India's Crypto Regulatory Evolution: FIU Enforcement and the Path to Institutional Compliance

India's cryptocurrency sector is undergoing a profound transformation, driven by the Financial Intelligence Unit-India's (FIU-IND) aggressive enforcement of anti-money laundering (AML) regulations. Since 2023, the FIU has issued show-cause notices to 25 offshore exchanges, including BingX, LBank, and Paxful, for operating without registration under the Prevention of Money Laundering Act (PMLA), 2002, according to WebProNews. These actions, coupled with mandates for virtual digital asset service providers (VDASPs) to adopt robust KYC/AML frameworks, signal a shift toward institutional-grade compliance and long-term sector viability.

Enforcement as a Catalyst for Compliance

The FIU's crackdown has forced global exchanges to either align with India's regulatory standards or exit the market. By 2025, 15 international platforms — including Binance, Coinbase, and KuCoin — had filed for FIU registration, with seven fully approved, according to Yahoo Finance. Non-compliant exchanges faced severe penalties, including URL blocks and app store removals, while compliant ones gained legitimacy. For instance, Binance paid a ₹188 crore ($2.25 million) fine and re-entered India after aligning with PMLA requirements, per OnChain Standard. This regulatory rigor has created a two-tier market: compliant platforms offering secure, transparent services, and non-compliant ones losing user trust and liquidity.

The enforcement actions also reflect India's alignment with global standards. The FIU's mandates mirror the Financial Action Task Force (FATF)'s recommendations on AML/CTF, requiring exchanges to report transactions, maintain KYC protocols, and integrate INR payment rails, as reported by FinanceFeeds. This alignment has attracted institutional investors, with India now hosting global forums like the FATF Private Sector Collaborative Forum in 2025, notes Republic World.

Economic Impact and Investor Confidence

Despite initial disruptions, the FIU's actions have bolstered investor confidence. CoinDCX, a FIU-registered exchange, saw a 2,000% surge in deposits following the 2023 crackdown, as users migrated from unregulated platforms, according to FinLaw. Similarly, Mudrex and ZebPay have gained traction for their secure storage and seamless INR transactions. However, challenges persist: a 30% flat tax on crypto gains and a 1% tax-deducted-at-source (TDS) on transactions have increased trading costs, particularly for high-frequency traders, as Outlook India explains.

The sector's resilience is evident in its growing institutional credibility. India's alignment with the OECD's Crypto-Asset Reporting Framework (CARF) and its status as the world's top crypto-adopting country have made it a magnet for infrastructure-focused investors, per Giottus. Global exchanges like Coinbase and Binance, now compliant with FIU guidelines, are re-entering the market, offering advanced trading features and global liquidity, according to 36Crypto.

Long-Term Viability and Global Leadership

The FIU's enforcement actions are reshaping India's crypto landscape into a model of regulatory innovation. By prioritizing compliance, the country is balancing investor protection with technological advancement. While operational costs for exchanges have risen — annual audits, 18% GST on fees, and transaction record-keeping — the benefits include reduced fraud risk, simplified tax reporting, and alignment with global standards, as FlitPay outlines.

Critics argue that stringent regulations could stifle innovation, but the data suggests otherwise. India's crypto market has domesticated, with local exchanges now dominating trading activity. The FIU's actions have also positioned India as a leader in crypto compliance, hosting global regulatory dialogues and setting precedents for emerging markets, per CryptoNews.

Conclusion

India's crypto sector is no longer a Wild West of speculative trading. The FIU's enforcement actions have instilled a framework of accountability, transparency, and global alignment, making the market more attractive to institutional investors and infrastructure providers. While challenges like high taxes and compliance costs remain, the sector's long-term viability is strengthened by its regulatory maturity. For investors, the message is clear: India's crypto market is evolving into a space where innovation and compliance coexist, offering both risk mitigation and growth potential.