India’s Financial Intelligence Unit (FIU) is moving to crack down on several offshore cryptocurrency exchanges for failing to comply with the country’s anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations.
The regulatory body announced on Thursday that it was seeking to recover USD$345 million in Goods and Services Tax (GST) from seven crypto exchanges in addition to the crackdown. Initiated under the Prevention of Money Laundering Act (PMLA), this move signals the government’s intent to bring virtual digital asset service provides under a stricter regulatory framework.
The FIU, operating under the Ministry of Finance, issued compliance show cause notices to nine prominent exchanges, including giants like Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex.
These notices were not merely a warning but a directive for these platforms to register with the FIU-IND as ‘Reporting Entities’ and adhere to the obligations set under the PMLA. The failure to comply could lead to the blocking of these exchanges’ URLs in India, effectively banning their operations within the country.
According to reports from the Economic Times, upcoming hearings will determine whether these exchanges can resume operations in India.
The exchanges must present their cases, demonstrating compliance with the PMLA and their ability to meet the reporting obligations required under Indian law.
The Indian government has prioritized recovering taxes from these exchanges, which previously failed to pay GST on transaction fees collected from Indian customers before their operations were banned.
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Moves causes concern among crypto enthusiasts
This action has stirred a mix of reactions within the cryptocurrency community and among legal experts. On one hand, it represents a step towards legitimizing cryptocurrencies by integrating them into the existing financial regulatory framework. This could potentially reduce the risks associated with money laundering and terrorist financing, which have long been cited as concerns with cryptocurrencies due to their pseudo-anonymous nature.
On the other hand, the move has caused ripples of concern among crypto enthusiasts and investors in India. The immediate fear was of a ‘shadow ban’ or a de facto ban on these exchanges, which could disrupt trading activities and affect the liquidity of cryptocurrencies within India. However, subsequent clarifications from regulatory bodies and industry observers suggest that compliance with the PMLA would allow these exchanges to continue operations legally in India.
Following the issuance of these notices, there has been a notable shift. Binance and KuCoin, for instance, have registered with the FIU, indicating a willingness to comply with Indian regulations. This compliance, however, comes with financial penalties, with KuCoin already having paid a fine, and Binance’s penalty still under determination. This development not only adds credibility to these exchanges but also sets a precedent for others in the industry.
Earlier this year, the FIU ordered Binance to pay $86 million in GST and a $2.25 million fine to restore its services in India.
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India’s actions could set a precedent for other countries
The FIU’s actions are part of a broader strategy to integrate cryptocurrencies into the AML/CFT framework, as evidenced by the registration of over 30 VDA SPs with the FIU since the mandate was introduced in March 2023. This framework requires exchanges to implement robust KYC (Know Your Customer) processes, transaction monitoring, and reporting of suspicious activities, aligning cryptocurrency operations with traditional financial services.
India’s approach reflects a global trend where countries are grappling with how to regulate cryptocurrencies effectively. While some nations have embraced cryptocurrencies with open arms, others are treading cautiously, balancing innovation with security. India’s move could set a precedent for other countries, especially in how regulatory compliance can coexist with technological innovation in finance.
The Chainalysis 2024 Global Crypto Adoption Index ranks India first among 154 countries for cryptocurrency usage, despite a 30 per cent crypto capital gains tax and a 1 per cent tax deducted at source (TDS).
India’s crypto ecosystem has thrived in the face of these challenges, driven by activity on centralized exchanges, decentralized finance (DeFi) platforms, and peer-to-peer trading.
However, the introduction of strict tax measures in recent years has led some Indian investors to shift towards international exchanges, where tax regulations are often more lenient.
In response, India’s GST authorities have begun considering sending notices to other foreign exchanges to enforce full compliance within the sector.
In early September, reports indicated that the FIU reviewed registration requests from four additional foreign crypto exchanges, with two expected to gain approval to operate in India by the end of the 2025 financial year.
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joseph@mugglehead.com
