MUMBAI — In a decisive move to institutionalize oversight across South Asia’s rapidly expanding retail and institutional fintech sectors, the Securities and Exchange Board of India (SEBI) has released comprehensive procedural standards governing Virtual Digital Asset (VDA) service providers. Designed to safeguard consumer balances against catastrophic exchange insolvencies and curb cross-border money laundering, the framework mandates domestic asset segregation, rigorous anti-money laundering (AML) protocols, and real-time taxation tracking.
The regulations establish clear operating boundaries following prolonged consultations between the Ministry of Finance, the Reserve Bank of India, and the Financial Intelligence Unit (FIU-India), ending years of regulatory ambiguity for compliant domestic exchanges.
Cold-Storage Segregation and Domestic Vaulting Mandates
Central to SEBI’s prudential framework is the absolute requirement for domestic asset custody. Registered exchanges are strictly prohibited from commingling proprietary corporate balances with user funds. Crucially, at least 80% of aggregate client holdings must be locked within air-gapped, multi-signature cold-storage hardware vaults physically maintained within Indian territorial borders.
The remaining 20% held in operational hot wallets to facilitate retail liquidity must be backed by comprehensive third-party cybersecurity insurance policies, protecting account holders against distributed denial-of-service (DDoS) assaults and smart contract vulnerabilities.
For continuing economic reporting and policy analysis, visit our Business Section and our real-time Today’s News Hub.
Automated 1% TDS Reconciliation and Tax Surveillance
To eliminate tax evasion on digital asset appreciation, SEBI has harmonized reporting requirements with the Central Board of Direct Taxes (CBDT). Operating platforms must integrate direct cryptographic reporting APIs that reconcile the statutory 1% Tax Deducted at Source (TDS) under Section 194S against PAN and Aadhaar records in real time.
Any peer-to-peer (P2P) transaction or off-market transfer exceeding ₹50,000 must automatically trigger a suspicious activity report (SAR) filed directly with FIU-India, closing loopholes previously exploited by international shadow brokers.
Capital Headroom and Investor Compensation Reserves
Under the revised licensing parameters, exchanges must maintain a statutory minimum net worth of ₹50 crore, alongside a dedicated Investor Protection Fund (IPF) funded by a 0.05% levy on gross trading volumes. This capital cushion ensures retail investors are compensated in the event of unexpected platform insolvencies or systemic liquidity seizures.
