When hawala meets blockchain: regulatory challenges in the digital asset era

The Dilemma of Decentralized Trust

For centuries, hawala has operated as a parallel financial solution in regions where the traditional banking system is inefficient or inaccessible. Its mechanism is deceptively simple: intermediaries known as hawaladars create mutual trust networks to facilitate cross-border transfers without formal documentation or intervention from conventional financial institutions.

The model has been particularly effective for expatriates. According to World Bank data, global remittances reached $785 billion in 2024, and a significant portion flows through informal channels. For millions of people in developing countries, hawala represents the most accessible and cost-effective option.

How These Systems Operate: The Mechanics of Trust

The elegance of hawala lies in that it does not require physical movement of cash across borders. Instead, hawaladars settle mutual debts through cross agreements—real estate transactions, commercial goods, or other compensations. This approach eliminates intermediary costs, speeds up settlement times, and bypasses regulatory requirements characteristic of conventional banking.

However, this same opacity that makes it attractive to legitimate users also makes it a vulnerable conduit for illicit activities. Banks face strict requirements under anti-money laundering frameworks (AML), know-your-customer obligations (KYC), and suspicious activity reports. Hawala, operating entirely outside the formal financial system, is not subject to these controls.

The Convergence Risk: Cryptocurrencies and Informal Networks

The emergence of Bitcoin and other digital assets has added a new dimension to the problem. Cryptocurrencies share critical features with hawala: speed, low cost, and pseudo-anonymity. When these technologies combine with existing hawala networks, the result can be a transfer system that is simultaneously fast, global, and virtually untraceable.

The United Nations Office on Drugs and Crime estimates that between $800 billion and $2 trillion are laundered annually worldwide, with informal systems playing a central role. Although research indicates that the percentage of illicit activities in cryptocurrencies is comparatively lower—possibly because blockchain traceability offers a certain level of deterrence—the potential risks remain substantial.

A Case of International Digital Asset Laundering

The case of Anurag Pramod Murarka illustrates how these networks operate in practice. This Indian national was sentenced to over a decade in prison for running an international money laundering scheme that moved over $20 million. Operating under pseudonyms like “elonmuskwhm” in dark web markets, Murarka used cryptocurrencies to launder proceeds from drug trafficking and hacking.

His infrastructure combined the old with the new: a traditional hawala network distributed between India and the United States, where physical agents received and remitted cash, complemented by crypto transfers that further obscured origins. The US Federal Bureau of Investigation took over his digital identity, resulting in cascading arrests and asset confiscation. Murarka faces serving at least 85% of his sentence plus three years of post-release supervision.

Global Regulatory Framework: The System’s Response

In response to these risks, international organizations and governments have intensified their regulatory measures.

The Financial Action Task Force (FATF) has classified hawala providers into three stratified categories: legitimate traditional operators, hybrid models mixing classic methods with modern systems, and criminal networks dedicated solely to illicit activities. In 2019, FATF issued the Travel Rule, requiring virtual asset service providers to share transactional details for transfers exceeding $1,000.

In the United States, the Bank Secrecy Act mandates reports for transactions over $10,000 and suspicious activity reporting. The 2021 Infrastructure Investment and Jobs Act extended these requirements specifically to the crypto ecosystem.

The European Union implemented MiCA (Regulation of Markets in Crypto-Assets) in 2024, creating a unified framework that obligates exchanges and wallet providers to comply with KYC and AML, significantly complicating the regulatory exploitation of digital currencies by hawala networks.

Regions where hawala is deeply integrated, such as the Middle East and South Asia, show varied approaches. The United Arab Emirates has implemented strict AML regulations with licensing requirements for hawaladars. In Pakistan and India, although hawala is technically prohibited, it persists widely due to operational efficiency.

Persistent Obstacles and Emerging Strategies

Effective regulation remains complex. The inherent decentralized nature of cryptocurrencies, combined with the global reach of hawala networks and their informal operating model, creates monitoring challenges that surpass traditional compliance methods.

Regulators are pivoting toward two complementary strategies. First, international cooperation: organizations like FATF push for greater shared intelligence and regulatory harmonization across jurisdictions. Second, technological innovation: advanced blockchain analysis and artificial intelligence are deployed to identify suspicious transaction patterns and map illicit activity.

The fundamental challenge remains: designing frameworks that protect the genuine benefits of hawala for legitimate users—particularly migrants sending remittances—while closing avenues exploited by these systems for criminal purposes. As the intersection of digital assets and informal transfers evolves, regulators’ ability to adapt will determine whether they can maintain the integrity of the global financial system.