India's FIU Alerts Crypto Exchanges to Monitor Terror Funding in Kashmir

India’s Financial Intelligence Unit (FIU) has issued an alert to crypto exchanges, urging them to monitor transactions linked to Jammu, Kashmir, and surrounding areas. The FIU is concerned about potential terror threats and the use of cryptocurrencies to fund military operations. The alert specifically mentions Pahalgam tokens and Operation Sindoor on the Solana blockchain. Indian authorities have asked exchanges to be vigilant against terror funding and money laundering, particularly focusing on private wallets that are not under the direct control of financial regulators.

The FIU has reached out to major crypto exchanges in India, advising them to be on high alert for suspicious transactions. The FIU is responsible for investigating financial crimes in India. There has been growing tension following a conflict between India and Pakistan, with officials suspecting that the conflict may not be over and could spread to the Kashmir and Jammu regions. The FIU has asked exchanges to monitor transactions, especially those involving private wallets, as most exchanges hold custodial rights over a customer’s crypto but do not control where customers send their funds. This loophole could be exploited by military groups to fund operations by sending money to private wallets, which can then be mixed to obscure the transaction trail.

Indian authorities are concerned that private wallets could make it challenging to track illicit funds, such as those used in terror financing and money laundering. Tracking all transactions from exchanges to private wallets would be a daunting task for the FIU, especially if tokens are mixed to further obfuscate the transaction trail. Despite these challenges, Indian officials have significant control over the crypto market and can compel exchanges to comply with their requests. Exchanges could focus on outliers and danger areas, such as border locations with concentrated separatist movements. The FIU requires Indian exchanges to create ‘suspicious transaction reports’ to investigate the source of the funds.

India has stringent crypto laws and a concerted effort to track private wallets, requiring crypto users to report their activities. New rules mandate that crypto users report the identity of beneficiary addresses when sending funds to a private wallet. This concern arises because a user on an exchange could transfer money to a private wallet and then swap the token for anonymous tokens like Monero or Zcash, potentially making payments to anyone, including terror groups. This issue has become a problem for other crypto projects, such as Ethereum, which aim to increase privacy features while ensuring that tokens have not originated from illicit trades.

The Enforcement Directorate (ED) recently conducted raids on a fraudulent cryptocurrency project called ‘Emollient Coin’ in locations including Leh, Jammu, and Sonipat. The project promised customers they could double their money in 10 months. The ED uncovered an extensive network of fraudulent crypto activities, including 7,200 mule accounts used for laundering money and 1,000 investors defrauded by the scheme. A core aspect of the project involved converting illicit fiat money to cryptocurrencies to enjoy the benefits of liquidity.