The ED's Bengaluru raids should encourage all businesses in the crypto sector in India to address the issue of compliance with FEMA.
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The FEMA and RBI's compliance on Bengaluru crypto firms has been found to be major problem in the raids by ED. So, what business, fintech and investors must do now to avoid risk from the regulator?
The Enforcement Directorate officers went on a single day in June 2025 and patrolled the six locations in Bengaluru. By mid-afternoon, five cryptocurrency firms had their banking accounts frozen and they were searched. Value of transactions under investigation: More than ₹2,500 crore.
This news story originated a fresh topic. There is one significant question however, that will keep the legal and compliance teams of all crypto exchanges, fintech startups and foreign investors in India up at night: "Are we compliant as per FEMA?
For many operators the answer is “I don't know” and the honest answer is that they don't.
The ED conducted the investigation to determine what activity was going on and why it is important for FEMA.The ED looked at the activities that were being conducted and the rationale behind it and its importance to FEMA.
The enforcement Directorate's action in Bengaluru was nothing to do with money laundering. That's crucial. The investigations were carried out under the Foreign Exchange Management Act, 1999 – not to determine whether these firms were hiding money from criminals. They were money changers dealing in funds without the sanction of the RBI which was alarming.
The purported mechanism: Indian rupees were converted into stablecoins (mostly USDT) and the stablecoins underwent international movement via multiple layers of company structure, foreign platforms, and over-the-counter transactions. This, at face value, was a cryptocurrency transaction, but actually a cross-border remittance without the regulatory approval of remittances.
This is an infraction of the FEMA rules. It's one that many companies don't know that it's possible to fall into.
This article summarizes the legal landscape that currently exists in relation to FEMA and cryptocurrencies.In this article, the legal structure that you are already working under when it comes to FEMA and cryptocurrency is presented.
There is a lot of crypto trading going on in India with the assumption that there is no clarity on legislation, and without there being any clarity there, it is less likely to be enforced. That's a misjudgement and the Bengaluru raids are to the contrary.
Crypto transactions aren't restricted to Bitcoin to be included in the FEMA coverage. The Act shall have effect on all foreign exchange transactions (which are defined as broadly as possible as any transaction between a resident and a non-resident involving transfer of foreign exchange or a foreign security). In both the above scenarios, in which the crypto platform is an intermediary to facilitate a payment made by an Indian user to an overseas counterparty or a foreign investor is making an investment via a crypto-denominated structure, FEMA is already engaged.
According to FEMA, part III of the act prohibits anyone in India from dealing with foreign exchange or foreign securities without any authorised person or with the permission of RBI. The stablecoin-to-stablecoin swaps happening on crypto exchanges are going about it similar to a foreign exchange transaction, but without the proper clearance from Section 3.
The Capital Account Regulations of FEMA restrict capital account transactions, as set out in Section 6. The Liberalised Remittance Scheme (LRS) is introduced by RBI, which allows Indian residents to remit USD 250,000 per year for permissible transactions abroad. There is a clear exposure in the crypto-denominated transfer that are capital account transfers but not reported in LRS.
Payment and Settlement Systems Act and the RBI's Master Directions on Cross-Border Payments apply to crypto platforms that facilitate cross-border settlement (as on-ramps and off-ramps do in the case of fiat).
Crypto is not prohibited under the law. Does not say anything about cryptos. Any other attributes listed are applicable.
These grey areas are where uncertainties in the regulatory environment are at their highest, and are part of the business climate.
In fact, the regulatory system is quite confused on three points and by adding prosecutions, the ED doesn't make it more clear, it makes it more confused.
The dollar from an economic perspective is a 1:1 backed, stable dollar. Cross Border payment is a payment made by an Indian business in USDT (which gets converted to INR). The RBI's 2018 circular reiterating its stance on the crypto entities not being applicable to the definition of crypto currency does not mention the regulation of the stablecoins under the foreign exchange laws or otherwise — but the ED (with support from FEMA) seems to be there.
All businesses who received goods from overseas suppliers, paid stablecoins for royalties/settled foreign obligations without maintaining proper FEMA records and documentation with the RBI can be at risk of being targeted by the FEMA.
