{India crypto regulation, offshore crypto exchanges, Binance India, wazirx volumes, non-compliant exchanges, fiu notices, aml laws, p2p trading, crypto exchange blocking, india crypto trading, kucoin india ban, india crypto taxes }
India Crypto Regulation: Crypto Trading in Chaos as India Targets Offshore Giants With Ban Threat
India’s financial regulators are turning up the heat on offshore cryptocurrency exchanges operating in the country without complying with local Anti-Money Laundering (AML) laws.
In a strong message signalling stricter oversight, India’s Financial Intelligence Unit (FIU) has issued show-cause notices to nine global crypto exchanges including market leaders like Binance, KuCoin, and Huobi. The exchanges have been accused of indulging in illegal operations while flouting mandatory Know-Your-Customer (KYC) and transaction reporting norms laid out under the Prevention of Money Laundering Act, 2002 (PMLA).
This latest regulatory salvo aims to rein in offshore platforms that have continued serving a significant chunk of Indian crypto users without adhering to rising compliance standards for Virtual Asset Service Providers (VASPs) in the country.
Let’s analyze the details around this regulatory crackdown, the Indian government’s attack plan to block these global exchanges, and how the development can reshape trading activity in India’s cryptocurrency landscape.
India Cracks Down on Non-Compliant Crypto Exchanges – Can Local Platforms Benefit?
In March 2022, the Indian government notified rules requiring all domestic and offshore crypto exchanges serving Indian residents to register with the FIU as reporting entities under the PMLA.
This mandated Know-Your-Customer (KYC) checks, transaction monitoring, Suspicious Activity Reporting (SARs) and various other compliance standards in line with traditional financial institutions. Exchanges were given 90 days after the March 28 notification to adhere to the updated norms.
However, the FIU called out several offshore exchanges for continuing operations in India beyond the deadline without fulfilling the new reporting requirements. In its press release, the Agency stated:
“Numerous offshore entities catering to a significant number of Indian clients were neither becoming registered nor falling under the ambit of Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) compliance framework of India.”
This regulatory gap and non-compliance prompted the stern action taken against marquee offshore exchanges that dominate India’s trading volumes like Binance and KuCoin.
The Extent of Non-Compliant Offshore Crypto Activity
Per blockchain data analytics firm Chainalysis, transaction volumes from India to offshore exchanges and P2P platforms surged over 700% in 2021 to reach $10.4 billion.
India accounted for the highest crypto transaction volume among emerging markets last year. But over 60% of these volumes went to non-compliant overseas exchanges and P2P platforms according to Chainalysis estimates.
This underscores the vast scale of offshore crypto activity by Indian users beyond the local regulatory ambit. The FIU is now pushing back against such unchecked arbitrage.
India Crypto Regulation: The Compliance Notices and Proposed URL Blocks
Using its authority under Section 13 of the PMLA, the FIU has served detailed compliance notices to nine crypto exchanges asking them to explain the lapses. The exchanges receiving notices are:
- Binance
- KuCoin
- Huobi
- Kraken
- Gate.io
- Bittrex
- Bitstamp
- Bitfinex
- MEXC Global
These notices allow the exchanges to clarify their stance and provide reasons for non-registration under the PMLA within reasonable timeframes.
Simultaneously, the FIU has also recommended the blocking of the website URLs of these nine exchanges after informing the Ministry of Electronics and Information Technology (MeitY).
Effectively shutting down access can prevent Indian users from accessing trading services offered by these platforms. However, technically savvy users can circumvent URL blocks using VPNs and other methods.
The FIU asserts that despite being offshore entities, these exchanges were conducting significant business in India through their global platforms. Hence the mandatory requirement to register as a VASP in India applied equally to them.
The Legal Basis for Extraterritorial Compliance
Cracking down on offshore exchanges draws validity from the extra-territorial applicability of India’s PMLA. The Act states:
“The provisions of this Act shall apply also to any offence or contravention committed outside India by any person if the proceeds of crime have been generated in India or laundered in India.”
Hence, exchanges serving Indian users come under compliance purview regardless of the offshore jurisdiction where they are registered or legally headquartered.
This extraterritorial authority allows Indian agencies to take punitive and preventive action against foreign entities engaging in money laundering or related violations concerning domestic transactions and users.
India Crypto Regulation: Expanding the Regulatory Perimeter
India took its first steps towards regulating cryptocurrencies in April 2022 by imposing a controversial 30% tax on income from virtual digital assets or VDAs along with a 1% TDS deduction.
The high taxes prompted a swathe of crypto investors and trading volumes to migrate abroad rather than trade on domestic exchanges like WazirX. According to industry estimates, daily trading activity worth $245 million moved out of India post the tax announcement.
Offshore exchanges like Binance which allow direct onboarding of Indian customers via P2P trading became key beneficiaries. Now, the FIU is looking to close this regulatory arbitrage and bring offshore platforms under India’s AML/CFT regulations.
Nischal Shetty, CEO of domestic exchange WazirX tweeted:
“This is a positive move. Bringing more Crypto exchanges under regulation will help prevent illegal activities.”
Improved oversight and transparency from exchanges combined with surveillance mechanisms can address risks around anonymity, fraudulent conduct, terror financing etc. associated with crypto assets – a key goal behind the notifications.
Global Regulatory Trends on Offshore Crypto Compliance
India is not alone in grappling with non-compliant offshore crypto activity. Global regulators are also mandating stronger oversight:
- The Dutch central bank fined Binance EUR 3.3 million for offering illegal crypto services to Netherlands residents.
- Italy’s market regulator blocked several major offshore exchanges.
- The UK FCA rejected Binance’s application for a license to operate in the country.
As the offshore crypto sector grows, jurisdictions are prioritizing stronger AML/CFT guardrails and cross-border coordination. India’s action mirrors these global trends.
