Self-custodial wallet / non-custodial software in India
Publisher of software where users hold their own private keys. The publisher never holds, controls, or has access to user funds.
Self-custodial wallet is conditionally permitted in India without local incorporation, subject to AML obligations and low licensing burden.
Verdict Details
- Permitted
- conditional
- Local entity required
- No
- Licensing burden
- Low
- Last updated
- 2026-07-13
AML Obligations
- Register as a VDA Service Provider (reporting entity) with FIU-IND under the Prevention of Money Laundering Act (amended March 7, 2023).
- Implement transaction monitoring systems — risk-based, real-time, AI-powered systems to flag suspicious activities like large transfers, structuring, or high-risk patterns, tailored to customer risk levels.
- Deploy blockchain analytics tools — monitor wallets, histories, and typologies like chain-hopping or mixers.
- Comply with the FATF Travel Rule — share originator/beneficiary details (name, account, address) for virtual asset transfers via secure channels, with screening, recordkeeping, and rejection of incomplete data.
- Screen wallets, addresses, and counterparties against sanctions lists (OFAC SDN List, UN Consolidated List) and block/ freeze sanctioned cryptoassets.
- File Suspicious Activity Reports (SARs) with FIU-IND.
- Subject to PMLA penalties — fines up to 3x contravention value and 3-7 years imprisonment, plus FEMA violations up to 3x amount.
Key Restrictions
- Self-custodial wallet software publishers that never hold, control, or have access to user funds may nonetheless be classified as VDA Service Providers (VASPs) under the PMLA amendment if they facilitate transactions or provide services beyond pure software distribution.
- No specific exemption for non-custodial software publishers exists in Indian law — the scope of 'VDA Service Provider' is broad and may capture wallet publishers who integrate with exchanges, swaps, or fiat on-ramps.
- Offshore wallet publishers face enforcement risk — India blocked 9 offshore exchanges in 2024 for non-compliance, and non-compliant VASPs had websites blocked.
- RBI has historically been hostile to private crypto (attempted outright ban in 2018, reversed by Supreme Court 2020), creating regulatory uncertainty for any crypto-adjacent services.
Key Risks
- Regulatory ambiguity — India has no comprehensive crypto legislation and no specific framework for DeFi or non-custodial services, leaving self-custodial wallet publishers in a grey area.
- Enforcement risk — FIU-IND has demonstrated willingness to block offshore crypto service providers, and the broad 'VDA Service Provider' definition could be applied to wallet software publishers.
- Tax exposure — Finance Act 2022 imposes 30% flat tax on virtual digital asset transactions and 1% TDS on transactions above INR 50,000, which could create reporting obligations for the publisher if they facilitate transactions.
- Risk that FIU-IND or RBI could issue guidance explicitly including non-custodial wallet publishers within the VASP regime, creating retroactive compliance exposure.
Evidence
This verdict synthesizes the following facts. Each fact links to its primary source(s).
FIU-IND registers VDA service providers as reporting entities under the PMLA 2002 (FIU guidelines effective 10 Mar 2023); on 28 Dec 2023 it issued section 13 show-cause notices to nine offshore VDA service providers and asked MeitY to block their URLs.
The RBI runs the e₹ CBDC, which is being piloted in retail and wholesale segments (RBI FAQ, 1 Oct 2026); its 6 Apr 2018 circular barring regulated entities from dealing in virtual currencies was set aside by the Supreme Court on 4 Mar 2020.
PMLA 2002 s 2(1)(sa)(vi): Ministry of Finance notification F.No. P-12011/12/2022-ES Cell-DOR of 7 Mar 2023 brought five VDA activities under the Act, and VDA service providers must register with FIU-IND as reporting entities (FIU guidelines effective 10 Mar 2023).
India has no VASP licence: VDA service providers register with FIU-IND as PMLA reporting entities (guidelines effective 10 Mar 2023). PIB reported 31 registered as of 28 Dec 2023 and 50 as of 1 Oct 2025; FIU-IND publishes no register.
India has no custody-specific crypto framework; safekeeping or administration of VDAs, or of instruments enabling control over VDAs, is one of the five activities notified under PMLA s 2(1)(sa)(vi) on 7 Mar 2023, so custodians register with FIU-IND as reporting entities.
FIU-IND guidelines of 10 Mar 2023 (§6.1.3) require VDA service providers to monitor transactions passing through their systems and to maintain transaction monitoring systems that determine the origin of a VDA and monitor its destination.
Blockchain Analytics Tools: Supported indirectly. Sources highlight blockchain monitoring (e.g., SaaS models analyzing wallets, histories, and typologies like chain-hopping or mixers) as essential for VASP compliance, often integrated with transaction monitoring.
