India’s Crackdown on Foreign Crypto Exchanges: What You Need to Know
India has recently taken a tough stance against foreign cryptocurrency exchanges that operate in the country without complying with local regulations.
The Financial Intelligence Unit (FIU), a wing of the Finance Ministry, has issued show cause notices to nine offshore platforms, including Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global and Bitfinex.
These exchanges have been accused of violating the Prevention of Money Laundering Act (PMLA), which requires all virtual asset service providers (VASPs) to register with the FIU and follow anti-money laundering (AML) and counter-terrorism financing (CTF) norms. The FIU has also requested the Ministry of Electronics and Information Technology to block access to their websites in India.
This move has created some confusion and panic among Indian crypto users, who have been using these foreign platforms for trading, investing and storing their digital assets. Many are wondering what this means for their crypto holdings, how they can withdraw their funds, and what are the alternatives available to them.
In this blog post, I will try to answer some of these questions and explain why India’s crackdown on foreign crypto exchanges could ultimately benefit the domestic crypto ecosystem.
Why is India cracking down on foreign crypto exchanges?
India’s crackdown on foreign crypto exchanges is not a sudden or arbitrary decision. It is part of a broader regulatory framework that the government has been developing since March 2022, when it brought cryptocurrencies under the purview of the PMLA.
According to this law, all VASPs dealing with crypto must register with the FIU and adhere to reporting requirements regarding suspicious transactions, customer due diligence, KYC verification, etc.
The law also states that the obligation is activity-based and not contingent on physical presence in India. This means that any entity that caters to Indian users must comply with the PMLA, regardless of where they are based or registered.
However, the FIU observed that many foreign crypto platforms have been operating in India without fulfilling these compliance standards. They were neither filing suspicious transaction reports (STRs) nor following KYC norms.
They were also not paying taxes on their income from Indian users, who were subject to a 1% tax deducted at source (TDS) on all crypto transfers above Rs 10,000 made on domestic exchanges.
By clamping down on these non-compliant offshore crypto businesses, the government aims to bring transactions back onshore where they can be monitored and regulated under local laws.
This is also in line with global efforts to prevent the misuse of virtual assets for illicit activities such as money laundering, terrorism financing, drug trafficking, etc.
What does this mean for Indian crypto users?
The immediate impact of India’s crackdown on foreign crypto exchanges is that Indian users will not be able to access their websites or apps in India. This means that they will not be able to trade, invest or store their crypto assets on these platforms.
However, this does not mean that they will lose their funds or face legal action. The government has not banned or confiscated cryptocurrencies in India. It has only restricted access to certain platforms that do not comply with local regulations.
Therefore, Indian users who have funds on these foreign platforms have two options: either withdraw their funds to their own wallets or transfer them to compliant domestic exchanges.
The first option is preferable for those who want to keep custody of their own assets and do not intend to trade frequently. They can use hardware wallets or software wallets that allow them to control their own private keys and access their funds from anywhere in the world.
The second option is suitable for those who want to continue trading or investing in crypto markets. They can use domestic exchanges that are registered with the FIU and follow AML/CTF norms. These exchanges also offer a variety of services such as spot trading, futures trading, margin trading, lending, staking, etc.
What should foreign exchanges and VASPs do?
The show cause notices issued by the FIU require the foreign exchanges and VASPs to explain the legal basis for their Indian operations.
If they fail to do so or provide unsatisfactory responses, they may face further action such as fines or penalties. Therefore, these entities should either comply with the PMLA or cease their Indian operations altogether.
Some of these entities have already taken steps to comply with the PMLA or exit the Indian market. Other entities have not yet made any official announcements, but may follow suit soon.
Will this move ultimately benefit or harm the Indian crypto ecosystem?
While India’s crackdown on foreign crypto exchanges may seem harsh or restrictive, it could ultimately benefit the Indian crypto ecosystem in the long run.
By enforcing compliance standards and creating a level playing field for domestic players, the government is fostering a more transparent, secure and regulated environment for crypto activities in India.
This will boost the confidence and trust of users, investors and regulators in the crypto space and pave the way for more innovation, adoption and growth.
Moreover, by bringing transactions back onshore, the government is also creating more opportunities for tax revenue and economic development. The crypto industry in India is estimated to be worth over $10 billion and employs over 50,000 people.
By supporting and regulating this industry, the government can tap into its potential and contribute to the country’s digital transformation and financial inclusion.
However, this move could also have some negative consequences for the Indian crypto industry. By blocking access to foreign platforms, the government is limiting the choice and diversity of the Indian crypto users.
They may miss out on some of the features, services and opportunities that these platforms offer, such as access to global liquidity, lower fees, higher security, etc.
They may also face difficulties in withdrawing or transferring their funds from these platforms, especially if they do not have their own wallets or do not know how to use them.
Moreover, by isolating the Indian crypto market from the global one, the government is reducing its competitiveness and attractiveness for foreign investors and innovators. This could hamper the growth and development of the Indian crypto ecosystem in the long term.
Conclusion
The government can promote a more fair, safe and regulated crypto environment in India by ensuring that domestic players follow compliance standards.
However, this decision could also hurt the Indian crypto industry in some ways. By preventing access to foreign platforms, the government is restricting the options and variety of the Indian crypto users.
They may not be able to enjoy some of the benefits, features and opportunities that these platforms provide. They may also encounter challenges in moving or withdrawing their funds from these platforms.
Furthermore, by separating the Indian crypto market from the global one, the government is lowering its appeal and competitiveness for foreign investors and innovators.
This could slow down the progress and innovation of the Indian crypto ecosystem in the future.
