Money laundering apprehensions prompting crypto exchanges to block and verify withdrawal request

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Money laundering apprehensions playing on their mind, cryptocurrency exchange authorities in India are blocking withdrawal of crypto coins if they come to suspect the intention behind any transaction, The Economic Times has reported. The crypto exchange authorities are being over cautious since there is no law that empowers them to block withdrawals by any investor.

Moreover, there is no uniform process that the exchanges are following. Each exchange is using a method that it thinks can be most effective.

The common apprehension that is gnawing at all exchange authorities is that the withdrawal and transfer of cryptocurrencies from the wallet of an exchange to a private purse could be the first step of a money laundering process, or cause fraud on investors attracted by ponzi schemes riding a bull run in cryptocurrency. In fact, exchange authorities are scrutinising requests for withdrawal to find out the source of money and details of counterparties controlling the external wallets where cryptos would be transferred. However, an official of a crypto exchange told the newspaper, “There is no law under which exchanges can ban withdrawals.”

However, in order to explain why the exchanges are being so cautious, he added, “Exchanges have to save their skin. If there is fraud or dubious fund transfers, the Enforcement Directorate would come after them and freeze their bank accounts. So exchanges are adding new layers that make withdrawals tougher. Stalling suspicious withdrawals is essentially to mitigate that risk.”

To be sure, free withdrawal of coins from the registered wallets of investors entails a possibility that the asset might be deployed to questionable or subversive ends.

For example, the crypto markets are rising after a sombre 2023 and it might provide the opportunity to someone to launch a scheme to raise money by promising high returns to individuals. This person behind the scheme could buy cryptos with the pooled fund and subsequently withdraw the coins to a private wallet or transfer them to a wallet of an overseas exchange or the personal wallet of a third party located in another country altogether.

In such a situation these withdrawals can bypass banking channels to move money out of the country in the guise of cryptos. Legal interpretations have often interpreted such action as a violation of the Foreign Exchange Management Act.

When one begins a trading account with a crypto exchange has to undergo mandatory KYC steps with PAN, Aadhaar and address proof. However, the withdrawal process is virtually borderless and, therefore, another level of due diligence is deployed. Since there is no law or regulation on withdrawal in the country, exchanges are pursuing their own process of due diligence.

“The rules would differ from exchange to exchange. For any withdrawal request, exchanges would seek information like income statement, income tax return, details of account an investor plans to send the crypto to, the network that will be used for the transfer and the receiver’s wallet address. Crypto withdrawals are available for select users only,” an official of an exchange told the newspaper.

If crypto assets are transferred to a wallet that was verified earlier, the process can be comparatively simpler. But in case of transferring coins to unfamiliar wallets, additional steps kick in. When the applicant submits all details of the destination, the withdrawal request moves to the verification stage.