India’s Financial Intelligence Unit (FIU IND) has issued a notice deeming nine major offshore cryptocurrency exchanges “illegal”. The agency, which is in charge of regulating all financial transactions in the world’s fifth-largest economy, cited a failure to comply with local Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulations as the reason for the decision.

As a result of the decision, all nine exchanges included in the notice will have their URLs blocked in the country, a move that could severely affect their Indian user base. The range of the notice includes Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex.

Can Foreign Crypto Exchanges Operate in India?

The decision to block access to the nine exchanges comes after amendments were made in March 2023 to India’s Prevention of Money Laundering Act, 2002 (PMLA). As a result of the amendments, cryptocurrencies were brought into the ambit of the country’s AML and CFT regulatory framework, which allows agencies like FIU IND to take action.

The notices state that foreign exchanges can operate legally in the country by registering with FIU IND as Reporting Entities. This would require the exchanges to comply with cast reporting, record keeping, and other bureaucratic procedures, all of them irrespective of whether they have a physical presence in India.

According to FIU IND, a total of 31 Virtual Digital Asset Service Providers (VDA SPs) have registered with FIU-IND so far. The 9 exchanges cited in the notice, however, are some of the “several offshore entities” that cater to what the agency called “a substantial part of Indian users” without registering at all.

Indian Investors Flooding Foreign Exchanges

India is a country in which its citizens are closely familiar with crypto, which has led to the proliferation of local exchanges over the past years. These exchanges, however, are subject to several taxes introduced by the government back in 2022. The so-called “crypto taxes” resulted in Indian investors quickly moving to foreign exchanges to increase their returns.

Over $3.8 billion of trading volume originating in India was gained by foreign exchanges in the 6 months following the announcement of the tax, according to Esya. This trading volume was taken directly from local exchanges, which resulted in massive financial losses. This translated to major foreign exchanges accounting for over 67% of Indian volumes.

Among the many reasons that made foreign exchanges an easy alternative for Indian investors was the lack of KYC regulations. Not only were limited trading operations possible by using exchanges like KuCoin and Gate but DeFi also offered a unique opportunity for users to fly under the radar.

India Loves Crypto

Chainalysis’ “2023 Global Crypto Adoption Index” report ranked India first in terms of adoption, showing that the country led in terms of centralized service value received, retail centralized service value, DeFi value received, and retail DeFi value received. The only category the country didn’t lead was “P2P exchange trade volume”.

As a lower middle-income country, India is one of the countries leading crypto’s grassroots adoption along Nigeria and Ukraine. This has been a trend among developing countries which have found cryptocurrency to be a more effective way of transacting with money both locally and abroad.

India’s government hasn’t shared the enthusiasm about crypto, as its taxation is not the only action taken against the investment asset. Reserve Bank of India (RBI) Governor Shaktikanta Das went as far as comparing it to “gambling” and calling for its ban earlier this year.

With India now joining countries like the United States in its efforts to regulate crypto, 2024 will be a crucial year for the technology. Most investors and crypto enthusiasts disagree with the regulatory crackdown on crypto as they believe it could be its downfall. Most experts, however, believe that it can lead to positive change and institutional adoption. Only time will tell who is right.