Key Insights
- Geo checks, live selfies, and penny drop bank verification have become the primary onboarding methods for crypto in India.
- Travel Rule wallet monitoring and mixer transaction blocks are enforced by India Crypto onboarding.
- India’s crypto onboarding process involves a month’s review of high-risk clients and a five-year record check.
India’s Crypto Onboarding Is Tightening as FIU Strengthens AML and KYC Controls
India has tightened its control over cryptocurrency exchanges with the Financial Intelligence Unit launching expanded identity checks and monitoring regulations aimed at restricting the illegal use of digital resources.
The new framework, issued by the Financial Intelligence Unit (FIU) of India, requires additional identity, location, and banking information from users of registered crypto exchanges.
According to news agency PTI, the measures are intended to address money laundering, terrorist financing, fraud, and other illicit uses of virtual digital assets.
Under the new regulations, crypto exchanges in India are required to take a live selfie of their users during onboarding, geo-tag and track IP addresses, and verify bank accounts through a test transaction, known as the “penny drop technique.”
The penny drop involves a refundable charge of 1 rupee to confirm account ownership.
Enhanced KYC Architecture Provides Layers of User Authentication.
As India tightens crypto onboarding, the FIU has clarified that the new controls supplement, rather than replace, existing Know Your Customer (KYC) obligations. Exchanges must continue to verify a user’s permanent account number and residential address.
Moreover, the platforms now require additional supporting materials, such as a passport, driving license, and Aadhaar card, to build a more comprehensive identity.
Additionally, users are also required to verify their mobile phone numbers and email addresses using a one-time password. These measures aim to introduce several verification points during the account creation process.
According to the FIU, high-risk clients will be subject to enhanced review at least once every six months, reflecting a more frequent monitoring cycle than that applied to standard users.
Enforcement of Travel Rules and wallet patrol.
The new structure also indicates an increase in the enforcement of the Travel Rule, which requires crypto service providers to disclose certain information on transactions when assets cross platforms.
The FIU stated that exchanges will be requested to be more vigilant about transfers of unhosted wallets and peer-to-peer transactions, which are considered riskier by regulators due to the lack of visibility.
As part of the same effort, exchanges must deploy tools capable of detecting the use of mixers, tumblers, and other services that enhance anonymity. Where such tools identify these services, platforms are required to block the associated transactions.
Additionally, records of customer identities and transaction data must be retained for a minimum of five years or until the completion of any related investigation.
India limits crypto onboarding under an environment of increased enforcement.
By the 2024-25 financial year, the FIU has registered 49 crypto exchanges, four of which include large international offshore principles.
https://twitter.com/BWA_Ind/status/2010588901933769206
Government officials have stated that platforms that were not registered and reported have received serious fines.
Earlier reporting indicated that the FIU blocked several crypto exchanges and imposed fines on Binance for non-compliance.
The FIU has also emphasized that the revised rules are intended to address risks linked to scams, online gambling, darknet activity, and other high-risk uses of cryptocurrency.
Limits on fund-raising and book-keeping requirements.
The new framework extends beyond onboarding to cover fundraising activity and operational practices.
The FIU also stated that the guidelines are aimed at highly deterring initial coin offerings and initial token offerings by providing economic rationale, disclosure standards, and risk reduction reasons. To track such activity, exchanges must perform close monitoring and control over compliance with reporting requirements.
Moreover, platforms are required to maintain detailed records of clients for at least five years, file suspicious transactions reports, undergo regular audits, and continuously track transfers.
These requirements are integral to the larger anti-money laundering framework for virtual digital assets in India.
Taxation and policy environment.
The Indian government still categorizes cryptocurrencies as virtual digital assets, which will be taxed under the income tax laws. Cryptocurrency gains are taxed at a flat rate of 30%, and a source tax of 1% is levied on transfers.
However, tax jurisdictions have already made several attempts to address issues related to the monitoring of cryptocurrency and decentralized finance activity. The use of anonymous wallets and cross-border transactions has been mentioned as making it difficult to enforce.
The Income Tax Department, under the Central Board of Direct Taxes, restated these issues last week at a meeting with the Parliamentary Standing Committee on Finance and cautioned that the greater the usage of digital assets, the lower the tax compliance.
