India Tightens Crypto Oversight To Block Illicit Money Flows
- India now demands live selfie verification with location data before crypto onboarding.
- Exchanges must run bank ownership tests and repeat deeper checks for high-risk users.
- India bars ICO mixers and privacy tools while enforcing strict five-year data retention.
India’s Financial Intelligence Unit has imposed stricter identity checks on cryptocurrency exchanges to combat money laundering and terror financing, according to the Press Trust of India. The updated rules, issued on January 8, require exchanges to adopt advanced user verification measures before onboarding customers. Authorities said the move aims to reduce misuse of digital assets while strengthening oversight of a rapidly expanding market.
Under the new framework, all crypto exchanges operating in India must comply with enhanced Anti-Money Laundering standards. The guidelines apply to platforms registered with the FIU and require consistent reporting of suspicious transactions. Officials stated that these steps seek to align crypto compliance with existing financial sector norms.
The report says that India treats cryptocurrencies as virtual digital assets under the Income Tax Act, 1961. Citizens may trade them through FIU-registered platforms and can’t use them as legal tender for payments. Why is India tightening controls just as millions of users enter crypto markets?
Stricter Identity Verification Requirements
The updated rules mandate exchanges to verify users through a live selfie that captures blinking movements to confirm liveliness and authenticity. Platforms must also record precise geographic coordinates, date, time, and IP address at account creation, according to the FIU.
Beyond the mandatory Permanent Account Number, exchanges must collect additional identity documents. Accepted records include passports, driver’s licenses, Aadhaar cards, or voter IDs. Users must also submit mobile numbers and email addresses, which platforms verify through one-time passwords.
Exchanges must authenticate bank account ownership through the “penny-drop” method. This process involves a refundable one-rupee charge to confirm that the account belongs to the user. Officials stated that this step reduces impersonation and fraud in onboarding.
Enhanced Monitoring and Restricted Activities
The FIU has directed exchanges to apply enhanced due diligence checks every six months for high-risk users. This group comprises customers’ connections to tax havens, FATF-flagged countries, people in politics who are exposed, and specific non-profit organizations.
The regulations prohibit the exchanges from assisting in the ICOs or ITOs. The authorities consider these forms of token sales as risky operations because they are not very transparent, and there is no clear understanding of their economic basis. Platforms must also stop offering services that obscure transaction trails.
Tools such as crypto mixers and tumblers, which conceal the sources of transactions, have now been categorized as restricted services. The FIU has deemed these tools as high risk, as they hinder the identification of ownership and traceability.
Read More: India Tax Authority Joins RBI in Warning on Crypto Use Risk
Tax Enforcement and Regulatory Context
Recently, officials from the Income Tax Department gave a briefing about tax challenges related to cryptocurrency to the parliament. According to the officials, decentralized exchanges, anonymous wallets, and cross-border crypto transfers complicate tax enforcement.
The department told lawmakers that differing tax rules across jurisdictions further limit efficient taxation of crypto transactions. These factors, officials said, weaken traditional compliance mechanisms.
Under India’s tax law, crypto gains face a flat 30% tax rate. Traders may deduct only the original purchase cost. Losses from crypto sales cannot offset gains from other transactions, according to the Income Tax Act. India remains cautious toward cryptocurrencies despite its large market potential. Regulators continue to prioritize traceability, reporting, and data retention as the country expands oversight of digital asset platforms.
