Virtual Asset Service Providers (VASPs): India’s Regulatory Push and FATF Concerns on Offshore Crypto Platforms

In a recent published report, the Financial Action Task Force (FATF) outlined that India has acted against offshore Virtual Asset Service Providers (oVASPs).

• The March 2026 report on ‘Understanding and Mitigating the Risks of Off-shore Virtual Asset Service Providers’ has discussed India’s regulatory perimeter, enforcement actions, and detection tools. 

Key Findings of Report

• Setting up Virtual Asset Lab: India is establishing a “Virtual Asset Lab” to detect unregistered and high-risk crypto platforms using analytics, open-source intelligence, and automated web surveillance.
• Launch of Sahyog Portal for Digital Enforcement: The Ministry of Home Affairs has launched the Sahyog portal to enhance coordination with social media intermediaries, enabling automated and streamlined takedown of unlawful content across platforms, web hosts, and service providers.
• Inter-Agency Coordination on Virtual Asset Risks: The Department of Revenue under the Ministry of Finance has set up a Virtual Assets Contact Sub-Group (July 2023) to facilitate coordination among enforcement, intelligence, and regulatory agencies, enabling sharing of trends, typologies, and strategies to tackle emerging risks.
• Investigation into Offshore Cybercrime: Agencies like the National Investigation Agency (NIA), Central Bureau of Investigation (CBI), and Enforcement Directorate (ED) are probing offshore scam compounds in regions like Myanmar–Thailand border, Cambodia, and Laos, where trafficked Indians were forced into cybercrime operations.
• Collaborative Framework to Counter oVASPs: The Financial Intelligence Unit – India has set up a dedicated Working Group with VASPs, banks, and payment intermediaries to develop red-flag indicators and strategies to detect and curb offshore VASPs targeting Indian users.
• Mandatory Appointment of India-based Principal Officers: The Financial Intelligence Unit – India mandates VASPs to appoint India-based Principal Officers (POs) responsible for regulatory liaison, transaction monitoring, filing STRs, and ensuring compliance with the Prevention of Money Laundering Act (PMLA).
• Shift of Crypto Trading to Offshore Platforms: Analysis indicates that after India’s 2022 virtual asset tax regime, a significant share of trading activity shifted from domestic platforms to offshore unregistered VASPs.

About Offshore Virtual Asset Service Providers (oVASPs)

• Offshore Virtual Asset Service Providers (oVASPs) are entities that provide virtual asset-related services from jurisdictions outside a country’s regulatory framework.
• They deal with virtual/digital assets such as cryptocurrencies, tokens, and NFTs.
• These entities operate beyond the direct legal and supervisory control of domestic regulators like the Reserve Bank of India or Securities and Exchange Board of India.

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Key Features

• Jurisdictional Arbitrage: Offshore Virtual Asset Service Providers (oVASPs) operate from jurisdictions that have lenient or weak regulatory frameworks, enabling them to avoid strict compliance requirements.
• Lack of Registration: oVASPs are often not registered with domestic regulatory authorities, thereby remaining outside the direct supervisory control of national regulators.
• Cross-border Nature: They function through digital and online platforms, allowing them to provide services seamlessly across multiple countries without physical presence.
• Anonymity and Pseudonymity: Transactions conducted through oVASPs frequently lack robust Know Your Customer (KYC) mechanisms, leading to anonymity or pseudonymity of users.
• Regulatory Evasion: oVASPs have the ability to circumvent Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) regulations, posing risks to financial integrity and security.

Challenges

• Financial Integrity Risks: Offshore Virtual Asset Service Providers (oVASPs) can facilitate money laundering and financing of terrorism due to weak regulatory oversight.
  • The pseudonymous nature of transactions makes it difficult for authorities to trace and monitor suspicious financial activities.
• Consumer Protection Issues: Users of oVASPs often have no legal recourse in cases of fraud, hacking, or insolvency of platforms, as these entities operate outside domestic jurisdiction.
  • Investors are exposed to high price volatility, misleading schemes, and fraudulent activities, increasing financial risks.
• Capital Flight and Tax Evasion: oVASPs enable unaccounted cross-border transfer of funds, leading to capital flight from domestic economies.
  • Their operations contribute to reduced tax compliance and loss of government revenue.
• National Security Concerns: oVASPs may be misused for illicit trade, darknet transactions, and other illegal activities, posing threats to national security.

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Way Forward

• International Cooperation: There is a need to strengthen global collaboration through multilateral frameworks such as the Financial Action Task Force (FATF) and the G20 to ensure coordinated regulation of virtual asset service providers across jurisdictions.
• Regulatory Harmonisation: Countries should work towards developing uniform and harmonised global standards for regulation of virtual assets, in order to reduce regulatory arbitrage and prevent misuse of offshore platforms.
• Strengthening Domestic Laws: Domestic legal frameworks must be strengthened to expand jurisdiction over foreign entities that provide services to Indian users, ensuring accountability and compliance with national regulations.
• Technological Solutions: Authorities should adopt advanced blockchain analytics and monitoring tools to enhance the tracking of virtual asset transactions and detect suspicious activities effectively.

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