Cryptocurrency investors in India are now subject to stricter Know Your Customer rules as part of a new mandate from the country’s Financial Intelligence Unit.
Registered crypto exchanges in India will be implementing new measures that seek to tighten onboarding procedures and enhance identity verification in compliance with new guidelines that became effective as of January 8, according to a local media report.
The latest directive is part of the FIU’s ongoing push to bring greater oversight to the largely unregulated cryptocurrency sector by enforcing enhanced anti-money laundering standards across the board.
What are the new KYC measures?
When onboarding new users, FIU-registered crypto exchanges in India would no longer be able to rely on basic documentation such as a profile picture paired with standard identity uploads.
As part of the new mandate, exchanges will require users to submit live selfie pictures that are verified using software capable of tracking eye and head movements in real-time.
With this approach, regulators hope to curb the use of deepfake images and static impersonation attempts that bad actors often deploy to bypass identity checks and gain unauthorized access.
Previously, users were only required to upload scanned copies of their government documents to complete the KYC process.
However, the updated rules now mandate the submission of additional government-issued photo identification, such as a passport, Aadhaar, or voter ID, along with OTP-based verification of both mobile number and email address.
Further, when linking their bank accounts for deposits and withdrawals, users would have to undergo a “penny drop” test, where a small transaction is sent to verify account ownership.
In the background, crypto exchanges would also be required to collect the geolocation and IP address of every user at the time of account creation, along with a timestamp and device-related metadata.
Users would be classified as high or low risk based on their jurisdiction, activity, and profile, and exchanges would be required to preserve their information for up to five years, or longer in cases where the user is involved in an active enforcement or legal investigation.
For context, high-risk clients include politically exposed persons, users from FATF grey or blacklisted countries, non-profits, and entities operating from or linked to tax havens.
These users will be required to update their KYC every six months, while regular users will be asked to complete this update annually.
Regulators are also taking a strict stance against privacy-focused cryptocurrencies and tools that enable anonymity in transactions.
Crypto exchanges would be required to adopt appropriate risk-mitigation measures to prevent the use of tumblers, mixers, and tokens that are designed to obfuscate the origin, ownership, or value of funds being transferred.
Transactions involving such tools are to be treated as high-risk and, in some cases, outright blocked.
Meanwhile, the FIU also discourages involvement in Initial Coin offerings (ICO) and Initial Token offerings (ITO) due to their lack of economic justification and elevated risks, the report noted.
FIU pushes for compliance or ban
India classified Virtual Digital Asset service providers under the Prevention of Money Laundering Act in 2023, which made it mandatory for exchanges to register as reporting entities with the FIU and offer services to Indian users only after securing regulatory clearance.
Over the past few years, the regulator has issued notices to several non-compliant platforms and blocked access to websites and apps that failed to register or meet compliance requirements.
Leading offshore exchanges like Binance, Bybit, and KuCoin have had to pay hefty fines to settle past violations and account for the years in which they operated without proper registration before they were allowed to re-enter the Indian market.
As per recent data, a total of 49 platforms, including both domestic and offshore exchanges, are now registered as reporting institutions under the FIU for the 2024–25 period.
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