Guidelines for Crypto and Virtual Digital Asset Entities

The Financial Intelligence Unit–India (FIU-IND), under the Ministry of Finance, has issued updated guidelines to strengthen regulatory oversight of cryptocurrency and Virtual Digital Asset (VDA) entities operating in India.

• The directives also discourage Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs), equivalent to IPOs in stock markets, by the exchanges.

Key Highlights of the Guidelines

• Mandatory Registration: 
  • All crypto exchanges must register with the FIU as Reporting Entities (REs).
  • Exchanges must submit Suspicious Transaction Reports (STRs) and maintain detailed records of clients and transactions to identify illicit financial activities.
• Principal Officer (PO): Every VDA Reporting Entity must appoint a Principal Officer (PO) mandatorily.
  • Role and Responsibility: Overall responsibility for Anti-Money Laundering (AML); Countering Financing of Terrorism (CFT) and Counter-Proliferation Financing (CPF) compliance.
• Cybersecurity and Data Protection Norms: VDA service providers must obtain a Cyber Security Audit Certificate from a CERT-In empanelled auditor.
  • Certificate must confirm compliance with CERT-In Directions and applicable cybersecurity frameworks.
• Unhosted Wallet and Peer-to-Peer Transactions: Reporting entities must collect information related to unhosted wallet transfers.
• Enhanced KYC Requirements: 
  • Exchanges must mandatorily collect Permanent Account Number (PAN), Selfie with liveness detection to verify physical presence and Geo-Tagging.
  • Account Verification: Client bank accounts must be verified using the ‘penny-drop’ mechanism.
    • ‘Penny-Drop’ Bank Account Verification: A refundable ₹1 transaction is credited to confirm ownership and operational status of the bank account.

Regulatory Authority and Legal Basis

• Legal Framework: Guidelines are issued under the Prevention of Money Laundering Act (PMLA).
• Status of Crypto: Cryptocurrencies are not legal tender in India, but are taxed under the Income-Tax Act.
  • VDAs are defined under Section 2(47A) of the Income-tax Act, 1961

Why Was There a Need to Update the Crypto Guidelines?

• Rising Risk of Money Laundering and Terror Financing: Increased use of cryptocurrencies for anonymous, cross-border transactions raised concerns regarding money laundering, terror financing and proliferation financing.
• Regulatory Gaps in a Rapidly Evolving Sector: Expansion of VDA activities such as peer-to-peer transactions, unhosted wallets and offshore exchanges creates gaps in monitoring and enforcement under the existing framework.
• Alignment with FATF Recommendations: The update was necessary to align India’s crypto regulatory regime with FATF AML/CFT standards, including enhanced KYC norms, reporting obligations and the Travel Rule.
• Ensuring Effective Oversight Post-PMLA Inclusion: After VDA service providers were notified as Reporting Entities under PMLA in 2023, detailed operational guidelines were required to ensure uniform compliance and effective supervision.

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About Financial Intelligence Unit – India (FIU-IND)

• Nature: FIU-IND is the central national agency responsible for handling financial intelligence related to suspicious transactions.
  • The FIU acts as the single-point regulator for cryptocurrency exchanges in India.
• It plays a vital role in countering money laundering and financing of terrorism, both domestically and internationally.
• Establishment: It was established in November 2004 by the Government of India by an order. ((Not a statutory body)
• Governance: It functions as an independent body, directly reporting to the Economic Intelligence Council (EIC) chaired by the Union Finance Minister