India Is Right to Act on Offshore Crypto Platforms but It Must Also Build a Fairer Market

Why It Matters

Offshore VASPs erode market fairness and expose Indian users to fraud, while compliant exchanges provide critical law‑enforcement intelligence. A balanced regulatory response is essential for consumer safety and industry credibility.

Key Takeaways

• FATF report confirms offshore VASPs risk to India
• Offshore exchanges bypass KYC, use UPI, card payments
• Non‑compliant platforms evade 1% TDS tax
• On‑shore exchanges aid law enforcement in cyber‑fraud
• Policy needs “same activity, same rules” framework

Pulse Analysis

The Financial Action Task Force’s latest assessment spotlights a growing vulnerability in India’s virtual‑asset ecosystem: offshore virtual‑asset service providers (VASPs) that operate without registering under the country’s AML/CFT framework. By exploiting domestic payment rails such as UPI, card networks and local intermediaries, these non‑compliant platforms can onboard Indian users with minimal KYC, move funds in and out of Indian bank accounts, and sidestep regulatory oversight. The report validates long‑standing industry warnings that the systemic risk stems not from crypto itself but from the ease with which foreign VASPs infiltrate the market. These practices also strain cross‑border cooperation, as foreign jurisdictions may lack reciprocal oversight mechanisms.

For domestic exchanges, the disparity translates into higher compliance costs, mandatory 1 % tax deducted at source, and robust consumer‑protection obligations that offshore rivals simply ignore. This regulatory arbitrage erodes a level playing field, exposing Indian traders to weaker grievance‑redress mechanisms and increasing the likelihood of fraud. Conversely, on‑shore VASPs have demonstrated tangible law‑enforcement value, supplying intelligence that helped dismantle scam operations in Cambodia and Myanmar, underscoring their role as a defensive bulwark against cyber‑crime. Customers also miss out on insurance schemes and audit transparency offered by regulated firms.

Policymakers now face a choice: tighten registration alone or adopt a holistic “same activity, same rules” regime that aligns offshore and domestic operators under identical AML, tax and consumer‑protection standards. Effective coordination among the Financial Intelligence Unit, banks, payment aggregators and compliant VASPs will be essential to close the seams that foreign platforms exploit. A clear legal definition of VASP activities will further reduce ambiguity for fintech innovators. By fostering a fairer market, India can preserve investor confidence, encourage responsible innovation, and position itself as a regional leader in regulated digital‑asset finance.