Overview of Updated Guidelines for Crypto Exchanges in India
On January 8, India’s Financial Intelligence Unit (FIU-IND) updated the guidelines for Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) for entities providing services related to Virtual Digital Assets, including cryptocurrency exchanges. These changes focus on Know-Your-Client (KYC) procedures and aim to tighten the regulation of crypto exchanges.
Key Requirements for Crypto Exchanges
- Know-Your-Client (KYC):
- Crypto exchanges must obtain verified client information, including personal identity number and contact details.
- Additional information such as occupation, income range, and a selfie with "liveness detection" is required.
- Geo-tagging details like latitude, longitude, date, timestamp, and IP address must be collected during onboarding.
- Bank account verification is conducted using the penny drop method.
- High-Risk Transactions:
- Enhanced KYC measures for high-risk clients, requiring updates every six months.
- Annual KYC updates for other clients.
- Prohibited Activities:
- Initial Coin Offering (ICO) and Initial Token Offering (ITO) activities are strongly discouraged.
- Transactions involving anonymity-enhancing crypto tokens and mixers are barred.
Rationale Behind the Guidelines
The guidelines aim to prevent the misuse of cryptocurrencies for illegal activities such as money laundering and terrorism financing. For instance, cases involving Binance highlight the need for robust KYC processes to deter such threats.
Compliance and Challenges
- Prominent Indian exchanges like WazirX and CoinDCX are already implementing stringent KYC processes, aligning with global best practices.
- Decentralized exchanges (DEXs) pose challenges as they offer anonymity and fewer controls, making them attractive for illicit activities.
Industry Response and Future Considerations
- Leaders in the industry, such as ZebPay’s COO, support the enhanced AML and KYC protocols for bolstering crypto acceptance in India.
- Despite the new guidelines, there is a call for clearer regulatory frameworks and legislative action at the parliamentary level.
- Current regulations lag behind those in the U.S., Europe, and East Asia, affecting investor protection and business clarity.
Taxation and Investor Concerns
- Cryptocurrencies are subject to a 30% capital gains tax and a 1% TDS rate in India.
- There is a lack of a reliable safety net for investors against scams, hacking, and unfair practices.
- Investors seek more coherent regulations to ensure security and compliance.
