India cracks down on ‘privacy cryptos’, flags money laundering risks
Synopsis
India is taking a strong stance against privacy cryptocurrencies. The Financial Intelligence Unit has directed crypto exchanges to stop dealing in these virtual assets. This move aims to curb money laundering and mask transaction trails. Privacy coins like Monero and Zcash use advanced cryptography to hide user identities and transaction details. This directive could significantly impact trading on recognized platforms.
Mumbai: India has clamped down on ‘privacy cryptos’ which have globally earned the notoriety as money-laundering currencies that mask the transaction trail and user identities.
The Financial Intelligence Unit (FIU), the finance ministry arm tracking suspicious financial dealings, has told crypto currency exchanges and platforms to stop dealing in such virtual digital assets (VDAs).
“Reporting entities (i.e. exchanges and intermediaries) shall refrain from permitting deposits or withdrawals of anonymity-enhancing crypto tokens (ACEs) or VDAs designed to conceal or obfuscate the origin, ownership, or value of transactions,” said a FIU guideline updated a fortnight ago. They should consider dealings in ACEs as not permissible within their risk-mitigation framework, FIU further said.
Crypto TrackerTOP COINS (₹) XRP179 (3.18%)Ethereum275,348 (2.5%)BNB81,455 (2.0%)Bitcoin8,232,321 (1.87%)Tether92 (0.64%) Compared with public blockchains used to move Bitcoin and Ethereum where transactions though pseudonymous can be tracked, privacy coins like Monero (XMR), Zcash (ZEC), and Dash (DASH) use sophisticated cryptography to shroud information. They use ‘stealth addresses’-one-time addresses created for each transaction-to shield true recipients.
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View Details » “Anonymity enhancing tokens were initially embraced as symbols of financial freedom and privacy, but the emerging global regulatory consensus is to prohibit their use. Given their inherent lack of traceability, FIU has rightly instructed the reporting entities to refrain from dealing in these tokens, given the unacceptably high-risks,” said Purushottam Anand, founder of Crypto Legal.
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Privacy coins can be acquired for rupees or swapped for other VDAs in some local platforms. While many have restricted the withdrawal of VDAs, coins can still be taken out under certain circumstances from wallets in an exchange to a private purse. While exchanges are not regulated, the FIU directive could end trading of privacy coins on recognised platforms.
The central body has also cautioned against privacy coins creeping into the system with the aid of tools like ‘tumblers’ and ‘mixers’ that pool in and mingle cryptocurrencies of multiple users to uncouple the original and final addresses and camouflage the transaction history. Thus, coins flowing in through sanctioned and blacklisted wallets would never be spotted, thanks to mixers which have been a concern for US regulators OFAC and FinCen.
Platforms will also have to collect data on ‘unhosted’ or non-custodial wallet transfers having private keys, and even consider putting limits on transactions with such wallets that promise greater secrecy.
“The FIU’s move shows that a clear policy framework is slowly emerging, even though the broader Web3 regulatory ecosystem still has a long way to go. From our direct experience assisting law enforcement agencies, once privacy coins move outside regulated exchanges, tracking is close to impossible. So, , FIU has struck a balanced approach-protecting the right to invest while restricting withdrawal and misuse,” said Sudhakar Lakshmanaraja, founder at Digital South Trust, which offers Blockchain education.
Countries like Russia have investment and withdrawal caps for less savvy, non-qualified investors while Japan mandates segregation of client funds and exchange operating capital, proof-of-reserves and solvency audit, along with investor protection fund. Similar suggestions are understood to have been made to the Parliamentary panel looking into crypto regulations.
Offshore Crypto Profits
Even as agencies grapple with the crypto challenge, some of the banks are unsure how to go about crediting funds of locals who have raked in profits from investments made some years ago on foreign platforms. One of the banks recently approached the industry body FEDAI after receiving unclaimed funds from the US Treasury following overseas crypto liquidation after an India investor’s account became dormant.
Since many banks are reluctant to let liberalised remittance scheme be used to buy cryptos abroad, they are in a dilemma whether to freely credit accounts when sale proceeds come back.
“If a resident receives money in India that represents encashment of offshore crypto (e.g., sells crypto abroad and remits the fiat to an Indian bank), the AD Bank will typically treat it as a normal foreign inward remittance but subject to enhanced KYC/source-of-funds scrutiny, because FEMA has not yet laid down a specific crypto framework. There is no express RBI permission for cross-border “crypto deals” under FEMA, so large, frequent or poorly-documented crypto-linked credits can lead to transaction being withheld, reported as suspicious, or referred to regulators (including FIU/ED) depending on facts,” said Harshal Bhuta, partner at the CA firm P. R. Bhuta & Co.
