Indian financial authorities have significantly tightened the regulatory landscape for virtual digital assets to mitigate systemic financial crimes. The Financial Intelligence Unit of India recently issued comprehensive guidelines that prohibit domestic and offshore exchanges from facilitating transactions involving anonymity-enhancing crypto assets. These new directives specifically target privacy-focused tokens and mixing services that provide advanced layers of transaction shielding. To enforce these standards, the regulator has already imposed substantial financial penalties, including a fine of 9.27 crore rupees against Bybit Fintech Limited in January 2026 for failing to meet rigorous anti-money laundering obligations. This move underscores a broader strategy to eliminate the operational space for digital tools that obscure the movement of illicit funds across borders.
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Anti-Money Laundering Framework for Privacy Coins
The Financial Intelligence Unit of India has formally categorized anonymity-enhancing crypto assets as high-risk instruments within the national financial ecosystem. These digital assets, which include notable tokens like Monero and Zcash, utilize cryptographic protocols such as stealth addresses and zero-knowledge proofs to decouple user identities from transaction histories. Under the updated guidelines issued in January 2026, any reporting entity providing services related to virtual digital assets is strictly forbidden from permitting the deposit, withdrawal, or transfer of such tokens. This prohibition extends to the use of mixers and tumblers, which are services designed to scramble transaction paths by pooling funds from multiple sources. By removing these opaque tools from regulated platforms, the government aims to ensure that every digital asset transfer remains traceable and auditable by law enforcement agencies.
Enhanced Due Diligence and Monitoring Standards
To support the ban on privacy-enhancing tools, the regulator has introduced a multi-layered verification framework that all exchanges must adopt. Onboarding now requires a live selfie with liveness detection technology to prevent the use of static images or deepfakes during the identity verification process. Furthermore, exchanges are mandated to capture geographical coordinates, including latitude and longitude, along with IP addresses for every account creation attempt. A critical component of this new regime is the penny-drop verification method, where a nominal transaction of one rupee is used to confirm that the linked bank account is active and matches the registrant’s identity. These measures are designed to create a transparent trail that links digital asset movements directly to verified natural or legal persons, thereby reducing the risk of anonymous money laundering through complex digital networks.
Regulation of Non-Custodial and Unhosted Wallets
The focus of the new guidelines also encompasses the risks associated with non-custodial or unhosted wallets, which allow individuals to maintain private keys without a central intermediary. Reporting entities are now required to collect detailed data on transfers involving these wallets, including the purpose of the transaction and the identification of the beneficiary. High-value movements without a clear economic rationale must be flagged as suspicious and reported within a specific timeframe to the authorities. The regulation specifies that offshore platforms targeting the Indian market must register as reporting entities under the Prevention of Money Laundering Act, regardless of their physical location. This ensures that the same compliance standards apply to international service providers, closing potential loopholes that could be exploited to bypass domestic anti-money laundering controls.
Strategic Compliance and Enforcement Outcomes
The rigorous application of the Prevention of Money Laundering Act has led to several high-profile enforcement actions against international platforms. Beyond the penalty levied against Bybit, other major exchanges such as Binance and KuCoin have previously faced fines totaling millions of dollars to regularize their operations within the country. These actions reflect a shift from regulatory ambiguity to a firm, activity-based approach where the technical structure of a platform does not exempt it from oversight. The current framework demands that all virtual digital asset service providers maintain records for at least five years to facilitate reconstruction of transactions during investigations. As the government continues to align its domestic rules with global standards set by the Financial Action Task Force, the emphasis remains on fostering a secure financial environment where digital innovation does not compromise national security or financial integrity.
Key Points
- Virtual digital asset service providers must now implement live selfie verification and geo-tagging for all new users to prevent identity fraud.
- The Financial Intelligence Unit has prohibited all regulated exchanges from dealing in privacy coins and using mixing services that mask transaction trails.
- Non-compliance with the Prevention of Money Laundering Act has resulted in significant fines and the blocking of offshore platform URLs.
- Entities are required to perform enhanced due diligence on all transfers involving unhosted wallets to mitigate risks of illicit cross-border fund movements.
Related Links
- Financial Intelligence Unit India VDA Guidelines
- Prevention of Money Laundering Act 2002 Official Text
- Ministry of Finance Department of Revenue Notifications
- Financial Action Task Force Recommendations on Virtual Assets
- Asia Pacific Group on Money Laundering Member Reports
Other FinCrime Central Articles About India
- 49 Crypto Firms Now Under FIU-India Watch to Prevent Money Laundering
- Reserve Bank of India Amends KYC Rules for Commercial Banks Effective Immediately
- India Cracks Down on 25 Offshore Crypto Exchanges for Money Laundering
Source: scanX, by Radhika S.
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