India's crypto exchanges flouted KYC, money laundering norms: ED

India’s top cryptocurrency (crypto) exchanges have facilitated transactions from other countries, including the US, Brazil, and Germany, on their platform without complying with know-your-customer (KYC) regulations and anti-money laundering (AML) norms as prescribed under the foreign exchange (forex) rules, reveals the Enforcement Directorate’s (ED’s) latest probe findings.

Further, investments to the tune of $1 billion received by these crypto players from global capital ventures, such as Sequoia, Tiger Global, etc, in the past three years have not been disclosed in the Reserve Bank of India (RBI)-mandated foreign currency-gross provisional return (FC-GPR) filing in many cases.

FC-GPR is a must when a company receives foreign investment, and in return allots shares to a foreign investor, failing which it is a breach of forex rules.

The ED probe into the matter also showed that Indian crypto exchanges used wallet infrastructure of foreign crypto exchanges, giving control to all deposits of Indian users transacting on their platforms without any formal agreement between them, which, according to the agency, is “prone to high risk”.

The probe also revealed that leading crypto exchanges, such as WazirX, CoinDCX, and CoinSwitch, have even facilitated foreign users’ request to convert one crypto into another by using third-party exchange based overseas, such as Coinbase and HitBTC, and earn commission on it.

The latest findings by the federal agency have come to light during its ongoing probe into forex violation by at least 11 crypto exchanges. The agency had earlier this month issued notices on some of these players, seeking explanation over non-compliance.

“These crypto players are allowing anyone in the world without any identification to execute crypto transactions. When enquired, one of the crypto players said it had captured only internet protocol addresses of users,” said a senior agency official.

He added that these exchanges executing hundreds of such transactions on a daily basis — which are getting converted from crypto into Indian rupee using banks and dealers without any identification — are a violation of the RBI’s 2018 notification and the Foreign Exchange Management Act (FEMA) rules.

When contacted, spokesperson for CoinSwitch said, “We receive queries from various government agencies. Our approach has always been one of transparency. Crypto is an early-stage industry with a lot of potential. We continuously engage with all stakeholders.”

WazirX declined to comment since the matter is sub-judice. An email sent to CoinDCX remained unanswered till the time of going to press.

Key findings

• Citizens of countries like US, Germany and Brazil allowed to transact without KYC, AML compliance
• No disclosure of foreign investment of $1billion in past 3 years
• Indian crypto platforms used wallet infra of foreign exchanges without any agreement
• Deposits of Indian users with such platforms prone to high risk

The RBI in its March 6, 2018, notification had said entities regulated by it shall not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or setting virtual currencies. However, the ban was subsequently revoked by the Supreme Court (SC) in March 2020.

“Despite the notification, all crypto exchanges were operated without any KYC/AML norms between 2018 and 2020,” said the official quoted earlier. Even now, many lack mandatory compliances under forex rules.

Crypto is currently an unregulated space. India is working on its framework. Agency sources said that after the SC revocation, these crypto exchanges have partnered foreign exchanges, mainly China-based Binance, for corporate accounts and wallet services to enable transactions for users on their platforms.

Explaining the modus operandi, another official said that the Indian crypto exchange pooled liquidity from leading crypto exchanges across the world to enable users to get cryptos at the “best rate”.

The probe also indicates that hundreds of thousands of transactions took place between Binance and Indian crypto exchanges on a daily basis without any formal agreement between the two.

To date, the total volume of transactions done by exchanges runs into thousands of crore, the ED findings pointed out.

Citing one of the players, an ED official said that about 18 million Indian citizens use the platform where it converts their deposits into crypto held in these wallets (located abroad) which no one has control over.

ED said these exchanges transacting in real money on a daily basis between their platform and one overseas without information to any authorities in India is in clear contravention of forex rules.

Under FEMA, payments made to any person outside India or receipts from them, along with forex deals and foreign security, are restricted. In June 2021, ED had asked WazirX for an explanation on transactions worth Rs 2,790 crore involving cryptos that are allegedly in violation of FEMA rules.