Source: CryptoTale Original Title: India Tightens Rules on Privacy Cryptos Over Laundering Risks Original Link:

India Tightens Rules on Privacy Cryptos Over Laundering Risks

• FIU orders Indian exchanges to stop handling anonymity-enhancing cryptocurrency tokens.
• Privacy coins like Monero, Zcash, and Dash are now restricted under the guidelines.
• Directive strengthens AML rules, wallet monitoring, and offshore crypto oversight.

India’s Financial Intelligence Unit has directed crypto exchanges to stop handling privacy-focused digital tokens, citing increased money laundering risks. The directive, issued earlier this month through updated compliance guidelines, targets anonymity-enhancing crypto assets traded on domestic platforms. The move involves exchanges, intermediaries, and regulators, aiming to curb untraceable transactions by restricting how such assets enter and exit the system.

FIU Targets Anonymity-Enhancing Crypto Assets

Under the updated guideline, the FIU instructed reporting entities to avoid deposits or withdrawals involving anonymity-enhancing crypto tokens. The guideline classifies these virtual digital assets as incompatible with existing risk-mitigation frameworks. According to the FIU, such assets conceal transaction origin, ownership, or value, raising compliance concerns.

In contrast, public blockchains like Bitcoin and Ethereum allow transaction tracing despite pseudonymous identities. However, privacy coins rely on advanced cryptography that blocks transaction visibility. Tokens such as Monero, Zcash, and Dash use stealth addresses and shielded transactions to hide recipients and transferred amounts.

Purushottam Anand, founder of Crypto Legal, said global regulators increasingly oppose these tokens due to traceability gaps. According to Anand, regulators now see anonymity-enhancing tokens as high-risk instruments rather than privacy tools. He added that the FIU directive aligns with this emerging global consensus.

The guideline further warns exchanges against allowing privacy coins through indirect tools. Notably, tumblers and mixers remain a concern because they obscure transaction trails. These tools pool funds from multiple users, breaking links between source and destination wallets.

Because of this, coins from sanctioned or blacklisted wallets may bypass detection. U.S. regulators, including OFAC and FinCEN, have previously flagged similar risks. Therefore, the FIU asked Indian platforms to remain alert to such methods.

Exchanges, Wallets, and Transaction Monitoring

Although exchanges in India lack a unified regulatory license, FIU registration remains mandatory for compliance. Consequently, the directive may effectively end privacy coin trading on recognized platforms. Some exchanges already limit withdrawals, though a few wallet transfers can still go through in certain cases.

To close that loophole, the FIU has stepped up checks on self-custody wallets. Platforms are now required to gather details on transfers that involve unhosted wallets where users hold their own private keys. Moreover, the guideline allows exchanges to limit transactions involving wallets promising enhanced secrecy.

Sudhakar Lakshmanaraja, founder of Digital South Trust, said enforcement agencies face major tracking challenges once privacy coins leave regulated platforms. Based on his work with law enforcement, tracing such assets becomes nearly impossible outside controlled environments. Therefore, he said, the FIU balanced investment access with withdrawal restrictions.

Meanwhile, the directive also reflects broader compliance expansion. Exchanges must appoint AML officers, complete CERT-In audits, and share sender and receiver data. These rules apply even to self-custody wallet transfers, strengthening transaction transparency.

Global data support the regulatory concern. According to Chainalysis, on-chain scams reached at least $14 billion in 2025. This figure rose sharply from earlier 2024 estimates, which were later revised upward to $12 billion.

Offshore Crypto Profits

Together with exchange compliance, banks now face challenges in handling offshore crypto proceeds. Some residents invested years ago in foreign platforms and later liquidated holdings abroad. When proceeds return to India, banks must assess compliance without clear FEMA guidance.

One Indian bank recently contacted the Foreign Exchange Dealers’ Association of India after receiving unclaimed funds from the U.S. Treasury. The funds followed the liquidation of a dormant overseas crypto account belonging to an Indian investor.

Banks remain cautious because RBI guidance on cross-border crypto transactions remains limited. Many lenders already restrict the Liberalised Remittance Scheme for overseas crypto purchases. However, they still face uncertainty when sale proceeds arrive as foreign inward remittances.

Harshal Bhuta, partner at P. R. Bhuta & Co., explained that banks usually treat such inflows as normal remittances. However, enhanced KYC and source-of-funds checks apply because FEMA lacks a specific crypto framework. According to Bhuta, large or poorly documented inflows may be withheld or reported to regulators, including the FIU or Enforcement Directorate.

Lawmakers are still having wider talks on the issue. Parliamentary committees have looked at how other countries handle crypto, such as Japan’s rules on keeping customer funds separate and Russia’s limits on how much people can invest. For now, these examples are being studied to shape India’s thinking, even though none of them have been formally adopted yet.

India’s FIU action restricts privacy-focused crypto assets while reinforcing monitoring across exchanges, wallets, and banks. The directive addresses anonymity tools, transaction tracking, and offshore fund flows within existing legal structures. Together, these steps show how regulators are tightening controls while managing unresolved gaps in cross-border crypto handling.