India ED probes four crypto firms for FEMA violations

India's Enforcement Directorate is investigating four crypto firms for moving money abroad using digital coins without authorization, people familiar with the matter said. The probe targets transfers that may have violated the Foreign Exchange Management Act, even when the source of the funds was legitimate.

The cases center on crypto-to-fiat conversions routed through overseas exchanges and peer-to-peer platforms, the people said. Investigators are examining whether the firms structured transactions to bypass the reporting thresholds that apply to bank transfers. One case involves a firm that sourced liquidity from a Singapore-based exchange without declaring the cross-border movement of value, according to the people.

The ED's focus on FEMA compliance marks a shift from its earlier crypto probes, which centered on money laundering and fraud. FEMA governs all cross-border payments and capital account transactions in India. Any transfer of value abroad – including crypto – requires prior approval from the Reserve Bank of India unless it falls under a general permission category. The four firms under scrutiny did not have such approvals, the people said.

The investigation threatens a key operational channel for Indian exchanges. Many rely on offshore trading desks and foreign liquidity providers to execute large orders and manage inventory. If the ED determines that sourcing liquidity from abroad constitutes a FEMA violation, exchanges would need to restructure their treasury operations or face penalties that could include seizure of assets.

Industry lawyers said the cases test a legal gray area. Crypto is not explicitly classified as a capital account instrument under FEMA, and the RBI has not issued a circular treating it as one. The ED's position is that any transfer of value abroad using crypto falls under the law's catch-all provision, which covers "any transfer of funds from a person resident in India to a person resident outside India."

"The ED is reading FEMA's definition of 'foreign exchange' to include crypto assets," said a Mumbai-based lawyer who advises crypto firms. "If that interpretation holds, every trade on an international exchange by an Indian resident is a potential violation."