India tightens crypto rules to fight money laundering and terror funding

India's financial intelligence agency has announced stricter identity checks for cryptocurrency exchanges to combat money laundering and terror financing, according to Press Trust of India.

New rules by the Financial Intelligence Unit (FIU), updated Jan. 8, require exchanges to verify users with a live selfie that shows them blinking to prove liveliness and authenticity, alongside precise logging of their geographical coordinates, date, time, and IP address.

Beyond the mandatory Permanent Account Number (PAN), exchanges are required to collect additional documents, such as a passport, driver's license, Aadhaar card (a local term for central government-issued ID), or voter ID, along with mobile numbers and email addresses, which are confirmed via one-time passwords (OTPs).

User's bank ownership is authenticated through the "penny-drop" method, which involves a small refundable 1 rupee (INR) charge, while high-risk clients, or those linked to tax havens, FATF-linked jurisdictions or potentially exposed persons or non-profit organizations, face enhanced due diligence checks every six months.

Exchanges can't support initial coin offerings (ICOs), which are token sales like mini-IPOs, and are barred from using tools like tumblers/mixers that hide transaction trails to make crypto untraceable. All platforms must register with the FIU, report suspicious trades, and keep user data for five years.

The guidelines state that ICOs and initial token offerings (ITOs) lack a justified economic rationale and pose "heightened and complex" risks of money laundering and terrorist financing.

India maintains a cautious stance on cryptocurrencies, defining them as virtual digital assets (VDAs) under the Income Tax Act, 1961. Indian citizens can buy and sell these VDAs via FUI-registered platforms, but cannot use them as legal tender or currency to make payments for goods and services.