If INR is converted to foreign currency denominated crypto assets in the OTC trading, the transactions could be termed as foreign exchange transactions.If INR is being converted to another currency denominated crypto asset in an OTC transaction, then such transactions can be treated as foreign exchange transactions. It's not a "crypto trading" anymore, it's a "forex trading" and it has no effect on economical aspect of this trading. Bengaluru, in particular, had been the target of the probe as money has begun to come out of India, without the RBI's permission, through OTC channels.
Foreign investors investing in Indian start-ups via token based instruments or companies in India via token sales are thus creating FEMA exposure for foreign investors. Investments in India should be based on the reporting norms, pricing norms and maximum investment in the sector as prescribed by RBI. From a legal point of view, a token which represents economic rights in an Indian business is not that different from a share – and the FDI rules remain in place whether the token is in the form of a blockchain asset or not.
Let's get specific as it largely relies on entity types.
The highest exposure is when using crypto exchanges or trading platforms. When they allow INR deposits which are then used in buying foreign crypto-assets, they are engaged in a capital account transaction. They will actually be doing an outward remittance when they take cryptocurrencies and can utilize them in other countries. Both are official platforms that are not utilised by both.
This is because they are not Payment Aggregators or Authorised Dealers, but are Fintech start-up companies that are leveraging crypto payment rails in the context of cross-border B2B payments like payments to vendors, payments to freelancers, cross-border invoicing etc.
Foreign investors who want to invest in Indian crypto companies or Crypto related structure of the Indian companies should make sure that they do the transactions as per the guidelines laid down by RBI. The ED's investigation with FEMA into cross border crypto flows has ushered in an audit of the foreign investment structures, failing to only perform a compliance audit.So the scrutiny audit of foreign investment structures is not just a compliance one, but an investigation as well, as seen in the ED's probe into the flow of cryptos between India and foreign countries using FEMA.
Indian businesses which conduct intercompany transfers in crypto to fund overseas subsidiaries, receive export proceeds in crypto or settle payables for intercompany transactions are exposed to FEMA risk in all such transactions.
The fine for FEMA violation can be up to three times the amount of the violation. It is the number of a transaction pool of ₹2,500 crore (all transaction pools have the same size).
The test for cryptocurrencies to be compliant with the FEMA doesn't exist as a checkbox. A multi layer approach and some requirements are per layer.
RBI Authorisation Mapping: They should be a current account transaction (which is normally allowed) or a capital account transaction (which will need authorisation by RBI). The most important flows cross the borders and are linked to crypto are the capital account flows.
Authorised Dealer Banking: All foreign exchange transactions have to go through an Authorised Dealer bank in India. The crypto platforms which do not involve the banking system anywhere, from the moment INR is converted to crypto to wallets overseas, don't stand a chance of being compliant with this requirement.
LRS Compliance for Individuals: If Indian residents make any payments to foreign countries through crypto currency, then it will be done under LRS limits filling up of proper Form A2. Cryptos are accepting remittances without inquiring about Form A2 information from users are running the risk of compliance, as well as their users.
For foreign investment related to crypto companies in India, there is a requirement to file the FCGPR (Foreign Currency – Gross Provisional Return) within 30 days of receipt while the FC-TRS (Foreign Currency transfer reporting) is to be filed for the secondary transfer. Late filing is allowed only on case-to-case basis by RBI and penalties are being compounded for late filing.
Registration under Financial Intelligence Unit of India (FIU-IND) and compliance with AML norms: Every Virtual Digital Asset Service Provider will be required to be registered under the Financial Intelligence Unit of India (FIU-IND) and be compliant with the AML norms. As of 2025, over 30 platforms have been registered – although numerous fintechs and startups that process cryptocurrency transactions just for the sake of it have yet to decide whether they need to be registered as VASPs. If you contribute to helping, converting or settling in cryptos, then assume you are.
Transaction Documentation: every cross-border transaction requires documentation, which includes counterparty information, remittance purposes, commercial contracts, bank correspondence etc. The ED's forensics abilities with blockchain have been a long way. The notion that cryptocurrency transactions are untraceable is a thing of the past. The documentation gap as a basis for prosecutions.
The Bengaluru raids weren't the only ones. They brought in a clear change in the strategy of Enforcement Directorate. The ED noted that while bank fraud and real estate fraud were continuing to be a steady part of the Insolvency and Bankruptcy Code and RERA, the hotbed of the new technology frauds were to be the financial crimes and crypto.
