FIU’s Notice to Binance & Others: Boon for Indian Crypto Exchanges?

Why did FIU send a notice to Binance and other major crypto exchanges?

In December 2023, the FIU of India issued notices to Binance and other major crypto exchanges. This was a part of its compliance enforcement action under the Prevention of Money Laundering Act (PMLA).

Understand the broader implications of regulatory changes by exploring how fintech and blockchain are impacting the financial landscape.

Nine exchanges that received the FIU notice

So, a total of nine exchanges received the aforementioned notice. Take a look:

• Binance
• KuCoin
• Huobi
• Kraken
• Gate.io
• Bittrex
• Bitstamp
• MEXC Global
• Bitfinex​​​​​​​

Potential for blocking the URLs

The FIU took this regulatory enforcement a step further by requesting the Ministry of Electronics and Information Technology (MeitY) to block the URLs of the mentioned offshore VDA SPs. This will effectively prevent them from offering services to Indian users. Additionally, this will reinforce that they do not circumvent the legal framework. 

Impact of FIU’s notice on Indian exchanges

The FIU’s notice has the potential to impact Indian crypto exchanges in both positive and negative ways. Here’s a breakdown:

Potential boon

Given below are the benefits Indian exchanges might get to enjoy. Take a look:

Increased market share

With major international platforms facing restrictions, Indian crypto players predict an influx of users seeking compliant domestic platforms.  Many companies are actively developing mechanisms to facilitate the transfer of investments from offshore exchanges back to Indian platforms, aiming to capitalize on this opportunity.

Future projections

The introduction of TDS initially led to reduced domestic trading volumes as investors explored international alternatives. Despite some resistance and calls for lower TDS rates, the new framework could incentivize the strengthening and innovation of local platforms, keeping capital within the country and creating opportunities for new entrants.

Projections by KuCoin, indicate that by 2030 the Indian crypto market could expand to a substantial $241 million. This exemplifies the potential of crypto in the domestic market.

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Enhanced regulatory clarity

The FIU’s action sends a strong message about India’s commitment to regulating the crypto space. This could pave the way for clearer regulations. Consequently, this would benefit all exchanges by providing a stable and predictable operating environment.

Increased security

Mandates from the FIU might lead exchanges to bolster their security measures and AML protocols, reducing the risk of fraudulent activities and hacks.

Boost in investor confidence

Following FIU guidelines can align Indian exchanges with global standards, facilitating easier international collaborations. This move can restore investor confidence in the Indian crypto market, attract new investments, and fuel further growth.

Compare the evolving landscape by reviewing the 11 best crypto exchanges in the UK, offering insights into global market trends.

Potential challenges

Now, let’s unravel the possible hindrances that Indian exchanges might face.

Operational challenges

Implementing the guidelines may require exchanges to overhaul their systems, leading to temporary disruptions. This could also lead to increased operational costs, which can be challenging for smaller exchanges or new entrants in the market.

Potential reduction in anonymity

The imposition of stringent KYC and AML norms may deter privacy-conscious individuals. It can cause a contraction in the user base and potentially limit the growth and adoption of the platform.

Potential for overregulation

There’s always a risk that overzealous regulation could stifle innovation and become a hurdle in the crypto market. Stricter regulations might put Indian exchanges at a competitive disadvantage compared to those in more lenient jurisdictions, possibly diverting traffic and investment to those areas.

Reduced liquidity

With major players potentially blocked, overall liquidity in the Indian crypto market might take a hit, impacting trading volumes and price volatility.

Future of Web3 in India: The Bharat Web3 Association (BWA)

BWAmarks a pivotal advancement in India’s digital asset and blockchain sector. It pools the expertise of leading Web3 platforms, including Polygon, Biconomy, CoinDCX, and CoinSwitch, to foster a robust ecosystem.

The platform is committed to propelling India into a leadership position in global Web3 innovation through comprehensive strategies like enhancing industry awareness and developing talent.

Central to its mission is facilitating strategic dialogues with industry, government, and regulators to advocate for a balanced regulatory environment and promote standardized principles for the burgeoning crypto realm.

Gain insights into what the future holds for crypto with a thorough analysis of the future of crypto in the next five years.

Anti-Money Laundering (AML) compliance

To get an in-depth understanding of FUI’s actions, let’s take a look at the applicable laws:

Prevention of Money Laundering Act (PMLA)

The PMLA, 2002, is a legislative act in India aimed at preventing money laundering activities. It was enacted on July 1, 2005. Under the PMLA, money laundering is defined as acquiring, owning, possessing, or transferring any proceeds of crime, knowingly involving such proceeds in any activity, or concealing or aiding in the concealment of the true nature of these proceeds.

The act imposes an obligation on banking companies, financial institutions, and intermediaries to verify the identity of clients, maintain records, and furnish information to the FIU. It also outlines the process for attachment and confiscation of the property of an individual if they are found to be involved in money laundering.

It mandates rigorous imprisonment for the individuals found guilty of the offense of money laundering. The PMLA is amended periodically to align with the evolving international standards and to effectively combat money laundering and related offenses.

Applicability of PMLA to crypto platforms

Until recently, crypto platforms operated in a regulatory grey area regarding AML compliance. However, in March 2023, VDA SPs were incorporated into the AML-CFT framework.

To date, 31 VDA SPs, including prominent names such as CoinDCX, WazirX, Coinswitch, CoinswitchX, and Zebpay, have registered with the FIU. The following are the key legal obligations for crypto businesses operating in India:

• Registration with FIU: Crypto businesses are required to register with the FIU. This includes both onshore and offshore VDA SPs that engage in various activities, such as the exchange between virtual digital assets and fiat currencies, the transfer of virtual digital assets, and the safekeeping or administration of virtual digital assets.
• Compliance with AML-CFT obligations: Once registered, crypto businesses must implement robust procedures for customer due diligence, which includes Know Your Customer (KYC) verifications.
• Record-keeping and reporting: Crypto businesses are required to maintain detailed records of all transactions for a specified period and furnish information to the FIU as per the guidelines. They must report any cash transactions over a certain threshold and all suspicious transactions, irrespective of the amount.

Stay safe out there and explore various lesser-known strategies that work for earning passive income with cryptocurrencies.

Crypto tax in India

In addition to regulatory compliance, the Indian government has imposed stringent taxation measures on cryptocurrencies, significantly impacting the sector. The imposition of a 1% Tax Deducted at Source (TDS) on crypto transactions exceeding $600 (₹50,000) in one fiscal year and a 30% tax on profits have notably dampened the trading atmosphere within the previous year.

The sector has further faced challenges due to calls by senior Reserve Bank of India (RBI) officials for a crypto ban and the downfall of major entities like FTX. Such developments have soured market sentiment, leading to a decrease in funding and the eventual cessation of operations by several crypto platforms.