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Business News/ Money / Personal Finance/  How India’s cryptocurrency exchanges are countering dirty money

How India’s cryptocurrency exchanges are countering dirty money

Unlike financial assets like FDs, stocks and bonds, bitcoin and other cryptos are not held in bank or demat accounts. They can be held outside crypto exchanges in what are called cold wallets.

Photo: AFPPremium
Photo: AFP

Bitcoin and other cryptocurrencies are often used by criminals to launder money. Despite lack of regulation, India's crypto exchanges deploy certain KYC and anti-money laundering procedures, but loopholes remain in the ecosystem. Mint explains.


India has no KYC norms for cryptocurrency. Despite this, India’s cryptocurrency exchanges have come up with their own KYC procedures for users. “As a matter of course, we ask for ID and address proof like Aadhar and PAN Card. We also insist that money must come from the concerned user's bank account and not some third-party account," said Nishal Shetty, CEO, WazirX, India’s largest cryptocurrency exchange.

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Exchanges use methods such as penny drop to conduct KYC. For instance in penny drop a token amount like 1 rupee is transferred to the user’s account to verify account details. The penny drop system reveals the account holder’s name as registered with the bank, to the transferor. Most large exchanges follow a roughly similar KYC system, with more rigorous checks for corporates. “For corporate clients who are given higher trading limits, more documents like articles of association, board resolutions authorizing crypto investment etc are needed", said Neeraj Khandelwal, co-founder, CoinDCX.

Blacklisting of crypto addresses

Most cryptocurrency exchanges use software such as Chainlink to identify rogue addresses. “We use a globally renowned crypto AML tool to check for blacklisted crypto addresses. If a legitimate user has got crypto from such an address, maybe through peer-to-peer and he or she wants to transact on our exchange, we ask for additional KYC such as source of funds and profession," said Khandelwal.

However, an exchange CEO admitted on condition of anonymity that the basis of blacklisting by blockchain analytics firms and software is opaque and does not have any legal basis in India. “However there is no standardization and some players use this as a pretext to block withdrawals," said Gaurav Dahake, CEO, Bitbns, a Bengaluru based cryptocurrency exchange.

Unlike financial assets like FDs, stocks and bonds, bitcoin and other cryptos are not held in bank or demat accounts. They can be held outside crypto exchanges in what are called ‘cold wallets.’ These are hardware devices or even paper and are not connected to the internet. As a result they cannot be easily seized by law enforcement authorities. Bitcoin and other cryptos can also be directly traded between users without any intermediary or exchange acting as go-between. The two parties only have to know each other’s public keys (crypto addresses).

“Individuals trading cryptocurrency through the P2P (peer-to-peer) mode run a much higher risk of getting funds or cryptocurrency derived from crime," said Dahake. “Peer to peer route cannot be stopped due to the decentralized nature of Blockchain. However, all transactions are also publicly available on the blockchain. So if someone wants to cash out of crypto, the funds will ultimately reach a crypto exchange, and this is the opportunity for law enforcement to catch hold of those performing any nefarious activities using crypto," said Shetty.

According to cryptocurrency professionals, investors can reduce the risk of ending up with dirty money or bitcoin from criminals if they transact through exchanges rather than peer-to-peer.

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Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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Updated: 18 Jan 2021, 06:00 PM IST
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