Explained: Why crypto users in India must now submit live selfies and location details
Synopsis
India’s Financial Intelligence Unit has tightened KYC and AML norms for crypto platforms, mandating live selfie verification, geo-location checks and enhanced due diligence to curb money laundering and illicit transactions, significantly raising compliance requirements for exchanges and users.
India’s Financial Intelligence Unit (FIU) has tightened compliance norms for cryptocurrency platforms, requiring live identity verification and location checks as part of enhanced Anti-Money Laundering (AML) and Know Your Customer (KYC) measures aimed at preventing illicit transactions.
The updated guidelines issued on January 8 have classified crypto exchanges as Virtual Digital Assets (VDA) service providers, who will now have to do more than just allow simple document uploads.
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The guidelines further said that keeping in view the anonymous and instantaneous nature of VDA transactions and the potential of services offered by reporting entities (REs) being misused by illicit actors for the purpose of money laundering, terror financing and proliferation financing, all REs must have a robust Client Due Diligence (CDD) mechanism in place.
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The Client Due Diligence process shall now include identifying clients by obtaining their details and documents, and verifying their identity using reliable and independent sources of identification.
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Secondly, REs must collect additional identifiers such as IP address with timestamp, geo-location, device ID, VDA wallet addresses and transaction hashes, among other parameters, which are considered necessary for verification, authentication, monitoring and risk assessment purposes.
Lastly, mandatorily obtaining and verifying the Permanent Account Number (PAN) of the client for onboarding and or undertaking any VDA-related activity. The REs shall ensure compliance with this requirement as part of their CDD measures.
The verification of the client’s bank account shall be carried out through a penny-drop mechanism for the purpose of confirming both ownership and operational status of the account.
In addition to a Permanent Account Number (PAN), users must provide a secondary ID such as a passport, Aadhaar or voter ID, along with OTP verification for the email ID and phone number.
How industry experts see this
Commenting on the guidelines, Edul Patel, CEO, Mudrex, said, “We welcome the FIU-IND’s updated guidelines as a positive and timely step for India’s crypto ecosystem.”
Patel further said many of these measures such as strong KYC, transaction monitoring, cybersecurity audits and Travel Rule compliance were already being followed by responsible exchanges, and putting them formally on paper helps standardise best practices across the industry.
While mentioning that leading Indian exchanges were already following global best practices and bank-level compliance standards, Nishcal Shetty, Founder, WazirX, said that the new rules mandated by the FIU are essentially a formalisation of the existing rules that exchanges were supposed to follow, and steps like the penny-drop method and ID verification through selfies were already in place as part of the customer onboarding journey.
Shetty also added that now the contours are clearly defined and everyone knows exactly what is expected, without any room for ambiguity, preventing any layer of non-compliance for Indian platforms.
The new guidelines aim to “strongly discourage” Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs) as they lack justified economic rationale, established and comprehensive mitigation measures, and full and transparent disclosures. Initial Coin Offerings and Initial Token Offerings are generally a means to raise funds for new projects from early backers and function similar to IPOs for stock offerings.
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Under the enhanced measures under Client Due Diligence, the measures shall be initiated for transactions assessed as high risk or where money laundering, terrorist financing or proliferation financing concerns arise based on any red flag indicators triggered.
REs shall mandatorily apply enhanced measures under Client Due Diligence to relationships and transactions involving natural and legal persons from known high-risk jurisdictions, specifically countries designated as tax havens and those on the FATF grey and black lists, when establishing relationships with politically exposed persons and clients that are non-profit organisations.
Sharing the approach on tumbler, mixer and other anonymity-enhancing products and services, the guidelines said the REs shall deploy appropriate transaction monitoring and analytical tools to identify such transactions and, upon detection, these transactions shall not be facilitated and must trigger suitable risk mitigation measures.
These guidelines prescribe the procedural and operational obligations to be followed by reporting entities to ensure compliance with AML, CFT and CPF measures, to identify and discourage any instances of money laundering, terrorist financing or proliferation financing.
The guidelines also ask exchanges to preserve client IDs, addresses and transaction details for at least five years and retain them until an investigation is closed.
What does it mean for investors?
Patel further added that for investors, this significantly strengthens trust, transparency and accountability, and clearly signals the need for a comprehensive regulatory framework that protects users while allowing India’s crypto sector to grow in a mature and sustainable manner.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
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