India's Strengthened KYC and AML Framework for Crypto and Its Impact on Exchange Viability and Market Trust

India's cryptocurrency sector has undergone a seismic regulatory shift in 2025, with the government imposing banking-level Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements on virtual digital asset (VDA) service providers. These measures, enforced under the Prevention of Money Laundering Act (PMLA), aim to align India's crypto framework with global standards while addressing risks of financial crime. However, the implications for exchange viability, market trust, and investment dynamics are complex, reshaping both risks and opportunities for stakeholders.

Key Provisions of the 2025 Framework

The revised regulatory architecture mandates that all VDA service providers-domestic and international-register with the Financial Intelligence Unit-India (FIU-IND) and implement robust AML programs. Central to these rules are advanced identity verification protocols, including liveness detection via live selfies, geolocation tracking, and IP address capture during account onboarding. Multi-factor authentication for email and mobile, coupled with a nominal "penny-drop" transaction, is now compulsory to deter impersonation and fake accounts.

High-risk clients, such as politically exposed persons (PEPs) or those linked to foreign jurisdictions, face enhanced due diligence, with KYC records requiring biannual updates for high-risk accounts and annual refreshes for others. Exchanges are also barred from facilitating anonymity-enhancing tools like tumblers or mixers, and must retain customer and transaction records for at least five years. These measures reflect a deliberate effort to eliminate anonymity while ensuring transparency in crypto transactions.

Impact on Exchange Viability

The compliance burden has proven substantial. According to a report by , non-compliance costs for exchanges in FY 2024–25 could exceed ₹28 crore, with 49 exchanges currently under AML scrutiny-45 domestic and four offshore. The operational complexity of implementing real-time identity verification and transaction monitoring has raised concerns about competitiveness of Indian exchanges in the global market.

For instance, the requirement to track transfers between exchange and private wallets adds layers of technical and financial overhead. Smaller exchanges, in particular, face existential risks as compliance costs eat into profit margins. Yet, the regulatory push has also spurred innovation. As noted by industry analysts, the need for compliance has opened avenues for crypto banking solutions and cross-border payroll services that adhere to Indian standards. This duality-costly compliance versus innovation-driven opportunities-defines the sector's evolving landscape.

Market Trust and Investment Trends

The regulatory crackdown has had a nuanced effect on market trust. On one hand, stricter KYC/AML norms have bolstered investor confidence by reducing the risk of fraud and illicit activity. A Chainalysis report highlights that users increasingly perceive regulated platforms as more secure, fostering trust in India's crypto ecosystem. On the other, the heightened scrutiny has created a more cautious investment environment. Investors now demand greater transparency and institutional legitimacy from exchanges, which may slow adoption in the short term.

Globally, AML enforcement trends have intensified, with India's measures aligning with broader efforts to combat financial crime. While this alignment enhances India's credibility as a crypto hub, it also raises the bar for market entry. For example, the mandatory use of liveness detection and geolocation tracking has led to user behavior shifts, with some investors opting for platforms that offer seamless compliance without compromising user experience.

Balancing Risks and Opportunities

For investors, the regulatory environment presents a dual-edged sword. The risks include elevated compliance costs, operational bottlenecks, and potential market fragmentation as smaller players exit. However, the opportunities are equally compelling. Regulated exchanges that successfully navigate these requirements are likely to gain a first-mover advantage in a market increasingly prioritizing institutional legitimacy.

Moreover, the government's emphasis on crypto as a tool for innovation and financial inclusion-provided it operates under transparent frameworks-suggests long-term growth potential. For instance, the prohibition of anonymity tools may drive demand for transparent, regulated tokens and services, creating new revenue streams for compliant exchanges.

Conclusion

India's 2025 KYC/AML framework for crypto is a transformative force, recalibrating the sector's risk profile while laying the groundwork for sustainable growth. While compliance challenges threaten the viability of smaller exchanges, they also incentivize innovation and institutional-grade security. For investors, the key lies in distinguishing between platforms that adapt to these regulations and those that falter under their weight. As the market matures, the interplay between regulatory rigor and technological agility will define India's position in the global crypto landscape.