India Crypto Regulation: Can the Notices Resuscitate Domestic Trading Volumes?
Ever since the 1st July 2022 tax implementation, India’s share in global crypto trading activity has stayed muted. Top exchanges like WazirX have reported 95% declines in trading activity accompanied by layoffs.
However, this regulatory action which can potentially block major offshore rivals may provide a stimulus for rebuilding trading volumes on the Indian crypto bourse. Domestic exchanges are already gearing up for this potential user inflow.
Sumit Gupta, CEO of CoinDCX said:
“This move will mean FIU registered and compliant Indian exchanges will be preferred by customers. It underscores that the government is noticing the offshore shift of volumes and indicates a focus on user safety.”
On the flip side, experts also caution that global exchanges may choose to adhere to Indian compliance rules if volumes from the country remain lucrative.
Sidharth Sogani, CEO of crypto research firm Crebaco suggests:
“Users can still move to decentralized exchanges. I doubt traders using Binance, KuCoin will stop and come to Indian exchanges. These exchanges may just now start registering with the FIU.”
Hence, only time will tell whether the FIU’s warning shots can revive fortunes for local crypto trading avenues by prompting a user exodus from prominent offshore platforms.
The Volume Equation for Indian Exchanges
According to data from CoinGecko, top Indian exchanges like WazirX reported average daily trading volumes of $245 million in June 2022 before the tax announcement.
This shrunk nearly 95% to $15 million per day by September 2022 after taxes were imposed. However, volumes seem to be stabilizing around $30 million in recent months.
Meanwhile, global exchanges like OKX average close to $2 billion in daily volume across all their operations. Hence, Indian exchanges have a massive gap to cover to regain market share.
Attracting even 15-20% of users from offshore platforms can significantly boost their volumes. But retaining these users requires policy stability and positive sentiment.
India Crypto Regulation: The Road Ahead
Cryptocurrency regulation remains a complex, evolving arena for regulators worldwide. India has actively carried out stakeholders consultations to formulate balanced rules.
The latest move signals authorities’ intent to implement stricter monitoring mechanisms by expanding the regulatory perimeter around offshore crypto players. However uncertainty around taxes and ownership rules continues to dampen investor appetite.
For Indian exchanges, this development may provide a window to lure back users and volumes. However, retaining them ultimately depends on fostering innovation-friendly regulations. The government must continue discussions with the ecosystem to unlock crypto’s immense potential without excessive restrictions.
With prudent regulation, India can become a forerunner in crypto adoption worldwide. However, a punitive approach focused solely on revenue collection and stringent policing will be counterproductive. The path ahead requires a nuanced balancing act.
Potential Compliance Roadmap for Global Exchanges
Here are some steps global exchanges can take to comply with Indian regulations:
- Register with the FIU as a reporting entity
- Conduct mandatory KYC for all Indian users
- Monitor transactions and report suspicious activity
- Maintain auditable records on Indian user data and transactions
- Collaborate with authorities for investigative inquiries
Proactive compliance and transparency will be key to resuming services for Indian customers.
FAQs Related to India Crypto Regulation
Which authority has issued notices to offshore crypto exchanges?
India’s Financial Intelligence Unit (FIU-IND) which functions under the Department of Revenue, Ministry of Finance has issued the compliance notices.
What violations are these exchanges accused of?
They are accused of providing cryptocurrency trading services to Indian residents without registering as reporting entities under India’s anti-money laundering law PMLA and flouting requisite KYC and transaction reporting requirements.
What is the objective behind this crackdown?
To extend India’s AML/CFT regulations to cover offshore crypto exchanges that have significant Indian user bases and bring them under stricter compliance frameworks applicable locally.
Can these exchanges continue India operations by registering now?
Yes, registering with the FIU after justifying prior non-compliance may allow them to resume services. However, they still face the risks of punitive action for past violations.
How does blocking exchange URLs impact investors?
It can disrupt access to trading, portfolio monitoring and withdrawal capabilities. However, tech-savvy users can bypass restrictions using VPNs and other methods.
Are peer-to-peer (P2P) exchanges also prohibited through this action?
No, the notice seems to cover only centralized offshore exchanges. P2P platforms may remain out of scope as they are largely non-custodial.
Can this boost trading volumes on Indian crypto exchanges?
Possibly yes, if offshore exchanges are eventually blocked, users may migrate back to Indian platforms. However, major offshore players can still draw volumes by complying with Indian norms if profitable.
Does this mean cryptocurrencies are completely banned in India?
No, cryptocurrencies remain unregulated but not fully illegal in India currently. The government aims to strengthen oversight of ecosystem participants, not impose a blanket ban.
India Crypto Regulation: Conclusion
India’s financial watchdog FIU taking action against leading offshore crypto exchanges signals an inflexion point in the cryptocurrency regulation timeline. This crackdown aims to extend compliance coverage and enforce stricter AML/KYC norms for players catering to Indian users.
If exchanges fail to provide satisfactory responses, blocking access can have significant ripple effects on trading activity and platform preferences. While repercussions remain uncertain, one thing is clear – the era of unchecked offshore crypto operations in India is ending.
Tighter regulation may prompt short-term upheaval but can place the industry on a sustainable long-term trajectory. The government must collaborate with ecosystem stakeholders to craft pragmatic regulations that tap into crypto’s promise while safeguarding user interests.
Disclaimer:
The article in Cryptowini is only for educational purposes. It should not be construed as financial advice to trade or invest in cryptocurrencies or digital assets which are subject to market risks. Please consult a certified financial advisor before entering this domain.
Watch The Web Story on this Article :
Also Read:
How To Buy Cryptocurrency In India Legally And Securely: The Complete 2024 Guide
