India’s Finance Ministry Targets International Crypto Exchanges for Legal Compliance

India’s Finance Ministry has taken decisive action against nine international cryptocurrency exchanges, including industry giants like Binance, Kucoin, Huobi, and others. These platforms are facing allegations of operating in India without compliance with the country’s money laundering regulations.

The exchanges in question – Binance, Kucoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex – have received compliance show-cause notices for allegedly not adhering to the Prevention of Money Laundering Act (PMLA) of 2002.

In a significant move, the ministry has requested the Information Technology Ministry to block the URLs of these platforms, citing their unauthorized operations in India.

Requirement to Register with the Financial Intelligence Unit

The Finance Ministry’s recent statement mandates that virtual digital asset (VDA) service providers engaged in exchanges between digital assets and fiat currencies, as well as those managing and transferring virtual digital assets, must register with the Financial Intelligence Unit-India (FIU-IND).

The FIU-IND, a pivotal agency in India’s financial surveillance system, is tasked with collecting, analyzing, and sharing information on suspicious financial transactions with law enforcement and international counterparts. This agency plays an essential role in maintaining financial integrity within the country.

According to the Finance Ministry, the obligation to register and comply with these regulations applies to all entities, regardless of their physical presence in India. This encompasses various responsibilities, including reporting, maintaining records, and adhering to other PMLA obligations.

As it stands, 31 virtual digital asset service providers have registered with the FIU-IND. However, the ministry noted that several offshore exchanges serving a significant Indian user base have not complied with the Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) framework.

Taxation Challenges with Offshore Exchanges

The implementation of a direct 1% tax on every crypto transaction on Indian exchanges has led many users to migrate to foreign platforms. This tax policy has reportedly resulted in the Indian government losing potential revenue of about $420 million (Rs. 3,493 crores). Reports indicate a significant shift of Indian users to offshore exchanges, with one such platform registering over 450,000 new sign-ups in just a month after the tax was introduced in July 2022.