New Crypto Regulations Enforced: Mandatory Live Selfies and Geo-Tagging for Users
India’s Financial Intelligence Unit (FIU) has introduced stringent new regulations aimed at enhancing the security and transparency of cryptocurrency exchanges. Effective from January 8, these guidelines mandate live selfie verification and geographical tracking during user onboarding. The updated framework classifies crypto exchanges as Virtual Digital Asset (VDA) service providers, requiring them to implement comprehensive measures to combat money laundering and ensure compliance with Know Your Customer (KYC) protocols.
New Verification Requirements
Under the new guidelines, users of cryptocurrency exchanges must complete a live selfie verification process. This involves using software that can detect physical presence through features like eye-blinking and head movement, thereby preventing the use of static images or deepfakes. Additionally, exchanges are required to capture critical data during the account creation process, including the user’s geographical coordinates, date, timestamp, and IP address. This move aims to enhance the integrity of the onboarding process and ensure that only legitimate users can access these platforms.
Moreover, the guidelines stipulate that exchanges must implement a “penny-drop” verification method. This involves conducting a nominal transaction of Re 1 to confirm that the bank account provided by the user is active and belongs to them. In addition to a Permanent Account Number (PAN), users are now required to submit a secondary identity document, such as a Passport, Aadhaar, or Voter ID. They must also complete OTP verification for both their email and mobile numbers, further tightening the verification process.
Regulatory Oversight and Reporting Obligations
The FIU, which operates under the Union Finance Ministry, serves as the primary regulator for cryptocurrency exchanges in India under the Prevention of Money Laundering Act (PMLA). All exchanges must register as reporting entities and are obligated to submit regular reports on suspicious transactions. They are also required to maintain comprehensive customer records to effectively identify and combat risks associated with money laundering, terrorist financing, and proliferation financing.
The guidelines emphasize that exchanges must ensure the individual whose credentials are provided during onboarding is the same person accessing the application and initiating the account creation process. This requirement is designed to enhance the security of user accounts and prevent fraudulent activities.
Enhanced Due Diligence for High-Risk Clients
The new regulations also mandate that KYC information be updated every six months for high-risk clients and annually for all other users. Enhanced due diligence is required for individuals or entities classified as high-risk, including those linked to tax havens, jurisdictions on the FATF grey or black list, politically exposed persons (PEPs), and non-profit organizations (NPOs). This includes gathering information from open sources and consulting independent databases to ensure thorough vetting of clients.
The FIU has expressed concerns regarding Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs), labeling them as activities that pose heightened risks for money laundering and terror financing due to their lack of justified economic rationale. The guidelines discourage the use of anonymity-enhancing crypto tokens, tumblers, and mixers, which are designed to obscure the origin and ownership of transactions. Exchanges are instructed not to facilitate such transactions and to implement appropriate risk-mitigation measures.
Record-Keeping and Compliance Duration
In line with the new regulations, cryptocurrency exchanges are required to preserve client identity, address, and transaction records for a minimum of five years. These records must be retained until any ongoing investigation is concluded, ensuring that authorities have access to necessary information for compliance and enforcement purposes. While cryptocurrencies are not recognized as legal tender in India, they are subject to taxation under the Income-Tax law. The FIU’s comprehensive guidelines reflect a significant step towards regulating the cryptocurrency sector, aiming to enhance transparency and reduce the risks associated with digital asset transactions.
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