The details of the change – 812 charge sheets filed in the past few months, 94% conviction rate and ₹63,142 crore of asset recovered for fraud victims. The ED is not an agency that is working to experiment in crypto enforcement. It's a now known entity with the ability to conduct blockchain forensics, inter-agency coordination with CBDT and FIU-IND, and the legal toolbox with FEMA, Black Money Act and PMLA to tackle crypto violations from multiple angles simultaneously.
With businesses already in the grey area, the question becomes one of when will enforcement come. Whether they will be ready when it does, is the question.
But the Bengaluru investigations might prove to be a good opportunity, if done correctly, to look into the compliance of the company in a comprehensive manner rather than getting into one.
This begins with a FEMA transaction audit. Document all cross border activities in the last 3 years on FEMA's current and capital account frameworks, including those done in crypto currency. Identify unauthorised transactions, transactions via AD banks and not reported to banks.
Enter into a banking relationship with an Authorised Dealer that is specifically for crypto-related foreign exchange. Banks are not keen on crypto clients, but a robust compliance framework can help make it easier. When there is no AD bank involved, the chances of having a cross-border crypto transaction that's compliant is close to none.
Submit voluntary disclosures/compliance applications in case of previous violations. By using the compounding system provided by FEMA, the businesses can be able to settle the violations without having to fear prosecution. The window to use this mechanism is prior to when the ED files a case. It will not be available following.
Complete KYC/AML Gap check as per the KYC/AML guidelines by FIU-IND applicable to VASPs. However, if you process VDA transactions on behalf of your clients, even if you do not focus your business on these types of exchanges you could be a reporting entity with obligations.
Draft a cross border payment compliance policy that will distinguish between the remittances under the current account under Schedule I of the FEMA Current Account Rules and capital account which will need specific approval from the RBI and will be routed through the relevant legal channels.
The Regulatory Clock has started and will continue indefinitely.So the Regulatory Clock is already ticking, since it has already begun.
There are 107 million crypto users in India. The sector is massively sized, increasing and worldwide linked. For a very long time it was never in the FEMA "completer" list.
The Bengaluru raids are a testament to the fact that tolerance is coming to an end. All tools, mandate and institutional momentum are present to take on the ED crypto violations across the border with FEMA.All the tools, mandate and institutional momentum are there to attack crypto violations under FEMA by the ED across the border. Businesses at greatest risk aren't only the ones that are blatantly breaking the law, they're also those that assumed that they were safe to operate when they were not, due to the ambiguity of the rules.
It is not a requirement that will be forthcoming in crypto transactions. This is a gift driven situation and the "due time" is already ticking.
The most important thing India's Leading FEMA Consultants can share is to contact them BEFORE contacting the ED!
Our team of CA Manoj K Pahwa, with 24+ years of experience in foreign exchange law and RBI regulatory advisory, have worked with the crypto exchanges, fintech companies, foreign investors and business entities in the complex cross border regulatory regime in India and have proactively assisted them as opposed to reacting to it.
This is a Crypto and Cross-Border Transaction Compliance Audit by FEMA.
RBI advises for Approvals for LRS and capital account and structuring as Authorised Dealer.
A notice or investigation has been received, or you need to notify the EPA that you are the representative for an entity that is being investigated or notified – ED Representation
Inbound and outbound FDI, intercompany transactions with digital assets: Cross-Border Transaction Advisory.
The Virtual Digital Asset Service Providers are required to register with PMLA / AML Framework.The Virtual Digital Asset Service Providers need to register with PMLA / AML Framework.
In the event of a previous FEMA violation, the first method to go is to resolve it before it turns into an issue.The best way to deal with past FEMA violations is to resolve them prior to it becoming an issue.
We have managed to successfully complete more than 1000 projects in more than 30 countries. If your company has ever been in contact with cryptocurrencies abroad, either now or in the past, then a discreet conversation at this time is more beneficial than a defense in court later.
Please schedule an appointment with CA Manoj K Pahwa.
Call: 011 4702 6276 | Email: skyquestc@gmail.com
FEMA Consultant is the most trusted Foreign exchange consultancy and Foreign regulatory Advisory firm in India.