The centre took a major step to curb illegal activities in the digital asset market. India's Financial Intelligence Unit (FIU) has issued new Anti-Money Laundering (AML) and Know Your Customer (KYC) guidelines for cryptocurrency exchanges. These new rules make user liveness detection and geographical tracking mandatory.
The guidelines issued on January 8 classify crypto exchanges as Virtual Digital Asset (VDA) service providers. As a result, simply uploading documents will no longer suffice. The user identity verification process has been made more stringent with new methods.
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Why the government says stricter checks are now unavoidable?
According to the new rules, users will have to take a 'live selfie' when opening an account. This selfie will be verified through movements like blinking or nodding. The purpose is to prevent the use of static photos or deepfakes. At the same time, the location from where the user initiates the account opening process must be specifically documented. This will include latitude, longitude, date, time and IP address.
The 'penny-drop' method has also been made mandatory for bank account verification. In this process, a transaction of Re 1 will be made to confirm that the concerned bank account is active and belongs to the applicant.
From now on, trading accounts for cryptocurrency cannot be opened with just a PAN card. Along with the PAN card, an additional identity document like passport, Aadhaar or voter ID will have to be provided. Besides, OTP verification on email ID and mobile number has also been made mandatory under the new rules.
The FIU under the central finance ministry has stated that this strictness is to prevent attempts to hide evidence of crypto asset transactions. The guidelines mention discouraging activities like ICO (Initial Coin Offering) and ITO (Initial Token Offering), as their economic rationale is weak and risks are high. The guidelines state that ICOs and ITOs have higher risks of money laundering and terrorist financing. Besides, anonymity-enhancing crypto tokens, tumblers and mixers are used to hide the source and ownership of transactions. Such transactions cannot be permitted and measures must be taken to reduce risks.
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The FIU has clarified that all crypto exchanges operating in India must register as reporting entities under the Prevention of Money Laundering Act (PMLA). Along with this, submitting suspicious transaction reports and maintaining detailed customer information is mandatory. For high-risk customers, KYC must be updated every six months. For other customers, this update is required once a year.
Under the new rules, exchanges will have to preserve customer identity, address and transaction information for at least five years. If any investigation is ongoing, this information must be retained until it concludes.
