India is right to act on offshore crypto platforms but it must also build a fairer market
Synopsis
A Financial Action Task Force report backs India’s concerns that the real risk in crypto lies in offshore, non-compliant virtual asset service providers (VASPs), not the asset class itself.
The recently released report by the Financial Action Task Force on the risks of offshore virtual asset service providers validates India’s longstanding concerns. Compliant Indian crypto-exchanges have long argued that the real policy problem in the sector is not crypto itself, but, more importantly, the growing role of offshore and non-compliant platforms in India.
These exchanges serve Indian users without properly registering with the Financial Intelligence Unit under the Prevention of Money Laundering Act and the subsequent AML and customer due diligence standards. The FATF report also notes that India requires VASPs to register under this AML/CFT framework regardless of physical presence. Yet many such VASPs continue to serve Indian users.
Notably, the report does not treat this as a theoretical risk. It clearly identifies how such offshore VASPs reach Indian users in practice. The report notes that these VASPs onboard customers with little or no KYC, accept deposits using domestic payment channels such as UPI or card networks, and enable withdrawals into Indian bank accounts by routing payouts through locally registered intermediaries. Essentially, FATF shows that offshore and non-compliant VASPs can access the Indian market through the seams of the wider financial system.
Crypto TrackerTOP COINS (₹) Ethereum201,965 (0.59%)Tether94 (0.32%)BNB60,270 (0.22%)Bitcoin6,626,849 (0.17%)XRP135 (-0.26%)This is important for two reasons. First, it is a consumer protection challenge. Indian users trading on offshore and non-compliant exchanges are exposed to weak consumer protection measures, such as ineffective grievance redress mechanisms and weak KYC norms. FATF rightly identifies that offshore VASPs deliberately lower KYC requirements and convert lower compliance costs into a price advantage over onshore and compliant exchanges. This creates an uneven playing field. For many years, domestic crypto-exchanges in India have been advocating for a level playing field in terms of taxes and compliance requirements. Offshore and non-compliant crypto exchanges also circumvent the tax obligation to collect 1% TDS on all transactions, taking advantage of ambiguity in the articulation of existing tax laws. By contrast, compliant and onshore exchanges incur significant compliance costs, including those related to KYC, transaction monitoring, reporting, and coordination with law enforcement agencies.
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View Details »Secondly, and crucially, there is a national security and enforcement challenge. FATF highlights the key role that registered Indian crypto exchanges play in tackling cyber fraud. The report explains how one Indian crypto-exchange provided crucial information to law enforcement agencies that directly contributed to the identification of cyber scam compounds in Cambodia and Myanmar. This is a powerful example of why regulated onshore VDA providers matter. Effectively supervised and properly regulated VDA exchanges are not the problem; they are a key component of the solution.
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From a public policy perspective, the FATF report also highlights the improvements needed in India’s regulatory approach to the VDA sector. It shows that registration rules alone are not enough, as offshore and non-compliant VDA exchanges are still able to onboard Indian customers and operate with relative ease. To curb this challenge, a more holistic regulatory approach is needed. Such an approach would allow Indian policymakers and law enforcement agencies to better detect and supervise market activity, improve coordination, and enforce compliance more effectively across participants.
To this end, India should consider a policy approach built on the principle of same activity, same rules. This should be supported by measures to improve coordination between the FIU, banks, payment providers, and domestic VASPs. Just as importantly, the approach should ensure that it does not incentivise or reward non-compliance.
The report calls for innovation, but in a responsible manner that facilitates accountable growth in the VDA ecosystem. Compliant VDA exchanges should not be penalised for following the rules while offshore exchanges profit from avoiding them. Ultimately, India’s regulatory approach must ensure that consumer trust and safety become the basis of competition, rather than regulatory arbitrage.
(The author of the article is Sumit Gupta, Co Founder at CoinDCX)
