Indian Crypto Exchanges Propose Identity Checks for Transfers to Private Wallets

In a bid to strengthen regulations and combat illicit activities, crypto exchanges in India are working on a proposed rule that would require senders to disclose the identities of the individuals behind private wallets receiving cryptocurrencies, according to a report by the Economic Times.

Under the current framework, the identities of buyers and sellers are generally known when they are clients of local exchanges, as these platforms follow standard know-your-customer (KYC) procedures that involve collecting identification documents. However, there is currently no process in place to verify the identity of a private wallet owner, nor any regulation preventing individuals from transferring cryptocurrencies held in an exchange’s wallet to the private wallet of another person, potentially a foreign national.

This scenario is expected to change significantly with the introduction of the new rule, which would require the disclosure of recipient details. A senior official from a prominent platform stated,

“Discussions are underway regarding the type of identification required, how it should be provided, and the measures exchanges can take to authenticate the provided information.”

While this rule may impose additional burdens, it could provide a certain level of protection to the platforms, as the sender of the cryptocurrencies would likely have knowledge of or access to the recipient’s information.

Clear Guidelines Needed to Safeguard Crypto Platforms and Users Amidst Suspicious Transactions

Jaideep Reddy, counsel at Trilegal, noted,

“Currently, platforms are under scrutiny when users conduct suspicious withdrawals to external ‘un-hosted’ wallet addresses. This often leads to the freezing of their bank accounts, causing collateral damage to the platform and its users. Establishing clear guidelines for withdrawals to un-hosted wallet addresses aligns with the Financial Intelligence Unit (FIU) guidelines, which advocate enhanced due diligence for such transactions.”

Cryptocurrencies held in an exchange’s wallet can be transferred to another domestic exchange’s wallet, the holder’s private wallet, another person’s private wallet, or an overseas exchange’s wallet. The latter two types of transfers are considered “high-risk” transactions.

Under the proposed framework, reporting entities, including crypto platforms, will generate “suspicious transaction reports” (STRs) as part of their obligations under the Prevention of Money Laundering Act (PMLA). These reports will be based on predetermined parameters such as customer profiles, transaction values, and frequencies.

Proposed Rule Aims to Track Transfers to Private Wallets

Transfers to private or unknown wallets have been identified as vulnerable aspects of the crypto ecosystem. Concerns arose when law enforcement agencies suspected that funds acquired through predatory lending facilitated by Chinese loan apps were leaving the country as proceeds of crime in the form of cryptocurrencies.

To circumvent traditional banking systems, these ill-gotten gains were converted into cryptocurrencies and transferred to private wallets owned by anonymous foreign entities. The proposed rule to track transfers to private wallets holds significant importance in addressing this issue.

Vyapak Desai, head of international disputes practice at law firm Nishith Desai Associates, commented,

“Clarity in exchange operations resulting from such measures would benefit the industry. However, it is essential that these measures strike a balance and do not become overly burdensome or impractical to implement given the technological complexities involved in conducting crypto trades.”

The implementation of identity checks for transfers to private wallets aims to enhance transparency and mitigate risks within the cryptocurrency ecosystem, providing a more secure environment for users and contributing to the overall integrity of the industry.

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