FIU-IND guidelines of 10 Mar 2023 (§11.3 "Travel Rule") require VDA service providers, under PMLA Rule 12(1)(a), to include accurate originator and beneficiary information on VDA transfers and to monitor for transfers lacking it; §11.3 states no threshold.
VDA service providers were brought under the Prevention of Money-laundering Act 2002 by Ministry of Finance notification F.No. P-12011/12/2022-ES Cell-DOR of 7 March 2023, which designated five VDA activities under s 2(1)(sa)(vi); FIU-IND's AML & CFT guidelines for these providers took effect on 10 March 2023.
FIU-IND's 10 March 2023 AML & CFT guidelines require VDA service providers to file a suspicious transaction report with FIU-IND irrespective of the transaction amount where there are reasonable grounds to believe the transaction involves proceeds of crime (§7); the travel-rule section (§11.3) sets no monetary threshold.
Five VDA activities carried on for or on behalf of another person make a provider a PMLA reporting entity: VDA-fiat exchange, VDA-VDA exchange, VDA transfer, safekeeping or administration of VDAs, and financial services for an issuer's VDA offer; all must register with FIU-IND, which counted 31 registered providers on 28 December 2023 and 50 on 1 October 2025.
FIU-IND's 10 March 2023 AML & CFT guidelines require VDA service providers to run transaction-monitoring systems that trace the origin and destination of VDAs (§6.1.3), expect blockchain-analytics and sanctions-screening tools in client due diligence (§5.8.5), and apply the travel rule to VDA transfers (§11.3).
The Prevention of Money-laundering Act 2002 was not amended to cover VDAs: the 7 March 2023 notification added VDA activities under s 2(1)(sa)(vi), so VDA service providers are reporting entities under s 2(1)(wa), bound by s 12 record-keeping and reporting duties and subject to FIU-IND penalties under s 13.
FIU-IND issued AML & CFT Guidelines for Reporting Entities Providing Services Related to Virtual Digital Assets on 10 March 2023, effective immediately; FIU-IND lists an updated version dated 8 January 2026 and registration circulars of 4 July 2023, 17 October 2023, 20 January 2025 and 15 September 2025.
Screening obligations: Continuous screening of wallets, addresses, and counterparties against the Specially Designated Nationals (SDN) List (https://sanctionssearch.ofac.treas.gov), plus the 50% Rule (block entities owned ≥50% by SDN-listed persons) (https://ofac.treasury.gov/faqs/topic/1626). No crypto exceptions; includes sanctioned jurisdictions like Iran, North Korea, Syria, Cuba, Crimea/Donbas (https://ofac.treasury.gov/sanctions-programs-and-country-information).
Blocking: Immediately freeze sanctioned cryptoassets (e.g., from designated wallets/exchanges like Blender.io or SUEX) and report to OFAC; no trading/transfer allowed without license (https://www.elliptic.co/blockchain-basics/what-are-ofac-crypto-sanctions).
Penalties: Civil fines up to $1M+ per violation (e.g., Binance $3.4B in 2023 for Iran/Russia/Cuba dealings; Bittrex $24M) (https://sanctionslawyers.net/ofac-lawyers/ofac-cryptocurrency-sanctions/); criminal penalties possible. Indian VASPs risk secondary sanctions or PMLA fines up to ₹10 lakh + imprisonment.
Screening obligations: Screen against UN Consolidated List (https://www.un.org/securitycouncil/content/un-sc-consolidated-list); covers terrorists, proliferators (e.g., North Korea).
Blocking: Freeze assets and prohibit dealings.
Penalties: PMLA fines (up to 3x contravention value) + 3-7 years imprisonment; FEMA violations up to 3x amount.
Finance Act 2022 inserted s 115BBH (30% tax on income from transferring a virtual digital asset, from AY 2023-24) and s 194S (1% TDS from 1 Jul 2022; none where a specified person pays up to ₹50,000 a year or another payer up to ₹10,000). Section numbers are those of the Income-tax Act 1961; the Income-tax Act 2025 replaced that Act from 1 Apr 2026 and also defines VDAs.
Verdict Attribution
- Source:
- AI-Generated · Unreviewed
- AI synthesized:
- 2026-07-13 (deepseek-chat)
- Last updated:
- 2026-07-13
- Confidence:
- low
This verdict was produced by an AI model from the underlying facts. Confirm with counsel before relying on it for material decisions.
Conditional — a self-custodial wallet software publisher that does not hold user funds may be classified as a VDA Service Provider under India's PMLA amendment if it provides services beyond pure software distribution (e.g., swaps, on-ramps), requiring FIU-IND registration and AML/CFT compliance, but the scope of the VASP definition is ambiguous for pure non-custodial software publishers and India lacks a specific framework for DeFi or non-custodial services.
Questions this verdict aims to answer
- Does software publishing trigger VASP / MSB classification?
- Do AML obligations attach when no custody exists?
- What disclosure or consumer-protection rules apply?