India Aligns Crypto Security with Banks to Combat Digital Crime Surge

India has mandated cybersecurity audits for cryptocurrency firms under the directive of the Financial Intelligence Unit (FIU-IND), a measure aimed at enhancing security protocols and addressing the rising threat of cybercrime within the virtual digital asset (VDA) sector. The directive requires all cryptocurrency exchanges, custodians, and intermediaries to undergo audits conducted by certified professionals affiliated with the Indian Computer Emergency Response Team (CERT-In), the nodal agency for cybersecurity under the Ministry of Electronics and Information Technology. This step aligns with the government's broader strategy to bring crypto platforms under the same regulatory and compliance framework as traditional financial institutions.

The move comes at a critical time, as reports indicate that cryptocurrency-related crimes account for nearly 20-25 percent of all cybercrimes in India. Cybercriminals frequently exploit darknet markets, privacy-enhancing coins, and mixing services to launder stolen assets, complicating investigations. The audits are expected to standardize security practices across platforms, ensuring that they adhere to rigorous protocols for storing customer funds, securing user data, and preventing unauthorized access. Industry leaders have largely welcomed the initiative, emphasizing that robust security standards are essential for fostering trust in an industry built on decentralization and digital transparency.

The Prevention of Money Laundering Act (PMLA) now applies to VDA service providers, placing them on par with banks and financial institutions in terms of compliance obligations. This regulatory alignment underscores the government’s intent to treat the crypto sector with the same level of oversight as traditional financial systems. Currently, approximately 55 firms are registered with FIU-IND, offering services such as exchange, transfer, and safekeeping of VDAs. The FIU-IND retains the authority to deny or cancel registration if any firm is found non-compliant with PMLA requirements, reinforcing the seriousness of the regulatory framework.

Industry experts, however, have highlighted the challenges associated with implementing these audits. While they acknowledge the necessity of the measure, they note that the crypto-specific nature of the audits may require tailored guidance and expertise. Additionally, the transition from the previous Fit & Proper certificate to the Partner Accreditation for Compliance & Trust (PACT) certificate has narrowed the focus of compliance assessments to more operational aspects. This shift has led to calls for more clarity and detailed implementation guidelines.

The regulatory environment in India continues to evolve, with the government also considering broader legislative measures, such as the Cryptocurrency and Regulation of Official Digital Currency Bill. While the original draft proposed a complete ban on private crypto operations, current expectations suggest a more balanced approach, aiming for comprehensive regulation rather than prohibition. These developments reflect the government's growing recognition of the crypto sector as a legitimate component of India’s financial ecosystem.

The impact of these audits is expected to be multifaceted. On one hand, they are likely to increase operational costs for smaller and mid-sized crypto platforms, potentially leading to industry consolidation. On the other hand, they may enhance investor confidence and attract institutional interest by demonstrating compliance with global best practices. As India navigates this regulatory landscape, the success of these measures will depend on the clarity of implementation and the ability of exchanges to adapt to evolving security and compliance standards.