Binance and its former CEO, Changpeng Zhao, recently pleaded guilty to multiple counts of money laundering, sanctions evasion, and operating an unregistered money service business in the United States. These developments shed light on the risks posed by unregistered offshore virtual asset exchanges, specifically a lack of oversight for money laundering and consumer protection.
Such risks are particularly pronounced in the Indian context, where more than 17 lakh users have shifted to foreign virtual asset exchanges after the imposition of a 1% TDS on all virtual asset transactions. Despite these concerns, no offshore virtual asset service providers have registered with India’s anti-money laundering watchdog, the FIU-IND, despite being required to do so by a Ministry of Finance notification issued in March 2023. This blog provides targeted policy suggestions that the Government can take to bring unregistered offshore virtual asset service providers within the regulatory purview, thereby shielding Indian users from their risks.
On December 6, 2023, Judge Richard Jones of the US Western District Court of Washington in Seattle accepted the guilty plea entered by Binance, the largest virtual asset exchange in the world, and Chanpeng Zhao (CZ), Binance’s CEO. CZ personally pleaded guilty to violating the Banking Secrecy Act by causing a financial institution to be involved in money laundering, while Binance accepted charges of running an unregistered money service business, sanctions evasion, and a failure to establish an effective anti-money laundering (AML) program. As part of the plea agreement with US government agencies, CZ agreed to step down as CEO of Binance and pay a fine of $50 million. Separately, Binance agreed to pay a fine of $4.3 billion.
Binance and CZ’s guilty plea highlights the financial risks that can emanate from the operation of unregistered offshore virtual asset service providers. For instance, the absence of a robust anti-money laundering (AML) program in such entities raises the risk of them being exploited for illicit financial activities. Moreover, the lack of registration and regulatory oversight can also lead to a situation where users might not have legal recourse in cases of fraud, theft, or mismanagement of funds.
Notably, this is not the first instance where Binance has been under regulatory scrutiny for failure to obtain a license and comply with domestic laws. In 2021, the Dutch Central Bank issued an advisory warning users that Binance was operating illegally in the country as it had not acquired a license and complied with AML regulations. Similarly, the Malaysia Securities Commission issued a public reprimand in 2020, requiring Binance to disable its websites and applications in Malaysia for a failure to acquire a license. Italy, the Cayman Islands, and the UK are a few other nations that have undertaken similar enforcement action or issued similar warnings against Binance.
The risks posed by unregistered offshore virtual asset service providers, including Binance, are particularly acute in the Indian context. As our recent report shows, a large volume of Indian virtual asset traders have moved to offshore service providers after the implementation of a 1% TDS on cryptocurrency transactions. The report highlights that an estimated 17 lakh Indian users switched from domestic virtual asset service providers to foreign counterparts that do not levy the 1% TDS, resulting in a cumulative shift of approximately 32 thousand crores between February and October 2022.[1] Data on monthly active users and application downloads also shows that there were 13.1 million downloads of foreign cryptocurrency exchange apps by Indian users in the same period. As such, a large percentage of Indian cryptocurrency investors and traders currently rely on offshore virtual asset service providers.[2]
Despite the large volume of revenue generated by Indian users on foreign virtual asset service providers, no such provider has registered with the Financial Intelligence Unit-India (FIU-IND), India’s anti-money laundering watchdog. In March 2023, the Ministry of Finance issued a notification requiring virtual asset service providers to register with the FIU-IND as reporting entities under the Prevention of Money Laundering Act (PMLA). Recently, the Minister of State for Finance, in reply to a question in Parliament, clarified that the registration and reporting requirement prescribed by the notification and subsequent FIU-IND guidelines apply to offshore virtual asset service providers. However, the list of 28 entities that have registered with FIU-IND does not include any offshore virtual asset service providers, including Binance, and consists entirely of entities based in India.[3] As such, a large volume of virtual asset activity by Indian users remains outside the FIU-IND’s purview, potentially complicating investigations and enforcement against the use of virtual assets for money laundering under the PMLA.
The Government must act urgently to ensure that offshore virtual asset service providers comply with the requirements set out in the FIU-IND guidelines. Tightening the noose around potential illicit money flows to such offshore entities is particularly important as India is currently undergoing its Financial Action Task Force (an international anti-money laundering watchdog) Mutual Evaluation in 2024. The Mutual Evaluation assesses the effectiveness of a nation’s measures to combat money laundering, including its compliance with the FATF Standards on Virtual Assets and Virtual Asset Service Providers. The VASP Standards require, among other things, registration and licensing of virtual asset service providers and their supervision/regulation to ensure AML compliance. Resultantly, a failure to bring offshore virtual asset providers within the FIU-IND’s purview could impact India’s upcoming Mutual Evaluation.
In the above context, the Ministry of Finance should consider prescribing a reasonable deadline within which offshore virtual asset service providers must register themselves with the FIU-IND and demonstrate compliance with its guidelines. Offshore service providers that fail to adhere to this deadline should be required to implement measures, such as IP-based geo-blocking, to ensure that Indian users cannot access their services. In the longer term, the Government should consider rationalizing the 1% TDS on virtual asset transfers in a bid to restore trade volumes of Indian virtual asset service providers, which have demonstrated their willingness and capacity to comply with regulatory requirements.
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[1] Page 5, Impact of VDA Tax Architecture on Risk Exposure of Indian Investors, Esya Centre, https://static1.squarespace.com/static/5bcef7b429f2cc38df3862f5/t/63da4cc2494eff35103fb326/1675250886748/Esya_Centre_Special_Issue_209_Impact-of-VDA-Tax-Arch.pdf
[2] Page 9, Impact of VDA Tax Architecture on Risk Exposure of Indian Investors, Esya Centre, https://static1.squarespace.com/static/5bcef7b429f2cc38df3862f5/t/63da4cc2494eff35103fb326/1675250886748/Esya_Centre_Special_Issue_209_Impact-of-VDA-Tax-Arch.pdf
[3] Annexure to un-starred question no. 112, Lok Sabha, December 04, 2023, https://www.medianama.com/wp-content/uploads/2023/12/loksabhaquestions_annex_1714_AU112.pdf