India Tightens Crypto Rules, Targets Anonymity-Enhancing Tokens

India has strengthened its regulatory framework for virtual digital assets (VDAs) by updating anti-money laundering and counter-terror financing norms. The move, led by the Finance Ministry’s Financial Intelligence Unit of India, signals a sharper risk-based approach towards cryptocurrencies, particularly those designed to enhance user anonymity.

Updated Guidelines for VDA Ecosystem

On January 8, the Financial Intelligence Unit of India updated its guidelines for entities dealing in VDAs. The revised framework clarifies organisational responsibilities, operational preparedness, reporting standards, and compliance mechanisms for reporting entities engaged in crypto-related activities. The objective is to align India’s crypto oversight with global AML/CFT standards while addressing domestic risks.

Anonymity-Enhancing Tokens Deemed High Risk

The guidelines categorise anonymity-enhancing crypto tokens as “unacceptably high risk” due to their elevated money laundering and terror financing potential. Reporting entities have been instructed not to permit deposits or withdrawals involving tokens or VDAs that obscure transaction origin, ownership, or value. Similar restrictions apply to crypto mixers, tumblers, and other services that facilitate transaction obfuscation. Entities must deploy monitoring tools to detect such activity and block it immediately.

Stricter Oversight of Wallet Transactions

Special emphasis has been placed on self-custody or unhosted wallets, which regulators see as particularly vulnerable to misuse. Where at least one wallet in a transaction is hosted, reporting entities must collect complete originator and beneficiary details. For unhosted wallet and peer-to-peer transactions, entities may impose additional controls or prohibitions based on their internal risk assessments, citing concerns over anonymity, speed, and cross-border portability.

Imporatnt Facts for Exams

• Anonymity-enhancing crypto tokens are classified as high ML/TF risk in India.
• Crypto mixers and tumblers are restricted under FIU-IND guidelines.
• Unhosted wallets face tighter scrutiny due to higher anonymity risks.
• AML/CFT norms apply to all reporting entities dealing in VDAs.

Exemptions, Digital Rupee, and Cyber Audits

The guidelines explicitly exclude the Digital Rupee (e₹), India’s Central Bank Digital Currency, from their scope as it represents sovereign fiat currency. Reporting entities must also undergo cybersecurity audits conducted by auditors empanelled with Indian Computer Emergency Response Team. These audits will cover governance, access control, AML systems, wallet security, third-party risks, and incident response readiness, reinforcing India’s push for a tightly regulated and transparent crypto ecosystem.