India’s Financial Intelligence Unit (FIU) has recently introduced stringent new Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols for cryptocurrency exchanges in an effort to crack down on illegal activities in the digital asset market. These new guidelines, which were released on January 8, require crypto exchanges to implement additional security measures during the onboarding process.
One of the key changes is the introduction of mandatory liveness detection and geographical tracking for users creating accounts on cryptocurrency exchanges. Users are now required to take a “live selfie” using software that verifies their presence through actions like eye-blinking or head movement. This measure aims to prevent the use of static photos or deepfakes.
Furthermore, exchanges must now record detailed information such as the latitude and longitude, date, timestamp, and IP address of the user when they start creating an account. Additionally, a “penny-drop” method has been introduced, which involves processing a nominal transaction to confirm the validity of the user’s bank account.
In terms of documentation, users are now required to provide a Permanent Account Number (PAN) along with a secondary ID such as a Passport, Aadhaar, or Voter ID. OTP verification for email and phone number is also mandatory. These measures are designed to enhance security and prevent fraudulent activities in the cryptocurrency market.
The FIU, operating under the Union Finance Ministry, is taking a firm stance against tools that can be used to conceal the paper trail of crypto wealth. The new guidelines aim to discourage Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs) due to their high risk and lack of economic justification.
Cryptocurrency exchanges in India are required to register with the FIU as reporting entities and submit regular reports on suspicious transactions. They must also maintain records of their clients to identify and combat risks associated with crypto assets. The FIU emphasizes the importance of verifying the identity of clients during the onboarding process to prevent money laundering, terrorist financing, and proliferation financing.
High-risk clients are subject to enhanced KYC procedures, with updates required every six months. Additionally, an ‘enhanced client due diligence’ is required for individuals or entities with links to tax haven countries, jurisdictions named under the FATF grey or black list, politically exposed persons (PEPs), or non-profit organizations (NPOs).
The guidelines also address the risks associated with ICOs/ITOs and anonymity-enhancing crypto tokens. Measures are in place to prevent transactions involving tumblers or mixers, which are designed to obscure the origin, ownership, or value of transactions.
Overall, these new guidelines aim to strengthen the regulatory framework for cryptocurrency exchanges in India and enhance transparency in the digital asset market. By implementing these measures, the FIU seeks to protect investors and prevent illicit activities in the crypto space.
