Govt Cracks Down On Crypto Watch In J&K, Border Zones Amid Terror Finance Fears: Report

While officials say this could be part of a routine compliance check, the timing suggests that authorities are tightening screws on all financial intermediaries handling large or opaque capital flows.

Over the past year, Indian exchanges have already started clamping down on free withdrawals of crypto assets.

Source : Ewan Kennedy/Unsplash

India’s cryptocurrency ecosystem is reportedly facing fresh regulatory heat as the government instructs crypto exchanges to intensify surveillance of transactions tied to Jammu & Kashmir and other sensitive border regions. As reported by The Economic Times, the directive comes amid rising concerns about the misuse of digital assets for money laundering and terror financing.

FIU Sounds Alarm On Private Wallet Transfers

According to sources quoted by the report, the Financial Intelligence Unit (FIU-IND), India’s central agency combating financial crimes, has issued an advisory to major domestic crypto exchanges. The exchanges have been told to pay particular attention to transactions involving "private wallets" — tools that allow users to manage digital currencies without relying on third-party platforms like exchanges or custodians.

Such wallets are seen as a loophole that could potentially be exploited for anonymous transfers. The concern is that by avoiding regular banking channels, actors with dubious intent can transfer cryptocurrency from an exchange-linked wallet to a private one, and then forward it to another private wallet via blockchain — all without leaving an easy-to-track trail.

"As per the instructions, exchanges for the time being would focus more on crypto trades by persons in the border locations and report them to FIU, than the regular STR trades," a person aware of the advisory said. In regulatory parlance, STR refers to a ‘suspicious transaction report,’ a disclosure requirement for financial entities to flag questionable transactions to the FIU.

Stricter Checks On Crypto Withdrawals Already Underway

Over the past year, Indian exchanges have already started clamping down on free withdrawals of crypto assets. Users withdrawing to private wallets are now subject to enhanced due diligence, which includes disclosure of beneficiary identity and the intent behind such transactions.

"For instance, privacy coins like Monero or Zcash, which have greater privacy and anonymity, can be misused. Though these coins are not listed on Indian bourses, theoretically, a person can purchase a common and universally accepted crypto like USDT, transfer to its wallet with an exchange outside India, and then swap them for privacy coins before making payments. Such transactions would not leave a trail that Indian law enforcement agencies can track easily," an industry insider explained.

With Binance now registered under FIU-IND, there has been a noticeable trend of users shifting part of their holdings to Binance wallets, many of which operate from overseas. This raises fresh jurisdictional concerns over regulatory reach and enforcement.

"Some of the exchanges are allowing coin withdrawals once they verify that the Binance wallet belongs to the customer. But once cryptos are moved to Binance, they can be transferred, swapped freely, or paid to anyone. Since regulations are unclear and the applicability of foreign exchange laws is ambiguous in cryptos, platforms find it tough to fully clamp down on such transfers once the account holder ticks the necessary boxes," said another source.

SEBI Tightens Scrutiny Of Private Funds

Parallel to the FIU’s focus on crypto, market watchdog SEBI has also ramped up its oversight. In a separate move, it has reached out to trustees of private equity and venture capital funds — also known as alternative investment funds (AIFs) — to review their exposure to risks related to money laundering and terror financing.

The trustees have been directed to check whether fund houses are identifying ultimate beneficial owners when onboarding clients. They have also been asked to disclose the percentage of high-risk customers, clients transacting over internet platforms, and investors from jurisdictions flagged by the Financial Action Task Force (FATF), the global anti-money laundering watchdog.

While officials say this could be part of a routine compliance check, the timing — alongside the crypto advisory — suggests that authorities are tightening the screws on all financial intermediaries handling large or opaque flows of capital.

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