The Indian government has recently strengthened regulatory measures on major foreign cryptocurrency exchanges such as Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex. that much Your country’s Financial Intelligence Unit (FIU) We have issued show-cause notices for infringement to the following nine platforms: Local anti-money laundering (AML) and Counter-Terrorism Financing (CTF) rule. The authorities also requested the Ministry of Electronics and Information Technology to restrict access to the website.
While this move has caused confusion among cryptocurrency investors and traders in India, it is a step in the right direction towards regulating the country’s virtual digital asset industry. Let’s take a closer look at what prompted the crackdown, its impact on various stakeholders, and why it could be beneficial in the long term.
Background – Why India is cracking down on foreign cryptocurrency exchanges
in March 2022Indian government supports cryptocurrency Prevention of Money Laundering Act (PMLA). All Virtual Asset Service Providers (VASPs) dealing with cryptocurrencies are required to: enroll at FIU Comply with reporting requirements regarding suspicious transactions, customer due diligence, etc.
However, the FIU recently observed that numerous offshore cryptocurrency platforms are broadly offering services to Indian users without meeting these compliance standards. Neither of them submitted any documents Suspicious Transaction Report (STR) Not even a follow Know Your Customer (KYC) canon.
FIU identified Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex as entities operating in India despite having no physical presence or registration in India.
Therefore, we have sent you a formal notice asking you to explain your legal basis for doing business in India.
This measure builds on earlier measures taken by the Enforcement Directorate and tax authorities against money laundering through cryptocurrency channels. Preventing the misuse of virtual assets for terrorism, drugs, and illicit weapons trafficking has become a top priority for governments around the world.
India’s tax policy has also made foreign exchange trading advantageous, bypassing domestic KYC and often tax requirements. All cryptocurrency transfers above Rs 10,000 made on Indian exchanges are subject to 1% tax withholding tax (TDS).
The crackdown on non-compliant foreign cryptocurrency companies aims to bring transactions back home where they can be monitored according to local regulations. An increase in tax revenue is also expected through the large-scale virtual asset market.
What does this move mean for Indian cryptocurrency users?
FIU’s firm action has upset many Indian investors and traders who use these global exchanges to buy, sell and trade cryptocurrencies.
Binance alone boasts approximately 5 to 10 million users in India, its largest market. When the tax rules kicked in in early 2022, trading volumes on India’s leading cryptocurrency exchange, WazirX, and other domestic platforms fell by 95%. Most of these have moved to offshore havens, but volumes have picked up again in recent months as users look for workarounds.
If a website like Binance.com is blocked in India, existing users will be locked out of their accounts. Those looking to enter/exit cryptocurrency positions may need to return to their domestic VASP to comply with taxes.
However, tech-savvy users can access these platforms via VPN or bypass the restrictions with other mechanisms. It is not yet known how waterproof the proposed website block will be.
Nonetheless, the case highlights the precarious legal position of investors trading cryptocurrencies overseas to avoid Indian regulations. If the platform itself goes against RBI or FIU norms, your assets can be frozen at any time without recourse. Regulatory uncertainty and lack of investor protection remain major threats.
What should foreign exchanges and virtual asset service providers do?
Foreign cryptocurrency companies must take India’s austerity stance very seriously or risk losing access to its biggest market.
Platforms like Binance and Kucoin will need to assess whether their current operating structures comply with Indian laws. If you accept Indian users and have servers or technical infrastructure here, registering with local authorities is the safest option.
Seeking legal advice is the first step to understand your exact regulatory obligations. You can then assess the feasibility of formally applying for approval and adjusting your compliance system accordingly.
If the exchange is based entirely overseas and only accepts non-Indian users; You need to geo-block signups from India and prevent transactions from Indian IP addresses..
This incident is a sign that India can no longer be under the scrutiny of foreign cryptocurrency exchanges, and considering that India is one of the largest markets for these exchanges, it will be interesting to see how the situation develops in the future.
Some time ago, Coinbase decided to discontinue its expansion and operations in India.
Why this move could ultimately benefit the Indian cryptocurrency ecosystem
Although FIU’s heavy-handed tactics have created some short-term uncertainty, there are long-term positives for the Indian cryptocurrency industry.
- A level playing field: With Binance and other global players taking away massive amounts of liquidity, domestic platforms suffer. Regulating this and limiting unfair access will again increase the volume of locally regulated enterprises, which fosters innovation and job creation within the country.
- Improved security: Monitoring transactions on Indian exchanges allows authorities to identify suspicious or illegal activity much more quickly than on offshore platforms.
- Expanding your tax base: As mentioned earlier, tax avoidance has been one of the main motivations for Indian users to move to international exchanges. Bridging this gap not only means higher returns, but it also sends the message that virtual assets should be treated equally as other investment assets.
- Increase industry confidence: For the Web3 ecosystem to thrive, confidence in its transparent and legal operations is critical. If regulation is perceived as lax or ineffective, it affects the image of the entire sector.
- Open the door to innovation: India is already emerging as a global hub for Web3 with cutting-edge research, applications and services built around cryptocurrencies. However, regulatory uncertainty has become a major barrier, making it more difficult to attract talent and capital. The current move signals the government’s seriousness in creating a calculated framework for industrial growth in India.
Conclusion: The Indian Problem Compliance ‘Show Cause’ Notice
India’s foreign exchange crackdown was desperately needed and expected after cryptocurrency regulations were strengthened last year. All major countries around the world are strengthening regulations on foreign exchange that is not registered with national financial authorities.
India’s crackdown on unregistered offshore cryptocurrency exchanges is a decisive step toward extending India’s AML and taxation policies to virtual assets.
There will be short-term difficulties if some users lose access. It could prove beneficial in the long run by consolidating trading volume on regulated Indian cryptocurrency exchanges, providing regulators with greater visibility into participants and ensuring capital controls.
Foreign cryptocurrency exchanges wishing to enter the Indian market must actively cooperate with regulators and comply with local laws. Otherwise, serious action may be imminent. At the same time, Indian authorities must ensure that laws are not so restrictive that they stifle innovation in this high-potential sector.
The next few years are sure to be exciting for the industry!