Guidelines for Cryptocurrency Exchanges by FIU

News– The Financial Intelligence Unit–India (FIU-IND) issued updated Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) guidelines on 8 January, tightening Know Your Customer (KYC) norms for cryptocurrency / virtual digital asset (VDA) exchanges operating in India.

Key highlights of the new FIU guidelines

1. Mandatory registration with FIU-IND

• All cryptocurrency exchanges and  virtual digital asset service providers must register as “Reporting Entities” under the Prevention of Money Laundering Act (PMLA), 2002.
  • FIU-IND is the single-point regulator for crypto exchanges in India.

2. Enhanced KYC & Client due diligence (CDD) norms

Crypto exchanges must mandatorily collect:

• Permanent Account Number (PAN)
• Selfie with liveness detection
• Geographical coordinates (latitude & longitude) of onboarding location
• Date & timestamp of onboarding
• IP address of the customer
• Verified bank account

3. Penny-Drop Verification Mandated

• Bank account verification using the ‘penny-drop’ method is compulsory.

  What is Penny Drop Verification? It is a bank account verification method where a small amount (usually Rs. 1) is deposited to confirm account ownership. Process: A micro-deposit is sent using the account number and IFSC, and the bank returns the registered account holder’s name. Verification: The returned name is matched with KYC/PAN details of the user. Purpose:It helps prevent fraud, fake accounts, and money laundering, and ensures secure financial transactions.

4. Restrictions on high-risk Crypto activities

The guidelines explicitly prohibit exchanges from facilitating:

• Tumblers and mixers (used to obscure transaction trails)
• Anonymity-enhancing tokens
• Transactions designed to hide the origin or destination of funds

5. Discouragement of ICOs and ITOs

Exchanges are discouraged from promoting or facilitating:

• Initial Coin Offerings (ICOs)
• Initial Token Offerings (ITOs)

6. Reporting & Record-Keeping obligations

• Exchanges must:
• Maintain detailed customer records
• Report suspicious transactions (STRs) to FIU-IND
• Monitor risks related to:
  • Money laundering
  • Terrorist financing
  • Proliferation financing

Note– Legal status of Cryptocurrency in India: Cryptocurrencies are not recognised as legal tender in India but are taxed under the Income-Tax Act. Regulatory oversight is exercised through the Prevention of Money Laundering Act (PMLA), not currency laws.

About Financial Intelligence Unit – India (FIU-IND)

• Established: 2004
• Nature: Independent national agency
• Administrative control: Reports to the Economic Intelligence Council (EIC) headed by the Finance Minister
• Function:
  • Receives, analyses, and disseminates information on suspicious financial transactions
  • Coordinates national & international efforts against money laundering and terror financing