Foreign crypto exchanges in India face uncertain future

Foreign crypto exchanges in India face uncertain future

The Financial Intelligence Unit (FIU) — an agency of India’s Ministry of Finance that gathers financial intelligence about offenses under the country’s Prevention of Money Laundering Act — issued a notice of noncompliance to Binance, HTX, Kraken, Gate.io, KuCoin, Bitstamp, MEXC Global, Bittrex and Bitfinex for illegally operating in India on Dec. 28, 2023. 

The notice gave the firms 12 days to comply with Indian Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.

Two weeks after the FIU notice, on Jan. 10, Apple’s App Store in India blocked the foreign crypto exchanges that received the FIU notice. Within a week, the crypto exchanges were unavailable on Google’s Play store, followed by a ban on the URLs and alternate URLs of the crypto platforms.

The ban on foreign crypto exchanges shocked many Indian crypto traders who had rushed to foreign crypto exchanges to evade the hefty 30% tax on cryptocurrency trading profits imposed by the Indian government. According to a report in the Economic Times, nearly $4 billion worth of crypto assets were stuck on offshore platforms, with almost 80% of this held by Binance. The report also cites research on the use of foreign crypto exchanges by Indian traders, which costs the Indian government 30 billion rupees (roughly $361 million) in tax revenue each year.

The latest compliance action from the Indian government against foreign crypto exchanges comes amid a regulatory environment in which there are no clear regulations for domestic exchanges to follow.

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Despite years of campaigns and demand for clear regulations, the Indian government has not offered clarity.

Siddharth Sogani, CEO of blockchain analytics firm Crebaco Global, which has worked with the Indian Ministry of Finance on digital asset regulations, told Cointelegraph that although the compliance-based actions were necessary to block Indian traders from evading taxes, the government should first focus on domestic exchanges:

“The government is trying to regulate the crypto exchanges outside the country, but what about the Indian exchanges? There are numerous cases where Indian exchanges have not allowed users to withdraw their funds. I think it’s hypocritical for the government to worry about foreign exchanges before setting clear regulations for Indian exchanges.”

Sogani referred to recent instances where crypto exchange users of platforms, such as Bitbns, have complained about being unable to withdraw their funds, with some reportedly locked out for over six months.

On the other hand, Rajagopal Menon, vice president of Indian exchange WazirX, told Cointelegraph that the FIU action was long overdue, as foreign exchanges were making merry at the expense of Indian exchanges thanks to regulatory and tax arbitrage:

“It was a bad situation for everybody: Indian users had no recourse, the government lost tax revenue, and Indian exchanges lost market share.” 

Menon said regulations are inevitable because India is a signatory to the Group of 20, or G20 Delhi declaration, which outlines a roadmap for crypto regulations: “All G20 countries are expected to have regulations in place by 2025. We hope for serious traction once the new government takes office.”

India has called for global collaboration on crypto regulations on multiple occasions, but at home, it has postponed crypto-focused legislation in parliament for over five years.

Are foreign crypto exchanges planning to reenter India?

India has remained an uncertain ground for crypto exchanges despite its vast potential.

During the last bull cycle in 2021, India became one of the fastest-growing crypto markets, with billions in daily trading volume. Many crypto exchanges and platforms showed their interest in opening an office in the country, but unclear crypto regulations along with the hefty 30% crypto tax — with no provision to offset losses — not only deterred foreign crypto companies but also persuaded thriving Indian companies and traders to look for better opportunities outside India.

Sumit Gupta, CEO of the Indian crypto exchange CoinDCX, told Cointelegraph that the FIU ban is just a step toward enforcing regulations. He said that the framework is in place to allow offshore exchanges to register and serve Indian customers under FIU guidelines.

He added that the FIU’s action would “reassure government stakeholders, safeguard Indian investors from potential bad actors and tax-related noncompliances and, most importantly, prepare the industry for supportive regulations, including fairer taxation.”

“The Indian Web3 industry will suffer from stringent tax laws until we create a collective effort to follow the law of the land. This would ensure that Indian developers and investors securely access a level playing field with abundant opportunities.”

Cointelegraph contacted Binance, Kraken, KuCoin, MEXC, Bitfinex and Huobi about their plans in India. However, most refused to comment.

A spokesperson from Binance told Cointelegraph that the firm “remain[s] committed to adherence to local regulations and laws, and we are dedicated to maintaining active communication with regulators to ensure user protection and the development of a healthy Web3 industry. Updates with relevant information will be promptly shared through our official channels.”

A spokesperson from HTX told Cointelegraph that the exchange currently has no operations in India, adding that it would “respect and strictly follow regulatory requirements across different countries and regions globally.”

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According to YouTuber SMC Kapil Dev, OKX was one of the first foreign crypto exchanges to work with existing compliance requirements and re-start KYC for Indian customers. OKX didn’t respond to Cointelegraph’s requests for comments.

In a post on X, Indian crypto influencer Aditya Singh said that most of the crypto exchanges he has talked with have already responded to the FIU notice and are currently working to resolve the issue.

Singh also suggested that the FIU registration for foreign crypto exchanges might begin after the general elections in India conclude in July 2024.