COURTKUTCHEHRY SPECIAL ON INDIA’s CRYPTO EXCHANGE LEGAL VALIDITY
How Cryptocurrency Exchanges in India Vet Customers and Operate Under Law
Strict KYC Rules Under PMLA for Crypto Platforms
Lack of Dedicated Crypto Law Creates Regulatory Uncertainty
By Our Legal Reporter
New Delhi: January 17, 2026:
Cryptocurrency trading in India has grown rapidly, with millions of users investing through exchanges like CoinDCX, WazirX, and ZebPay. But with this growth comes the challenge of ensuring customer safety, preventing money laundering, and curbing terror financing risks.
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To address these concerns, the Government of India brought Virtual Digital Asset (VDA) service providers under the ambit of the Prevention of Money Laundering Act (PMLA), 2002 in March 2023. Since then, crypto exchanges must comply with Financial Intelligence Unit (FIU-IND) guidelines, like banks and financial institutions.
This framework requires exchanges to vet customers through stringent KYC processes, monitor transactions, and report suspicious activity. However, the absence of a dedicated crypto law continues to create uncertainty for the industry.
Strict KYC Rules Under PMLA for Crypto Platforms
The Financial Intelligence Unit (FIU-IND) issued updated guidelines in January 2026, tightening compliance for crypto exchanges.
Key requirements include:
- Mandatory PAN verification for all users.
- Liveness detection during onboarding to prevent fake identities.
- Appointment of a Principal Officer and Compliance Officer in every exchange.
- Suspicious Transaction Reports (STRs) to be filed with FIU for unusual activity.
- Exchanges must maintain detailed records of transactions for at least five years.
By classifying exchanges as reporting entities, the government ensures they are accountable under PMLA, making them part of India’s anti-money laundering ecosystem.
This means crypto platforms must now follow the same compliance standards as banks, NBFCs, and stockbrokers, ensuring tighter monitoring of digital asset transactions.
Lack of Dedicated Crypto Law Creates Regulatory Uncertainty
While exchanges operate under PMLA, India still lacks a dedicated cryptocurrency law.
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- The Reserve Bank of India (RBI) has repeatedly warned about risks of crypto trading but has not banned it.
- The Income Tax Act introduced a 30% tax on crypto gains and 1% TDS on transactions in 2022, treating crypto as “Virtual Digital Assets.”
- However, there is no licensing framework like SEBIs for stock exchanges. Crypto platforms register with FIU but do not hold formal “licenses” under a crypto-specific law.
Industry leaders, including CoinDCX’s Sumit Gupta, have urged the government to provide regulatory clarity and tax rationalization in the upcoming budget. They argue that clear rules will create a level playing field for domestic and offshore exchanges, boosting investor confidence.
Wider Legal Context
Currently, crypto exchanges in India operate under a patchwork of laws:
- PMLA, 2002 – Compliance, KYC, and reporting obligations.
- Income Tax Act, 1961 – Taxation of crypto gains and transactions.
- Information Technology Act, 2000 – Cybersecurity and data protection obligations.
- Foreign Exchange Management Act (FEMA), 1999 – Applicable in cases of cross-border crypto transactions.
This fragmented framework has led to calls for a Crypto Regulation Bill, which could provide clarity on licensing, investor protection, and dispute resolution.
Implications of Current Framework
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- For investors: Safer onboarding and reduced fraud risk due to strict KYC.
- For exchanges: Higher compliance costs and risk of penalties for non-compliance.
- For regulators: Better monitoring of suspicious transactions linked to money laundering or terror financing.
- For industry growth: Lack of clear licensing rules creates uncertainty, discouraging foreign investment.
Conclusion
India’s crypto exchanges now operate under PMLA compliance, with strict KYC and reporting obligations enforced by FIU-IND. While this strengthens oversight and reduces risks, the absence of a dedicated crypto law continues to create uncertainty.
The Supreme Court’s 2020 ruling lifting the RBI’s banking ban revived the industry, but long-term stability will depend on whether the government introduces a comprehensive regulatory framework. For now, exchanges must balance compliance with innovation, ensuring that India’s growing crypto ecosystem remains secure and transparent.
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