates users to disburse capital without exposing their identities. The subject at hand gets even more convoluted with metaverse having a ‘cross-border jurisdiction’, which makes enforcement and legal accountability hard to align. Moreover, several suspicious transactions go unseen because there are ‘no mandatory established reporting or disclosure norms’ to adhere to. Collectively, these elements create loopholes that could be exploited easily to mint illicit earnings via money laundering and insider trading.
Money Laundering a Digital Disguise in Virtual Economies
Money laundering, at its core, when exercised in the metaverse, models the canonical three-stage model which is placement, layering, and integration. The ‘Placement’ stage deals with the infusion of illicit funds into the financial system. In metaverse the said stage is achieved via reclassifying ‘dirty’ money into cryptocurrencies through exchanges with lenient Know Your Customer (KYC) protocols. This anonymity aids individuals’ injecting funds without instantaneous detection.
Following this comes the ‘Layering’ stage, which involves the masking of the trails left while infusing the illicit funds into the financial system. This is done by purchasing digital assets such as (NFTs), virtual land parcels, avatars, or in-game items. These virtual assets are then traded multiple times through several wallets owned by the same entity, creating a complex web of transactions. Additionally, since there are no formal regulators, there is a lack of standardised pricing for such assets. This enables individuals to influence a significant price manipulation, also known as ‘wash trading’, which would hinders ascertaining actual market value.
Lastly, there is a stage of ‘Integration’ which reintroduces the laundered funds into the legitimate economy anywhere in the world. Under this, the assets owned are at their peak inflated value and are sold to unsuspecting buyers or converted back into fiat currency through exchanges, making the proceeds appear to be ‘earned’ through multiple transactions within the metaverse.
Insider Trading Goes Virtual
Insider Trading has uncovered a new arena in the metaverse, where individuals with privileged access to upcoming material developments can exploit such information for private interest, often without being subjected to any legal repercussions. The process of insider trading remains the same but within a virtual context. An individual gets access to a piece of material confidential information and, before the announcement of such information, acquires the said virtual assets and holds them till such information is announced. After announcing and witnessing the heightened demand for such assets, these are sold at inflated prices and secure substantial profits.
An appropriate example could be drawn from the 2022 case of OpenSea, where a former employee exploited insider information about upcoming NFT listings and purchased NFTs before they were featured on OpenSea’s homepage and subsequently sold them for significant profits.
The major hurdle in Insider trading in the metaverse is its lack of clear regulatory frameworks. Such virtual assets are often not categorised as ‘Securities’ even though they are traded like securities, leaving a regulatory vacuum that facilitates such illicit activities to flourish without restraint.
India’s Legal Black Hole and Global Regulatory Gaps in the Metaverse
The Indian regulatory frameworks for digital assets, although evolving, remain handicapped in addressing the complexities of the metaverse. The Prevention of Money Laundering Act has now been extended to cover Virtual Digital Assets; however, it only targets the exchanges rather than individual NFT or game platforms, leaving considerable gaps in enforcement against illicit activities within the metaverse. Similarly, the Income Tax Act 1961 classifies Virtual Digital Assets and mandates a 30% tax on capital gains from their sale; however, it primarily focuses on taxation without entailing broader regulatory oversight. Moreover, the Securities and Exchange Board of India does not govern or regulate virtual assets unless declared as securities and on a similar line of thought, the Reserve Bank of India has expressed caution but has not facilitated any explicit guidance of the governance of the metaverse economy creating a grey area where act of digital insider trading and money laundering can occur with limited oversight.
Even more surprising is that the regulatory approach adopted globally is also fragmented. The Financial Action Task Force (FATF) issued guidelines for Virtual Asset Service Providers (VASPs), but these guidelines are non-binding and often go unenforced. Moreover, the European Union’s Markets in Crypto-Assets Regulation (MiCA), which aims to furnish an extensive regulatory framework for crypto assets, omits most NFTs from its scope. Similarly, the UK’s Financial Conduct Authority (FCA) and other countries of similar stature have yet to establish a clear regulatory framework governing the NFTs and metaverse-related financial activities, which often leads to inconsistent application of laws and regulations across jurisdictions.
The Way Forward: Towards Digital Economic Policing
As per the recent reports, by mid-2025, the crypto market is expected to be valued at over $3.4 trillion, while the metaverse sector is projected to reach $1.27 trillion, together emerging as a humongous and fast-growing digital economy. However, as digital economies advance into a significant facet of the global digital economy, a robust legal guardrail with a comprehensive legal framework is necessary to prevent the metaverse from becoming a financial wild west.
At the outset, all digital assets, such as NFTs and virtual land, which hold substantial monetary value, should be classified as financial instruments, making such assets come under the purview of current financial regulations, assisting better supervision and control. It would also furnish the application of specific laws that govern money laundering and terror financing transactions involving such assets. Extending this perspective, it becomes imperative to enforce strict KYC and AML protocols as outlined in the FATF’s guidelines on VASPs, mandating leading metaverse platforms to not only verify users’ identities but also to monitor transactions that appear to be suspicious.
Subsequently, the Insider Trading Regulation is required to be broadened to incorporate decentralised asset issuance within the metaverse. This would prohibit individuals with material information from exploiting it for personal gains, ultimately leading to the maintenance of market integrity and safeguarding investors from unfair practices. In the aftermath, international synergy via treaties and cooperation protocols among countries merits consideration as it would facilitate cross-functional information flow, joint investigations, and standardised legal frameworks. Organisations like INTERPOL have effectively recognised the same technique for addressing such metaverse-related crimes.
Conclusion
Money laundering and insider trading have taken the form of cutting-edge menace, with the metaverse becoming a hotspot for financial crime, enabled by its anonymous transactions, regulatory grey areas, and cross-border operations. Recent cases such as the ₹1,800 crore laundering by Manideep Mago, the Torres Jewellery scam, and Operation Destabilise showcased how specific virtual platforms can outstrip the governing archaic laws. It makes countries be at a critical juncture, necessitating amending and widening the scope of current laws to prevent the metaverse from evolving into a financial black hole.
The authors are final-year students currently pursuing the B.A. LL.B. (Hons.) programme at the National University of Advanced Legal Studies (NUALS), Kochi.